If you’re new to the market, you’ve likely encountered what feels like a new language. Trading jargon can be confusing, but understanding the industry’s various terms, techniques, and vocabulary will help you thrive.
The team at Trade Sage compiled a list of must-know vocabulary for new traders. We hope our trading glossary is helpful to you and those around you who’ve entered the exhilarating world of trade!
Arbitrage: Arbitrage is when you purchase an asset from one market and sell it to another at a higher price.
Ask: This is what sellers want to be paid for their shares.
Asset Allocation: Asset allocation is a trading strategy that balances risk and reward by dividing specific percentages of investments (including stocks, real estate, cash, etc.) across various assets in a portfolio.
Asset Classes: Asset classes are categories of assets like cash, real estate, stocks, and bonds.
Averaging Down: Averaging down is when an investor buys more of a stock as the price goes down, decreasing the average price at which the trader purchased the stock.
Bear Market: A market in which short sellers shine, a bear market is one in which prices are expected to drop.
Beta: Beta is a measurement of the relationship between a stock’s price and the market’s movement.
Bid: Your bid is what you’re willing to pay for stock.
Bid-Ask Spread: A bid-ask spread is the difference between what buyers have to spend and what sellers want to be compensated. This number must be resolved before the transaction can occur.
Blockchain: A blockchain is a record-keeping database where cryptocurrency transactions are recorded across multiple computers and distributed across the whole network of those computers.
Blue-Chip Stocks: These stocks are from well-known companies known for their stability and growth history.
Bond: Bonds are a type of security loaned by an investor to a borrower –– typically a company or government –– and used to fund their operations.
Broker: A broker is the person or firm who executes your buy and sell orders.
Bull Market: This is a market in which stock prices are expected to rise.
Buy: As the name suggests, you buy when you take a position or buy shares in a company.
Buyback: Buybacks occur when a company repurchases outstanding shares to reduce the number of shares on the market and return profits to its investors. This increases the value of the remaining shares.
Capitalization: Market capitalization is the value of your company as defined by the market.
Capital Gains: Capital gains are the profits earned by selling an investment for a profit.
Common Stock: Common stock is a security that represents ownership in a company. If you hold common stock, you can vote on corporate policy and elect directors.
Current Ratio: Determined by dividing current assets by liabilities, this measures a company’s ability to pay short-term debts.
Day Trading: Day trading is buying and selling within the same day.
Debt-to-Equity Ratio: This ratio measures the function of an organization’s debt relative to its equity (the value of its assets minus its liabilities.)
Diversification: Diversification is a common trading strategy that includes investing across various assets to mitigate risk.
Dividend: This is a portion of earnings paid to shareholders in a company quarterly or annually.
Dividend Yield: Dividend yield expresses a dividend as a percentage of its stock price, found by dividing annual dividends by the current share price.
Dollar-Cost Averaging: Dollar-cost averaging is an investment strategy wherein traders regularly invest a fixed amount regardless of the asset’s price at the time of investment.
Dow Jones Industrial Average (DJIA): Known as the Dow, the Dow 30, or the Dow Jones, the DJIA is a stock market index measuring the performance of 30 publicly-owned companies listed on the New York Stock Exchange and the NASDAQ. This index helps traders gauge market direction and stability.
Earnings per share (EPS): EPS is a ratio indicating a company’s profitability on a per-share basis. Calculated by dividing profit by outstanding shares of common stock, the EPS shows how much a company makes for each share of its stock.
Economic Bubble: An economic bubble occurs when asset prices soar to levels much higher than the basic value of the asset.
Equal Weight Rating: This number measures a stock’s performance compared to other stocks and suggests a performance similar to the stocks used in comparison.
Equity Income: Equity income is what you earn from stock dividends.
Exchange: An exchange is where you can trade investments, like the New York Stock Exchange or the NASDAQ.
Exchange-Traded Funds (ETFs): ETFs are like stocks in that you buy and sell shares but are similar to mutual funds because they track an index.
Forex: Forex, or “foreign exchange,” involves trading different currencies.
Futures: A future is a contract requiring a buyer to purchase an asset. The seller must sell the asset on a specified date at a predetermined price. Futures empower investors to offset potential losses in other trades or investments.
Going Long: When you go long, you assume that the company’s stock will increase in price, allowing you to buy low and sell high.
Going Short: Also referred to as short selling, going short is when you sell a share assuming and expecting the asset’s price to drop. An investor goes short when they borrow an asset, sell it, and hope to purchase it later and at a lower cost.
Growth and Income Funds: These mutual funds carry a history of capital gains and income resulting from dividends. These funds have both long-term growth and short-term income.
Growth Stocks: Growth stocks are common stocks of a company that are rapidly increasing in value. They’re often expected to outperform the market in the short term.
Head and Shoulders Pattern: This pattern refers to a certain chart formation found on a technical analysis chart, appearing when a stock price reaches three peaks: when the price peaks, then falls; when it exceeds that peak, then falls again; and when it rises a third time without necessarily reaching a peak, and then finally falls again. The second peak is the formation’s “head,” and the third is the “shoulders.”
Index Funds: Index funds follow the performance of a benchmark or stock market index. When you invest in an index fund, your investment is spread across every company within the index.
Inflation: Inflation is the rate of price increases for goods and services in an economy.
Initial public offering (IPO): IPOs are once-private companies that are now public and whose stock shares are sold on the market.
Leverage: When you use leverage, you borrow capital from your broker to increase profits. Leverage allows you to risk more for greater profits but can significantly increase the risk for loss when used unwisely.
Limit Order: A limit order provides instruction to execute at or under a purchase price or at or above a sale price.
Liquidity: Liquidity is how easily you can get into and out of a stock.
Margin: Margin is the difference between the loan amount and the price of the securities. A margin account allows a trader to borrow money from a broker to purchase an investment.
Market Index: A market index tracks the performance of specific groups of stocks (usually representing a particular industry.) Investors use an index to compare current and past stock prices to gauge market health.
Market Volatility: This metric measures how much and how frequently the stock market fluctuates.
Moving Average: This is a stock’s average price per share during a set period.
Mutual Funds: Mutual funds are pooled investments from shareholders to buy securities.
NASDAQ: The National Association of Securities Dealers Automated Quotations is an exchange where investors can buy and sell stocks. NASDAQ can more broadly refer to the NASDAQ composite index, including more than 3,300 companies listed on the NASDAQ exchange.
Non-Fungible Token (NFT): An NFT is a blockchain-based security, each representing a unique digital asset. NFT can include everything from a digital home to a digital piece of art. Because they’re non-fungible, they can’t be replicated or replaced.
Order Imbalance: Order imbalances happen when there’s an excess of orders for a specific stock because that stock isn’t offset by opposite orders, sometimes resulting in volatile price changes.
OTC Stocks: Over-the-counter stocks are securities traded on a broker-dealer network rather than a major exchange. Smaller companies often take advantage of OTC stocks when they don’t meet the requirements for a formal exchange.
Outstanding Shares: This refers to the total number of a company’s shares issued to shareholders.
P/E Ratio: A Price/Earnings Ratio defines a company’s value based on the ratio of its share price to its earnings per share.
Preferred Stock: This type of stock has qualities of both common stock and bones. Shareholders of preferred stock receive dividends before common stockholders but typically don’t have voting rights.
Price Quote: A price quote is the information on a stock’s latest trading price.
Profit Margin: Expressed as a percentage, profit margins are found by dividing the company’s net profit by its total revenue. A profit margin measures a company’s profitability.
Recession: A recession is a period wherein an economy faces decline.
Risk Tolerance: Risk tolerance is the level of risk you’re willing to take on in your investments.
Roth IRA: A Roth IRA is an individual retirement account that allows owners to contribute post-tax funds. After a certain period, you can withdraw from your IRA with no penalties or taxes.
Sector: A sector is a group of stocks in the same business or industry.
Sell: To sell is to get rid of the share you’ve purchased (either because you’ve met your goal or want to cut losses).
Shares: A share is a unit of ownership in a company’s stock.
Stock Option: A stock option is a contract giving an investor the right to buy or sell a specific number of shares at a predetermined price within a set time frame.
Stock Portfolio: Your stock portfolio is your collection of investments, including bonds, mutual funds, stocks, and other assets. A portfolio includes all investments, not just those connected to a single account.
Stock Split: Stock splits happen when a corporation distributes more shares to its stockholders and increases the number of its outstanding shares. Splitting shares makes the stock more affordable.
Time Horizon: A time horizon is the period a trader expects to keep an investment. Your time horizon will depend on your goals, strategies, and risk tolerance.
Typically, longer time horizons correlate to more risk potential, while shorter horizons correlate to a less risky portfolio.
Value Stocks: Value stocks are shares of companies selling at unusually low prices that traders expect to rise because the company’s financial analytics suggest the shares are of greater value than what the market has currently determined.
Volatility: Volatility is how fast a market moves up or down.
Volume: A stock’s volume indicates how much or how many shares have been traded over a set period and is used to determine market strength.
Volume-Weighted Average Price (VWAP): VWAP is the average price of a stock or other asset adjusted for volume. Find the VWAP by dividing the total dollar value of trading in that asset by the volume of trades.
Yield: Yield is the income an investment earns over a specific period. It’s expressed as a percentage of the original investment.
52-Week Range: The 52-week range is an indicator measuring the lowest and highest price of a stock traded during a 52-week period.
Understanding the Market and Positioning Yourself for Success
Those new to the world of trading likely feel bombarded by the learning curve. You have a lot of information to consume and understand before you can responsibly enter the market and earn the kinds of profits you hope for.
At TradeSage, we know the value of educating yourself before jumping into this fast-paced environment. Learning the terms listed here will help you set a foundation for a solid investment strategy. We hope this trading glossary gives you the understanding to invest confidently and profitably.
