101 Stock Market Terms You Need To Know [Simply Explained]

We Explain Simply The 101 Most Important Stock Market Terms So That You Can Invest With Confidence & Speak With Anyone About Investing Or Trading

Table of Contents

Stock market jargon is confusing and intimidating. Both professional and amateur traders use an incredible variety of lingo that can mystify even veteran stock investors.

Understanding Stock Market Terminology Is Important

You will need to understand stock market terms because some traders, brokers, and advisors deliberately speak in technical jargon to confuse you. These people use financial market terms to make themselves sound smarter and to intimidate ordinary people.

The good news is that most stock market terms are easy to comprehend. The bad news is that many financial professionals refuse to explain these terms to outsiders. Insiders refuse to educate outsiders to protect their jobs and commissions from informed investors.

Every investor needs a good knowledge of stock market terms because professionals will use the lingo to fool you.

To help you understand what traders, speculators, fund managers, financial journalists, and others say, we have created a list of essential stock market terms.

What is the Stock Market?

The Stock Market is a catchall phrase for all trading centers (stock exchanges) that enable the exchange of shares of public companies. Today, the term Stock Market refers to all the stock exchanges in all the countries of the world. We can view all Stock Exchanges around the world as part of one giant global Stock Market.

Why is the Stock Market Important?

The stock market is important for 3 big reasons. Firstly it provides capital for new companies to fuel their growth via an IPO. Secondly, the majority of people in developed economies have their retirement fund invested in stocks via a 401K or IRA. Lastly, it provides a method for companies to distribute profits to shareholders via dividends.

Important Stock Market Terms
Important Stock Market Terms & Jargon Made Easy To Understand

101 Most Important Stock Market Terms

10-K Annual Report

The 10-K annual report is submitted by every publicly traded company to inform the shareholders about the company’s performance. The 10-K is required by the SEC and includes financial information, balance sheet, income statement, cash flow statement. Additionally, business operations, outlook, and potential risks must be outlined.

Algorithmic Trading

Algorithmic Trading is the use of pattern recognition & analysis software to execute trading strategies without human involvement. An algorithm is a set of directions for a bot or a digital platform. Algorithmic Traders use complex formulas and mathematical models to create trading algorithms. Algorithmic Trading is often used for High-Frequency Trading.

Alpha

Alpha is a term used to describe the ability of a portfolio, fund, or strategy to beat the market, e.g., outperform the underlying index. If a strategy beats the market, usually the S&P500, by 2% in a year, it is awarded an Alpha of 2. Alpha does not guarantee future market outperformance; it simply reports the previous year’s performance.

Automated Trading System

An Automated Trading System is a platform that allows traders to make automated trades. Most Automated Trading Systems use Algorithmic Trading to execute High-Frequency Trades.

Popular trading apps, such as the Cash App, and many brokerage accounts, let ordinary investors access Automated Trading Systems.

Averaging Down

Averaging Down is the strategy of continuing to buy more shares of a company as the stock price is falling.  This means that you are bringing your Average Cost Per Share Down. This strategy is used by long-term investors to take advantage of temporary fluctuations in stock prices to reduce their average share price and improve end profit.

This strategy can be risky if a stock is in a long-term downtrend, and you do not have enough investment capital to average the price low enough to sell at a profit.

Bear Market

A Bear Market occurs when stock prices fall in a bad or weak economy. Writers use the term Bear Market to describe the opposite of Bull Markets. Journalists use the terms “bearish,” and the “bears are running” to describe stock sell-offs and falling markets. Writers use the term bear to describe pessimistic or cynical investors.

Some people think Bear Market indicates a weak economy. Those investors are wrong.

A Bear Market does not show the health of the overall economy. Instead, the market shows investors’ view of the economy’s health. If investors think the economy is bad, they sell, creating a Bear Market. If investors believe the economy is good, they buy creating a Bull Market.

Bear Markets occur in strong economies when investors believe an economic boom is ending, or consumer demand is falling.

Beat the Market

To beat the market means that your stock investments will need to outperform the underlying index of stocks. In the USA, the market to beat is generally the 8% annual return of the S&P500 index. Anyone could beat the market in a single year, but outperforming the market over the long-term is the challenge.

Beta

Beta measures the relationship between the movement of a company’s stock price and the stock market index. If a stock on the S&P500 index has a beta of 2, this means that historically if the index moves up by 1 point, the stock is expected to increase by 2 points. This also works in the opposite direction.

Beta can be used on and entire investment portfolio to understand the overall risk.

Blue-Chip Stocks

Blue-Chip Stocks are enormous companies with excellent reputations for making money. Blue-Chip companies are often old, stable, and well-established companies such as Exxon-Mobil (XOM) or Apple (AAPL). Blue-Chip Stocks often have enormous market capitalizations and high share prices.

Behavioral Investing

Behavioral Investing, Behavioral Finance, or Behavioral economics is the belief that human psychology drives the markets.

Behavioral Investors believe that all investment decisions are irrational. Many Behavioral Investors believe emotion is the main force behind investment decision making.

Behavioral Investors think panic drives crashes and corrections, and greed drives bear markets. Value investing is the most popular variety of Behavioral Investing.

Bid-Ask-Spread

The Bid-Ask-Spread is the difference between the highest price a buyer will pay for a stock and the lowest price a seller will accept.

The Bid-Ask-Spread is a measure of the supply and demand for a stock. Thus, the Bid-Ask-Spread can give you a good picture of the market for a stock.

The Bid-Ask-Spread is based on the Bid Price and the Ask Price. The Bid Price is the maximum price investors will pay for a stock. The Ask Price is the minimum price investors will pay for a stock.

Bull Market

The common description of a Bull Market is a rising market in a good economy. In a Bull Market, most stocks gain share value.

Observers often use the term Bull Market to describe investors’ moods. In a Bull Market, the investors are happy and confident about the market’s future.

A Bull Market does not always indicate a good economy. Instead, all a Bull Market shows is that investors think the economy is good. Past stock market bubbles, including the Great Crash of 1929, occurred because investors had too much confidence in the economy.

Writers use the terms “the bulls are running” and bullish to describe investor confidence and stock-buying frenzies. The term bull describes an investor who is optimistic about the market. They base those terms on the phrase Bull Market.

Bubble

A Stock Market Bubble is a rapid escalation in share value with no increase in companies’ values. In a classic Stock Bubble, share prices far exceed companies’ true value.

In a Bubble, a company’s stock price will grow, but the company’s business is not growing. Money-losing companies often experience rapid share price growth during Bubbles. Excessive amounts of speculation and trading accompany bubbles. Another characteristic interest of a Bubble is widespread popular interest in the stock market.

Investor overconfidence and fear of being left out of moneymaking opportunities drive Bubbles. Bubbles sometimes occur when prices for only one class of investments grows.

For instance, Stock Market Bubbles often occur when interest rates are low, and the real estate and commodities markets are stagnant. People who usually invest in real estate or commodities buy stocks because they can make more money in the stock market.

Bubbles are dangerous because they can collapse fast.

Buying on Margin

Buying on Margin is borrowing money to buy stocks. Most Margin traders make a down payment by paying a percentage of the stock’s value.

People buy on Margin because it increases the amount of stock they can buy. Buying on Margin is dangerous because stock prices can fall, leaving the borrower without the money to repay the loan.

CAN SLIM

CANSLIM is a stock investing strategy designed by William J. O’Neil to produce market-beating profit performance. Using the CAN SLIM criteria in your investing should mean profitable returns. Current Earnings, Annual Earnings, New Products, Supply, Leaders, Institutional Sponsorship & Market Direction, are vital criteria.

Cash and Short-Term Investments

This number measures the amount of liquid cash a company has on hand.

Short-term investments are securities, such as bonds, a company can sell for cash fast. Some companies hold large amounts of US Treasury Bonds or Euro Bonds as short-term investments.

Value investors look at the Cash-and-Short-term Investments because it shows much money a company has. A company with lots of Cash-and Short-term Investments will not have to borrow money to cover emergency expenses. In addition, it costs less for companies with enormous amounts of Cash-and short-term investments to borrow money.

Cash Equivalents

Cash Equivalents are investments or assets a company can sell fast to generate cash. Another term for Cash Equivalents is short-term investments.

Popular Cash Equivalents include government bonds such as US Treasury Bills and Eurobonds, Certificates of Deposit (CDs), bankers’ acceptances, corporate commercial paper, and precious metals.

Some companies, including Berkshire Hathaway (NYSE: BRK.B), Apple (AAPL), and Microsoft (NYSE: MSFT), hold enormous amounts of Cash Equivalents. Some value investors think the Cash Equivalents are the most important measurement of a company’s value.

Cash Flow

Cash Flow is the amount of cash and cash-equivalents moving through a company’s business. Investors monitor Cash Flow because it can be a measure of a company’s ability to create value.

Positive Cash Flow indicates a company makes money. Negative Cash flow shows a company loses money.

Cash Flow Statement

The Cash Flow Statement summarizes the cash and cash equivalents a company runs through its business in a fiscal period.

The Cash Flow Statement measures how well a company manages its cash. The Cash Flow Statement can show you how much cash a company has and how much cash a company can generate.

Certificate of Deposit

A Certificate of Deposit (CD) is a bank-issued security that pays a high-interest rate. The difference between a CD and a bank account is that cash must be held in a Certificate of Deposit for some time. Financial analysts consider Certificates of Deposit, short-term investments, and cash equivalents.

Commercial Paper

Commercial Paper is a short-term debt corporations issue to pay for day-to-day expenses. Companies issue Commercial Paper to get cash to cover expenses such as payroll, accounts payable, utility bills, rent, and supply purchases.

Commercial Paper is a popular investment because it pays high-interest rates and offers a quick return. Most Commercial Paper has to be repaid within 270 days. Companies that rely on Commercial Paper may not make enough money to finance their operations.

Common Stock

Common Stock is another term for publicly-traded shares of stock. Companies list Common Stocks on exchanges. Anybody can buy Common Stock. Common Stockholders usually have voting rights in a company.

Correction

A Correction is a drop of 10% or more in stock prices. The difference between a crash and a Correction is that a crash leads to a long sell-off.

The market quickly recovers after a Correction. Corrections often trigger Bull Markets because many bargain hunters enter the market.

A crash causes a bear market that can last for years. A Correction will lead to a bull market.

Cost of Goods Sold

The Cost of Goods Sold, or cost of sales is the amount a company pays to produce, buy, or deliver its goods and services. Accountants calculate the gross profit by subtracting the Cost of Goods Sold from a company’s revenues.

A good way to think about the Cost of Goods Sold is how a company spends to make money.

Crash

A Stock Market Crash is a sudden share sell-off and a drop in stock prices nobody expects. In a crash, many people panic and leave the market.

Panic selling driven by fear of losses is a sign of market crashes. Most crashes are unanticipated and often mistaken for corrections.

A Stock Market Crash does not indicate a depression or an economic downturn. Some stock market crashes, including the Great Crash of 1929, occur at the beginning of downturns.

No economic downturn followed The Black Monday Crash of 1987, however. Instead, Black Monday marked the beginning of a long period of economic growth.

Day Trading

Day Trading is the practice of buying and selling stocks each day. Day Traders speculate in stocks in an attempt to make a quick profit each day.

Learning what common stock market terms mean is the best way to understand the market. The best way to learn stock market terms is to look up any new stock market term you hear or see. Accumulating more knowledge about the stock market is the first step in becoming a successful investor.

Debt to Equity Ratio

The Debt to Equity Ratio (D/E) can tell analysts if a company uses debt to pay its bills. Value investors use the Debt to Equity Ratio to tell if a company is making money. You can calculate the Debt to Equity Ratio by the Total Stockholder’s Equity by the company’s total liabilities.

Degree of Financial Leverage

The Degree of Financial Leverage (DFL) is an attempt to measure the effect of a company’s debts on its earnings per share. Some analysts use the DFL to determine how much it costs a company to borrow money.

Analysts calculate DFL by measuring the interest rate a company pays on its debts. Interest is a fixed expense that cuts into a company’s profits.

Diversification

Diversification is buying a mix of different kinds of stocks to reduce risks. A diversified portfolio could contain tech stocks, finance stocks, banking stocks, retail, and foreign stocks.

People who diversify believe there is no safe category of stocks. They think the only way to reduce risk is to own several kinds of stock.

Diversification as Risk Management

Diversification is a Risk Management strategy in which an investor buys a variety of different stocks. In Diversification, the hope is to limit risks by not having too much money in one asset.

Diversification can limit an investors’ ability to make money by not concentrating money in fast-growing shares.

Dollar-Cost Averaging (DCA)

Dollar-Cost Averaging is the strategy of continuing to buy more shares of a company as the stock price is falling.  This means that you are bringing your Average Cost Per Share Down. This strategy is used by long-term investors to take advantage of temporary fluctuations in stock prices to reduce their average share price and improve end profit.

This strategy can be risky if a stock is in a long-term downtrend, and you do not have enough investment capital to average the price low enough to sell at a profit.

DuPont Analysis

The DuPont Analysis or DuPont Model is a fundamental performance monitoring tool popularized by the DuPont Corporation. Its proponents believe the DuPont Analysis or DuPont Identity can identify the factors that drive a company’s Return on Equity (ROE).

Investors can use the DuPont Model to identify a company’s strengths and weaknesses.

Earnings per Share

Earnings per Share (EPS) is a measure of profitability you calculate by dividing a company’s profit or net income by the number of shares of common stock.

Some investors believe EPS is one of the best indicators of a company’s ability to make money and its intrinsic value. Value investors believe EPS is meaningless and ignore it.

Efficient Market Hypothesis

The Efficient Market Hypothesis (EMH), or Efficient Market Theory is the belief that the market is always right.

EMH believers think that the share price of stocks and the market capitalization are accurate reflections of value. Value investors think the market reflects investors’ opinions and not an accurate assessment of value. EMH believers think Mr. Market is always right, while value investors think Mr. Market is insane.

Emerging Markets

An Emerging Market is a nation with an expanding economy with a growing presence in international markets. Many Emerging Markets are countries that have historically refused to participate in international markets. Some Emerging Markets are former Communist and socialist countries turning capitalist.

Examples of Emerging Markets include India, Africa, the Middle East, Russia, and Brazil. Emerging Market stocks are popular because of China’s massive economic growth in recent years. China was an Emerging Market, but it is now the world’s largest or second-largest economy.

Ending Cash Flow

The Ending or End Cash Flow is the amount of cash a company has on its balance sheet at the end of a fiscal period, such as a quarter. The Ending Cash Flow shows how much money a company has.

Exchange-Traded Fund (ETF)

An Exchanged-Traded Fund, or ETF, is a corporation that makes investments on behalf of its owners. ETFs issue stocks that trade on exchanges such as the NYSE.

Many American ETFs own indexed portfolios. The SPDR S&P 500 ETF Trust (NYSEARCA: SPY) owns a portfolio containing all the Standards & Poor’s 500 companies, for instance. Exchange-Traded Funds are popular because they are simpler and cheaper than mutual funds.

Eurobonds

A Eurobond, or external bond, is a debt instrument issued by a syndicate of financial institutions on behalf of various European governments. Many people regard Eurobonds as a secure and low-risk investment.

Eurobonds, unlike T-Bills, can be denominated in multiple currencies, such as US Dollars or Euros. Many corporations use Eurobonds to finance operations in different countries.

FANG Stocks

FANG stands for four enormous and profitable American tech companies. Those companies are Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Alphabet (NASDAQ: GOOG).  They used to call Alphabet (NASDAQ: GOOGL) Google.

Many people view FANG stocks as safe moneymakers because they have long experienced share growth.

FAANG Stocks

The FAANG is a modified FANG that contains Facebook (FB), Amazon (AMZN), Apple (NASDAQ: AAPL), Netflix (NFLX), and Alphabet (GOOG). They add Apple (AAPL) to the FAANG because it pays a dividend.

Financing Cash Flow

Financing Cash Flow, or cash from financing flow, measures the amount of money a company makes from financing activities. Financing activities can include borrowing and selling debt. Examining the Financing Cash Flow can tell you how much money a company is borrowing. A high Financing Cash Flow is a sign a company is borrowing money to finance its operations. Financing Cash Flow can be an important measure of a company’s health.

Free Cash Flow

The Free Cash Flow is the money a company has left over after it covers all its expenses and meets its all obligations. The Free Cash Flow shows how much money a company has to pay out in dividends or invest in expansion.

A high Free Cash Flow is an indicator of a profitable company. Value investors look at the Free Cash Flow because it shows how much money a company makes.

Fundamental Analysis

The Fundamentals are a set of basic data about stocks investors use for analysis. The Fundamentals can include macroeconomics, microeconomics, liabilities, debts, and revenues. Different schools of analysis use different sets of Fundamentals.

Gross Profit

The Gross Profit, or gross income, is the money a company has left after covering all its expenses. A classic means of calculating Gross profit is subtracting the cost of goods sold from a company’s revenues. Values investors look at the Gross Profit because it shows how much cash a company could generate.

High-Frequency Trading

High-Frequency Trading is the purchase of enormous amounts of stock at high speed. Trading Bots and Automated Trading Systems or platforms make most High-Frequency Trades.

Large institutions such as mutual funds, hedge funds, and corporations make most High-Frequency Trades.

Hedge Funds

A Hedge Fund is a privately-held company that makes investments on behalf of its owners. Hedge Funds often make exotic or unusual investments and employ risky strategies. Hedge Fund investment is usually only available to select wealthy individuals.

Index

An Index is a basket of stocks assembled for a specific purpose. For example, the S&P 500 measures American economic growth by containing the 500 largest publicly-traded companies in the United States.

Managers base many ETFs and mutual funds on indexes of stocks, hence, the term Index Fund.

Intrinsic Value

The Intrinsic Value is the true or inherent value of a stock. Value investors base their stock picks on their perception of the Intrinsic Value.

Factors value investors use to determine Intrinsic Value include a company’s total assets, cash-and-short-term investments, gross profit, revenues, level of debt, cash from operations cash flow, a margin of safety, and rate of revenue growth.

Investing Cash Flow

Cash from Investing Activities or Investing Cash Flow is the money a company makes from its investments. Investing Cash Flow shows how much extra cash a company has.

High Investing Cash Flow is in a sign that a company is making large amounts of money.

Investment

An investment is the purchase of assets in the hope that they will generate income or gain value over time. Investors buy stocks because they have higher and faster rates of appreciation than other assets.

Stocks are also easier to sell and transfer than real estate or collectibles. Moreover, the stock market is easy for ordinary people to access.

Initial Public Offering (IPO)

An Initial Public Offering (IPO) is the first group of a company’s shares sold to the public on stock exchanges. To go public, a company has to hold an IPO.

To issue an IPO in the United States, a company must meet all the requirements of the Securities and Exchange Commission (SEC). IPOs are a risky speculative investment because they are not proven moneymakers.

Company founders sometimes use IPOs to cash out and leave the business. Many investors like IPOs because they can be cheap but offer high rates of growth.

Large-Cap Stocks

The term Large Cap Stock or Big Cap refers to a company with a huge Market Capitalization. In today’s market, companies with market capitalizations of over $10 billion are considered Large Cap.

Examples of Large-Cap Stocks include Amazon, Apple, and Tesla. Most people consider Large-Cap Stocks safe and stable investments.

Limit Order

A Limit Order is an instruction to buy or sell a stock at a specific price. Short Sellers often use Limit Orders for speculation. Trading Bots usually execute Limit Orders.

Liquid Assets

A Liquid Asset is something a company can convert into cash fast. Liquid Assets can include inventory, precious metals, commodities, marketable securities, T-Bills, Eurobonds, CDs, and unpaid accounts receivable. Liquid Assets are considered Cash Equivalents or Short-Term Investments.

Long Position

Taking a Long Position means buying stock with the hope that its price will experience long-term growth. Long Position investors often hold stocks for months or years.

Maintenance Margin

Most Margin Traders borrow from a brokerage. Many brokerage accounts have a Maintenance Margin. If the account’s funds fall below the Maintenance Margin, the brokerage can sell the stocks in the account to recover its losses.

Margin

The Margin is money a trader borrows to buy stocks with. Most Margin traders hope to repay the loan with the gains of stock.

The term Margin refers to the difference between the stock’s purchase price and its selling price. Most Margin traders hope to make money by selling the stock at a higher price. Short Sellers often finance their trades with the Margin.

Margin of Safety

The Margin of Safety is the difference between a stock’s intrinsic value and the share price. Benjamin Graham believed the Margin of Safety determined a stock’s level of risk.

Some investors believe factors such as the rate of growth, the amount of cash a company holds, and dividends determine the Margin of Safety. Another belief is that the Margin of Safety is the level of risk an investor can safely accrue.

Market Capitalization (Market Cap)

Market Capitalization is the monetary value of all the shares of a company’s stock. The Market Cap is the value Mr. Market gives a company.

Growth investors examine the Market Cap to see how much a company can grow. Value investors use the Market Capitalization to determine if a company is undervalued. Some value investors look for companies with high cash flows or revenues and low market capitalizations. The Market Capitalization must not be confused with the Share Price.

Market Order

A Market Order is an instruction to sell stocks immediately for the best available price. Market Orders are considered the best way to sell large amounts of stock. Today’s digital trading makes instant execution of Market Orders possible.

Mid-Cap Stocks

A Mid-Cap Stock is a share in a middle-sized company. Most investors consider any company with a Market Capitalization of $2 billion to $10 billion, Mid-Cap.

Many Value Investors prefer Mid-Cap Stocks because they think Mid-Caps are cheaper and stable. Buying many Mid-Cap Stocks is a fast way to diversify a portfolio.

Modern Portfolio Theory

Modern Portfolio Theory (MPT), or mean-variable analysis, is the belief that investors can reduce risks and increase returns through selective diversification.

Nobel Prize-winning Economist Harry Markowitz invented MPT in 1952 with his classic paper Portfolio Selection. Many mutual funds and exchange-traded funds (EFTs) use MPT to reduce risks.

The objection to MPT is that it can reduce both returns and risks. An investor who uses MPT could miss huge gains in booming sectors such as tech.

Mr. Market

The term Mr. Market can describe either a hypothetical ordinary investor or the entire market.

Value investors view Mr. Market as insane or irrational. Hence the popular saying, “Mr. Market is insane.”

Classic value investors, such as Benjamin Graham and Warren Buffett, believe Mr. Market is insane and usually wrong about stock values. Graham created the term Mr. Market in his 1949 classic The Intelligent Investor.

Modern investors view Mr. Market as manic-depressive or rapidly swinging from one mood to another. Others believe Mr. Market gets high on different kinds of drugs before investing. In a bull market, Mr. Market is taking uppers. In a bear market, Mr. Market is taking downers.

Mutual Fund

A Mutual Fund is a corporation that makes investments on behalf of its owners. The difference between a Mutual Fund and an ETF is that a Mutual Fund has far more structure.

Mutual Funds often charge fees and commissions to pay for professional management. Mutual Funds invest in stocks, but they do not trade on stock exchanges.

Naked Shorting

Naked Shorting means to sell stocks you do not own or have an options contract on. Naked Shorting can also refer to stocks that do not exist, such as options to buy IPO shares.

Naked Shorting is illegal in the United States. However, loopholes in regulations and trading systems allow some Naked Shorts to occur in the United States.

Operating Income

Operating Income is a measure of a company’s profitability calculated by subtracting expenses from revenues.

A good way to think of Operating Income is as the cash a company generates from its operations. Operating Income can show you how much money a company makes because taxes are not subtracted from it. The usual difference between Operating Income and net income is that accounts deduct taxes from net income.

Net Income

Net Income, net profit, or the bottom line is the amount of money a company makes after deducting all costs and expenses from its’ revenues.

Net Income is important because companies use it to calculate Earnings per Share (EPS). Some American analysts are downplaying Net Income in favor of other figures such as operating income.

Operating Cash Flow

The Operating Cash Flow is the money a company generates from its normal business activities. Examining Ford’s (NYSE: F) Operating Cash Flow can tell you how much money Ford makes by selling trucks, for instance.

Many value investors view Operating Cash Flow as one of the most important financial numbers. These people examine Operating Cash Flow because it can show if a company’s business is viable.

Options Contract

An Options Contract is an agreement to buy or sell stocks at a specific price. An investor could agree to buy 100 shares of Microsoft (MSFT) at $100 if Microsoft falls or rises to that price.

Options Contracts give investors a chance to buy stocks at the prices they want. Today, algorithms and Trading Bots execute most Options Contracts.

Price-Earnings Ratio

The Price-Earnings Ratio (PE Ratio or PER) is a formula for performing a company valuation. It is calculated by dividing the current stock price by the previous 12 months’ earnings per share (EPS). A P/E Ratio of 12 means you would pay $12 for every $1 of earnings if you invested. It should only be used to compare companies in the same industry.

Portfolio

A portfolio is a diversified package of stocks designed to limit risks. Most people create portfolios with strategies such as Modern Portfolio Theory (MPT). Many ETFs and mutual funds own portfolios of stocks.

Post-Modern Portfolio Theory (PMPT)

Modern Portfolio Theory assumes that investors need to assume potential risks are always greater than possible gains. PMPT teaches that future returns can be more lucrative than potential risks.

Investors base popular portfolios, such as the FANG, on PMPT. FANG investors believe that FANG companies’ share value growth and enormous amounts of cash justify the risks of buying those stocks.

Preferred Stock

Preferred Shares, preferred stock, or preferred stocks, are special shares of stock. Preferred Shares have special privileges that common stocks do not offer.

Preferred Stock privileges can include dividends paid before common stockholders. Preferred stockholders can be paid before common stockholders in a bankruptcy procedure.

Preferred Shares usually lack voting rights. Companies often make Preferred Shares available to certain groups such as executives and private equity investors.

Publicly-traded

Publicly-Traded stocks are shares listed on a stock exchange. A Publicly-traded or public company is a corporation with the legal right to issue stock.

A private company is a corporation that cannot issue stock. A private company has to hold an Initial Public Offering (IPO) to issue stock.

Companies stay private because there are more government regulations for Publicly-traded companies. Companies go public because they can raise more money through the stock market.

Reserve Currency

The Reserve Currency is the currency major financial institutions, and central banks use for international transactions. The People’s Bank of China uses the Reserve Currency to purchase T-Bills, for instance.

Central Banks and big international banks hold enormous of the Reserve Currency to cover transactions. Companies and governments use the reserve currency to buy important resources such as oil. The US Dollar is the world’s current Reserve Currency.

Return on Equity

The Return on Equity (ROE) is a measure of a company’s financial performance. The ROE is popular because it tells investors how much money a company makes from its assets.

You can calculate the Return on Equity by dividing a company’s net income by its shareholders’ equity. ROE can predict how much money a company could make.

Revenues

Revenues or revenue is all the income a company generates from all its activities. Revenues do not show the amount of money a company makes. Instead, Revenues reflect all the money a runs through its operations.

Revenues are important because they show the demand for a company’s and services. The media often mislabels revenues as sales.

Revenues show all the money a company makes from all sources. Accounts consider the proceeds from the sale of a company’s real estate or subsidiary’s revenue.

Risk Management

Risk Management is the belief investors can limit risks and prevent losses by selective stock picking. Risk-averse investors use strategies such as MPT and PMPT to pick stocks.

Risk Managers buy stocks based on the level of risk or the margin of safety.

Robo Advisors

A Robo Advisor is a computer program or algorithm designed to automate the job of a financial advisor, by automating the buying & selling of Stock’s or ETFs and structuring an investment portfolio based on the investor’s risk tolerance. These services are provided directly to investors online or via a smartphone app.

Securities and Exchange Commission

The Securities and Exchange Commission (SEC) is the federal agency regulating stock markets and enforces securities law in the United States.

The SEC writes the rules publicly traded companies have to follow. Stockbrokers, fund managers, and many other financial professionals need to register with the SEC – if they want to do business in the United States. The SEC is the organization that usually investigates allegations of investment fraud in the United States.

The SEC regulates many classes of investments in the United States, including stocks, bonds, and cryptocurrencies. The SEC can bring lawsuits against companies and individuals who violate securities laws. The SEC staff can also ask the US Justice Department to prosecute people they suspect of violating securities laws.

Share Price

The Share Price is the amount an individual share of a company’s stock sells for in the markets. The Share Price is the number the financial media uses to value stocks.

Most stock purchases are based on Share Price. Value investors believe the Share Price does not reflect a stock’s true or intrinsic value. Efficient Market Hypothesis believers think the Share Price is the most accurate valuation of a stock or company.

Shareholders’ Equity

The Shareholders’ Equity is the value of all the stockholders’ shares of the company. You can calculate Shareholder’s Equity or Total Shareholders’ Equity by subtracting the company’s total liabilities from the company’s total assets.

The best way to think of Shareholders’ Equity is a company’s value after it has paid its debts. Value investors use Shareholders’ Equity to calculate a company’s intrinsic value.

Shares

A Share or stock is a unit of ownership or equity in a corporation. Stocks exist as financial assets that trade in markets.

Some Shares offer other benefits, including voting rights and dividends. Shares were originally pieces of paper. Today, almost all Shares are digital and exist only online or in the cloud.

Short Position

Taking a Short Position or Short means buying a stock with the hope the price will fall. A short buyer hopes to make money by short-selling or shorting the stock.

Short Selling

In Short Selling, an investor tries to make money by speculating that a stock price will fall.

In a Short Sell, an investor buys stock on the credit or the margin. Short Sellers bet that the stock price will fall by the time they have to for it.

The advantage of Short Selling is that a seller can buy a good stock at a lower price. The disadvantage is that there are times sellers cannot afford the stock they have agreed to buy. Most Short Sellers hope that the stock price will rise in the future, and they can sell it for more money.

Small-Cap Stocks

A Small-Cap Stock is a share in a company with a small market capitalization. In today’s market, any company with a capitalization of under $2 billion.

Many investors consider Small-Cap Stocks risky speculative investments. Value investors and bargain hunters often shop for cheap Small-Cap Stocks.

Speculation

Speculation, or speculative trading, is the purchase of stock in anticipation of price change. Speculators hope to make money by selling the stock at a higher price or shorting it.

In Speculation, the investor only makes money by selling the shares. Speculators do not hope to make money from the dividends.

Stock Exchange

A Stock Exchange is a market where stocks are traded. Originally, Stock Exchanges were places where traders gathered to exchange stocks hence the term. The original New York Stock Exchange (NYSE) met under a tree on Wall Street, for example.

In the 20th Century, Stock Exchanges were large buildings where traders bought and sold shares on the trading floor. Today, all Stock Exchanges are digital, and most exchanges have no trading floor.

Shares have to be listed on a Stock Exchange to be publicly traded.

Stock Trading

Stock Trading is the term describing the act of buying and selling company stocks to gain a profit. A stock trader might trade stocks on any timeframe, holding a stock for days, weeks, or even months. Those who invest for longer periods are usually referred to as stock investors.

Technical Analysis

Technical Analysis is the use of stock charts, data, metrics, and mathematical formulas to predict future stock prices. Technical Analysts are strong believers in the Efficient Market Theory. Most Technical Analysts believe market data is the only useful indicator of stock values.

Technical Analysts are speculators who seek quick gains in the market rather than long-term accumulation.

Trading Bot

A Trading Bot is a digital robot that engages in algorithmic trading, automated trading, or system trading.

Trading Bots allow people to trade without sitting at the computer all day. Trading Bots carry out enormous numbers of transactions in today’s stock market. Investors can buy Trading Bots online and deploy them without elaborate computer systems.

Treasury Bills (T-Bills)

A Treasury Bill or T-Bill is a short-term bond or debt obligation the US government issues to finance its operations. Many people regard T-Bills as secure and low-risk investments.

Companies and governments hold Treasury Bills because they are liquid and easy to sell. However, others consider T-Bills a poor investment because they pay interest rates. Treasury Bills are popular because they denominate T-Bills in the world’s most reserve currency, the US Dollar.

Trend Trading

Trend Trading is an effort to make money from a stock’s momentum. A Trend Trader looks for trends that indicate market momentum.

A Trend Trader could hope to make money from rising prices in a sector. If auto stocks are rising, the Trend Trader could look for a cheap auto stock hoping that momentum will drive its price up.

Tutes

In stock market terminology, “Tutes” refers to Institutions or institutional investors. The Tutes are considered the large mutual funds, hedge funds, or exchange-traded fund companies that usually have billions of dollars in assets they manage for their clients.

Value Investing

Value Investing is the belief that a company’s assets and moneymaking capabilities determine a stock’s true value. Most Value Investors subscribe to Benjamin Graham’s belief that Mr. Market is insane and usually wrong about stock prices. Value Investors search for moneymaking companies that Mr. Market undervalues hence the term Value Investing.

Berkshire Hathaway (NYSE: BRK.B) CEO Warren Buffett is the world’s most famous and successful Value Investor. Historians usually credit Buffett’s mentor Benjamin Graham with creating Value Investing in 1949 with his classic book, The Intelligent Investor.

Volatility or Market Volatility

Market Volatility is a statistical measure of share price and market changes. The rate of change or level of Volatility can tell you how stable stock is. High levels of Volatility can indicate the emergence or a Bull Market or a Bear Market. Traders use volatility software to make short term gains.

Volume

The Market Volume or trading volume is the number of stocks traded in the markets or exchanges in a period of time. All the stock stocks traded in one week, for example.

Market Volume is one of the metrics people who use technical analysis monitor. A popular belief is that trading volumes can predict demand for stocks and stock prices. A falling volume could predict drops in prices while rising volumes can indicate price increases.

Widows and Orphans Stock

A Widow and Orphan Stock is a low-risk stock that pays a high dividend. A Widow and Orphan Stock are safe enough for people with no other income to invest in.

Before Social Security, many widows and orphans relied on such stocks for income. Many professionals bought Widow and Orphans Stocks so their families could have an income – if they died or became disabled.

Apple (AAPL), which pays a dividend and makes enormous amounts of money, is a 21st Century Widow and Orphan Stock.

Stock Market Terms Summary

Learning what common stock market terms mean is the best way to understand the market. The best way to learn stock market terms is to look up any new stock market term you hear or see. Accumulating more knowledge about the stock market is the first step in becoming a successful investor.

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