We explain the 101 most important stock market terms and decipher financial jargon with simple definitions and practical examples.
Stock market jargon is confusing and intimidating. Both professional and amateur traders use an incredible variety of terminology that can mystify even veteran stock investors.
Understanding Stock Market Terminology Is Important
Most people understand basic stock market terms like Bulls, Bear, Long, and Short. But most do not know important terms like 10-K Report, Alpha, Bid-Ask Spread, Debt to Equity, or Fair Value. Other critical stock lingo includes Earnings Per Share, Margin of Safety, Discounted Cash Flow, or EBITDA. Understanding this market jargon is important for your success.
Video: Stock Market Terms Everyone Should Know
Extract from the Liberated Stock Trader Pro Training
We have created a list of essential stock market terms to help you understand what traders, speculators, fund managers, financial journalists, and others say.
What is the Stock Market?
The Stock Market is a general term 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 world’s countries. We can view all Stock Exchanges worldwide as part of one giant global Stock Market.
Why is the Stock Market Important?
The stock market is important for three big reasons. Firstly, it provides capital for new companies to fuel their growth via an IPO. Secondly, most 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.
10-K Annual Report
Every publicly traded company submits the 10-K annual report to inform the shareholders about the company’s performance. The 10-K is required by the SEC and includes financial information, a balance sheet, an income statement, and a cash flow statement. Additionally, business operations, outlook, and potential risks must be outlined.
Algorithmic Trading uses pattern recognition & analysis software to execute trading strategies without human involvement. An algorithm is a set of bot or digital platform directions. Algorithmic Traders use complex formulas and mathematical models to create trading algorithms. Algorithmic Trading is often used for High-Frequency Trading.
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 reports the previous year’s performance.
Automated Trading System
Popular trading apps, such as the Cash App and many brokerage accounts, let ordinary investors access Automated Trading Systems.
Averaging Down is the strategy of continuing to buy more company shares as the stock price is falling. This means that you are bringing your Average Cost Per Share Down. Long-term investors use this strategy 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.
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 “bearish” and “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 must 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.
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Beta measures the volatility of a stock and, therefore, its risk compared to a broad market index like the S&P 500. The S&P 500 has a beta of 1, so if a stock has a beta of 1.2, that stock will generally be 20% more volatile than the market.
Beta measures the relationship between a company’s stock price movement and the stock market index. If a stock on the S&P500 index has a beta of 2, 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 an entire investment portfolio to understand the overall risk.
Blue-chip stocks are enormous companies with excellent reputations for making money. Blue-chip companies are often old, stable, 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 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.
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.
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 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.
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 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 grow.
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.
Candlestick patterns are a form of technical analysis used to predict future trends in stock prices. The patterns, which consist of a series of candles with different shapes and sizes, show when the market is bullish or bearish. By studying Candlestick Patterns, traders can identify potential buying opportunities and areas where they should be cautious.
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, and Market Direction are vital criteria.
Capital stock is the number of shares a company is authorized to issue. This includes both common stock and preferred stock. Capital stock is important because it represents the ownership of a company.
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, that a company can sell for cash quickly. Some companies hold large amounts of US Treasury Bonds or Euro Bonds as short-term investments.
Value investors look at Cash-and-Short-term Investments because they show how 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 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 is the cash and cash equivalents moving through a company’s business. Investors monitor Cash Flow because it can measure 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 is 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 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.
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 the 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.
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 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.
Circuit breakers are rules and regulations put in place by exchanges to curb rapid declines in stock prices due to panic selling. When a circuit breaker triggers, trading halts for a short period of time before resuming at a lower price point. Circuit breakers are intended to reduce volatility and prevent further losses from cascading out of control.
Dead Cat Bounce
A dead cat bounce is a short-term asset price recovery after a significant volatile decline, followed by a continuation of the downtrend. Look for a short-lived rally that loses momentum quickly, often trapping bullish traders.
Day trading is the practice of buying and selling stocks each day. Day traders speculate in stocks to make a quick profit each day.
Learning common stock market terms is the best way to understand the market. The best way to learn stock market terms is to look up any new ones 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 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 dividing the total liabilities by the shareholder’s equity. A ratio of 1.0 or higher indicates that a company may be in financial distress.
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.
Discounted Cash Flow (DCF)
Discounted cash flow (DCF) is a method of valuing a company or project based on its future cash flows. It is typically used for long-term projections and is often considered more accurate than other methods, such as the price/earnings ratio (P/E ratio).
To calculate DCF, you discount each of the company’s future cash flows by a certain rate. This rate is known as the discount rate and is usually the company’s weighted average cost of capital (WACC). The WACC considers the company’s different financing types (debt, equity, etc.) and how each type of financing affects the company’s overall cost of capital.
People who diversify believe there is no safe category of stocks. They think owning several kinds of stock is the only way to reduce risk.
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 investor’s ability to make money by not concentrating on fast-growing shares.
Dollar-cost averaging (DCA)
Dollar-cost averaging is the strategy of continuing to buy more company shares as the stock price is falling. This means that you are bringing your Average Cost Per Share Down. Long-term investors use this strategy 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.
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.
Equivolume charting is a strategy that allows investors to analyze the volume of shares traded in a given period and compare it to the stock price. This can indicate market support or opposition, helping you decide when to buy or sell. Equivolume charting takes into consideration both the number of shares traded and their prices, which
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.
EBITDA is an acronym for “earnings before interest, taxes, depreciation, and amortization.” EBITDA is a measure of a company’s profitability that excludes these expenses.
Because EBITDA excludes these expenses, it provides a more accurate picture of a company’s operating cash flow. This makes EBITDA a useful tool for comparing companies across different industries.
EBITDA is also used as a measure of a company’s financial health. A high EBITDA indicates that a company generates a lot of cash flow and is in good financial health. A low EBITDA indicates that a company may struggle to generate cash flow and is in poor financial health.
Investors often use EBITDA when they are considering investing in a company. They want to see if the company generates enough cash flow to cover expenses and debt payments. If the answer is yes, the company will likely be a good investment.
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 market capitalization are accurate reflections of value. Value investors think the market reflects investors’ opinions and is not an accurate value assessment. EMH believers think Mr. Market is always right, while value investors think Mr. Market is insane.
An Emerging Market is a nation with an expanding economy and a growing international market presence. 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 a company’s cash 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. Exchange-traded funds are popular because they are simpler and cheaper than mutual funds.
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.
When a company goes public, the stock it offers is typically valued at fair value. This is the price that an investor would pay for the shares if they were to buy them on the open market. The valuation is determined by considering the company’s earnings, growth potential, and other factors.
Investors often use fair value as a benchmark when considering whether to buy or sell a stock. If a stock is trading below fair value, it may be seen as a bargain. On the other hand, if a stock is trading above fair value, it may be considered overpriced.
Fair value is just one factor that investors use when making investment decisions. It’s important to remember that stock prices fluctuate based on various factors, so it’s always important to research before buying or selling any security.
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.
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 dividends.
Freeriding in stocks refers to a trader buying shares or securities and selling them before the initial transaction settles, using capital that doesn’t exist in the account yet.
Uninformed investors can face significant penalties due to this practice. While it might seem harmless or a way to profit from market movements, it violates established trading regulations.
Financing Cash Flow
Financing Cash Flow, or cash from financing flow, measures the 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 borrows. 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.
Float is the number of shares available to the public for trading. A low float stock is a stock that has a small float, which can be as low as 10 million shares. This means fewer shares are available for trading, and buying or selling the stock can be more difficult.
Finding the stock float is important because it can show you the company’s ownership structure. Large numbers of shares outstanding that are not trading in the market can indicate an outside owner or shares in the hands of insiders.
Free Cash Flow
The Free Cash Flow is the money a company has left over after it covers all its expenses and meets all its obligations. The Free Cash Flow shows how much money a company has to pay 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.
The Fear of Missing Out (FOMO) is a captivating phenomenon that entices investors with the possibility of reaping great benefits from stock investments. However, this potent emotion can prompt hasty decisions without thorough research or risk assessment, ultimately resulting in detrimental investment choices.
Fundamentals are a financial dataset stocks investors use for analysis. The Fundamentals can include macroeconomics, microeconomics, liabilities, debts, and revenues. Different schools of analysis use different sets of Fundamentals.
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.
Hawkish & Dovish Policy
Dovish and hawkish are terms used to describe the monetary policies of the United States Federal Reserve. A dovish stance means that the Federal Reserve leans towards lower interest rates and is more willing to engage in quantitative easing. In contrast, a hawkish stance indicates that the Fed may raise interest rates or tighten monetary policy to control inflation. A dovish position may also be characterized by rhetoric from central bankers suggesting an expansionary fiscal agenda, such as growth-promoting fiscal initiatives from fiscal authorities.
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 the most High-Frequency Trades.
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.
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.
Factors 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, margin of safety, and revenue growth rate.
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 a sign that a company makes large amounts of money.
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 appreciation rates 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 Securities and Exchange Commission (SEC) requirements. 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 growth rates.
Large Cap Stock or Big Cap refers to a company with a huge Market Capitalization. Companies with capitalizations of over $10 billion are considered Large-Cap in today’s market.
Examples of Large-Cap Stocks include Amazon, Apple, and Tesla. Most people consider Large-Cap Stocks safe and stable investments.
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.
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.
A long position in stocks refers to an investment strategy whereby the investor purchases shares of a particular stock with the expectation that the stock price will rise. The investor then plans to hold the stock for a period to generate profits. There is no set time frame for how long a trader may hold a long position; it depends on the individual’s investment goals and objectives. Some traders may hold a long position for days, weeks, or even months, while others may choose to wait years before selling.
Lot size is the standardized number of units involved in a transaction for a security or asset. It ensures uniformity in trade volumes, simplifying the trading process and impacting liquidity and pricing in the market. The standard lot size for stocks is usually 100 shares, but there can also be odd lots or mixed lots involving more or fewer shares.
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 to recover losses.
The Margin is money a trader borrows to buy stocks. 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.
Using margin can be risky, and traders could owe more money than invested.
Margin of Safety
Some investors believe factors such as the growth rate, 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 a company’s stock shares. 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 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. Market Capitalization must not be confused with the Share Price.
A Market Order is an instruction to sell stocks immediately for the best 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.
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 more 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 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 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.
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.
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.
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 Income is a measure of a company’s profitability calculated by subtracting expenses from revenues.
A good way to think of Operating Income is the cash a company generates from its operations. Operating Income can show you how much a company makes because taxes are not subtracted. The usual difference between Operating Income and net income is that accounts deduct taxes from net 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.
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 allow investors to buy stocks at the prices they want. Today, algorithms and Trading Bots execute most Options Contracts.
Pattern Trading involves analyzing stock patterns and trading accordingly. Chartists or technical analysts look at visual representations of stocks to anticipate where the price will go in the future. These investors rely on past trends, volume, and other data points from various sources to determine whether they should buy or sell a particular stock. If you want to pattern trade, see our best books for traders article.
A penny stock is the equity of a small company that trades for less than $5 per share. Most penny stocks are not traded on a major exchange like the NASDAQ or NYSE but via over-the-counter transactions (OTC).
Penny stocks are usually small companies with a low capitalization, lacking liquidity, meaning they trade infrequently. Because of low liquidity, the spread, the difference between the bid and ask prices, will be larger, making it more difficult to trade for a profit.
The Price-Earnings Ratio (PE Ratio or PER) is a company valuation formula. 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. PER should only be used to compare companies in the same industry.
A price floor is the lowest allowable price a product or service may sell for. Price floors can also help protect against predatory trading, which is designed to take advantage of uninformed investors or those who make poor decisions based on emotion rather than logic.
Points Moves in Stocks
In individual stocks, a point move is the equivalent of $1.00 per share. When a stock’s price changes, the change is usually measured in points. For example, if a stock goes from $50 to $51 per share, that’s a one-point change or a 2% move. If a stock is worth $100 and moves to $101, it is a 1-point increase but equivalent to a 1% change.
A portfolio is a diversified package of stocks designed to limit risks. Most people create portfolios using Modern Portfolio Theory (MPT) strategies. 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 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.
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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.
Quad-witching is a unique phenomenon in stock and options markets, happening four times a year. It involves the simultaneous expiration of four types of derivatives contracts: stock index futures, stock index options, stock options, and single stock futures.
These critical days fall on the third Friday of March, June, September, and December. They offer distinct opportunities and challenges for investors and traders.
Renko means Brick in Japanese, and Renko charts are created by placing a brick in the next column once the price moves a pre-determined amount from the previous brick. The size of the move is called the “box size.” Renko charts can identify trends, support and resistance levels, and potential buy and sell signals.
The Reserve Currency is the currency major financial institutions and central banks use for international transactions. For instance, the People’s Bank of China uses the Reserve Currency to purchase T-Bills.
Central and big international banks hold enormous amounts 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) measures 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 are 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 that runs through its operations.
Revenues are important because they show the demand for a company’s services. The media often mislabel revenues as sales.
Revenues show all the money a company makes from all sources. Accounts consider the proceeds from selling a company’s real estate or a subsidiary’s revenue.
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 risk level or the safety margin.
A Robo Advisor is a computer program or algorithm designed to automate the job of a financial advisor by automating the buying & selling of stocks 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.
RSI, or Relative Strength Index, is an important stock chart technical indicator that measures the magnitude of recent price changes to help you determine whether a stock is overbought or oversold. It can be used to identify buy and sell points and trend reversals.
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 must 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 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.
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.
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.
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.
A short stock position is a bearish bet that the stock will fall in value. The trader selling the stock borrowed it from someone else and hopes to buy it back at a lower price so they can return it to the lender and pocket the difference. Shorting stocks is risky because if the stock goes up instead of down, the trader will owe money to the person they borrowed the stock from.
In Short Selling, an investor tries to make money by speculating that a stock price will fall.
In a Short Sale, an investor buys stock on the credit or the margin. Short Sellers bet 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 sellers sometimes 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.
Short-squeeze stocks are typically businesses with poor financial performance targeted by institutional short-sellers. When a stock has a high level of short interest, it becomes a target for investors to buy, thus causing a short squeeze that propels the stock price upwards.
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.
A Spac stock is an investment vehicle created to acquire or merge with an existing company. SPACs are also known as blank check companies because they have no commercial operations when first launched. Investors who are interested in investing in SPACs do so because they believe that the management team of the SPAC will be able to identify and acquire a target company that will be successful.
Speculation, or speculative trading, is the stock purchase anticipating 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.
A Stock Exchange is a market where stocks are traded. Originally, Stock Exchanges were places where traders gathered to exchange stocks, hence the term. For example, the original New York Stock Exchange (NYSE) met under a tree on Wall Street.
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 is 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 months. Those who invest for longer periods are usually referred to as stock investors.
A stock warrant is a security that gives the holder the right, but not the obligation, to purchase shares of common stock at a specified price within a certain time frame. Companies typically issue warrants to raise capital or to incentivize employees.
Technical Analysis uses 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.
A Trading Bot is a digital robot that engages in algorithmic, automated, or system trading.
A trading bot is a computer program that automates buying and selling securities. Bots can trade stocks, options, futures, and currency pairs. They are typically programmed using specific rules designed to optimize trading profitability.
Hedge funds and other institutional investors often employ trading bots to execute trades based on complex algorithms. Individual investors may also use bots to automate their trading strategies.
Bots can provide several advantages, including 24-hour market access and the ability to execute large orders quickly and without slippage. However, bots can also be subject to errors and may incur significant losses in periods of market volatility.
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.
A Trend Trader could hope to profit 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.
In stock market terminology, “Tutes” refers to Institutions or institutional investors. The Tutes are 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 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 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 the stock is. High levels of Volatility can indicate the emergence of a Bull Market or a Bear Market. Traders use volatility software to make short-term gains.
The Market Volume or trading volume is the number of stocks traded in the markets or exchanges in a period. 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 price drops, while rising volumes 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.
Before Social Security, many widows and orphans relied on such stocks for income. Many professionals bought Widow and orphan stocks so their families could have an income – if they died or became disabled.
Apple (AAPL), which pays dividends and makes enormous money, is a 21st Century Widow and Orphan Stock.
Stock Market Terms Summary
Learning common stock market terms is the best way to understand the market. The best way to learn stock market terms is to look up any new ones you hear or see. Accumulating more knowledge about the stock market is the first step to becoming a successful investor.