To buy on the stock market means to purchase shares of a company's stock. This can be done through a brokerage account or directly through the company. A strong buy is a recommendation given by analysts for a stock that is expected to outperform the market or its sector.
To sell on the stock market means to liquidate an asset in exchange for cash. This is done by placing an order to sell, which is processed by computers according to a set of rules. When a stock is sold, the price of the stock decreases due to a lack of buying activity. The difference between the buy and sell prices is known as the bid-ask spread, which helps facilitate trading.
The bid is the highest price a trader is willing to pay to buy a stock. It is typically expressed as the number of shares and the price per share. The ask is the lowest price someone is willing to sell a stock for. The last price is the most recent price at which a stock was traded. These three prices can be useful for understanding the current state of the market for a particular stock.
The bid-ask spread is the difference between the highest purchase price and the lowest sales price for a stock. It is an important factor to consider when trading securities, as it represents a hidden cost that is incurred during trading. Market makers can set a bid-ask spread by offering to both buy and sell a given stock, with the spread amount going to pay various fees in addition to the broker's commission.
A bull market is a financial market in which prices are rising or are expected to rise. It is generally a positive environment where the price of an asset or group of assets is increasing. This is in contrast to a bear market, where prices are falling. Gold bull markets refer to periods of time when the price of gold consistently increases, often less influenced by political and economic factors than stocks.
A bear market is a condition in which securities prices fall and widespread pessimism causes the stock market's downward spiral to be self-sustaining. It is defined as a decline of 20% or more of a major stock market index, such as the DJIA or S&P 500, for a sustained period. A bear market reflects concerns and anxieties about the economy and is the opposite of a bull market, which signals that the market is up significantly. The closing price of the S&P 500 is often used to gauge if the US stock market is in bear-market territory.
A limit order is an order placed with a bank or brokerage to buy or sell a set amount of a financial instrument at a specified price or better. It allows traders and investors to specify the price they are willing to pay for a security when buying, or the price they are willing to receive when selling. Limit orders "limit" the price you pay to buy a stock, or the price you receive for selling one, and they allow you to choose the price you want to buy a stock at or sell it for. A limit order sets a price on how much you’re willing to spend when you're buying a stock, as well as the price at which you’re willing to sell. Unlike market orders, limit orders guarantee an execution at the specified price.
A market order is an order to buy or sell a security at the going market price, usually used for highly liquid stocks. It does not specify a price and will be executed immediately at the best available current price. This is in contrast to limit orders, which only execute a purchase or sale at a specified price or better.
Good Till Canceled Order (GTC)
A Good Till Canceled Order (GTC) is an order to buy or sell a stock that remains active until it is completed or canceled. It can be placed by an investor to buy or sell a security at a specified price and typically has a time limit set by the brokerage firm. GTC orders are always tied to a condition, such as the stock achieving a certain price. For example, if the investor has a stock priced at $10 per share, but he wants to sell if the stock moves to $15, then the Good til Cancelled order will stand until that condition is met, unless the investor intervenes and cancels the instruction.
A day order is an order to buy or sell a security that automatically expires if not executed on the same day it was placed. It is not carried over into after-hours trading or the next regular trading session. If the trade can't be executed at the specified price by the end of the day, then the order expires. Day orders are used when selling and buying would be a wise move but this could no longer be the case the following day due to volatile stock prices.
Volatility on the stock market refers to the degree to which the overall market value or prices of individual stocks fluctuate up and down. It is typically measured using the standard deviation or variance between returns and is often associated with large price swings. The Chicago Board Options Exchange's Volatility Index (VIX) is a commonly used measure of volatility that uses stock options to determine market risk. High volatility means prices can change quickly and dramatically, while low volatility means lower risk but potentially lower rewards. Investors can use historical volatility data and implied volatility (IV) to understand market patterns and predict future price movements.
Liquidity on the stock market is the ease with which a stock can be bought or sold without affecting its price. High liquidity means there is a high supply and demand for an asset, making it easy to buy or sell. Liquidity is important because it determines how quickly a position can be opened or closed, and securities with low liquidity usually carry a higher risk premium. Market liquidity is measured by indicators such as trading volume, bid-ask spread, and accounting ratios such as the current ratio and quick ratio. High liquidity ensures that traders can efficiently exchange assets and investment instruments.
Trading volume is the total number of shares of a security that are traded during a given period of time. Low trading volume can indicate a lack of interest in buying or selling, while high trading volume that accompanies rising prices or an upward trend can signal strong interest in a security. Volume is an important indicator in technical analysis because it is used to measure the relative significance of market moves. When bar chart bars are higher than average, it is a sign of high trading volume. High-frequency traders and index funds have become major contributors to trading volume statistics in U.S. markets.
Going long on the stock market means buying a stock with the expectation that its price will rise. An investor in a long position owns the security and their funds invested will rise and fall with the price of the stock. The opposite of a long position is a short position, which involves selling a stock you do not own with the expectation that its price will decrease. To go long on a stock, an investor must open an account with a brokerage firm. Deciding when to enter a trade is an important aspect of investing strategy when considering going long on a stock. However, going long carries risks if the price falls instead of rises, so it is important for investors to understand what they are doing before taking this kind of position.
Going short on the stock market means taking a bearish stance by selling a security with the intention of buying it back at a lower price later. This is done by borrowing a stock from a broker and then selling it, hoping to buy it back at a lower price in the future. Shorting the market allows traders to profit from price dips. There are three standard ways to short the stock market: short-selling, futures contracts, and options. Short-selling involves borrowing shares from a broker and then selling them, while futures contracts involve agreeing to buy or sell an asset at a predetermined price in the future. Options involve buying or selling an option contract that gives the right but not the obligation to buy or sell an asset at a predetermined price in the future.
Averaging down in the stock market is an investment strategy that involves buying more shares of a stock when its price declines, which lowers the average cost per share. This strategy, also known as "dollar cost averaging," allows investors to take advantage of market volatility and reduce their average price per share. Averaging down is often used by long-term value-oriented investors, but it carries significant risk if not done properly. The main benefit of averaging down is that it provides a lower breakeven point for an investor's position, potentially maximizing returns. However, losses are exacerbated if the stock continues to decline.
Market capitalization (market cap) is the most recent market value of a company's outstanding shares. It is calculated by multiplying a company's shares outstanding by its price per share. Market capitalization is used to determine a company's size, rank companies and compare their relative sizes in an industry or sector, and make investment decisions. Large-cap companies own more capital and assets than small-cap companies. Float-adjusted market cap (sometimes called free-float market cap) is calculated using only shares available to the general public, excluding locked-in shares held by insiders or major shareholders. Market capitalization can be used to assess the value of a company in the stock market compared to other companies, as it takes into account both the number of shares issued and the price per share.
Public float on the stock market is the number of shares available for trading in the open market. It is calculated by subtracting closely-held and restricted stocks from a firm's total outstanding shares. A company's float can fluctuate over time and is influenced by various conditions, such as when a company sells additional shares to raise capital or implements a share buyback. Generally, a higher float indicates that the general investing public owns the shares, not the operators, and it is good for stocks to have a high float as it increases liquidity and narrows the bid-ask spread.
Outstanding shares refer to a company's stock currently held by all its shareholders, including institutional investors and company officers. The outstanding shares total is used to calculate financial metrics such as earnings per share and market capitalization. Outstanding shares are equal to the number of shares issued minus the number of shares held in the company's treasury. Outstanding shares fluctuate due to actions such as stock splits and share repurchase programs. The number of floating shares is found by subtracting closely-held shares from the number of outstanding shares. The basic number of outstanding shares is synonymous with the number of currently outstanding stocks, while fully diluted outstanding stocks include potential common stock from options and convertible securities.
An initial public offering (IPO) is the process where a privately owned company offers stocks for purchase to the general public for the first time on the stock exchange to raise capital. Companies must go through a series of financial auditing and underwriting processes before they can sell shares to public investors. Investors can buy IPO stock by opening a brokerage account and placing an order through their broker. Exchange-traded funds (ETFs) that invest in IPOs, referred to as IPO ETFs, offer access to newly public companies.
A secondary offering is a public sale of stocks, bonds, or another security that occurs after a company's initial public offering (IPO). It involves the company making some of its authorized shares available for sale to the public, in which case all funds raised go to the company. Alternatively, a secondary offering may involve existing shareholders selling their shares on the secondary market. Secondary offerings are often used by companies to raise capital for acquisitions and expansions and to increase liquidity and reduce stock price volatility. They can come with restrictions such as lock-up periods that prevent investors from reselling their shares for a certain period of time. In a non-dilutive offering, no new shares are made available and the proportional value of a single publicly held share does not change. In a dilutive offering, the share price that an investor pays is lower than the current market value due to expected dilution.
Blue-chip stocks are stocks of large, well-established, and financially sound companies that have operated for many years. They typically have a market capitalization of at least $5 billion and are often industry leaders in their respective sectors. Blue-chip stocks are usually considered to be safe investments due to their long history of steady growth and dividend payments, although they can still be subject to price fluctuations. Blue-chip stocks can be bought as individual stocks or through funds containing multiple stocks. They are usually appropriate for use as core holdings within a larger portfolio but should not make up the entire portfolio. Investing in blue-chip stocks is generally seen as a way to achieve long-term growth with relatively low risk.
Forex (FX) is the global electronic marketplace for trading international currencies and currency derivatives. It has no central physical location, yet it is the largest, most liquid market in the world with average traded values that can be trillions of dollars per day. Forex trading involves buying one currency while at the same time selling another, and it is open 24 hours a day, five days a week, except for holidays. Leverage up to 50:1 in the U.S. and even higher in some parts of the world is available to traders. The forex market allows individuals to enter the world of forex trading through investment firms, banks, and retail brokers.
Hedge funds are alternative investments that use pooled funds and employ numerous different strategies to earn active returns for their investors. They typically have more flexible investment strategies than mutual funds, and are not subject to the same level of regulations. Hedge funds charge an asset management fee of 1-2% of assets, plus a “performance fee” of 20% of the hedge fund’s profit. The goal of investing in a hedge fund is to get positive returns from exclusive assets uncorrelated to typical mainstream investments.
Mutual funds are pooled investment vehicles, where money collected from various investors is taken together to buy a portfolio of securities such as stocks, bonds, and short-term debt. Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities, allowing them to participate proportionally in the fund's assets and income generated. There are several types of mutual funds available for investment, including stock funds, money market funds, bond funds, and Exchange Traded Funds (ETFs). Mutual funds can provide benefits such as lower transaction costs than what an individual would pay for securities transactions, but they also carry some level of risk as the securities held by a fund can go down in value. Investors should read the prospectus carefully before buying shares in a mutual fund to understand the mutual fund's investment objectives, risks, performance, and expenses.
An ETF (Exchange-Traded Fund) is a type of investment fund that holds assets such as stocks, commodities, bonds, or foreign currency. They can be bought and sold like regular stocks and often track indexes like the S&P 500 or the Dow Jones. ETFs have lower expense ratios than mutual funds and offer more liquidity and price discovery.
An ADR (American Depositary Receipt) is a certificate issued by a US bank representing a certain number of shares in a foreign company. They are traded on US stock exchanges and allow US investors to buy foreign stocks. ADRs are priced in US dollars and closely track the price of the company's stock on its home exchange.
Beta is a measure of the volatility or risk of a security or portfolio compared to the market as a whole. A stock with a beta above 1.0 is more volatile than the market, while a stock with a beta below 1.0 is less volatile. Beta is calculated using regression analysis and represents the tendency of a security's returns to respond to market swings. Alpha is another measure of risk related to beta that measures returns after adjusting for overall market volatility and random fluctuation.
A stockbroker is a regulated financial representative who enables the buying and selling of securities on behalf of clients, institutions, and firms. They are typically paid on a commission basis and hold a bachelor's degree in finance or business administration. Stockbrokers can be associated with brokerage firms or be independent agents and may provide advice on which stocks to buy and sell. The average salary for a stockbroker in the US is $75,521.
A dividend is a distribution of a portion of a company's earnings paid to shareholders. It can be issued as cash or additional shares (stock dividends). Dividends provide investors with a reward for their investment in the company's equity. Stock dividends are issued when a company wants to reward its investors but doesn't have the cash or prefers to preserve it for other purposes. Dividends are usually paid out on common stock and may take the form of dividend per share (DPS). Investors typically seek a dividend with a payout ratio of 80% or less.
Stock charts are used to show how a stock's price has changed over time. They include information such as pricing trendlines, volume, resistance and support levels, and technical indicators. Stock charts are useful for identifying support and resistance levels for stocks. They have two main parts: the thin line (shadow) which shows the price range from high to low, and the wider area (real body) which measures the difference between the opening price and closing price. Other terms related to stock charts include bid, volume, average volume, day's range, and beta.
A stock exchange is a marketplace where securities such as stocks and bonds are bought and sold. It allows companies to raise capital through initial public offerings (IPOs) or issuing new shares. Companies listed on a stock exchange must follow reporting standards set by regulatory bodies. The leading US stock exchanges are the NYSE (New York Stock Exchange) and the Nasdaq. The stock market is a component of a free-market economy and allows companies to raise money from investors to grow their businesses.
Execution on the stock market refers to the completion of a buy or sell order for a security. When an investor places an order, it is sent to their broker who decides which market to send it to for execution. The timing and method of trade execution can affect the price investors pay for the stock. Brokers have several options for executing trades such as sending orders to a market or market maker, internalizing orders using the firm's inventory of stocks, or manually executing trades with the help of a dealer or broker. The SEC requires brokers to report the quality of their executions on a stock-by-stock basis and also requires them to notify customers if their orders are not routed for best execution.
Day trading is a type of speculative investing that involves buying and selling the same stock or another asset within the same day to profit from rapid intraday price movements. Day traders are classified based on the frequency of their trading, with pattern day traders (PDTs) executing four or more day trades over the span of five business days using a margin account. The goal of day trading is to make small profits from short-term price inefficiencies based on the theory of supply and demand. Day traders also benefit from their market knowledge gained through news or announcements that could impact security prices.
Margin is the collateral that an investor must deposit with their broker or exchange to cover credit risk. Margin trading allows investors to buy more stock than they could without borrowing money, using leverage. When investing on margin, investors must meet a minimum equity requirement, typically between 30-50% of the purchase price of a marginable investment. Marginable investments include stocks listed on a national securities exchange, any over-the-counter security approved by the SEC for trading in the national market system, or appearing on the Board's list of over-the-counter stocks.
A moving average (MA) is a widely used indicator in technical analysis that helps smooth out price action by filtering out random price fluctuations. It is a trend-following or lagging indicator based on past data points. There are two main types of moving averages: simple moving average (SMA) and exponential moving average (EMA). A simple moving average is calculated by taking the arithmetic mean of a given set of values over a specified period, while an exponential moving average gives more weight to recent prices in an attempt to make them more responsive to new information. The 50-day moving average is a widely respected technical indicator that helps investors gauge whether a stock is trending up or down and identify areas of support and resistance. It is considered a lagging indicator, and when a stock is forming a base, it should ideally form partially or entirely above the 50-day line.
A stock portfolio is a collection of stocks that an investor holds with the aim of making a profit. It is important to have specific goals in mind when assembling a stock portfolio, and investors may choose to have multiple portfolios that each reflect a different strategy for a different need. A stock portfolio can include growth stocks, which are expected to climb in value quickly relative to the rest of the market, and income stocks, which are expected to generate a reliable return with little risk. Diversification is also important when building a stock portfolio, as it involves buying several different stocks and keeping them in the same portfolio to help balance out profits and losses. A market portfolio is a theoretical bundle of investments that includes every type of asset available in the world financial market, with each asset weighted in proportion to its market capitalization. It is an essential component of the capital asset pricing model (CAPM), which is widely used for pricing assets. However, economist Richard Roll suggested in 1977 that it is impossible to create a truly diversified market portfolio in practice due to its complexity.
A price quote on the stock market is a fixed price for a security offered by a supplier to potential buyers. It includes various data points such as bid and ask prices, volume traded, and market capitalization. These quotes are used to provide customized pricing for specific jobs and to measure a security's sensitivity to the market.
A stock market rally is a broad-based increase in stock prices, characterized by positive investor sentiment and strong buying activity. It can take place in various settings, but is generally a rapid and persistent upward movement. A bear market rally is a 10-20% increase during a primary bear market trend.
Stock market sectors are large groupings of companies with similar business activities. The Global Industry Classification Standard (GICS) identifies 11 sectors: Energy, Materials, Industrials, Consumer Discretionary, Consumer Staples, Health Care, Financials, Information Technology, Communication Services, Utilities, and Real Estate. Investors may engage in sector rotation, shifting assets from one sector to another that is expected to perform better.
A stock symbol, also known as a ticker symbol, is a unique series of letters used to identify a specific publicly traded company and its securities. These symbols are typically made up of one to five letters and are used to facilitate the large number of daily trades that occur worldwide.
Dividend yield is a financial ratio that represents the yearly dividend payments of a company relative to its share price. It is calculated by dividing the dividend payments by the stock price and is expressed as a percentage. Many investors consider a dividend yield between 2-5% to be positive.