If you are new to trading stocks, the insider lingo of stock market terms can be off-putting. But learning some basic stock trading terminology is a great place to begin before investing any money. For any new investor just getting into trading, these are the top basic stock terms to know before you start.
Buying stock, also known as shares or equity, is like owning a piece of a company. You purchase stock in a company, and receive a proportional part of that corporation’s assets and earnings. The price of stock is different for each company and fluctuates over time.
This is why you hear the phrase, “Buy low, sell high” because if you invest in an organization when their stocks are priced lower, and then the company grows and makes money, you may be able to make a profit if you sell that stock at a higher price later on. (To be clear, that’s not advice we’re giving—it’s just an investment adage you might hear around town.)
To trade in the stock market means the buying and selling of a stock. For every seller, there is a buyer on the other side. This transfer, shares of stock in exchange for money, requires an agreement on price. People who trade can be small individual investors, or larger entities like banks and insurance companies, whose buy or sell orders might be executed for them by a stock exchange trader.
Also known as a ticker symbol, this short abbreviation helps traders identify stocks from various companies. The limit is usually one to five characters, made up of letters and numbers, and is often tied closely to the company’s own name—AAPL for Apple, for instance, or V for Visa.
Bid and Ask
Any potential buyer bids a certain price for stock, and the seller asks for a specific price for the same stock. Buying or selling at the market means you will accept any current bid or ask price, resulting in a market order.
When the bid and ask prices match, a sale takes place, on a first-come basis if there is more than one buyer. The bid-ask spread is the difference between the highest price a buyer is willing to bid, and the lowest price a seller is willing to ask.
Short for stockbroker, this is a professional who executes buy and sell orders on behalf of clients, typically for a fee or commission. Brokers usually work for a brokerage firm. This person can also serve as a financial advisor, understanding the markets and making investment decisions that will ideally lead to profit for their clients.
The payment made from a company to its shareholders, often drawn from earnings. Usually, these are made in cash, but sometimes they are paid out as additional stock shares. They are typically paid on an annual or quarterly basis, and typically only come from more established companies, not startups.
A stock yield is the ratio of annual dividends divided by the share price. For example, if a stock is set to pay $1 in dividends over the next year, and is currently trading for $50, the yield would be 2%. Dividends and yield are both an important reflection of a company’s value, but only a piece of the puzzle.
Collectively, all of the financial assets, such as stocks, that an investor currently owns. Building up a diversified portfolio means investing in many different assets that perform differently so that if one asset falls in value, other assets will hopefully pick up the slack.
A stock exchange can be a physical in-person location, like the NYSE, where transactions take place on a trading floor. Here, traders shout their bid and offer prices, known as open outcry. Other stock exchanges such as the NASDAQ are electronic only, where everyone uses computers to manage trades.
Market capitalization is the total dollar market value of a company’s outstanding shares—which is the stock currently held by all shareholders. The market cap is calculated by multiplying the number of outstanding shares by the share price.
Since it refers to the organization’s total value of all shares of stock, it is an important number to consider relative to future growth expectations or when comparing companies in the same sector.
Besides buying at face value, aka a market order, there are also limit orders, good til canceled orders, and day orders. More advanced traders, or with the help of a broker, can negotiate stock prices. A limit order will only allow someone to buy or sell stock at a specific price or better.
A day order is exactly what it sounds like—an order to buy or sell that automatically expires if it is not executed that same day. Good til canceled (GTC) orders can be good for investors who do not wish to consistently watch stock prices and can place buy or sell orders at specific price points, and keep them for many weeks. If the market price hits the price of the GTC before it expires, the trade will execute.
Volatility really comes down to the range a stock price changes over time. If the price stays stable, then the stock has low volatility. If the price jumps from high to low and then back to high often, it would be considered more of a high-volatility stock.
Market liquidity is essentially how easily shares of stock can be converted to cash. The market for a stock is “liquid” if its shares can be sold quickly, and the act of selling only minimally impacts the stock price.
For a stock trading on a stock exchange, the volume is typically reported as the number of shares that changed hands during any given day. It’s important to note that even with an increasing price, if it’s paired with a decreasing volume, that can mean a lack of interest in a stock.
A price increase or drop on a larger volume day (i.e., a bigger trading day) is a potential signal that the stock has changed dramatically.
If an investor already owns some stock but then purchases additional stock after the price has dropped, this is known as averaging down. It results in a decrease in the overall average price for which you purchased the company stock. Investors can profit if the company’s price subsequently recovers.
The Initial Public Offering is the process by which a company first sells stocks to the public. A company’s goal is to sell a predetermined number of shares to the public at the best possible price. Not all large companies are public; IKEA and Mars Candy are still privately held, meaning they have a small number of shareholders and individuals aren’t able to invest in them. But going public offers the company a lot of money for it to grow, by raising a lot of money quickly with a new group of large investors.
Sadly, not a fun stock market-themed snack. These are largely considered to be top-notch stocks you can invest in long term. These stalwarts of the stock market are well-established, large, and financially sound companies like Disney, Intel, and Coca-Cola.
Bull and Bear Markets
When someone refers to a bull market, it means broadly that the market is “up.” A bear market on the other hand, means the market is “down.” A bull market typically describes an economy that is growing and optimistic, while a bear market indicates the opposite, with loss on investments and general pessimism about the economy.
This can be as simple as the difference between rising and falling stock prices, but also takes into account things like job creation or loss, and unemployment rates.
No matter when you start investing, it’s always important to have a great team supporting you as you navigate the stock market. If you are looking for a smart, painless way to begin, SoFi offers wealth management using automated investing, with access to our human financial advisors.
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