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Stock Terminology for Beginners

Selling and buying shares in the stock markets can make a lot of money. However, for inexperienced investors, all the terminology of everyday stock trading may be confusing, particularly if they are unfamiliar with trading patterns and techniques.

If you are a potential investor, make sure that take the time to understand all the information you can, relating to the everyday processes and stock terminology used – these stock market terms should become part of your normal vocabulary. So to help widen your vocabulary a little, here are a few stock market terms that you may be unfamiliar with:

Stocks

Stocks are the most commonly traded items in the stock market. These are actually shares, or percentages of ownership, of publicly listed companies – which basically means that they can be traded openly on the stock market by anyone.

Whenever people buy the stock of a certain company, this means that they become an owner of that business (albeit a very small percentage). This ownership gives the stockholder ( a.k.a.”shareholder”) certain privileges and rights within the company (including the right to vote in shareholder meetings, such as the Annual General Meeting (AGM) and also his or her share of the company’s profits (Dividends)).

Broker

A broker, or stockbroker is the person who is responsible for the actual trading of stocks. He or she carries out the the negotiations involved in selling and buying shares in the companies involved, on behalf of the investors. There are many different kinds of broker, including full-service, online, auto-trade and discount brokers.

Bull Market

A bull market is a market that exhibits a continual rise in the value of its stocks as well as a steady overall growth. Typically, in this type of market, investors have an optimistic attitude and may want to buy stocks, rather than sell, with the hope that the market will continue to rise, and they will be able to make a good profit when they eventually choose to sell the stock.

Bear Market

Bear markets are characterized by substantial losses in particular sub-markets and companies, with general declines overall. Under this types of market, most investors lean toward selling stock rather than buying and may be pessimistic about investing. Investors usually also try to shift their portfolio to “steadier” investments, such as commodities, bonds or even cash.

Dividends

Dividends are payments often given to stockholders (but not always) after a profitable quarter for the company. Many investors reinvest their dividends in more shares of the stock, which often allows their investment’s value to grow significantly faster.

Futures

Futures are traded in the stock market just like normal stocks. However, these are purchased against the future costs of commodities (physical goods like metals, mineral and foodstuffs). Futures give a return on the investment, if in time, the actual price of the commodities becomes higher than what was paid initially for the futures. Conversely, if the price becomes lower that what was paid for the futures, money will be lost.

Day Trading

This is a trading practice of buying and selling stocks aggressively during one day. Usually, day traders do this several times each day in order to attempt to make a number of profits during the day.

Trading on Margin

Trading on margin is essentially investing and trading stocks with the use of borrowed money. By trading on margin, you can acquire shares of stock for less than the actual market price. The remainder of the cost can be settled upon the subsequent sale of the particular stock, or at a later date. This can lead to big profits, if you know what you are doing, but big losses if it goes wrong. This is because the absolute drop in the value of the stock is reflected only in your the net value (total value of shares – loan). For example: Jim acquires shares in Company A for $200, using $40 of his own money, and $160 borrowed from his broker. The net value (share – loan) is thus $40. His broker specifies a minimum margin requirement of $20. Suppose the share value drops to $170. The net value is now only $10 (net value ($40) – share loss of ($30)), and Jim will either have to sell his stocks in Company A or repay part of the broker’s loan (so that the net value of his position stays above $20).

In the early 20th century, margin requirements were relatively lax. Brokers required investors to contribute only very little of their own money. This has been tightened up in modern times, in fact, the Federal Reserve’s margin requirement now restricts debt to 50 percent of the total investment value.

These stock market terms are only a few of the more widely used terms used in stock trading. With the complex nomenclature used the the stock markets, it is easy for beginners to get into a situation where they don’t know enough to do what they want. Learning the language of trading is a key step in becoming comfortable and confident in a trading environment.

Also, if you are a beginner, put in a little extra work, not only to learn the stock terminology, but also to educate yourself about the investment strategies used to maximize profit. A little hard work will undoubtedly pay off. Maybe not tomorrow, but with the right mindset, perhaps sooner than you expect.

Why not check out our full Glossary of Stock Market Definitions