Investing in the stock market can be complex and intimidating, especially if you’re new to the game. To help you navigate this world, we’ve compiled a dictionary of essential stock market terms for traders and investors. Understanding these terms can help you make more informed decisions whether you're a beginner or a seasoned investor.
Alpha: A measure of an investment’s performance compared to a market index or benchmark, representing the excess return of an investment relative to the return of the benchmark index.
Ask Price: The lowest price at which a seller is willing to sell a security.
Asset Allocation: The process of dividing an investment portfolio among different asset categories, such as stocks, bonds, and cash. The goal is to balance risk and reward based on an investor’s goals, risk tolerance, and investment horizon.
Bear Market: The opposite of a bull market, marked by falling stock prices and a generally negative investor sentiment. Bear markets can also last for extended periods and are typically associated with economic downturns.
Beta: A measure of a stock’s volatility in relation to the overall market. A beta greater than 1 indicates that the stock is more volatile than the market, while a beta less than 1 means it is less volatile.
Bid Price: The highest price a buyer is willing to pay for a security.
Bid-Ask Spread: The difference between the bid price and the ask price of a security. It represents the transaction cost and liquidity of the security.
Blue Chip Stocks: Shares in large, well-established, and financially sound companies that have operated for many years. These stocks are often considered safe investments due to their stable performance and dividend payouts.
Bollinger Bands: A technical analysis tool that consists of a middle band (a simple moving average) and two outer bands set at a distance based on standard deviations. They help traders identify potential overbought or oversold conditions.
Book Value: The net value of a company’s assets, calculated as total assets minus intangible assets (such as patents and goodwill) and liabilities. Book value can be used to determine whether a stock is undervalued or overvalued.
Breakout: Occurs when the price of a stock moves above a resistance level or below a support level, often accompanied by high trading volume. This is typically seen as a signal that the stock will continue to move in the direction of the breakout.
Bull Market: Characterized by rising stock prices and a generally positive investor sentiment. This period can last for months or even years and is often driven by strong economic fundamentals.
Buy and Hold: A strategy involving purchasing stocks and holding onto them for a long period, regardless of market fluctuations. This approach is based on the belief that the market will increase in value over time.
Candlestick Chart: A type of financial chart used to describe price movements of a security, derivative, or currency. Each “candlestick” typically shows one day, and includes the open, high, low, and close prices.
Capital Gains: The profit realized from the sale of a security or investment. Capital gains can be short-term (held for less than a year) or long-term (held for more than a year).
Day Trading: A strategy where investors buy and sell stocks within the same trading day, aiming to capitalize on short-term price movements. This approach requires close monitoring of the market and can be highly speculative.
Dead Cat Bounce: A temporary and short-lived recovery in the price of a declining asset, such as a stock, before it continues to fall further. This term is often used in financial markets to describe a brief, deceptive rally that occurs during a prolonged downtrend.
Dollar-Cost Averaging (DCA): An investment strategy where a fixed dollar amount of a particular investment is purchased on a regular schedule, regardless of the share price. This strategy reduces the impact of volatility on the overall purchase.
Dividend: A portion of a company’s earnings that is paid out to shareholders. Dividends are usually paid on a regular basis and can be an attractive source of income for investors.
Dividend Yield: A financial ratio that shows how much a company pays out in dividends each year relative to its stock price. It is calculated as annual dividends per share divided by the price per share.
Diversification: The strategy of spreading investments across various asset classes or securities to reduce risk.
Earnings Per Share (EPS): A company’s net profit divided by the number of outstanding shares of its common stock. It’s a key indicator of a company’s profitability.
ETF (Exchange-Traded Fund): A type of investment fund that is traded on stock exchanges, much like stocks. ETFs hold assets such as stocks, commodities, or bonds and generally operate with an arbitrage mechanism designed to keep trading close to its net asset value, though deviations can occasionally occur. They offer the benefits of diversification, low costs, and liquidity.
EV/EBITDA: A valuation metric that compares a company’s enterprise value (EV) to its earnings before interest, taxes, depreciation, and amortization (EBITDA). It is used to assess the value of a company, considering its debt.
Ex-Dividend Date: The date on which a stock begins trading without the value of its next dividend payment. Investors who purchase the stock on or after this date are not entitled to the declared dividend.
FCF Yield (Free Cash Flow Yield): A financial ratio that measures a company’s free cash flow relative to its market value. It is calculated by dividing free cash flow by the market capitalization of the company. FCF Yield is used to assess the value of a company, with a higher yield indicating a potentially undervalued company with strong cash generation capabilities.
Fundamental Analysis: This analysis method evaluates a stock by examining the underlying company’s financial statements, health, and overall economic environment. It includes studying metrics like revenue, earnings, future growth, and return on equity.
Gap Down: Happens when the price of a stock opens lower than the previous day’s closing price with no trading activity in between. This is often seen as a bearish signal, indicating a decrease in investor confidence.
Gap Fill: Refers to the price movement of a security returning to the level where a previous gap occurred on a stock chart.
Gap Up: Occurs when the price of a stock opens higher than the previous day’s closing price with no trading activity in between. This can be a bullish signal indicating strong interest in the stock.
Hedge: An investment made to reduce the risk of adverse price movements in an asset. Typically, a hedge consists of taking an offsetting position in a related security.
Index: A statistical measure of the performance of a group of stocks. Examples include the S&P 500, which tracks 500 of the largest publicly traded companies in the U.S., and the Dow Jones Industrial Average, which includes 30 major companies.
Index Fund: A type of mutual fund or ETF designed to replicate the performance of a specific index, such as the S&P 500.
Initial Public Offering (IPO): The process through which a private company offers shares to the public for the first time. It’s a way for companies to raise capital from public investors.
Intrinsic Value: The actual worth of a company or an asset based on an underlying perception of its true value, including all aspects of the business. This value may or may not be the same as the current market value.
Leverage: The use of borrowed capital to increase the potential return on investment. Leverage can amplify gains, but it can also amplify losses.
Liquidity: Describes how quickly and easily an asset can be converted into cash without significantly affecting its price. Stocks with high liquidity are easier to buy and sell.
MACD: The Moving Average Convergence Divergence (MACD) is a popular technical analysis indicator used in stock trading and other financial markets. It helps traders understand the relationship between two moving averages of a security’s price and is used to identify potential buy and sell signals.
Margin: Borrowed money used to purchase securities, where the securities themselves serve as collateral. Trading on margin can magnify both gains and losses.
Market Capitalization (Market Cap): The total market value of a company’s outstanding shares of stock. It’s calculated by multiplying the current share price by the total number of outstanding shares. Market cap helps categorize companies into different size ranges, such as small-cap, mid-cap, and large-cap.
Market Order: An order to buy or sell a security immediately at the current market price.
Moat: Popularized by Warren Buffett, a moat refers to a company’s ability to maintain competitive advantages over its peers to protect its long-term profits and market share.
Moving Average: A widely used indicator in technical analysis that helps smooth out price action by filtering out the noise from random price fluctuations. The two most common types are the simple moving average (SMA) and the exponential moving average (EMA).
Mutual Fund: An investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities, managed by a professional fund manager.
Penny Stocks: Low-priced, small-cap stocks that trade at less than $5 per share. They are considered highly speculative and risky investments due to their volatility and low liquidity.
PEG Ratio: A stock’s price-to-earnings (P/E) ratio divided by the growth rate of its earnings. It’s used to determine a stock’s value while taking into account the company’s earnings growth.
Portfolio: A collection of investments owned by an individual or institution. A well-diversified portfolio includes a mix of asset types, such as stocks, bonds, and real estate, to manage risk.
Price-to-Book Ratio (P/B Ratio): A financial ratio used to compare a company’s current market price to its book value. It is calculated by dividing the stock price by the book value per share.
Price to Earnings Ratio (P/E Ratio): A measure of a company’s current share price relative to its per-share earnings. It helps investors determine the market value of a stock compared to the company’s earnings.
Rebalancing: Adjusting the proportions of assets in a portfolio to maintain the desired level of asset allocation. This process usually involves selling some assets and buying others to keep the portfolio aligned with the investor’s goals.
Relative Strength Index (RSI): A momentum oscillator that measures the speed and change of price movements. It ranges from 0 to 100 and is typically used to identify overbought or oversold conditions in a stock.
Retest: Happens when the price of a stock moves back to a previously broken resistance or support level to test its validity. Successful retests can confirm the strength of the breakout or breakdown.
Risk Management: The process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions. Effective risk management involves diversification, asset allocation, and other strategies to limit potential losses.
Securities: Financial instruments that represent ownership positions in publicly traded corporations (stocks), creditor relationships with governmental bodies or corporations (bonds), or rights to ownership (derivatives).
Sector: A segment of the economy in which businesses share the same or related products or services. Examples include technology, healthcare, and financials.
Short Selling: Involves borrowing shares of a stock and selling them with the expectation that the price will fall. The goal is to buy back the shares at a lower price, return them to the lender, and pocket the difference as profit.
Stock Split: A corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares. While the number of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts.
Stop Loss: An order placed with a broker to buy or sell once the stock reaches a certain price. It’s used to limit an investor’s loss on a security position.
Technical Analysis: Involves evaluating a stock based on its past price movements and trading volume. Analysts use charts and other tools to identify patterns and trends that can indicate future price movements.
Trailing Stop: A stop order that can be set at a defined percentage or dollar amount away from a security’s current market price. The trailing stop price moves with the market price when it is favorable but remains the same when the market price goes against you.
Volatility: Refers to the degree of variation in a trading price series over time. High volatility means the stock price can change dramatically over a short period, while low volatility indicates steadier price movements.
Volume: The number of shares or contracts traded in a security or market during a given period. Higher volume often indicates higher interest in the security.
Yield: The income return on an investment, such as the interest or dividends received, expressed as a percentage of the investment’s current price or cost.