Advanced Stock Trading Terms You Should Know
For the layman investor, there are technical jargon that are not easily understood. Here are some common ones and what they mean
1) Arbitrage
Market Arbitrage simply refers to the process of buying and selling the same security at the same time, from different markets and at different prices. Here, one market sells at a lower rate and the other sells at a higher rate.
An investor simply buys from the cheaper one and sells on the higher priced one. The goal of arbitrage is to take advantage of the price difference to make easy gains.
2) Index
A stock market index is a tool used to measure parts of the stock market. It serves as a benchmark that is used as a reference for traders.
It is computed using prices of selected stocks and it helps in assessing the market and to compare with specific investments. A popular index is the Standard & Poor’s index that compares 500 or 1000 stocks in the US.
3) Hedge
A hedge is a strategy that helps the investor reduce the risk of adverse price movements of securities. Here, investors use certain investments to hedge other investments that are adversely correlated to reduce the overall risk of their portfolio.
4) Convertible Securities
Convertible securities are securities in one form that can be changed or converted to other forms. For example, a security like bonds can be converted to preferred stocks and it is usually based on the option the holder has to make the swap.
5) Beta
Beta is simply a unit of measurement that measures the relationship between the price of a particular stock in respect to the entire stock market.
It indicates whether an investment is more or less volatile than the entire market itself. It shows how much individual stocks deviate from the position of the stock market.
6) Blue Chip Stocks
These are stocks of large companies that have existed for many years and are industry leaders. They typically have a good record of significant dividend payments and usually have their market capitalization stated in billions.
The term is derived from blue gambling chips which are the premium and highest denominated chips in casinos.
7) Capitalization Change
Capitalization change refers to changes in the issued and outstanding listed securities of any issuer. It involves the modification of a company’s capital structure or its initial capitalization from equity to debt or vice versa.
The implication of this is that there might be need for issuing shares, cancelling listed securities, or repurchasing shares.
8) Delist
Companies or securities that are removed from the stock market re said to be delisted. This typically happens when a company goes bankrupt or its distribution of securities are now too low to be made public.
It can also take place when a company breaches rules of its listing agreement or is deemed to be fraudulent.
9) Rally
A rally is simply a fast increase in the general price level of the market or of the price of a stock. The increase is usually sustained over a period of time and it can happen during a bull period (bull rally) or a bear period (bear rally).
A bear rally happens when there are increases of above 10% in price levels.
10) Exchange-Traded Fund (ETF)
An ETF is a form of marketable security whereby an investor purchases an entire portfolio of stocks through a single security based on the returns of a stock market index.
ETF’s are listed on a stock exchange and while they seem like mutual funds, they are traded like single stocks.
11) Board Lot
Board Lot is simply a standard number of shares or trading units. The group of shares are sold as a single block on the stock exchange for ease.
This unit depends on the share price of stocks and are set by the exchange board. The popular board lot sizes are 50, 100, or 500.
12) Defensive Stock
A defensive stock is simply a stock that has the capacity to provide stable dividends for the investor whether the market is doing well or not.
Investors use stocks like this to get stable earnings at a constant rate and it serves as a buffer for the highly volatile stocks because even in extreme economic downturns, these stocks still thrive.
13) Insider Trading
It is no news that the market is influenced by information. When information that are not public knowledge are divulged by either people belonging to a company or when some insiders possess material information that is not public knowledge about a stock, giving them an unfavorable advantage.
14) Over-The-Counter (OTC) Market
This is where trade is done directly between two parties for issues that are not listed on a stock exchange. Also known as an unlisted market, it does not have the supervision of an exchange and usually through dealer networks.
15) Escrowed Securities
These are securities that cannot be traded or transferred until a certain period has lapsed or until certain events take place. They are not freely tradable and are held by a third party pending completion of a corporate action.
Written by Lawretta Egba