Basic Stock Trading Terms You Should Know As An Investor

You would normally hear investment professionals throw around a lot of jargon in the stock market. As a rookie investor, these basic terms would bring you up to speed.

Anyone that ever tells you investing is hard truly doesn’t love you – take it from us. It isn’t rocket science, and even if it was, rocket science can also be understood by garnering the right skills and the right knowledge. As you already know, stock trading is the buying and selling of stocks and it is a key component of our ideal investment portfolio.

Sometimes the difference between you and the professionals is the language they communicate with one another in the stock market. These terms are typically jargon that help you navigate and understand the securities industry. At the basic level, here are some of the stock trading terms you should know.

1) Bull Market

A market is said to be bullish when share prices are rising and you are encouraged to buy. Just as a bull attacks by thrusting its horns towards the attacker, the bull market is the condition or covers the period where the financial market of a group of securities are forward looking. In the bull market, share prices are expected to rise or are rising and investors typically buy in order to be able to sell at future dates.

2) Bear Market

The bear market is the opposite of the bull market and it can also be explained based on their approaches to attacks. When attacked, a bear swipes its paws downward. Consequently, a bear market represents a market where share prices are falling. Here, investors are typically encouraged to sell as investing is risky. It is important to note that a share price has to fall by at least 20 percent before it is considered to be bearish.

3) Initial Public Offering (IPO)

Investment represents capital to the company and an Initial Public Offer (IPO) is the process of offering the shares of a private corporation to the public for the first time. This is what companies mean when they are “going public.” Here, a company's owners sell a portion of the firm to public investors and it is done through an underwriting process with investment bankers.

4) Bid Price

A bid price is typically the price that a buyer, bidder, or dealer is prepared to pay for securities or other assets.

5) Ask Price

The ask price on the other hand is the lowest a seller is willing to take for the securities. This is also referred to as the offer price.

6) Spread

Spread typically explains range. It represents the difference between two share prices or two interest rates. As far as trading is concerned, a spread is the difference or gap between the bid and the ask prices of a security ranging from stocks, bonds or other commodities.

7) Volatility

Volatility is typically used to explain risk with regards to fluctuations. The finance explanation of volatility is the degree of variation of a price series over time. In stock trading, highly volatile assets explain securities that fluctuate a lot while assets low in volatility are stable.

8) Trading Volume

Volume has to do with amount. In stock trading, it represents the amount or number of assets or securities that were traded over a given period of time. When stock market analysis are given, trading volumes are used to show how many securities were bought and sold in a day.

9) Long Position (Going Long)

You are said to take a long position when you purchase securities with the expectation that they will rise in value over a period of time. You can only hold a long position when you already own shares.

10) Short Position

A short position is simply the opposite of long position. For one, it represents the sale of a stock that an investor does not own. Investors who sell stock short usually believe that the price of the stock will fall so that they can purchase the stock at the lower price and make a profit. It is also known as short selling and it is typically use as a method of hedging risks.

11) Averaging Down

This is the process of buying stocks at different prices. What happens is that when the price of shares are decreasing and the investor keeps buying, he ends up buying at different prices. If he buys them as they fall, the average purchase price would decrease.

While these terms would help you understand the stock market better, there are some other complex terms that would give you deeper insight into the market. These will be discussed in the next article.

Written by Lawretta Egba.