Common Terms Used for Stock Market TradingStock Trading Glossary
Traders who buy and sell through the stock market use unique financial terms in order to communicate complex ideas and strategies. Understanding how to communicate about market factors is vital for success especially when working through a broker. There are several basic stock market trading terms that every trader should know.
Ask, bid and spread are three components that are used to form a stock quote. The asking price is the minimum price that an individual or company will accept for a stock. The bid price is the maximum about a buyer will pay for that stock. The difference between these two prices is known as the spread.
A dividend is the amount of profits from a company that are distributed to stockholders. Dividends are often paid out annually based on the performance of the company. Dividends do not affect ownership or the price of the stocks that are held. The amount that is received by each stockholder is based on how much stock is owned.
Traders often refer to markets or market forecasts as being bearish or bullish. A bear market means that the general direction of key stocks is trending downward or is stagnant. A bull market has very high trading volumes and is trending upwards. Bull and bear markets tend to be cyclical and could change quickly over the course of just a few days or weeks.
Short selling is a trading technique used to make a profit when a stock drops in value. Short selling involves purchasing a stock without actually paying for it. The stock then drops in value and the buyer sells the stock. The buyer actually purchases the stock just before the sale at the reduced price and claims the difference between the sale price and lowered purchase price as profit.
Stop orders are a type of trading contract that is designed to protect a trader. A stop order states that a broker should automatically sell some or all of a particular stock if the price drops below a certain amount. Stop orders ensure that severe market swings do not completely eliminate the value of an investment.
Margin accounts are trading accounts held at a brokerage that are used for stock market trading. A margin account allows a trader to borrow money for trades based on cash deposits or other assets held through the brokerage. This gives traders with relatively small amounts of cash the ability to trade in larger volumes.
Indexing is an investment and trading strategy that is used to create a balanced portfolio. Indexing means purchasing a range of stocks that are intended to mirror the overall movements of the stock market. Many large firms use indexing to create indicators showing how markets are performing. Indexing allows for stable growth in a good market but generally provides low yields over time.