Stock Trading Terms for Beginners
Common Stock Trading Terms for Beginners
What is a long position?
A buy or long position is a term that describes when a trader buys a stock expecting that it will rise in price and then sell and take the profit.
A long position is the opposite of a short position and traders who open a long position will be said to have a bullish (stock price will rise) attitude.
When a trader opens a long position without leverage they will own the stock.
On the trading platform, you select the buy button to open a long position and when the stock price rises and you want to sell, click the close button to sell the stocks.
YouTube video tutorial: What is a long position?
What is a short position?
A sell or short position is a term that describes when a trader sells (shorts) a stock expecting that it will drop in price and then buy back at a lower price and take the profit.
A short position is the opposite of a long position and traders who open a short position will be said to have a bearish (stock price will drop) attitude.
When you short a stock you borrow the stock from a stockbroker like eToro for a fee betting that it will drop in value, when it drops in value, you buy back the stock at a lower price and take the profits of the difference of the price you shorted at and the price you bought the stock back at.
On the trading platform, you select the sell button to open a short position, then when you want to buy back when the price drops, just click the close button to buy back the stocks.
YouTube video tutorial: What is a short position?
What is leverage in trading?
Leverage is the practice of borrowing money from the stockbroker such as eToro to increase your investment or the number of stocks you buy or short, planning to increase your profits, but oppositely leverage increases your risk and amount you could lose by the same amount.
Most stockbrokers offer various leverage usually up to 20x Leverage which means you could multiply your profits by 20 times, equally you could lose an amount multiplied by 20 times.
When you use leverage you don’t own the stock or underlying asset. Also, leverage is not recommended for beginners as you could magnify your losses by 20x leverage, meaning you could lose all your money very quickly if you don’t know what you’re doing.
For example: If you buy stocks with $200 with leverage 20x, you will be buying $2000 worth of stocks. Leverage is available in many different levels on eToro such as 2x Leverage, 5x Leverage, etc.
What are dividends in stocks?
Dividends are paid to stockholders as a way to reward and entice new investors, a company will share some of its earning determined by the board of directors and approved by shareholders through a cash dividend or a dividend of stocks. Dividends are paid yearly, quarterly, or monthly.
Larger, more established companies with predictable profits and less volatility in price will usually pay the best dividends, smaller startups companies are less likely to pay a dividend.
To qualify for stock dividend you must hold the stock you must buy or behold the stock before the ex-dividend date.
Important dividends dates (you can search Google to find).
Announcement date: This is when a company will announce the dividend rate, payment date, and ex-dividend date.
Ex-dividend date: This is the date when traders who buy stocks on and after will not be eligible for a dividend payment. Basically, you need to buy stocks before this date to qualify for the dividend.
Record date: Simple put, this is the date the company makes a record of which stockholders are eligible to receive the dividend. The record date is usually the day after the ex-dividend date.
Payment Date: This is the date when the dividends will be paid to the stockholders.
Dividends can also impact a stock price as essentially the company is giving away money, usually, the stock price will rise by the agreed dividend amount on the announcement date and drop by a similar amount on the ex-dividend date, when the stock market opens.
YouTube video tutorial: What are dividends on stocks?
What is a catalyst in stocks?
A catalyst is an event or news that can drastically move the price of a stock up or down. Catalysts are especially used by day traders and other short-time traders but can be used by long-term investors to buy a stock at a lower price.
There are two types of catalysts in stocks:
Positive catalysts: Will propel the price of the stock upwards, examples are, news of a new product release, offer to buy or partner with another company, large investors buy stocks, a good earnings report that analysts expectations, analysts upgrade the price expectation or stock rating to a buy. Traders will open a long position in these cases.
Negative catalysts: Will propel the price of the stock downwards, examples are, a lawsuit against a company, war, or a pandemic, large investors sell stocks, CEO steps down, a bad earnings report missed analysts expectations, analysts downgrade the price expectation or stock rating to a sell.
Traders will open a short position in these cases.
YouTube video tutorial: What is a positive catalyst in stocks?
YouTube video tutorial: What is a negative catalyst in stocks?
What is a support line in stocks?
A support line is a price that a stock hasn’t dropped below for a period of time, the support line or support price is created by traders buying the stock when it dips to that lower price, creating a price point that a stock struggles to drop below. You can analyze a support line by drawing a line along the lowest points over a period of time on a stock chart.
Generally, stock traders will buy a stock when it drops to the support line and holds its position or bounces back up from that price, but if it doesn’t, a new low is created and a new lower support price is created.
Picture: Support line
What is a resistance line in stocks?
A resistance line is a price that a stock hasn’t risen above for a period of time, the resistance line is created by traders selling or shorting the stock when it rises to that highest price creating a price point that a stock meets pressure to rise above. You can analyze a resistance line by drawing a line along the highest points over a period of time on a stock chart.
Generally, stock traders will sell or short stocks when it rises to the resistance line and holds the position or bounces back down from that price, but if it doesn’t, a new high is created and a new higher resistance price is created.
Picture: Resistance line
What is dollar-cost averaging in stocks?
Dollar-cost averaging is a stock trading strategy where a trader will divide up their total investment in a stock, by buying at different times to reduce the impact of volatility and to get an average price over time.
This strategy takes away the challenge of trying to evaluate the best time and price to buy a stock. In short, dollar-cost averaging is the practice of having a system of investing equal amounts, spread over equal time periods, regardless of the price, with the idea of avoiding a lump sum investment in a stock at the wrong time or price. This is one of the most valuable stock trading terms for beginners.
Picture: What is dollar-cost averaging?
Complete List of Stock Trading Terms for Beginners
Bid price: The highest price that a buyer is willing to pay for a security.
Ask price: The lowest price that a seller is willing to accept for a security.
Spread: The difference between the bid and ask price of a security.
Bull market: A market characterized by rising prices and optimistic investors.
Bear market: A market characterized by falling prices and pessimistic investors.
Volatility: A measure of the fluctuation in the price of a security over a given period of time.
Liquidity: The ability to buy or sell a security quickly and easily, without affecting its price significantly.
Diversification: The practice of investing in a variety of different securities in order to reduce risk.
Risk/return trade-off: The relationship between the level of risk an investor is willing to take on and the potential return they hope to receive.
Long position: A position in which an investor holds a security with the expectation that its price will rise.
Short position: A position in which an investor sells a security that they do not own, with the expectation that its price will fall.
Margin: The practice of borrowing money from a broker to purchase securities, using the securities themselves as collateral.
Leverage: The use of financial instruments or borrowed capital to increase the potential return of an investment.
Fundamental analysis: The process of evaluating a security based on its underlying business and financial performance.
Technical analysis: The process of evaluating a security based on its past price and volume data, in order to identify patterns and make predictions about its future performance.
Asset: A financial resource, such as a security or property, that has value and can be traded or invested in.
Capital: The money or other resources that a company or individual has available for investment or expansion.
Capital gain: The profit realized from the sale of a security or other asset for more than its purchase price.
Capital loss: The loss realized from the sale of a security or other asset for less than its purchase price.
Dividend: A distribution of a portion of a company's profits to its shareholders, typically in the form of cash payments or additional shares of stock.
Earnings per share (EPS): A company's profit divided by the number of its outstanding shares of stock, used to measure the profitability of a company on a per-share basis.
Market capitalization (market cap): The total value of a company's outstanding shares of stock, calculated by multiplying the number of shares by the current market price per share.
Initial public offering (IPO): The process by which a private company becomes a publicly-traded company by selling shares of stock to the public for the first time.
Order: A request to buy or sell a security at a specific price or better.
Limit order: An order to buy or sell a security at a specific price or better, but only if the market price reaches the specified level.
Market order: An order to buy or sell a security at the best available price, regardless of the current market price.
Stop order: An order to buy or sell a security when the market price reaches a specified level, also known as a "stop-loss" order.
Day order: An order to buy or sell a security that expires at the end of the trading day if it is not filled.
Good-til-cancelled (GTC) order: An order to buy or sell a security that remains in effect until it is either filled or cancelled by the trader.
Portfolio: A collection of investments, including stocks, bonds, and other securities, held by an individual or organization.
Return on investment (ROI): The profit or loss realized on an investment, expressed as a percentage of the original investment.
Stock split: A corporate action in which a company increases the number of its outstanding shares by issuing more shares to its shareholders, typically in a ratio such as 2-for-1 or 3-for-1.
Volume: The number of shares or contracts traded in a security or market during a specific period of time.
52-week high/low: The highest and lowest prices at which a security has traded over the past 52 weeks.
Alpha: A measure of the excess return of an investment relative to the return of a benchmark index, used to evaluate the performance of a portfolio manager.
Beta: A measure of the volatility of a security or portfolio compared to the overall market, used to evaluate the risk of an investment.
Blue chip stock: A stock in a well-established and financially stable company with a long track record of steady growth and dividends.
Bond: A debt security issued by a government or corporation, which pays periodic interest to the holder and returns the principal when the bond matures.
Bullish: A positive outlook on the market or a particular security, characterized by the expectation that prices will rise.
Commission: The fee paid to a broker for executing a trade.
Correction: A temporary decline in the price of a security or market, typically after a period of rapid appreciation.
Currency exchange: The process of converting one currency into another currency.
Derivative: A financial instrument whose value is derived from the value of an underlying asset, such as a stock, bond, commodity, or currency.
Fundamental analysis: The process of evaluating a security based on its underlying business and financial performance.
Index fund: A type of mutual fund or exchange-traded fund (ETF) that tracks the performance of a specific financial market index, such as the S&P 500.
Insider trading: The illegal practice of buying or selling securities based on non-public information.
Leverage: The use of financial instruments or borrowed capital to increase the potential return of an investment.
Mutual fund: A type of investment vehicle that pools money from many investors and uses it to buy a diversified portfolio of stocks, bonds, and other securities.
Options: A financial derivative that gives the holder the right, but not the obligation, to buy or sell a security at a specified price on or before a certain date.
Over-the-counter (OTC) market: A market where securities are traded directly between buyers and sellers, rather than on a centralized exchange.
Penny stock: A stock with a low price per share, typically less than $5.
Short selling: The practice of selling a security that the seller does not own, with the expectation that the price will fall so that it can be purchased at a lower price in the future.
Volatility: A measure of the fluctuation in the price of a security over a given period of time.
Yield: The return on an investment, expressed as a percentage of the price.
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