Stock trading terms for beginners

Get help to learn stock trading terms

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.

Intermediate

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

Advanced

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.


Picture: What is dollar-cost averaging?

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