The first step in becoming a successful trader is to make sure you understand common trading terminology. Here’s an overview of 20 terms that are often used in the trading community. Full disclosure: this list relatively short, but it’s enough to get you started. For more explanations of common Wall Street terms, check out our trading education center.
Arbitrage is the simultaneous buying and selling of two correlated assets at the same time to take advantage of short-term pricing inefficiencies.
Bid/ask spread is the difference between the current ask price to buy a stock and the bid price to sell it. The wider the spread, the harder it will be to buy or sell at the exact price you want.
Buybacks, along with dividends, are a major way that companies return capital to shareholders. Companies can choose to use excess cash to repurchase and retire shares of the company’s stock. Buybacks reduce the number of shares in the float, which can drive the price of a stock higher (less supply equals more demand).
Call options are contracts to buy an underlying stock or asset at an agreed-upon price on a particular date. Call option buyers are typically bullish on the underlying asset.
Exchange-traded funds, often abbreviated as ETFs, are a type of investment fund that holds collections of stocks and/or other assets and trades on an exchange just like an individual stock.
Float is the number of shares of a company’s stock that is available to trade on the public market at any given time. The float doesn’t account for shares held by company insiders, which may be restricted.
Fundamental analysis is a method of evaluating a stock that involves considering the financial metrics of the company (earnings per share, revenue, cash flow, debt, etc.) and the current price at which the stock trades. Fundamental analysis attempts to place a value on a given stock based on those metrics to determine whether a stock is currently undervalued or overvalued.
Hard-to-borrow stocks are stocks that are difficult to sell short due to the broker’s inability, for whatever reason, to locate available shares to for you borrow.
Hedge trades are trades made strictly to limit the risk involved in other positions. For example, traders often buy put options on a particular stock in which they are heavily invested as a hedge against a large sell-off.
Moving average is a line on a stock chart that shows a stock’s price as a smoothed out average. Common examples of moving averages are 10-day moving averages, 50-day moving averages, 100-day moving averages, and 200-day moving averages.
Outstanding shares is the total number of shares of stock currently held by all its shareholders, including insiders.
Put options are contracts to sell an underlying stock or asset at an agreed-upon price on a particular date. Put option buyers are typically bearish on the underlying asset.
Resistance occurs when a stock has a hard time moving higher than a certain price. This price acts as a temporary ceiling and tells us that, for whatever reason, there is strong selling pressure when the stock gets there.
Secondary offerings are sales of new or closely-held shares of stock by a company into the open market. Dilutive secondary offerings involve selling new shares, wheres non-dilutive secondary offerings involve a major shareholder selling a large number of shares that were not previously part of the stock’s float.
Short squeezes are large spikes in a stock’s price caused by short sellers closing out their positions and driving buying volume abnormally high over a short period of time.
Support is the opposite of resistance. While resistance acts as a ceiling on a stock chart, support acts as a floor. The uptick in buying volume will, at least temporarily, prevent the stock price from going lower.
Technical analysis involves looking for patterns or indicators in a stock chart or other market data, such as price movement or volume changes. Technical analysts believe that a stock’s current price always represents its true value and that stocks tend to move in patterns.
Trading halts occur when a stock exchange prevents a particular stock from trading for a certain period of time. Halts can be triggered by a number of different factors, including pending news, extreme volatility or suspicious activity.
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