The Basics of Stocks, ETFs, Options, and Futures

Even the best at online stock trading admit that learning all the ins and outs of the industry makes for a daunting task. Entry into the field involves mastery over its often opaque jargon and complex concepts. At Lightspeed, we strive to design trading tools that assist everyone from the most experienced traders to those just looking to get started.

Part of that endeavor involves education. To that end, we have provided a short glossary of some basic stock market terminology to help beginning traders on their way. Those with more experience can always stand to review their knowledge, as well.

Securities — like stocks, exchange-traded funds, options, and futures — form the core of traders’ day-to-day lives. These assets represent investments. Subsequently, they allow companies, commercial enterprises, and municipalities to raise new capital.

Stocks

Although practically everyone recognizes the term “stocks,” public understanding remains low as to how they actually function. These securities denote ownership in a corporation. This ownership entitles the shareholder (the person who owns the stock) to a part of the corporation’s earnings and assets. Generally, stocks consist of two different types:

  • Common – This kind of stock typically allows the owner to collect dividends and grants them voting power at shareholders’ meetings.
  • Preferred – Most often, these stocks do not grant the owner voting rights. However, these shareholders will have a higher claim than those with common stocks. When it comes time to receive dividends, or if a company declares bankruptcy and becomes liquidated, shareholders with preferred stocks have priority.

Exchange-Traded Funds (ETFs)

On the stock market, ETFs trade like stocks but more closely resemble mutual funds. They hold stocks, commodities, and other assets while remaining tradeable themselves. Because they reflect an index, their prices change throughout the day. In contrast, mutual funds have their net-asset values (NAV) calculated at the end of the business day. ETFs combine the flexibility of stocks with the diversification inherent in mutual funds. That, in addition to their tax efficiency and low costs, make ETFs an appealing choice for many traders.

Options

These highly versatile securities represent sellable contracts. Those who sell options give buyers the license to buy or sell a particular asset at a previously agreed-upon “strike price” at a specific time. Option speculation highlights the buyers’ disparate views of the asset’s projected value.

  • Call Option – This option allows the buyer to buy the asset at a certain price, meaning that they believe the option will go up in value, thus earning them a profit. In this instance, the seller typically believes that the value will go down.
  • Put Option – Conversely, the put option allows the buyer to sell at a predetermined price, which means that they think the value will go up. The option seller in this case likely expects the value to go down.

Due to their high liquidity, options usually carry more leverage than stocks but require less capital, giving traders with less buying power more choices when diversifying their portfolios.

Futures

Futures, like options, consist of sellable contracts. However, unlike options, futures require the holder to fulfill the terms of the contract at the time of expiration. In practice, traders can still buy or sell futures in much the same way as options. Futures help to manage potential increases or decreases in the value of the contract’s underlying assets, allowing them to speculate or hedge their investments.

Lightspeed’s platforms help traders to more easily manage all these disparate financial securities and more. Lightspeed Trader, our trading system for day traders, allows our clients to trade and maintain stocks, ETFs, and options all in the same place. To learn more about the products and services we offer, call us at 1.888.577.3123 or try a demo.

Lime Brokerage LLC is not affiliated with these service providers. Data, information, and material (“content”) is provided for informational and educational purposes only. This content neither is, nor should be construed as an offer, solicitation, or recommendation to buy or sell any securities. Any investment decisions made by the user through the use of such content is solely based on the users independent analysis taking into consideration your financial circumstances, investment objectives, and risk tolerance. Lime Brokerage LLC does not endorse, offer or recommend any of the services provided by any of the above service providers and any service used to execute any trading strategies are solely based on the independent analysis of the user.

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