Here are terms both novice investors and seasoned pros should understand
Every profession, passion project, and hobby has its own terminology. The same is true of the stock market. So if you’re going to invest in the stock market, it’s important to know some of the basic terminologies. Understanding these terms can help provide insight into how the stock market works.
In this article, we’ll review some basics about investing in the stock market including how to go about buying stocks. At the end of the article, we’ve compiled a master list of stock market terms. We encourage you to return to this link regularly as a handy reference.
What is the Stock Market?
Let’s start with a basic question, what is the stock market? The key thing to understand is that “the market” is not one single entity. It’s a marketplace of all the individuals and institutions that buy and sell stocks. These investors do their trading on several stock market exchanges. Some of the most commonly referenced exchanges are the New York Stock Exchange (NYSE) and the NASDAQ.
Stocks listed on an exchange can be bought and sold. These stocks represent shares of ownership in a company. Companies are willing to sell shares of their company in order to raise capital to fund their own operating expenses or grow the business.
Companies with stocks for purchase on a publicly-traded market must follow certain rules set forth by regulatory agencies like the SEC (Securities and Exchange Commission). They must be transparent about their accounting and make their business operations public.
Investors can also purchase stocks privately—they don’t have to be traded on a trading platform like the NYSE or the NASDAQ. However, this carries a bit more risk because privately held companies are not subject to the same regulatory requirements as publicly traded companies.
How to Buy and Sell Stocks
Despite the myriad complexities of the stock market, learning how to buy stock is not difficult. You can go online or onto an app on your phone, search for a company, and place your trade. The brokerage firm may or may not charge you a small, nominal fee to make the trade. These stocks then go into your portfolio. You can hold on to them as long as you like or sell them when you feel the time is right.
That’s all there is to it.
On the back end, it’s a little more complicated, but you don’t have to worry about any of it. In case you’re curious though, once you indicate an interest in buying or selling a certain stock, a broker finds a buyer or seller on your behalf. Market makers used to pack onto the floor of the stock exchange and fight through the frenzied mob of other stock brokers until they connected with a willing party to the transaction. Today, most matchmaking between buyers and sellers is done electronically.
But as mentioned, from your end, there is not much to it other than clicking on which stocks you want to buy and hitting submit.
The stocks you buy will be common shares. These shares give holders voting rights in the activities of the company. If you own enough shares, you can even effectively take ownership of the company.
There are also preferred shares of stock, which are not readily available to retail investors. These preferred stocks do not carry voting rights, but they do get preferential treatment in regard to dividends, receiving company payouts first. If the company is liquidated, preferred stockholders will also get their money first.
How to Understand the Different Objectives of Stock Trading
Stock trading is the act of buying or selling stock. Every time an investor buys shares, or fractional shares, of a stock, they make a stock trade. But not all stock traders have the same objectives.
Some investors buy shares of stock with the intention of holding on to them for long periods of time. This is called taking a long position. The objective is to let the stock price appreciate and/or collect dividends. Taking a long position doesn’t necessarily mean these investors are holding the stock forever. However, it’s generally understood that a long position means holding the stock for more than 12 months.
There is nothing wrong with this strategy. In fact, it’s been used by great investors like Warren Buffet to build sizeable wealth.
Other investors take a more active approach to stock trading. Their objective is to capitalize on market fluctuations. The strategy is to buy low and sell high as stock prices go up and down.
Active traders place trades at least 10 times per month. They may follow current events, general market trends, and company activity to time their moves.
Day traders are even more active traders. As the name implies, day traders spend the whole day buying and selling stocks. They may not even need to invest attention in global, market, or company events—they can just watch stock prices. In fact, the most experienced traders can even just rely on stats, trends, and math to make their move.
Of course, without a working, ingrained knowledge of stock trading terminology, everything they know would just be theory. After all, how would a trader know how to make the right type of transaction if they don’t even know what it’s called?
Why Every Investor Should Understand Stock Trading Terms
You may not be a day trader, but if you have any interest in dabbling with stocks, you need to know the rules of the game. Even if you’re a passive investor who invests 10% of their income into a mutual fund managed by someone else, you should get to know stock market trading terms. For one thing, you’ll be able to have a more nuanced conversation with your financial advisor. But you’ll also be more likely to identify additional opportunities for income growth as they become available.
If you are an active investor, knowing these stock terms will help you see additional pathways for increasing your cash flow. When there’s a term you don’t understand, you can go down that proverbial rabbit hole and learn a whole new way of trading.
Just keep in mind that the more you know, the more you can leverage your knowledge into profit. The basic stock trading terms are your starting point for this growth.