Investing is full of technical terms and jargon that can be a barrier to beginners. Without knowing what the terms are, learning about the stock market and other investments can be confusing. Instead of presenting you with an exhaustive glossary, we’ve pared it down to the most important terms. Below, you can find definitions of basic investment terms, types of investments and investment strategies.
Ask: This is the absolute lowest price at which a seller will allow you to purchase a stock.
Bear: This refers to a situation where the market is declining, meaning the price of stocks is going down. This is the opposite of a bull market. A good mnemonic device to use is to imagine an attacking bear because they tend to swing their paws in a downward arc.
Bid: This is the highest price that a buyer is willing to pay for a stock.
Broker: A person or firm that buys or sells stock on behalf of an investor. Brokers receive commissions for their services. They may or may not give investment advice as well.
Bull: This is the opposite of a bear market and refers to a situation where the market value is increasing, so stock prices are going up. To use an analogy, when a bull attacks, it swings its horns up.
Capital Gain: This is the gain, or profit, that you receive when a stock’s selling price exceeds the price at which you initially bought it. Capital gains are taxed at different rates depending on how long you’ve held those assets. For a more thorough discussion, read our article about capital gains taxes.
Dividend: Made on either a quarterly or an annual basis, a dividend is the portion of a company’s profits that it pays to its investors. Not every stock pays out dividends. Growth stocks do not pay dividends, as the profit goes back into growing the company, while value stocks do pay dividends.
Dow Jones Industrial Average: This is an extremely common term that refers to the compilation of the 30 most traded blue chip stocks.
Margin Account: A margin account is a loan from a broker to purchase stocks. You put down a certain percentage of the securities’ price, then borrow the rest from the broker. Then as you make money on the stocks, you pay back the broker. This is a great deal if your stocks make a good profit but can be costly if the stocks lose money because you still have to pay back the loan.
NASDAQ: An acronym for the National Association of Securities Dealers Automated Quotations, the largest electronic stock market.
Paper Trading: Also known as virtual trading, it mimics actual stock market trading but in a paper (virtual) environment with pretend funds. You can learn about the stock market and try out strategies in a virtual stock exchange without risking real funds.
Portfolio: Your portfolio is simply the collection of your investments that you own. This can include securities, CDs, mutual funds and other investments.
Position: A position is the amount you have invested in a particular stock, commodity or currency. A long position is one you own, and a short position is one you borrow to sell later.
Quote: This is the last price a stock was traded at. These are always changing, so unless you are on a broker's trading platform, this price could be as much as 20 minutes old. Bid or ask quotes include the price and the quantity a current buyer is willing to purchase or sell shares for.
Security: A security represents your ownership position in either the equity or debt of an organization. Stocks, bonds and options contracts are types of securities.
Ticker Symbol: Each publicly traded company has a unique ticker symbol comprised of one to five letters to identify it in the stock market. For example, Facebook’s symbol is FB and Apple’s is AAPL.
Volatility: The amount a stock price fluctuates in either direction. Highly volatile stocks have extreme daily ups and downs. These are usually stocks that are thinly traded, meaning there are few people who buy or sell them.
Volume: Volume refers to the total number of stocks traded or options contracted on any given day.
Blue Chip Stock: Stocks in businesses, corporations or companies that are well-established and have a reputation for excellence, dependability and profitability. Blue chip stocks are perceived as less volatile than stock in companies without blue chip status. Investors choose these stocks for stable growth.
Bond: Bonds differ from stocks in that you are financing a company's debt. It's a little like a loan, and you are guaranteed a return on the money you invested, plus any interest. Stocks, on the other hand, finance a company's equity, which means you can earn or lose your investment – there is no guarantee.
Exchange Traded Funds (ETFs): An ETF works like a mutual fund but trades on the exchange like a stock. An ETF holds other assets, such as commodities or bonds, in a grouping that is meant to make it follow a particular index. ETFs offer a convenient way to buy a diverse range of assets at once. There are several types of ETFs, but they all track a pre-existing index.
Forex: The Forex, or foreign exchange, market deals solely in money. When you invest, you are essentially buying currencies of other countries in hope that the exchange rate changes in your favor so you can sell the money back at a profit. The Forex is the largest market in the world, and any person, firm or country can participate in trade there. It's open 24 hours a day for five days, and currencies travel among the major financial centers of London, New York, Tokyo, Zürich, Frankfurt, Hong Kong, Singapore, Paris and Sydney.
Futures: Futures are contracts on commodities, currencies and stock market indexes that attempt to predict the value of these securities at some date in the future. Although the theory is that you are purchasing goods at a specific price, speculators seldom invest intending to make or take delivery of the commodity. Rather, they buy when they anticipate rising prices and sell when they anticipate declining prices. Futures investing is very high risk and recommended only for experienced traders with a great deal of money.
Hedge Fund: Hedge funds are a type of investment that pools funds from multiple investors, and they are designed to pursue high returns. Each hedge fund has its own investment strategy, and many are privately owned and require a high amount for an initial investment.
Index Fund: An index fund is a passively managed type of mutual fund that tracks the performance of a particular index, such as the S&P 500. Essentially, an index funds invests in all the stocks that make up a particular index. Index funds are a relatively stable investment without many associated costs.
Mutual Fund: A mutual fund is a type of investment that combines a pool of funds from multiple investors to invest in a wide range of securities, such as stocks, bonds or money market funds. Mutual funds are professionally managed and can be a good way to instantly diversify your investments. Drawbacks of mutual funds include fees and unpredictability.
Option: An option is a contract to buy or sell a financial product known as the option’s underlying interest or underlying instrument. The underlying instrument in an equity option is a stock, exchange-traded fund (ETF) or similar financial product. It allows you to buy or sell a security at an agreed upon price during a certain period of time or on a specific date regardless of what the actual price is at the time.
Penny Stock: The stock of a small, unproven company with almost no track record and little background. These are cheap stocks that often trade only a few thousand shares a day with the hope of generating revenue to help the business grow. These stocks can be had for literally pennies per share, hence the name.
Securities: Another name for stocks, bonds or options. In short, it's proof of ownership or debt that has an assigned value and can be sold.
Stock: The smallest measurable unit of ownership in a company, stocks are usually sold as a way to raise capital without having to borrow money. There are two kinds of stocks. Common stocks are ownership interests in a publicly traded business, and investors get one vote per share to elect board members for the company. Preferred stock doesn't usually come with voting rights, although it may. However, investors are usually guaranteed a fixed dividend for as long as they hold the stock. In addition, if the company goes bankrupt, preferred stock holders get paid off before the common stock owners. Companies can also create different classes of stock, such as stocks with no voting rights attached.
Treasury Stock: A treasury stock is a stock that is bought back by the issuing company in order to reduce the amount of outstanding stock on the market.
Aggressive: An investment strategy with an above-average risk level that seems to promise a higher-than-average return. Traders usually employ this strategy when buying stock in rapidly growing companies, buying on margin or investing in options trading.
Algorithmic Trading: Also known as algo trading, robo trading or automated trading, algorithmic trading uses complicated mathematical models to determine when to buy or sell a holding. Supercomputers using these models can conduct these calculations much faster than a human can, and the result is a more precise trade that hopefully reduces costs in the transaction, such as price slippage. Often, large mutual funds use this technique to manage high numbers of transactions.
Day Trader: An investor who tries to profit by making rapid trades during the day. In other words, he or she closes all the trades before the day ends. For example, if a day trader purchases 100 shares of a stock, he or she will sell those stock before the day ends. Day traders, like scalpers, are looking for frequent, small profits on individual stocks that can add up to large profits over the day.
Diversification: In stock trading, this is a strategy for limiting your overall risk level by investing in a wide range of companies in different industries that are unlikely to all perform poorly at the same time. When executed correctly, it is a long-term stock-trading strategy that is designed to weather a wide-range of economic conditions comfortably. It can be simply summarized as the opposite of putting all your eggs in one basket.
Going Long: When you buy a security expecting the asset will rise in value. In the context of options, buying an options contract. It does not have to do with time but rather your expectation that the stock price will continue to rise. In this case, as the price rises, you can sell and take your profit or hang onto them in hopes the price rises higher.
Going Short: Selling a security with the expectation that it will fall in value. For this, you borrow shares from your broker and sell those stocks on the open market. Then, you wait for the stock price to fall, buy the shares back, return them to your broker and keep the profit.
Hedging: Hedging is an investment strategy designed to offset potential losses. Usually this is done by taking a concurrent position in a similar security, usually a futures contract. While hedging can usually reduce the risks of sudden downturns, they also minimize the size of potential returns. It’s important to note that hedging is different from investing in a hedge fund; an individual investor can hedge their own investments without investing in hedge funds.
Momentum Trading: Momentum trading is all about following the pack and riding the wave of the success or failure of a particular kind of stock rather than a specific company’s stock. Traders using this strategy stay with a particular trend of stock until they reach the ultimate profit and then jump ship as soon as there is a shift in the market that trends in the other direction.
Scalping: This is trading in the equities or options and futures market but only holding the stock for a very short time in order to profit. It usually results in small gains that can lead to large returns by the end of the day.
Short Sell: Selling shares that you don’t own, usually borrowed from your broker. It’s an advanced practice to borrow a security or commodity for currency (in forex) in order to sell it. The trick is to sell it and then buy it back later at a lower price to return it to the broker you borrowed it from. If you sell it at a higher price than you bought it back at, you get a profit.
Stop-Loss Order: This is an order to sell an option when it reaches a specific price. A stop-loss order is used to prevent you losing too much on a security or to take the emotion out of trading. It also lets you continue to handle your stocks when you cannot monitor the market, such as when you are on vacation.
Swing Trading: This is a form of investing where an investor holds securities longer than a day but does not hold on to the security long term.