Terms Every Market
Trader Should Know

Earnings

A publicly traded company is required to release an earnings report ever three months. These are referred to as quarters. Earnings refers to the total amount of money the company took in that quarter minus the amount of taxes, operating expenses, and the cost of their goods. A lot of companies traded on the stock market have negative earnings. This isn’t necessarily bad because they could be using a lot of money to grow quickly and take a large share of the market. Earnings releases often cause shares of a company to spike or drop depending on the report. Be careful if you are holding a stock that is about to release an earnings report. If you are at a stock trading 101 level you might want to avoid owning shares of a stock through earnings dates as there is potential for enormous losses.

Bullish/Bearish

bull vs bear stock trading 101The stock market is said to be a constant battle between the bulls and the bears. A bull is someone who believes the value of the market, or of a specific stock, will go up. A bear is the opposite, choosing to believe instead that the value of the market as a whole, or an individual stock will go down. A bull market is a time when the overall value of the stock market is climbing for a long period of time and a bear market, also known as a correction, is when that value drops for a significant period of time.

Long

If a person is “long” on a stock it means they purchased shares of said stock planning on selling them later at a higher price. This is similar to a bull.

Short

Shorting a stock is much more complicated than being long. Put simply shorting a stock is to bet that the price of that stock will go down in the future. The logistics behind this type of investing involve telling your broker to sell another investors shares of the stock, promising that you will buy back those shares down the road. You are hoping that the price will drop and you will be able to buy back the shares at a cheaper price, pocketing the difference. Shorting can be dangerous and losses can be high because theoretically the price of a stock has no limit to how high it can go. Beginning Stock Trader recommends avoiding shorting stocks if you are still learning stock trading 101 principles.

Index

An index is a group of stocks that can be purchased. Indices are usually a safer bet than shares of a single stock and are much less volatile. A number of well known indices include the S&P 500 SPY 246,88 -0,22 -0,09%, The Dow Jones Index Dow Jones Industrial Average 21.580,07 -31,71 -0,15%, and the Nasdaq NDAQ 72,74 +0,72 +1,00%. If you are a beginner and do not want to spend time looking for individual stocks it is an excellent idea to invest in an index that covers either a specific part of the market (e.g. oil, commodities, energy, etc.) or the market as a whole.

Volume

Volume refers to the amount of shares of a particular stock bought or sold in a day (or other period of time). It is incredibly important to look at the volume when looking at the current price of a stock. If the price of a stock shows that it has dropped 10% it can be worrisome, but if you look at the volume and realize that it was a single share of stock that was sold at that price you will feel less worried. Conversely if you see the stock price making a significant change and notice that the volume is much higher than normal than there is a good chance that a lot of investors are getting in or out of the stock.

Day Trading

Officially defined, day trading is when an investor buys and sells the same security in the same day. There are a lot of rules to day trading and beginning traders often get in trouble for not understanding these rules. For example, if you day trade more than 3 times in a week with less than $25,000 in your account you will be banned from purchasing shares of any stock for 90 days. Because of this and other reasons it is recommended that beginners avoid day trading until they have a solid understanding of market forces and rules.

IPO

An IPO is when a private company becomes a public company. This is when shares of a company first become available to the general public. When a company has an IPO the price of the stock will fluctuate wildly as investors try to determine the value of the company. A lot of money can be made and lost on IPOs and it is recommended that they be avoided until more experience is obtained. Check out our page about trading IPOs as a beginner to learn how to make money off IPOs or sign up for Motif Investing to participate in your first IPO.

Margin

Many brokers will offer to lend investors money to put into the markets. Most will allow you to lend the amount your account currently holds, so if you have $500 in an account they will lend you an additional $500. This means if the stock you invest in goes up, you can make twice as much. Conversely this means that you could lose twice as much as well. Additionally if the stock price begins dropping your broker could force you to sell the shares to make sure you maintain the necessary 2:1 ratio, thus guaranteeing your losses. These are called margin calls.

Momentum

You have likely heard what momentum is when applied to the real world. A car can have a lot of momentum when driving quickly that makes it hard to stop the car. Stocks can sometimes act in a similar fashion. Momentum comes when the price of a stock starts climbing or dropping quickly. If the momentum is up, a lot of investors will see the price climbing quickly and try to get in on the quick spike, this in turn drives the price even higher, which in turn increases the momentum. If the price is dropping quickly, a of traders stop losses can be hit which will increase the downward momentum as more investors sell the stock.

Trading momentum is a quick way to make money because it usually involves purchasing shares of stock that are already moving quickly. It is important to note that once momentum runs out, the price of a stock will often reverse quickly and a lot of money can be lost in just a few minutes.

Institutional vs Retail Investor

You will often hear investors use the terms institutional investor or retail investor on forums and chat boards. An institutional investor is someone that runs a hedge fund or invests for an investing institution. A retail investor is an individual who is investing their own savings, IRA, or capital in the stock market. When institutions purchase or sell shares of stock it usually in much higher quantities than when a retail investor does the same. It is also a good sign when a lot of institutions are buying shares of a companies stock. Not only does this help stabilize the price (because institutions tend to hold onto shares for longer), but it can also help drive the price of stocks higher as they purchase large amounts of shares.

Dividend

Sometimes when a company begins to make more than it can spend on its own growth it will give dividends. Dividends are basically a cut of a companies profit, or the money they make after paying all their expenses. You can get the amount of a dividend and multiply it by the number of shares you own to see what your dividend would be in a certain company. The nice thing about dividends is you still own shares of the company after the dividend is payed. Some companies pay no dividend, while some have payed as high as 10% of the stock price in dividends yearly. A lot of investors just chase dividends and try to time purchases to dividend dates. We recommend owning stocks that pay dividends as part of your investment strategy, but not playing the dividend stocks as the price of the stock often drops after the dividend is payed.

The process of a dividend is simple. A company announces an ex-dividend date. This is the date when anyone who owns shares of a stock will get a dividend. The dividend will usually take another few weeks to be payed out, but all you have to do is own the stock on the ex-dividend date to be included in the payout. The payout will come through your broker.