Developing a strong understanding of stock market basics and relevant terms can be daunting, especially if you are a new investor or trader. If you don’t know where to start — look no further!
Let’s cover stock market basics with a full list of common terms, so you can invest with clear understanding and confidence.
What is the Stock Market?
The stock market is a collection of international markets and exchanges where traders and investors can buy and sell shares of publicly traded companies, such as Apple, Tesla, and Disney. In the U.S., the bulk of trading happens on the NASDAQ (National Association of Securities Dealers Automated Quotations) and NYSE (New York Stock Exchange), two of the largest exchanges in the world. Investors and trader buy and sell stocks to earn a profit, whether through holding stocks for years or trading them frequently, respectively.
What are Stock Market Terms and Why are They Important?
Like sports, traders and investors in the stock market use common terms. If you want to build your understanding of the stock market and investing, you’ll need a solid foundation. That said, let’s dive in!
48 Common Stock Market Terms
If you believe the market price of a company’s stock will rise, you can take a position by purchasing shares of the company.
When you sell your position, you are getting rid of shares of stock you own in a company. You generally sell if you believe that you have made enough profit or if you are losing too much money and want to cut your losses.
The bid is the highest price that a buyer is willing to pay for a stock. It is the opposite of an ask/offer.
The ask is the lowest price a seller is willing to sell their stock at. It is the opposite of a bid.
5. Bid-Ask Spread
The bid-ask spread is the difference between the bid and ask price of a stock, which is the difference between the price a seller is willing to sell their stock for and the price a buyer is willing to pay. For a trade to happen, the buyer and selling will need to compromise and come to an agreement on price.
For example, if a seller is willing to sell their share of Apple for $130 and a buyer is willing to purchase the Apple share at $128, the spread is $2. The buyer and seller will need to agree on a price between $128 and $130 for the trade to occur.
6. Bear Market
In a bear market, the stock market is trending downwards, meaning that the prices of stocks are falling. It is the opposite of a bull market and indicates that traders and investors are bearish or not confident in the stock market.
7. Bull Market
In a bull market, the stock market is trending upwards, meaning that the prices of stocks are rising. It is the opposite of a bear market and indicates that traders and investors are bullish or confident in the stock market.
8. Market Order
A market order is an instruction to execute your trade as soon as possible at the current market price. If you want to buy or sell your stock immediately, you should use a market order. Note that using a market order can be more expensive. You are a price taker, meaning you are buying and selling at whatever price is available.
9. Limit Order
A limit order is an instruction to execute your trade at a fixed price without considering the current market price. If you want to use a limit order to purchase a stock, you should set the price to be at or below the maximum price you want to pay. If you want to sell your position, you should set the price to be at or above the sale price you want. Generally, it is more profitable to use a limit order, but your order may take some time to be filled or may not be filled at all if there is a significant difference in the price you set and the current market price.
10. Good Til Cancelled Order (GTC)
A Good Til Cancelled Order is an order that will be in place until you cancel it or until the stock price reaches the price that you set, at which point your order will execute. The timeframe could range from weeks or months down the road, depending on the date you set for your GTC order.
11. Day Order
A day order means that your market order to buy or sell a stock is only valid until the end of the day that you placed the order. If your order is not executed or filled by the end of the day, it will automatically get canceled.
12. Margin Account
A margin account is one of the two main types of brokerage accounts, the other being a cash account. It is an account in which a person can borrow money from their brokerage firm to buy stocks. Margin is the equivalent of taking out a loan against the existing value of your account and may incur interest over time. If you can use instant deposits in your brokerage, you have a margin account.
13. Cash Account
A cash account is an account in which a person can only buy stocks with settled cash. That means the money has to be available in your account, either in cash or equity, before you can invest.
A portfolio is the collection of investments that a trader or investor owns. Your portfolio could have as little as one stock or an infinite number of stocks.
A rally occurs when the general stock market rapidly goes up in value or an individual stock’s price rises significantly in a short amount of time. An example of a rally is when the price of Tesla shot up more than 750% in one year.
16. Stock Symbol / Ticker Symbol
A stock or ticker symbol is a unique symbol a company is given when they decide to go public on the stock market. The ticker symbol could be a mix of characters and numbers. For example, Paypal, an online payment system, trades under the stock symbol PYPL.
Volatility refers to the price fluctuations in the stock market or an individual stock. If a stock is highly volatile, its price is moving up and down rapidly. Volatile stocks have a high profit potential but are much riskier. Make sure you know how to manage your risk if you choose to take advantage of market volatility.
Liquidity is how easily you can get in and out of a position. If a stock has a high trading volume, it is relatively liquid, meaning you can easily buy or sell your shares.
19. Trade Volume
Trade volume is the number of shares of a company that gets actively traded during a specific period. If a stock has a high trading volume, that means many traders and investors are buying or selling simultaneously, which makes it easier to enter or exit a position. If a stock has low volume, it is less liquid, which makes entering or exiting a trade more difficult.
20. Day Trading
Day trading refers to buying and selling a position within the same day, whether you make the trade seconds or hours apart. That includes positions purchased and sold pre- or post-market hours. People who actively day trade are known as “active traders” or “day traders.” Most brokerages require active traders to have a minimum of $25,000 in their margin accounts.
21. Swing Trading
Swing trading is a type of short-term trading style in which traders attempt to capture profits by holding a position in a stock anywhere from one day to a few weeks. When traders are swing trading, they generally hold their positions longer than day traders but shorter than investors who use the buy and hold strategy.
22. Options Trading
Options trading refers to traders and investors buying or selling options contracts. There are two types of options trading – calls and puts. A call option gives you the right to purchase shares of a stock at a specific strike price, while a put option gives you the right to sell shares of a stock at a set price. When we say right, it means that you can choose to buy or sell shares at the set price, but you are not obligated to do so.
Options contracts are bought and sold at a predetermined length of time, ranging from days to years, and each option contract typically equals 100 shares of the underlying stock. You have a right to exercise an option contract any time before it expires, but most options do not get exercised. Options trading can be a great short- or long-term trading strategy, depending on your personal goals.
23. Short Selling
Short-selling occurs when a trader or investor bets that the value of a stock will fall by selling stocks that they borrow from their broker and then purchasing them back at a lower price. The short seller then returns the stocks to their broker and makes a profit from the difference.
This technique is very risky, especially for beginners. If the stock you shorted goes up significantly in value, you may have to purchase the stock back at a higher price to cover your position, causing you to lose money. Additionally, you will likely have to pay a fee to your broker for borrowing the shares.
24. Averaging Down
When a trader or investor purchases more of a stock as the price falls, they are averaging down. This strategy decreases your stock’s overall average purchase price. You should generally do this if you believe that the stock’s price is undervalued and will rebound in the future.
25. Averaging Up
When a trader or investor purchases more of a stock as the price rises, they are averaging up. This strategy will increase your stock’s overall average purchase price. You should generally do this if you believe that the stock’s price will keep rising.
26. Moving Average
A moving average is the average price per share of a stock in a given period. It is a technical indicator that is commonly used to determine the direction a stock is trending towards and identify support and resistance levels. Examples of periods that often get used include 50, 100, or 200 days. However, the longer the time, the more the data lags as the moving average uses past data.
27. Going Long
When you go long on a stock, you are betting that the stock price will continue to rise in the future. Your goal is to buy the stock at a low price and sell at a higher price (buy low, sell high).
28. Price to Earnings Ratio (P/E Ratio)
The P/E ratio refers to the ratio of a company’s current share price to its earnings per share. They are used to determine how valuable a company’s shares are either compared to its historical record or aggregate markets. If a company’s stock has a high P/E ratio, that could mean one of two things – either the company’s shares are overvalued, or investors believe that the company has high potential value in the future.
A dividend is a payment that companies distribute to their shareholders to share their earnings with investors. They are typically distributed every quarter and are a way for investors to develop a passive cash flow. Not all companies will have dividends.
30. Blue Chip Stock
A blue-chip stock refers to a company that is large, well-established, and reputable. Generally, these companies are the market leaders in their industry and pay regular dividends to investors. Blue-chip stocks are considered low-risk investments for traders and investors. They include household names such as Apple, Coca-Cola, Johnson & Johnson, Walt Disney, AT&T, and more.
31. Penny Stock
A penny stock refers to a small-sized company that trades at a share price of $5 or less. Penny stocks often have low trading volume and liquidity, which makes it difficult for investors and traders to go in and out of a position quickly. They are highly speculative, meaning that you can lose a lot of money from trading penny stocks. Penny stocks are more suited for traders and investors who have a high risk tolerance.
32. Institutional Investor
An institutional investor is a person or organization who trades stocks in large quantities on behalf of other people. Examples of institutional investors are pension funds, hedge funds, investment banks, and money managers. Because of their sheer size, institutional investors generally get preferential treatment and have access to investments that retail investors do not have access to.
33. Retail Investor
A retail investor is an individual who buys and sells stocks in brokerage and retirement accounts for themselves. Retail investors have much smaller purchasing power than institutional investors and are typically motivated by personal financial goals. They do not get preferential treatment and usually manage their own money.
34. Fundamental Analysis
Fundamental analysis is one of the major schools of thought for the stock market. Fundamental analysts use public data to measure the value of an asset based on its intrinsic value. To derive this value, they look at economic and financial factors, such as the overall state of the economy, industry conditions, how effectively a company gets managed, and how a company spends money. The goal of fundamental analysis is to determine whether the current price of an asset is overvalued or undervalued.
35. Technical Analysis
Technical analysis is another one of the major schools of thought for the stock market, but it is on the opposite spectrum of fundamental analysis. Technical analysts measure the value of an asset based on statistical trends. The goal of technical analysis is to evaluate different investments and identity any trading opportunities that may arise. Technical analysts often focus on the historical price patterns of a company and stock trends.
36. Market Capitalization
Market capitalization, or market cap, is the total market value of a publicly traded company’s shares. Market cap gets calculated by multiplying the total shares of a company’s stock and its stock price. Large-cap companies are valued at over $10 billion, mid-cap companies are valued at between $2 and $10 billion, and small-cap companies are valued at between $300 million and $2 billion.
Large-cap companies are generally more established and are key players in their industry. Mid-cap companies are usually companies that are less established but are rapidly expanding. Small-cap companies tend to be less mature but have more growth potential than large-cap companies.
An exchange is where different investments get traded. Examples of exchanges are the NYSE on Wall Street and the NASDAQ.
38. Broker/Brokerage Firm
A broker/brokerage firm is a registered securities firm. Examples of brokerage firms are TD Ameritrade, Fidelity, Webull, and Charles Schwab. A broker serves as an advisor for investing, but they do not own the assets themselves and can charge a fee for their services.
39. Mutual Fund
Mutual funds are a professionally managed financial vehicle where investors pool together money to invest in various securities. Depending on the type of mutual fund, they can hold different securities, have distinct investment objectives, and seek varying returns. By investing in mutual funds, an individual investor can gain access to a diversified portfolio. However, typically mutual funds will have annual fees (expense ratios) and sometimes charge commission.
40. Exchange-Traded Fund (ETF)
Similar to a mutual fund, an exchange-traded fund (ETF) is a type of financial vehicle that pools capital together for investing purposes. However, the main difference is that you can purchase shares of an ETF directly on your exchange rather than putting money into a fund.
41. Initial Public Offering (IPO)
An initial public offering occurs when a private company decides to become a publicly traded company. To hold an initial public offering, a company must meet the specific requirements set by the exchanges and the Securities and Exchange Commission (SEC). Typically, a company will hold an IPO to raise capital. But, other reasons include allowing early investors to cash out on their investments in the company, gaining publicity, or securing better lending terms.
42. Secondary Offering
When a company issues more shares to sell after they go public, that is called a secondary offering. The goal is usually to raise more capital or to pursue growth acquisitions.
43. Special Purpose Acquisition Company (SPAC)
A special purpose acquisition company, also know as a “blank check company,” is a shell company that a team of investors set up to raise money through an initial public offering so they can later acquire a different company. By definition, a SPAC has no commercial operations, and most of its assets comprise the money raised through its IPO. SPACs come with risks as investors who buy into a SPAC’s IPO typically do not know what company the SPAC is aiming to acquire in the future.
44. Trading Hours
Trading hours refer to the hours that the stock market is open, which is from 9:30 AM – 4:00 PM EST Mondays to Fridays in the U.S. However, certain brokerages will allow traders and investors to trade in the pre-market hours and after-hours, which can run from 4:00 AM – 8:00 PM EST.
45. Public Float
The number of shares that are available for trading to the public is the public float. It excludes shares that insiders, such as company executives and early investors, own.
Stocks that are in the same line of business or industry are considered a sector. An example of a sector is “technology,” which includes companies like Apple, Amazon, Facebook, and Microsoft.
47. Forex (Foreign Exchange Market)
Similar to the way stocks get traded globally, Forex refers to various currencies around the world that get traded.
48. Annual Report
An annual report is a document that public companies must provide to their shareholders annually that details their finances and operations. By reviewing a company’s annual report, you can gain a greater understanding of how the company has been operating during the year, its financial state, and its forecast for the future. Additionally, you will have more information to evaluate the company and make adjustments to your trading strategy.
Frequently Asked Questions (FAQs)
What is the stock market in simple words?
The stock market is a collection of markets and exchanges around the world where traders and investors can buy and sell shares of publicly traded companies to make a profit.
What are the terms used in the stock market?
Common terms used by traders and investors in the stock market include buyers and sellers, bear market, bull market, rally, dividend, blue-chip stocks, margin, bid, ask, and spread.
What are stocks in simple terms?
A stock is a type of investment. When you buy a company’s stock, you own a share of the company. For most people, the goal is ultimately to make a profit from their investments.
How do I start learning about the stock market?
Some great ways to learn about the stock market are through a traditional trading platform like Fidelity and TD Ameritrade, books, articles, friends and family, and free investing courses. Personally, I use a mix of YouTube channels, financial news, podcasts, Discord servers, Reddit communities, and friends.
What should a beginner invest in?
Ideal investments for beginners include retirement accounts (Roth IRA, 401(k), Traditional IRA), index funds, ETFs, and robo-advisors.
How do I begin investing in stocks?
You can start by deciding how you want to invest, whether through individual research, a financial expert, or your company’s retirement account, and the type of investing account/trading platform you want to use.
Is it worth it to buy 1 share of a stock?
Yes, it is worth it because you can start small and add more to your investments later on as your income increases. The amount of money you put in over time can make a big difference in the value of your investments.
What are the types of common stock?
Types of common stock include blue-chip stocks, value stocks, growth stocks, cyclical stocks, income stocks, speculative stocks, defensive stocks, and penny stocks.
The Bottom Line
Learning these terms will help build your financial literacy and investing know-how — making you a better investor over time. Successful investing takes trial-and-error, but learning the most commonly used terms early on will help build you a sturdy foundation. We hope this breakdown helps you go down your investing journey!