Understanding the terminology used for stocks, investing, and even Wall Street is challenging to many people. However, below are some terms we hear pretty often summarized to help you.
Assets: Asset is a general term to describe any resource that holds present or future economic value. It can be a physical or nonphysical good, converted into cash, and may have the potential to generate cash flow.
Asset Classes: A varied collection of tradable assets, both physical and financial. They fall into specific classes based on shared characteristics, how they behave in the marketplace, and the rules that apply to them.
Bear Market: The market when stocks strongly trend downwards for a prolonged period. A typical indicator is a fall of 20% in prices or more. In addition, investor confidence is low during this time.
Blue Chips: Stocks with a history of consistently strong dividend payments issued by big corporations with solid management are blue-chip stocks. It’s also a nickname for the Dow Jones Industrial Average, which includes 30 companies.
Bull Market: The market when stocks strongly trend upwards for a prolonged period. A typical indicator is an increase of 20% in prices or more. In addition, investor confidence is high during this time.
Capital Gain: The profit earned after selling an asset for more than its purchasing price. The difference stems from the asset gaining value during the time the investor held it.
Capital Loss: A loss incurred after selling an asset for less than its purchasing price. This follows the asset losing value over time while the investor held it.
Closing Price: The price of a stock at the time when the market closes. Closing occurs every weekday at 4 PM, Eastern time.
Day Trading: Typically refers to the buying and selling of a security on the same trading day, usually on the stock and foreign exchange markets. You may also hear it referred to as intraday trading.
Diversification: A strategy to minimize the risk of losing money when investing is called diversification. It requires you to divide your money among multiple assets across various companies, industries, or areas. Therefore, if one investment performs poorly, the success of the others keeps you from experiencing a severe loss.
Dividend: A portion of profits distributed by a company to its shareholders. It’s typically expressed as a percentage.
Equities: When the word is on its own and plural, it usually means shares of a security, such as stock.
Hedge: A position you take with your money or investments to try and counteract or control your losses. An investor who owns a lot of bank stocks, for example, might hedge by also investing significantly in utility shares. If any, the two industries have little, if any, relationship, so if stocks suffer in one industry, the other may not be hurt.
Index: A collection of stocks with similar traits or characteristics representative of a section within the larger market. The S&P 500, the Dow Jones Industrial Average (DJIA), and the NASDAQ Composite Index are popular examples.
Liquidity: Describes how efficiently or easy it is to buy or sell an asset on the market without impacting its market price. An asset’s liquidity may depend on its type and the demand for it.
Moving Average: This is simply the average per-share price of a stock within a set period – it could be 50 days, 100 days, or 200 days. The Dow Jones and Nasdaq also have moving averages that are measured in the same way.
Open Positions: The state of trade while it is still active can result in losses or gains. A trade may stay open for a long or short time, depending on the trader’s strategy. For example, an investor who owns shares of a company’s stock has an open position. Once they sell it, the position closes.
Portfolio: A portfolio is a collection or group of investments in financial assets such as stocks or bonds owned by an investor.
Rate of Return: Simplified as ROR, this is the profit or loss made on an investment, typically over a year-long period. It’s expressed as a percentage of the investment’s initial cost. If the RoR is positive, it makes a profit, whereas a negative ROR indicates a loss.
Risk Tolerance: How much risk an investor is willing to take on in their investing strategy. Several factors may determine risk tolerance, such as age, financial goals, and time horizon.
Short-Selling: A trading strategy that requires the trader to sell borrowed stocks, or other borrowed assets, before they decrease in value. The trader sells them at market price with the intent to repurchase them for less at a later point. The short seller returns the borrowed shares to their broker or lender and make a profit by keeping the difference.
Thin Trading: A period when the market has relatively few buyers and sellers. The months of August and December commonly see thin trading, as summer vacations and holidays impact the volume of buy and sell orders that traders process. The phenomenon can also apply to certain stocks or stock market sectors.
Volatility: The price movement of a stock (or a stock index). Some stocks are not very volatile; others are. Thinly traded stocks may see greater price swings than others.
Yield: This is often confused with the return of a stock, but it is not the same. Yield is a measure of dividends from a dividend-paying stock, and you figure it out by dividing the yearly dividend payment by the initial price you paid for the shares. For example, say you buy shares of a firm for $10, and they yield $0.45 annually. Your yield is 4.5%.
The Bottom Line
Overall, the financial world is complex and has the language to match. If you find yourself interested in opening an investment portfolio, you may want to brush up on the lingo before starting. However, taking it one step at a time and slowly examining your vocabulary is the best way to begin.
Hopefully, this clears up a little of that stock market jargon. Although this is a relatively short list, there is much more out there to learn. If you have questions regarding any financial topic, feel free to reach out.