You can’t save your way to retirement. You have to invest. And there’s really no better person to handle your investments than you. Whether you’re self-investing or using a financial advisor, you need to understand what’s going on.
It’s easy to get distracted and feel like you can’t do it with confusing investing jargon and so-called experts in the field. Yet, as an investor, you have to know how stocks work. And part of knowing how they work is understanding trading terminology. Like any other discipline, investing is filled with a secret language and words that most people don’t understand.
But it doesn’t have to be that way. Investing doesn’t have to be hard or foreign. Despite your overwhelming feelings when you start, I promise you’ll quickly catch on. Just keep this page bookmarked to help you with any definitions that you may not know or understand today and tomorrow.
This blog post contains 107 stock market terms that every investor needs to know. They’re organized alphabetically and by like-terms. Keep reading to learn more or use the table of contents to jump to different sections. This is just the beginning. Good luck investors.
25 Trading-Related Stock Market Terms
Ask price: The lowest price a seller is willing to accept.
Bears: Investors who believe a stock is going to go down in value.
Bid-ask spread: The price difference between the highest price a buying is willing to pay (bid) and the lowest price a seller is willing to accept (ask).
A large bid-ask spread indicates more volatility in the price and lower trading volumes with less buyers. Fewer buyers sometimes indicates that the price will start to fall if sellers are motivated to sell.
A small bid-ask spread indicates that there are many buyers and sellers looking to make a trade; sometimes indicates the price may be rising.
Bid price: The highest price a buying is willing to pay (bid).
Bulls: Investors who buy stocks because they believe a stock is going to rise in value.
Buy: A stock market position to purchase a stock.
Buyer: A person who is interested in buying a security or asset.
Day trading: The act of buying and selling securities on one trading day by looking at small short-term price fluctuations and trading charts. These types of traders are not considered investors as they are trading companies in a short time frame rather than investing in companies for the long term.
Dow Jones Industrial Average: A benchmark index for the U.S. stock market. Tracks 30 of the most traded stocks on the New York Stock Exchange (NYSE). Used to give investors an overall indication of market performance.
Green day: Refers to a trading day when a stock price ends higher than the opening price.
IPO (Initial public offering): The process of taking a private company public by issuing new stocks. Allows a company to raise capital through public investors in the stock market. IPOs allow companies to grow.
Limit order: Also called buy-limit order. A basic type of trade made to purchase a stock share at a certain price. These types of orders are not guaranteed to result in a purchase. There must be a seller willing to sell at the price that the buyer has set (too high or too low).
Long position: A long term trade that is made to buy an asset with the expectation that you will keep it for at least one year, the price will rise, and then you will sell it.
Market order: A basic type of trade made to immediately buy at the current price.
S&P 500: A benchmark index for the U.S. stock market. Measures 500 of the largest publicly traded companies in the U.S. Used to give investors an overall indication of market performance.
Sell: A stock market position to sell an asset or security.
Seller: A person who is motivated to sell a security or asset.
Share: Units of a company’s stock. Also known as a unit of capital. Equates to ownership of a company’s stock.
Stock Market: A network of stock exchanges where shares of stocks are bought and sold through brokers.
Stock Symbol (Ticker Symbol): A unique combination of letters that are assigned to a specific security for trading purposes. All stocks listed on the stock exchange have a ticker symbol to identify them.
Stop limit order: An advanced type of market order that activates as soon as a certain price is passed. At that point it changes to a limit order and the shares are sold at the limit price or better..
Stop order: Also called an on-stop-buy, on-stop sell, and stop-less sell. A advanced type of market order that activates as soon as a certain price is passed. At that point it changes to a market order and the shares are sold.
This allows investors to sell based on their minimum price rather than missing out completely as the price momentum swings in an unexpected direction. Used when investors cannot watch the market continuously and need protection from large moves in the stock price.
Trade: An exchange of stock between buyers and sellers.
Red day: Refers to a trading day when a stock price ends lower than the opening price.
Volatility: The range of price changes in a given security (stock) over a period fo time. Stable prices are said to have low volatility. Rapidly changing prices are said to have high volatility.
High volatility works well for day-traders who are able to buy/sell according to price momentum and buy-and-hold investors who are willing to wait for prices to improve.
15 Types of Investments-Related Terms
Bond: A type of investment where an investor loans money to an entity (private company or government) for a specific period of time (the maturity date) at a specific interest rate.
Commodity: A type of raw material or agricultural product that is interchangeable with other basic goods. It is the raw material that is used in manufacturing of goods to be sold to consumers. Examples include: wheat, gold, oil, cattle, cotton, lumber, soybeans, bulk foods, sugar, or copper.
Commodities are sold in the futures market where sellers and buyers can bargain on payment and delivery dates.
Common Stock: A type of stock (security) that represents ownership in a fraction of a company. Common stock shareholders have a form of equity that yields higher rates of return when compared to shareholders of preferred stock. Common stock shareholders can vote on company policies and the board of directors. Common stock shareholders do not have any rights to the company’s assets in the event of a liquidation. Preferred shareholders are paid first.
ETFs (Exchange traded funds): a cost-effective passive type of investment portfolio where shares of individual stocks are put together as one fund. It is similar to mutual funds except they’re traded on the stock exchange just like a stock is throughout the day. Sometimes you will pay more or less than the underlying assets that the fund is holding.
ETFs have some advantages to mutual funds. First, investors can reinvest dividends to defer paying taxes on them until the money is withdrawn. Second, they tend to have lower fees, which allow more of your invested money to compound in the market.
Index Fund: A cost-effective passive type of mutual fund or ETF that tracks an index such as the S&P 500 or NASDAQ. Returns on these types of investments mirror the underlying indexes that track small-cap stocks, emerging markets, asset classes, and more.
Hedge fund: A type of actively-managed investment that uses a wide range of strategies to maximize returns for their clients. Funds are allocated to specific assets and hedged with non-cyclical assets. They are considered high-risk investing because:1) not strictly regulated by the Securities and Exchange Commision (SEC), 2) frequent use of leverage, and 3) investments in derivatives to multiple potential returns. Hedge funds typically require a high minimum investment and net worth.
Market Index: A hypothetical investment portfolio tbat represents the best companies in a particular financial market. The market index sets the benchmark for how well the market segments are moving and performing. It calculated by the prices of its underlying holdings.
Investors use market indexes to build portfolios for passive index investing.
Examples: The S&P 500 Index, The Dow Jones Industrial Average (DJIA), and the Nasdaq Composite Index.
Money Market: An interest-earning account at a bank, credit union, or brokerage firm. Typically offer higher interest rates than a normal savings account along with check writing privileges. However, they have fees, minimum balance, and limited transactions.
Mutual Funds: A type of investment portfolio where shares of individual stocks are put together as one fund that is managed by a professional portfolio manager. It is similar to ETFs. However, shares are traded at the end of the trading day rather than during the day like an ETF.
One disadvantage is that mutual funds are buying and selling various stocks on a regular basis. This causes the fund to have to pay taxes on money earned since the initial purchase. While investors don’t see these fees, they do lower the value of the mutual fund for all investors.
Penny stocks: A stock that is trading for less than $5 a share. They are associated with increased risk and can be traded on the New York Stock Exchange and through privately owned exchanges.
Pink Sheet Stocks: Stocks that are traded over-the-counter instead of the New York Stock Exchange. These stocks are typically sold by companies that cannot meet the regulatory requirements to be listed on a major U.S. stock exchange. Trading pink sheet stocks is seen as speculative.
Preferred Stock: A type of stock (security) that represents ownership in a fraction of a company. Preferred stock shareholders have a form of equity that yields a higher claim on distributions in the form of dividends compared to shareholders of common stock. Preferred stock shareholders do not vote on company policies or the board of directors. Preferred stock shareholders have a right to the company’s assets in the event of a liquidation.
Real Estate: Property consisting of land and buildings. May also include natural resources such as water and crops. Aside from purchasing properties, investors can invest in real estate through real estate investment companies such as Crowdstreet, a type of crowdfunding platform.
REIT (Real estate investment trust): A type of real estate investment that is traded on stock exchanges. This allows investors to invest in real estate without owning property. REITs own income-producing commercial real estate and trade like stocks during the day. Investopedia lists five types of REITs: retail, Residential, Healthcare, Office, and Mortgage.
Stock: A type of security that represents ownership in a fraction of a company. Also described as a piece of a company that investors can own.
Stock Market: an exchange where investors buy stocks and companies sell stocks.
14 Types of Account-Related Terms
401 K: A type of employer-sponsored tax-deferred retirement account that allows employees to invest for retirement directly from their paychecks. These accounts have tax-free contributions and tax-free earnings until retirement when they pay full taxes on withdrawals. Many employers will match contributions. Max annual contribution limit is $19,500 (not including employer contributions). Those over age 50 may contribute an additional $6,500.
Brokerage: a company that acts as the middleman to connect buyers and sellers in the stock market.
Custodial account: A financial account controlled by an adult for a minor (a person under the age of 18). The account can buy or sell securities and stocks with approval from the custodian.
Cryptocurrency: An online form of digital payment that can be used for goods and services. They work via blockchain using a decentralized technology that manages the currency and records transactions.
There are more than 10,000 different types of cryptocurrencies with a total value of more than $1.9 trillion. The use of cryptocurrencies is controversial. Investments in cryptocurrency are viewed as highly speculative and volatile with wide fluctuations in pricing.
Fiduciary: A financial agent that is legally required to put the interest of their client above their own. It requires agents to disclose conflicts of interest.
HSA (Health savings account): A type of investment account where money is invested for health-related expenses. With a HSA you can invest in stocks, bonds, and ETFs just like any other investment account. However, not everyone is not eligible for a HSA. HSA are connected to health insurance plans. Therefore, some people will not qualify for an HSA.
Individual Retirement Account (IRA): A type of tax-advantaged retirement account that allows individuals to invest for retirement. Examples include Roth IRA, Rollover IRA, or SEP IRA.
Rollover IRA: A type of retirement account where money is rolled over from an employer-sponsored retirement plan such as a 401K or 403b into a traditional IRA.
Roth 401K: A type of employer-sponsored retirement account that allows employees to invest for retirement directly from their paychecks. These accounts have after-tax contributions but they get tax-free earnings and tax-free withdrawals. Many employers will match contributions. Max annual contribution limit is $19,500 (not including employer contributions). Those over age 50 may contribute an additional $6,500.
Roth IRAs: A type of retirement account where contributions that have already been taxed before being invested. This allows the money to grow tax-free.
SEP IRA (Self-employed Individual Retirement Account): A type of self-employed tax-deferred retirement account that allows business owners to invest for retirement. All contributions are made before paying taxes. Therefore taxes must be paid on withdrawals. You can contribute up to 25% of your net income, up to a maximum of $57,000 annually.
Taxable Investment Accounts: A type of investment account in any brokerage that isn’t listed as a tax-advantaged account. There are no tax benefits to having this account. You make contributions to this account after you have paid taxes on the contribution. And you will pay taxes on any profits and dividends that your investment makes.
This account doesn’t have restrictions on contributions or withdrawals. However, it’s recommended that most people max their tax-advantaged accounts first to plan for retirement and then invest what’s left over in taxable investment accounts. If you retire early, you will need to have some money in your taxable investment account to fund your early retirement.
Tax advantaged account: Any type of account that has exempt, tax-deferred, or other tax benefits.
Traditional IRAs: A type of retirement account where money is not taxed before being invested. This allows contributions to grow using tax-deferred earnings. Taxes are paid when money is withdrawn during retirement.
19 Investor Strategy-specific Terms
Asset allocation: An investment strategy that balances an investment portfolio among different asset classes. This creates a diversified investment portfolio with balanced risks and rewards.
Averaging down: An investing strategy where an investor buys additional shares of a given as the stock’s price falls after the initial purchase. The investor tries to lower their cost per share of their investment by buying more stocks at a lower price.
Buy and hold investing: A long-term investing strategy where investors buy strong companies and keep them for at least five years before selling them.
Buy the dip: A slogan that refers to investors buying additional shares of a given stock when the price drops below the initial purchase price. The belief is that the lower price represents the stock on sale and offers an investor the opportunity to reduce their price paid per share to maximize their returns later.
Diversification: An investment strategy that minimizes risk by investing across a wide variety of investments in a portfolio. The idea is that the portfolio will have some assets that yield higher returns by neutralizing the negative performance of others. Portfolios can be diversified within sectors, asset classes, and geographically.
Dollar cost averaging: An investing strategy where an investor buys shares of a given stock on a regularly scheduled basis regardless of the stock’s price.
Fundamental analysis: a type of stock analysis that measures a security’s (stocks) value by evaluating its economic and financial performance. Used to see if stocks are trading at higher or lower prices than their real value.
Investment strategy: The plan an investor uses to achieve their financial goals through investing. Examples include: passive investing, value investing, growth investing, momentum investing, and dollar cost averaging.
Lump sum investing: An investment strategy where investors stockpile large sums of money or receive large sums of money via an inheritance or bonus at work before investing.
Micro investing: an investment strategy where investors invest small amounts of money such as change. Over the long-term these small investments are compounded into larger amounts of value (money) through Exchange Traded Funds (ETFs) or fractional shares of stock.
Examples: Acorns, SoFi, M1Finance, Public.com, Betterment, Ally, Stash, Charles Schwab
Online trading platform: a type of brokerage where buyers and sellers can connect digitally and online. the exchange platform where stocks are traded (bought and sold).
Options trading: A type of trading that is bought through contracts. An option is a contract that gives the bearer the right but not the obligation to buy it. They are also known as derivatives because they gain value from an underlying asset.
Call: Option to buy a share (via the contract). When the underlying price rises, the bearer can make a profit on the difference.
Put: Option to sell a share (via the contract). When the underlying price decreases, the bearer can make a profit on the difference.
Robo-investing: an investing method that relies on computers (robo-advisors) to build and manage an investor’s portfolio through algorithms.
Sector: An area of the economy shared by companies with similar or related activities, products, or services. Allows economists and investors to analyze a company’s financial performance against its peers.
Examples include technology, banking, fin tech, real estate, financial services, commodities, aerospace, energy, utilities, consumer discretionary, consumer staples, industrials, textile, automobiles.
Short selling: An investing strategy where a seller borrows shares in the hopes that the price will fall so that they can then sell them at a higher price and buy them back at a lower price to return to the brokerage where the shares were borrowed from.
Stock Broker: an individual who buys and sells shares of a stock on behalf of an investor.
Technical analysis: a type of stock analysis that focuses on price trends and chart patterns. Typically used by day traders for momentum trading.
23 Company-Specific Terms
Asset: a resource with economic value that can be converted into cash. Assets generate cash flow, reduce expenses, and improve sales. Assets are expected to benefit the company and are listed on the balance sheet.
Balance sheet: A financial statement that shows a company’s assets, liabilities, and shareholder equity.
Blue chip stock: A well-established company with an excellent reputation. These companies are financially stable and have operated for many years.
They often pay dividends to their investors and have a market capitalization in the billions. They have a stable debt-to-equity ratio, high return on investment, low price to earnings (PE) ratio, and high return on assets.
Examples: Coca-Cola Co. Johnson & Johnson, McDonald’s, Disney, Walmart, General Electric
Book value: Also called stockholder (shareholder) equity. It is the value of an asset according to its balance sheet. Book value represents the difference between a company’s assets and its liabilities.
Cash flow statement: A financial statement that accounts for the cash and cash equivalents entering and exiting the company. It measures how well a company manages its cash. It shows how well the company generates cash, pays its debts, and funds its operating expenses. It complements the balance sheet and income statement.
Capital: Anything that can be used as a financial resource to fund operations. Examples include: assets like machines, equipment, cash, and cash-equivalents that a business owns.
Capital gain (or loss): An economic concept which describes the increase (decrease) in an asset’s (stock, property, etc.) value. Capital gains are assets that have increased in value since its original purchase. They are taxed according to how long the investment had been held. Short term capital gains have been held for less than 12 months and long term capital gains have been held for more than 12 months. A capital loss is incurred when an asset’s value has decreased from its original purchase price.
Dividend: A distribution of a company’s earnings in the form of cash to shareholders. Many shareholders choose to reinvest their dividends back to the company in the form of additional shares of the company’s stock.
Dividend yield: A financial ratio that reports a company’s annual dividend as a percentage of the company’s share price.
EBIT (Earnings Before Interest and Taxes): A basic financial measure that shows a company’s profitability as revenue minus expenses before taxes and interest. It is the operating profit before taxes and interest.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): A basic financial measure that shows a company’s profitability as an alternative measure to net income in specific circumstances. It does not account for depreciation and amortization as seen in the EBIT. This may be a misleading measure of earnings because it removes the cost of investments like property, equipment, and plants.
Equity: A company’s value (total assets minus total liabilities). Also known as shareholders’ equity or book value. This is the money that would be returned to shareholders if all assets were liquidated and debts were paid. A negative equity means that the company has more liabilities than assets. A positive equity means that the company has more assets than liabilities.
Financial Statements: Examples include the income statement, cash flow statement, and balance sheet. These documents must be submitted to the SEC (Securities and Exchange Commission). They are used to report a company’s financial performance.
Growth stock: A stock with strong potential for growth. These companies are usually expensive to buy as they are building capital to reinvest back into the company. They do not tend to have dividends.
Investors who buy growth stocks are looking for the next big company. These companies may have a high price to earrings (PE) ratio.
Examples: Amazon, Netflix, Facebook, Apple, Google, NVIDIA, Intuitive Surgical, Raytheon
Income statement: A financial statement that details the company’s revenue and expenses.
Insider Trading: Buying and selling of company stock by someone on the inside of the company with non-public information about the stock. Must be disclosed to shareholders.
Market Capitalization (Market cap): The market value of a company based on total number of shares and the share. It is calculated by the total number of shares multiplied by the current share price. It reflects how much investors are willing to pay.
Price-to-earnings ratio (P/E ratio): A financial ratio that measures a company’s current share price to its earnings. It is the share price divided by the earnings per share. It is used to understand the cost of purchasing shares of a company. It can be used to compare companies in the same industry.
Profit: Total income remaining after all operating expenses and debts have been paid.
Return on equity (ROE): A measure of financial performance that tells how well a company uses its assets to produce a profit. It is calculated by net income divided by shareholder equity.
You can think about ROE as how much of a return is the company producing based on the assets they have gained from shareholders buying stock.
ROE should be near or above 14%. Anything less than 10% is seen as poor ROE.
Revenue: money generated by normal business operations (sales, services, products)
Unrealized gains and losses: paper gains and losses that show an increase or decrease in value but are not taxable yet.
Value stock: A stock that is priced lower than it is worth fundamentally. These stocks have a relatively cheap valuation given its earnings and long term potential. These companies are not necessarily blue chip companies but rather they are companies that may be “on sale” because of a financial problem with the company or a problem with earnings.
Investors are trying to capitalize on the inefficiencies within the market by buying value stocks that are valued less than their worth, so that they can sell at a higher price later. Investors see value stocks as bargains as the company is typically viewed unfavorably in the market. They feature a lower PE ratio, lower price to book (PB) ratio, and higher dividend year.
13 Market Cycle Related Terms
Bear: An investor who thinks the market is going to go downward. They often delay investing in an attempt to wait for better prices when the market “crashes.” They are pessimistic about the overall trajectory of the market and economy.
Bear Market: A sustained period of time where the stock market is on the decline (usually a 1. Often viewed as a negative period of time in the economy and stock market. Investor confidence is low, causing them to stay on teh sidelines rather than invest.
Bull Market: A sustained period of time where the stock market is on the rise. Investor confidence is high and investors want to keep investing with momentum to make money.
Correction: A market term that indicates the decline (at least 10%) of a given stock, bond, sector, or indexes.
Economic cycle: Characterized by periods of economic growth (early-cycle phase, mid-cycle phase, late-cycle phase, recession).
Early cycle phase: In the early-cycle phase the economy is returning from a recession. Interest rates are low. Investors want to invest in sectors that are growing such as cyclical consumer goods and financials.
Mid-cycle phase: The longest phase in an economic cycle characterized by strong corporate earnings and continued low interest rates. Investors are focused on technology and growth during this phase. They may also invest heavily in industrials and basic materials.
Late-cycle phase: Growth begins to slow and the economy is considered to be hot as inflation and corporate earnings continue to grow. Stock prices appear to be high and investors may shift into stocks that can perform well in a recession because they are necessities (utilities, healthcare, energy, and consumer staples).
Economic depression: A steep and downward drop in economic activity. Characterized by a decrease in Gross Domestic Product (GDP) by 10% and high levels of unemployment and low inflation.
Economic recession: a significant decline in economic activity in a specific region. Characterized by two or more quarters of a decrease in Gross Domestic Product (GDP) along with rising unemployment.
Market Cycles: The four cyclical phases markets move through (accumulation, mark-up, distribution, mark-down.
Rally: A sustained period of time where stocks, bonds, or indexes increase in price. May be rapid or over a relatively short period of time.
Timing The Market: An act where investors try to pick the best time to buy a stock in order to outperform the market. Often results in investors missing out on time in the market and future earnings. Bottom line: you can’t time the market.
So there you have it. Your introduction to the talk on Wall Street. These are the top 100 stock market terms that every investor needs to know. Mastering your understanding of trading terminology will increase your knowledge and confidence to invest today. It may take time but just imagine the number of conversations you will be able to have once you understand the investing lingo. Tell me, are you comfortable with these definitions?