This beginner's handbook is ideal for getting your feet wet in the Stock Market. You can begin investing as soon as you finish understanding this terminology.
Any successful stock market investor will tell you that they began by studying stock market terminologies, ideas, and how the market operates.
The next book won't be as tough or scary after you've finished this one. You'll be able to complete your research quickly and understand the investment you are about to put your money in.
You will see for yourself how simple it is to learn about the stock market with the correct terms.
By beginning small, you're not putting your finances at risk!
You can play it safe by easily gathering all the necessary information to get started the right way!
This beginner's handbook is ideal for getting your feet wet in the Stock Market. You can begin investing as soon as you finish understanding this terminology.
Any successful stock market investor will tell you that they began by studying stock market terminologies, ideas, and how the market operates.
The next book won't be as tough or scary after you've finished this one. You'll be able to complete your research quickly and understand the investment you are about to put your money in.
You will see for yourself how simple it is to learn about the stock market with the correct terms.
By beginning small, you're not putting your finances at risk!
You can play it safe by easily gathering all the necessary information to get started the right way!
PART 1:
ON THE SURFACE
This refers to the current price a stock share is trading for in the stock market. When the shares of a publicly traded company are issued, they are assigned value that ideally reflects the company’s value. The stock prices may go up or down depending on different factors like changes within the industry, environmental changes, war, changes in the economy, or political events.
One mistake people make is assuming that when the stock price is low, it means they are cheap, and when the stock price is high, it means they are expensive. The truth is, stock prices tell very little about the stock’s value. Most importantly, it does not predict whether the value is headed higher or lower. Your main goal as a stock investor is to identify stocks that are currently undervalued by the market.
Let’s consider an example – one company has created a game- changing technology while another is laying off staff to cut down on cost. What stocks would you want to buy?
When buying stocks, it helps to dig deeper instead of “judging a book by the cover.” You might be surprised that the company that has just created a game-changing technology does not have a plan to build its
Stock price
STOCK MARKET TERMINOLOGY FOR BEGINNERS |13 initial success. On the other hand, the company that is cutting down
on costs may already be streamlining its operations to achieve success.
The stock prices only tell you the current value of a company or its market value. If there are more buyers than sellers, the chances are that the stock prices will rise, and vice versa. Your role is to investigate the company to determine its true value.
Ticker symbol
This is a unique string of letters assigned to security for the purposes of trading. For instance, stocks listed on the NYSE might have four letters or less. On the other hand, those listed on the Nasdaq may be up to five letters. For example, if you wanted to search for Amazon, you would simply type in AMZN, or for Nike, it would be NKE. These symbols are just a shorthand way of describing stocks by different companies.
When a company issues their securities to the public marketplace, they select symbols for their shares – often related to the name of the company. The investors and traders will then use these symbols to place trade orders. There is no significant difference between those with three letters and those with four or five. Any additional letters simply mean the stocks have more features like trading restrictions or share class, which ranges between A and Z.
But what happens if the company has more than one class of shares trading the market?
In that case, it adds a class to its suffix. For instance, preferred stocks called Jeff’s Tequila Corporate preferred A shares would use the symbol JTC.PR.A.
If a company is in a bankruptcy proceeding, it will have a Q letter after its symbol. On the other hand, if the company is non-US but is trading
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in the US financial markets, it will have a Y letter following its ticker
symbol.
Stocks
Think about it – when you purchase a company’s stocks, you are purchasing a small portion of that company, which is called a share. Therefore, stocks are defined as securities that represent your ownership share in a company. As an investor, if you think that a company’s stocks will grow in value, you can purchase a slice of that company and sell your shares later for profit. They are ways for you to grow your money and outpace inflation.
There are two types of stocks namely: common stocks and preferred stocks.
Common stocks
Are you new to stocks investing? Are you looking to buy few shares?
If yes, then you might want to invest in common stocks. As the name suggests, common stocks refer to the most common type of stock in the market. When you own common stocks, it simply means you own a slice of the company’s profits and the right to vote. You may also earn dividends, which is a payment made to you – the stock owner – regularly. However, these dividends are typically variable and not a guarantee you will receive them.
Pros
− They offer you potential for higher long-term returns
− You have voting rights
STOCK MARKET TERMINOLOGY FOR BEGINNERS |15 Cons
− The dividends – if available – are variable, lower, and not guaranteed
− Their prices are highly volatile
− In case the company goes bankrupt, you risk losing your
investment
Preferred stocks
This is a type of stock in which you are entitled to a fixed dividend whose payment is a priority over ordinary share dividends. They have a higher claim on distribution compared to common stocks.
Pros
− The dividends are higher, fixed, and guaranteed
− Their prices are less volatile
− In the event of a liquidation, you are likely to recover at least
part of your investment
Cons
− In most cases, you have limited or no voting rights in corporate governance
− You have a lower long-term potential for growth Basis point
This refers to a unit of measure used in finance to describe the % change in the rate or value of a financial instrument. It is also denoted as bps or “bips.” 1 bps = 0.01%. In the bond market, bps is used to describe the yield a bond pays to an investor.
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Bips are commonly used by investors to describe the incremental interest rate change for securities and interest rate reporting. Additionally, they are used to prevent ambiguity or confusion when talking about absolute and relative interest rates – especially in cases where the rate difference is less than a percent, but the amount has a material significance.
Percent
This refers to the number of points divided into the value of the stock, which produces a percentage change.
Let us consider an example;
If you say that a company’s stocks are up 5 points from $100/share, it simply means it's up to $5, which translates to a 5% gain. In short, the percent value is always calculated from the starting value, which makes the comparison understandable.
Types of charts
As an investor, the first thing you must understand is that technical analysis is all about timing. While a stock may be doing very well, if you trade at the wrong price, you risk incurring heavy losses. This explains why traders use a wide range of tools to make informed decisions in the stock market. The biggest tool is the stock chart.
When performing technical analysis, there are three major principles you must bear in mind;
− Stock prices reflect all the relevant information about the market
− The stock prices move with market trends
− History has a way of repeating itself
STOCK MARKET TERMINOLOGY FOR BEGINNERS |17
If the stock prices move in patterns, the trick is to study the patterns to help you make informed trading decisions, hence the reason you must learn to use stock charts – graphical representations of stock volume and price movements over a certain duration. Typically, the X axis represents the time – which varies from intra-day to months or more – while the Y axis represents the movement in price.
There are various types of charts;
Line chart
This is the most common type of chart that tracks the closing prices of the stock over a specific duration. Every closing price is represented by a dot, and all the dots are connected by lines, which give a graphical representation. While most people think of the line chart as simplistic, traders can use it to spot trends in price movements.
Bar chart
This is quite similar to the line chart, except it offers more information. Instead of a dot, every plot point is represented by a vertical line with two horizontal lines from both sides. The top part of the vertical line is the highest price at which a stock is traded during the day. On the other hand, the lower part is the lowest traded price. The extension on the left represents the price at which the stock opened, while on the right represents the closing price for the day.
The bar chart also offers insight into volatility. For instance, if the line is longer, it simply means greater volatility in trading the stocks.
Candlestick charts
These charts are popular among technical analysts because they offer a lot of information in a precise way. As the name suggests, the movement in stock price is represented in candlestick shape. Just like
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the bar chart, it has 4 data points – high, low, open, and close. However, this chart gives volatility information for a longer period, and the price movements are represented in different colors. A falling stick is black or red, while a rising candlestick is white or clear.
That said, as you trade in the stock market, you must read the chart and understand the information it represents to help you identify patterns in price movements and use that to make informed trading decisions.
Time frame
This is the amount of time a trend lasts in the stock market and can be identified and used by traders. These trends can be classified as primary, intermediate, or short-term. The truth is, markets can exist in several time frames at the same time. In that case, there can be conflicting trends within a stock depending on the time frame considered. It is not unusual to find stocks that are on a primary uptrend while still being mired in the short-term or intermediate downtrends.
A general rule of thumb is that when the time frame is longer, the signals are more reliable. The more you drill down in the time frames, the more the charts become polluted with noises and false moves. Ideally, you should use a longer time frame to define primary trends of whatever stocks you are trading.
Range
This displays how many periods you wish to display, which is a key depending on the information you want. By just looking at the stock charts, you can tell where prices have been for a particular duration without much description. Once you set the range, you can tell the
STOCK MARKET TERMINOLOGY FOR BEGINNERS |19 stock movement for that time. There are various default settings – like
1,5 or 10 days; 1,3 or 6 months; 1,3,5,or 10 years.
Watchlist
These are set of securities monitored for their potential in trading or as investment opportunities. Just as the name suggests, it is a list of stocks an investor watches with the aim of leveraging price falls to create interesting undervalued situations. With several instruments, you can create a watchlist that will help you make informed and timely investment decisions. You can also use a watchlist to keep track of companies and keep up with financial events and news that could impact these instruments.
Bid and ask
Bid and ask are also referred to as bid and offer. They refer to two-way price quotations indicating the best potential price a security can be bought and sold at a certain time. The bid price is the maximum price a buyer is willing to pay for a share of stock or securities. On the other hand, the asking price is the minimum price a seller is willing to take for that specific security. For a transaction to happen, a buyer must be willing to pay the best offer available or sell at the highest bid.
The difference between bid and ask is termed as spread, which gives information on liquidity. In other words, the smaller the spread, the greater the liquidity of that security.
For instance, if the current price for a stock of ABC is $12.50 / $12.55, if you are looking to buy A at the current market price, you will pay $12.55, while another investor who wishes to sell ABC shares at the current market price will receive $12.50.
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Volume
This refers to the amount of assets or securities changing hands over a given period, in most cases over the course of the day. For example, stock trading volume would be the number of shares of security traded between daily open and close. Generally, stocks with more daily volume are considered more liquid than those without because they are more active.
In technical analysis, volume is a key indicator used to measure the relative significance of a market move. If the volume is higher during a price move, the move is considered more significant. However, if the volume is lower during a price move, then the move is considered less significant.
In short, volume tells you more about the market activity and liquidity. If you feel hesitant about the direction of the stock market, the chances are that future trading volume will likely increase, causing options and futures ion-specific stocks to trade actively. Overall, volumes tend to be higher near the market’s opening and closing times; and on Mondays and Fridays. Additionally, they are lower during lunchtimes and before holiday seasons.
Previous close
This is a security’s – including stock, commodity, bond, futures or options contract, or market index – closing price of the preceding time of the one being referenced. Almost always, it refers to the prior day’s final price of a security when the market officially closed for the day.
In financial information, it is an important daily metric used for reporting purposes. It marks the daily measuring point against which updated returns are calculated and for which new information is collected to inform new decisions and strategies. It is one of two key components in a candlestick day chart.
STOCK MARKET TERMINOLOGY FOR BEGINNERS |21
Today’s open
This is the starting period of trading on a security exchange or organized over the counter market. In most cases, an order is considered open until it is cancelled by the client, it is executed or it expires. Depending on the exchange, today’s open can be the first executed trade price for that specific day. However, there is a good chance that the open price may not be the same as the previous day’s closing price.
You must note that different exchanges have different opening times. For instance, NYSE may open at 9:30 am EST, while CME may open at 7:20 am CST. That said, the main reason an order may remain open is because it carries such conditions as stop levels or price limits. The other reason may be a lack of liquidity for that specific security. In other words, if there are no established bids and offers by market makers, it means no trading will happen.
Market cap
This is also referred to as market capitalization. It is the total dollar market value of a company’s outstanding shares of stock. To calculate the market cap, you simply multiply the total number of company’s outstanding shares by the current market share price.
Let us consider an example; A company X has 10 million shares selling for $100/share with a market cap of $1 billion. In that case, investors will use this figure to tell the company size instead of using total asset figures or sales. In an acquisition, the market cap will determine whether a takeover candidate is a good value or not to the party acquiring it. The initial market cap of a company is established through an IPO. Before that, the company that wishes to go public must enlist an investment bank to employ valuation techniques to help derive a company’s value and determine how many shares will be offered to the public and at what price.
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Once the company goes public and begins trading on the exchange, the share price is determined based on supply and demand in the market. If the demand is high due to favorable factors, the price will likely increase. However, if the company’s future growth potential is in doubt, the sellers will likely drive the price down. In that case, the market cap becomes a real-time estimate of the company’s value.
Market cap = share price x # shares outstanding
1-year target estimate
This refers to the predicted price of stocks a year from the current date. In most cases, the price levels reflect the collective opinion given by different analysts on where they think the stocks will be trading a year from now. For an analyst to give an estimate, they must predict what a company’s business will be like in a year by focusing on the revenue and other key factors. Additionally, they must consider the investor’s willingness to pay a given price. That said, the results of such predictions are usually not extremely successful.
Average volume
This refers to the average number of shares you trade within a day in a given stock. While daily volume is the number of shares you trade each day, averaging this over a number of days gives you the average daily volume. The average volume is a key metric because high or low trading volumes attract different types of traders and investors.
Most traders and investors prefer high trading volumes compared to lower volumes. This is mainly because high volumes are easier to get into and out of position. On the contrary, lower volumes have fewer buyers and sellers, making it harder to enter or exist at the most desired price.
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Higher volumes indicate that the securities you are trading are highly competitive, have narrower spreads, and are less volatile. Does this mean they will not have large price moves? Definitely not! On any day, any stock can have a very large price move even on higher than average volume.
You can use the average volume as a metric for analyzing the price action of liquid assets. In other words, if the price of an asset is rangebound and a breakout happens, an increase in volume is likely to confirm the breakout. However, a lack of volume indicates that a breakout is likely to fail.
Dividend yield
This refers to a financial ratio of dividends/price showing how much a company pays out in dividends annually relative to its stock price. This value is expressed as a percentage. Dividend yield is likely to be paid by mature companies, while those with higher dividend yields are likely to be in the utility and consumer staple industries.
Even though companies in the REITs, BDCs, and MLPs are thought to pay higher than average dividends, they are taxed heavily. This is why investors must bear in mind that higher dividend yields don’t always mean an attractive investment opportunity because the dividends of a stock might be increased because of a decline in stock price.
Earnings date
This is the date of the next release of a company’s financial report. This is when the company’s profitability for a particular duration is officially announced. In most cases, companies in the private sector are required to give quarterly financial reports to stock exchanges across the world so that investors know the company's state.
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Percentage change
This is a mathematical concept representing the extent of change happening over time. In finance, this is important in telling the price change of a security. This value can be applied to any quantity you measure over time. For instance, if you are tracking the quoted price of a security, an increase in price is calculated using the following formula;
− [(New Price - Old Price)/Old Price] x 100.
− If the answer you get is a negative value, it simply means the
percentage change is a decrease.
Alternatively, a decrease in price is calculated using the following formula;
− [(Old Price - New Price)/Old Price] x 100.
− If the answer you get is a negative value, it simply means the
percentage change is an increase.
52 weeks high and low
This refers to a data point in data feeds obtained from financial information sources online, which includes the lowest and highest price at which a stock has traded over a period of 52 weeks. Most investors use this kind of information to tell how much fluctuation or risk they have to endure over a year if they choose to invest in a particular stock.
The 52-week range can be obtained from stock’s quote summary given by brokers or financial information websites. You can also see the visual representation on a price chart displaying one year’s worth of price data. Considering that price movement is not always balanced or symmetrical, investors must know the most recent number – the high or the low. In most cases, the number closest to the current price is
STOCK MARKET TERMINOLOGY FOR BEGINNERS |25
assumed to be the most recent. However, this is not always the case. That said, not having the correct information risks making costly investment decisions.
Shares outstanding
These are the amount of stocks present in an open market and are currently held by its shareholders, institutional investors, company officers, and insiders. On a balance sheet, they are termed as Capital stock. Shares outstanding is used in calculating key metrics like market cap, earning per share, and cash flow per share. This number is not static and is likely to fluctuate wildly over time.
Analyst ratings
This refers to a measure of expected performance of a stock over a given duration. In most cases, analysts and brokerage firms use these ratings when issuing stock recommendations to traders. The analysts arrive at these ratings after conducting comprehensive research into the public financial statements of different companies, talking to customers and executives, or attending conferences.
These ratings are issued at least four times annually – once every quarter. These analyst ratings are accompanied by target prices to help traders gain deeper insight on stock’s fair prices compared to the current market value. There are different types of ratings;
Buy rating is a recommendation to buy specific stocks. It implies that an analyst expects the stock price to rise in the short- or mid-term.
Sell rating is a recommendation to sell specific stocks. It implies that the analyst expects the stock prices to decline below the current level in the short- and mid-term. This means the analyst has identified key challenges in the company.
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Hold rating implies that an analyst expects that the stock will perform in line with the market and at the same pace as similar stock. It tells brokers not to sell their stock nor buy more. Often, this rating is given when a company is not sure whether or not it will meet its guidance even though it’s making respectable profits.
Underperform rating implies that a company’s stock is likely to get worse than the market average or the benchmark index. In that case, traders are advised to stay away from the stock. This is often expected when a company’s growth slugs more than the previous quarter.
Outperform rating implies a stock is expected to yield higher returns than the benchmark index or market average. Typically, this rating says that this is a good buying opportunity for a particular stock.
That said, it is your responsibility as a trader or investor to do your due diligence because analyst ratings are just a starting point but are far from fail-proof.
ETFS
This refers to a set of securities that track a specific set of equities. They trade the same way stocks do and just like an index; they track equities. Investors who purchase shares of ETFs gain exposure to a basket of equities ad limited company-specific risks associated with a single stock, hence offering them cost-effective ways to diversify their portfolio.
Christopher Hamilton's Stock Market Stock Market Terminology for Beginners provides a solid primer for those looking to jump into the stock market. If readers look at all the investment jargon the stock market can be intimidating. But with this book you can begin to familiarize oneself with investment jargon. You can learn what EV, ETF, EBITDA and more mean. This handbook is a great resource for someone looking for a crash course.
The book gives succint and clear explanations that respects the readers time. There are no unnecessary drawn out passages. However much of the information is easily and readily available anywhere on the internet. While this book does provide value to those who are looking to attain a thorough beginners understanding of the stock market, someone who simply wants to get started investing can do so without a large portion of the text.
There are sections that are invaluable to a stock investor. If you've ever wondered about the mechanics of valuation this primer provides the answers. A stock investor can make more educated decisions about their money and improve their chances at maximizing gains from their stock portfolio. Instead of flipping a coin and hoping it lands on the right side the reader will learn to add a little weight to their coin.
If one seeks to learn methodologies for investing they will find the book to be lacking but the book does it's stated job of providing a solid source for stock terminology.