Understanding the Stock Market and Stock Trading Terminology can be hard. We’ve put together some of the most commonly used terms used in Day Trading to help.
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Common Stock Trading Terms You Should Know
FINRA rules define a “day trade” as the purchasing and selling or the selling and purchasing of the same security on the same day in a margin account. This definition encompasses any security, including options. Selling short and purchasing to cover a position in the same security on the same day is also considered a day trade. Exceptions to this definition include: a long security position held overnight and sold the next day prior to any new purchase of the same security; or a short security position held overnight and purchased the next day prior to any new sale of the same security.
The Pattern Day Trader (PDT) Rule dictates that a trader with a less than $25,000 USD account balance can only complete 3 trades in a 5-business day window.
Swing Trading requires a trader to buy a stock and hold it at least overnight before selling. Swing Traders can hold stocks for more than just one night, but they are intending to sell the stock as a short term investment.
Pre-Market Trading is any buying and selling of stocks prior to the opening of the trading day on Wall Street. The stock market hours are 9:30am – 4p.m. EST Monday – Friday, excluding designated holidays.
After-Hours Trading is any buying and selling of stocks after the closing of the trading day on Wall Street. The stock market hours are 9:30am – 4p.m. EST Monday – Friday, excluding designated holidays.
The term Bullish means that the outlook of a particular stock, or even the market, is optimistic and upward moving.
The term Bearish means that the outlook of a particular stock, or even the market, is pessimistic and trending downward.
When a company goes public, they offer to sell a pre-determined number of shares in order to raise capital for their business. Example: ABC Trucking is going to sell 20 million shares during their IPO. If those shares are priced at $5 per share, ABC Trucking will raise $100 million from their IPO to reinvest in the business.
A Buy Back is when the company who issued shares during an IPO buys their own stock shares back. Buy backs are typically viewed as good things for shareholders as the supply of the stock to the consumers is lowered the value generally increases.
Float is an important term and it refers to the number of available shares to trade. When a company first does an IPO, they release shares and that number is typically the float – but float can change over time. Think of Float as kind of the supply of the stock. When supply is low but demand is high, the price will usually be fast moving, either up or down.
Liquidity generally speaks to how quickly and easily it is to buy and sell a stock. The higher the liquidity the easier it is to buy and sell. The lower the liquidity the harder it becomes to buy or sell, and orders could end up only partially executing or not at all.
Volatility is an important term you’ll often hear in trading, especially penny stock trading, and it refers to how quickly a stock will rise and fall in price or volume.
A Secondary Offering is similar to an IPO but, as the name indicates, comes sometime after the IPO. Additional shares are issued during a secondary offering at a specific share price, thus increasing the supply and typically devaluing the stock. This term applies to any offering after the IPO and not just the second time, meaning, if it’s the fifth offering it’s still called a Secondary Offering.
A stock split occurs when a company decides to reduce the price of the stock in order to make it more appealing to a wider range of investors. When a stock is split, it usually splits in some kind of ratio, such as 3:1, 10:1 or 20:1, where the price of the stock is reduced but the shares held are increased. Example: IBM stock price is $1000 and you own 100 shares. IBM executes a 10:1 stock split which takes the price of the stock down to $100 a share, but the shares you own increase 10x up to 1,000. Your equity in the company does not change at the time the split happens. Stock Splits are usually viewed as positive indicators of long-term success.
A reverse split occurs most commonly when a company decides to increase the price of the stock in order to avoid being delisted due to a low stock price. When a stock is reverse split, it usually splits in some kind of ratio, such as 1:3, 1:5 or 1:10, where the price of the stock is increased and the shares held are decreased. Example: IBM stock price is $1 and you own 1000 shares. IBM executes a 1:5 stock split which takes the price of the stock up to $5 a share, but the shares you own decrease 5x down to 200. Your equity in the company does not change at the time the reverse split happens. Reverse Splits are usually viewed as negative indicators of long-term success.
A stop limit order is an order to sell your stock at a price you choose once the price hits a point that you specify. When the price of the stock hits your price point, the order automatically turns into a limit sell order. This order will only execute if it can sell for the limit price that you specified when placing the order.
A stop loss order is an order to sell your stock once the stock price hits a price point that you specify. When the price of the stock hits your price point, your brokerage will automatically and instantly turn that order into a market sell order and sell the stock.
A market order is a buy or sell order that tells your brokerage firm to buy or sell a stock at the current market price.
A limit order is a buy or sell order that tells your brokerage firm to buy or sell a stock at a price that you specify when placing the order.
A Trailing Stop Order is a sell order that allows the trader to specify a certain percentage or price value below the current price that will adjust and move as the stock price also move upward. In the event of a quick downturn on a fast upward moving price, the trailing stop order will execute and sell if it hits the percentage or price value you specified when placing the order.
A penny stock is technically any stock trading below $5 per share, not just those trading for under $1. Penny Stocks can trade on the larger market like the NASDAQ or be Over The Counter (OTC) stocks.
A stock is referred to as a Pump and Dump when some kind of information, that is usually false, are circulated in order to inflate the price of the stock artificially.
The bid price of a stock is the current price that buyers are seeking to purchase it for.
The ask price of a stock is what current owners of the stock are trying to sell it at.
The spread is the price difference between the Bid Price and the Ask Price. Example: Tesla’s current stock price is $800. The Bid is $798 and the Ask is $802. The Spread in this example would be $4.
Taking a position on stock is a fancy way of saying you are going to buy the stock. When you buy a stock, you have bought a position.
Closing a position on a stock means that you own it and are selling all your shares. When you close a position on a stock, you have sold all your shares and no longer have a position on that stock.
Going long is a term that refers to a trader who buys stock in a company with the intent of holding for a long period of time. How long the stock is held will depend on the trader, and the term can be used differently by different traders. For example, a day trader may think buying in the morning and holding until the afternoon is going long while a swing trader may think going long means you buy and hold for more than a week.
Averaging down refers to the act of buying more shares of a stock you already own when the price drops in order to lower your average cost.