Stock Terms

Terms You Need to Know Before You Start Investing in the Stock Market

If you've ever listened to two or more stock traders talk about investing, you might think they're speaking in a special code—and essentially they are. Every industry has its jargon, and stock trading is no exception. Before you begin exploring the opportunities in stock trading and investing, learn the basic terms. Let's begin by understanding what stocks actually are and how they differ from bonds:

Stock: Ownership of a corporation indicated by shares, which represent a piece of the corporation's assets and earnings.

Common stock: Traditionally, units of ownership that do not give guaranteed payments or dividends to their owners and are usually limited in their voting power. Holders of common stock exercise control by electing a board of directors and voting on corporate policy, but are not involved in the day-to-day operations of the corporation. Owners of common stock normally receive all growth over the amount paid to preferred shareholders; however, if the company goes bankrupt, they will not receive their money until the creditors and preferred shareholders are paid off. Though common stocks may be riskier than debt or preferred shares, they can outperform bonds and preferred shares in the long run.

Preferred stock: Shares that give investors a fixed dividend from the company's earnings and entitle them to be paid before common shareholders. Preferred stock shareholders usually do not have the voting rights of common stockholders. Preferred stock is a greater claim on the company's assets than common stockholders. A single company may issue several classes of preferred stock and the precise structure of preferred stock is specific to each corporation.

Bond: Debt issues for a period of more than one year. When investors buy bonds, they are lending money. The seller of the bond agrees to repay the principal amount of the loan at a specified time.

Security: An instrument representing ownership (stocks), a debt agreement (bonds), or the rights to ownership (derivatives) that can be assigned a value and traded.

As a stock trader, you'll need to understand these basic terms that will guide your trading decisions:

Bull: A bull is an investor who thinks the market will rise; a bull market is any market in which prices are in an upward trend; and bullish refers to the attitude of an investor as being optimistic.

Bear: A bear is an investor who believes a stock or the overall market will decline; a bear market is any market in which prices exhibit a declining trend for a prolonged period, usually falling by 20 percent or more; and bearish refers to the attitude of an investor as being pessimistic.

Broker: An individual or firm that charges a fee or commission for executing customer orders to buy or sell securities. A discount broker is a brokerage house featuring lower commission rates; typically, discount brokers do not provide any advice or assistance with selection of securities. A full-service broker provides clients a range of services including security selection and financial planning and generally charges higher fees and commission rates.

Support: The price at which a stock has historically stopped falling. This is the level at which a lot of buyers tend to enter the stock.

Resistance: The price at which a stock may trade but not exceed for a certain period of time. This is essentially a price ceiling and is often the level at which traders sell the stock.

Breakout: A rise in the price of a stock above the resistance zone or a drop below the support zone; often used as a buy or sell indicator.

Fundamental analysis: A method of evaluating a stock by analyzing the company's business prospects, historical performance, financial condition, and management, as well as the overall economy and industry conditions. This type of analysis attempts to measure a stock's intrinsic value then compare that value with the stock's current price in order to make a decision on whether to buy or sell.

Technical analysis: A method of evaluating stocks by detecting and interpreting patterns in statistics generated by market activity, such as past prices and volume, that can suggest future activity. A technical analyst does not measure the stock's intrinsic value but rather uses mechanical rules to detect changes in the supply of and demand for a stock in order to capitalize on the expected change.