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Trading offers an incredible opportunity for financial success and independence, attracting individuals from all walks of life who seek to capitalize on the dynamic nature of the global markets. However, before you become a successful trader, you must first equip yourself with the necessary knowledge and skills. As a beginner trader, grasping the intricacies of how trading works is crucial to navigating the markets confidently, and the first step is knowing and understanding vital trading terminology for beginners.
In this blog, we demystify the world of trading with a comprehensive overview of the must-know trading terminology beginners need to understand. Our blog is here to support and empower you, ensuring that you have a thorough understanding of the essential concepts and terminologies used in the trading universe.
Key Trading Terms for Beginners
Getting familiar with trading terms is crucial for new traders. Understanding these concepts will help you make better decisions and build confidence. For example, tools like the Parabolic SAR, a popular trend-following indicator, can provide insights into potential reversals in market trends.
Common Trading Terms to Know:
- Leverage: Utilising borrowed capital to amplify potential returns on an investment.
- Stop-Loss: An order to sell a security when it reaches a predetermined price, aiming to limit potential losses.
- Bull Market: A market condition characterised by rising prices, indicating investor confidence.
- Bear Market: A market condition where prices are falling or are expected to fall, often leading to pessimism among investors.
- Bid Price: The maximum price a buyer is willing to pay for a security.
- Ask Price: The minimum price a seller is willing to accept for a security.
- Spread: The difference between the bid and ask prices of a security, representing the transaction cost.
- For further understanding of how these prices interact within the market, you can explore the concept of market depth, which refers to the market’s ability to sustain large orders without impacting the price of the asset significantly.
- Going Long: Purchasing a security with the expectation that its price will rise.
- Going Short: Selling a security that one does not own, anticipating that its price will decline.
Understanding these basic trading terms will provide you with the foundational knowledge and confidence to begin your trading journey on the right foot. So, let’s dive in and explore the fundamental concepts that every aspiring trader should know before getting started.
For a quick and easy overview of the below terminology that you can keep on hand to refer to any time, download our Pocket Guide to Understanding Financial Jargon – Volume I.
Make sure you have a look at our trading glossary for more terms
Stock or share
A “stock” is a security representing ownership of a portion of a corporation. This entitles the stockholder to a share of the corporation’s assets and profits in proportion to the amount of stock owned.
Similarly, a “share” represents a singular unit of ownership in a company. It is a discrete portion of the company’s stock that individual investors or shareholders possess. When someone buys shares of a company’s stock, they are essentially purchasing these individual units of ownership. For example, if a company has one million shares outstanding, each individual share represents a fraction of that total ownership.
Bid, ask and closing prices
In the world of trading, the “bid” is a fundamental concept that plays a crucial role in determining the price at which a financial instrument, such as a stock, is bought or sold. The bid represents the maximum amount of money a trader or investor is willing to pay per share for a given financial instrument. On the other hand, the “ask” represents the minimum amount of money that a seller is willing to sell a financial instrument for.
The “closing price” refers to the specific price of a stock or financial instrument at the end of a given trading day when the stock market closes. At the end of each trading session, the close price is recorded as the final value for that particular financial asset until the market reopens for the next trading day.
Spread
The “spread” represents the difference between the bid and ask prices of a financial instrument. In simpler terms, it’s the gap between what someone is willing to pay to buy an asset and what someone is willing to receive to sell it. For example, if a trader is looking to sell XYZ stock for $20, and a buyer is willing to pay $18 for it, the spread would be $2.
Understanding the spread is crucial for traders, as it influences the overall trading costs and liquidity of an asset. A narrower spread typically indicates higher liquidity and lower transaction costs, while a wider spread may suggest lower liquidity and higher trading costs.
Going long versus going short
When an investor “goes long,” it means they believe that the price of a particular asset will rise in the future. In this scenario, an investor buys an asset and owns it with the expectation of a price appreciation, and the chance of of selling it at a higher price, later.
On the other hand, “going short” is a strategy employed when an investor believes that the price of an asset will decline. In this case, the investor sells an asset they do not currently own but instead, borrows it from their broker with the intention of repurchasing it at a lower price in the future. This process is known as “short selling” or “shorting.”
Market index
A market index is a group of stocks with common characteristics that represent a segment of the overall market. For example, the S&P 500 tracks the performance of 500 of the largest publicly traded companies in the United States, while the DAX Index is composed of the 40 major blue chip companies on the Frankfurt Stock Exchange.
Market correction
A “market correction” is a decline of 10% or more of the price of a security, asset, or a financial market from a recent high. For example, in February 2020, the S&P 500 tumbled by 33.9% over a period of 33 days, driven by the spread of the Covid-19 pandemic.
Market capitalization
Also known as “market cap”, is the value of a company or index measured by the market price of the shares it has issued. The market capitalization calculation is the number of shares outstanding multiplied by the price of the shares. As of 2023, the three largest U.S.
stocks, as measured by market cap, are Apple, Microsoft and Amazon.
Benchmark
A “benchmark” standard against which the performance of a fund or investment manager is measured, which is often an index. For example, ONE SIGNAL’s benchmark is the S&P 500, as it is the largest index tracking the performance of the 500 largest companies in the US. Since 2000, ONE SIGNAL Xpress, our convenient and profitable trading signal subscription, has returned 35.3% on average p.a., compared to 5.5% for the S&P 500.
Volatility and volume
“Volatility” defines the price movements of a stock or the stock market. High volatility stocks are those with high daily up and down movements. This is common with stocks that have low trading volumes or don’t have a lot of shares outstanding.
Conversely, “volume” plays a pivotal role in measuring the activity and liquidity of the market. It denotes the number of shares of stock traded during a specific time period, typically measured as the average daily trading volume. Additionally, volume can also indicate the number of shares purchased for a particular stock. For instance, consider the SPDR S&P 500 ETF Trust, boasting an impressive average daily trading volume of 66.057 million shares.
Leverage trading
“Leverage trading”, a powerful tool in the world of financial markets, empowers traders to amplify their potential gains by borrowing money to increase their exposure beyond what they could afford when paying in cash. By utilizing leverage, traders can maintain a more substantial position in a financial instrument, such as stocks, currencies, or commodities, with a smaller initial capital outlay.
Margin and margin calls
The “margin” plays a crucial role in trading, as it acts as collateral that an investor must deposit with their broker or exchange to cover the credit risk they pose. When purchasing a financial instrument on margin, the investor borrows the remaining balance from the broker, using the marginable securities in their brokerage account as collateral for the transaction.
However, this approach carries a certain level of risk. If the value of the margin account falls below the broker’s required amount, a “margin call” is triggered. A margin call is a demand from the broker for the trader to deposit additional funds into the account to meet the minimum value required. Essentially, it serves as a warning signal to the trader that their account’s equity has dropped below a certain threshold, and they need to take action to restore the required margin level. Failing to meet the margin call may lead the broker to liquidate some or all of the trader’s positions to recover the owed amount.
Rally
A “rally” in the financial markets signifies a phase of sustained price increases in various assets, such as stocks, bonds, or related indexes. This period is defined by a swift and notable upward movement over a relatively short span of time, igniting excitement among investors and traders.
Bull market versus bear market
A “bull market” is a phase in the financial world characterized by a sustained rise in stock prices. To meet the technical definition of a bull market, the stock market must experience an increase of at least 20% and avoid a subsequent decline of 20%. Currently, we find ourselves amidst an exciting bull market since March 2020, during which the S&P 500 has impressively returned approximately 89%.
In contrast, a “bear market” is a challenging period marked by falling stock prices, typically declining by 20% or more. One notable example was the bear market experienced from 2007 to 2009, lasting approximately 1.3 years and causing the S&P 500 to plummet by a significant 50.9%.
You can gain a deeper insight into market sentiment indicators like the Put-Call Ratio, which traders often use to gauge the mood of the market, further helping in identifying potential trends during these market phases.
Deepen your knowledge with more advanced trading terminology for beginners
In this section, we’ll help you to further elevate your trading knowledge by delving into the realm of intermediate must-know trading terminology for beginners. In this section, you will build on the foundational knowledge you’ve gained as we introduce you to a whole new set of essential concepts, equipping you with a deeper understanding of the financial markets and how they operate.
For a quick and easy overview of the below terminology that you can keep on hand to refer to anytime, download the second volume of our Pocket Guide to Understanding Financial Jargon.
Market order, limit order and day order
A “market order” is an order to buy or sell a stock at the current best available price in the market. A market order guarantees execution but does not guarantee a specific price. Market orders are the best option when the primary goal is to execute the trade as soon as possible.
A “limit order”, on the other hand, is a buy or sell order that specifies the maximum price to be paid or the minimum price to be received (the “limit price”). If the order is filled, it will only be at or above the specified limit price. However, unlike a market order, there is no guarantee that the order will be executed.
Similarly, a “day order” is a type of order or instruction given to a broker by a trader to buy or sell a specific asset. Setting a day order means that the transaction must be completed if an asset reaches a specified price (referred to as the level) at any point during the trading day on which the order is placed.
Additionally, traders might also consider using a Buy Stop Order in specific circumstances where they wish to buy an asset once it reaches a certain price above the current market value.
Basis point
In finance, a “basis point” is a common unit of measurement for interest rates and other percentages. One basis point is equal to one-hundredth of one percent, or 0.01 percent, or 0.0001. It is used to represent the percentage change in financial instruments.
Public float
The “public float”, also known as the “free float”, is the proportion of a corporation’s shares held by public investors or that public investors can trade, as opposed to locked-in shares held by company officers, controlling-interest investors, or governments.
Yield and return
The income returned on an investment, such as the interest received from holding a security, is referred to as the “yield”. It is typically expressed as an annual percentage rate based on the cost, current market value, or face value of the investment. The yield is always forward-looking.
Where a yield denotes the amount of income an investment has made, a “return”, in its most basic form, is the amount of money gained or lost on an investment over time. A “nominal return” is the change in the dollar value of an investment over time.
Over-the-Counter (OTC) trade
“Over-the-counter”, also referred to as “OTC” refers to the process of how securities are traded
via a broker-dealer network as opposed to on a centralized exchange. Over-the-counter securities are traded without being listed on an exchange, and over-the-counter trading can involve all kinds of instruments. Smaller companies that do not meet the requirements to be listed on a centralized exchange often trade their stocks via OTC.
Alpha and beta performance measures
“Alpha” is a measure of performance that measures the excess return of an investment relative to the return of a benchmark index. In essence, it measures the degree to which a trader can manage to ‘beat’ the market over a period of time.
Conversely, “beta” measures the volatility of an investment’s performance relative to a benchmark. The beta of the market (as represented by the benchmark) is 1.0. For example, a fund with a beta of 1.1 is expected to have 10% more volatility than the market.
Contract for Difference (CFD)
A “Contract For Difference”, or CFD, is a contract between a buyer and a seller in which the buyer agrees to pay the seller the difference between the current value of an asset and its value at the time of the contract.
Exchange Traded Fund (ETF)
An “Exchange Traded Fund”, or ETF, is a security that tracks an index, commodity, or sector, but which can be bought or sold on a stock exchange the same way a regular stock can. ETFs can contain many types of investments, including stocks, commodities, bonds, or a mixture of investment types. For example, one of the possibilities to follow ONE SIGNAL is with the SPDR S&P 500 Trust ETF, which tracks the S&P 500 index.
Futures and options
“Futures” are financial derivative contracts that bind the involved parties to trade an asset at a predetermined future date and price. Regardless of the current market price at the expiration date, the buyer or seller must purchase or sell the underlying asset at that set price.
“Options” are also a type of derivative financial instrument in which two parties agree to trade an asset at a predetermined price before a future date. An option grants its holder the right to buy or sell an asset at the exercise price, but the holder is not required to exercise (buy or sell) the option.
Call option and put option
The buyer of a “call option” has the right, but not the obligation, to purchase a financial instrument and at a given price on a given date. “Put options”, on the other hand, give the option buyer the right to sell a financial instrument, but not the obligation to do so at a given price on a given date.
Summary: Kick-start your trading success with One-Signal
Entering the world of trading and the financial markets is an exciting time for any beginner trader, but having the fundamental knowledge and understanding firmly established before you get started is paramount to success. A good starting point is having a sound understanding of the must-know trading terminology for beginners explored above.
Once you’re comfortable with the basics, you can expand your trading knowledge and strategy and start leveraging solutions like those offered by One-Signal to help bolster your trading endeavours. We provide beginner and seasoned traders with easy access to the markets, helping them to achieve trading success more quickly. Our trading signals, delivered to your inbox daily, are straightforward to follow, and based on tried and tested strategies backed by years of closely monitoring the performance of the markets.
Discover what makes One-Signal the trading signal provider of choice for traders, or get started with ONE-SIGNAL to experience our capabilities for yourself. Alternatively, if you have any questions, get in contact with our expert team now.
DISCLAIMER
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product referred to directly or indirectly in this newsletter (article), will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Due to various factors, including changing market conditions, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter (article) serves as the receipt of, or as a substitute for, personalized investment advice from our team in One-Signal. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. A copy of our current written disclosure statement discussing our advisory services and fees is available for review upon request.