44 Stock Market Terms Every First-Time Investor Should Know

Written by Lisa Meyer on January 22nd, 2016

44 Stock Market Terms Every First-Time Investor Should Know

The market can be a brutal place when you first start out.

Believe me, I’ve been there!

Bear markets…

PE Ratio’s…

Bid Prices…

Position Sizing…

I had no idea what was being thrown at me, let alone how to make sense of it all.

That’s why I’ve decided to reveal the 44 terms you HAVE to know when starting out in the investing game.

It took me longer than I care to admit to learn all of these.

But today you can skip that steep learning curve and get right to it with my stock-o-pedia "cheat sheet"!

 

Go From Money-Zero To Investment-Hero In Just 10 Minutes

 

Learning these phrases should make the market a lot easier for you to navigate.

The best part is it shouldn’t take you more than 5 - 10 minutes to read through and learn ‘em!

Let’s get to it…

 

Alternative Exchange (AltX)

The Alternative Exchange is a stock exchange that was founded as a division of the JSE in order to accommodate small- and medium-sized high growth companies.

The Alternative Exchange is known as AltX.

 

Alternative Investments

Alternative investments are not one of the three traditional asset types (stocks, bonds and cash).

Most alternative investments are held by institutional investors or high-net-worth individuals, and can include hedge funds, managed futures, property, commodities and derivatives contracts.

 

Arbitrage

The action of profiting from the correction of price or yield anomalies and differentials in similar securities in different markets.

It involves taking a position in one market and an offsetting position in another.

As prices or yields move back into line positions may be profitably closed out.

For example, a stock and its equivalent futures contract may be quoted at different prices; the cheaper one can be bought and sold to the higher priced market.

 

Bear Market

The situation where the majority of shares are dropping and the overall market is falling - A market in which the trend has been consistently downward. The opposite of a bull market.

 

Bid Price

This is the maximum price a buyer is prepared to pay for a particular share/derivative.

 

Black Swan

A Black Swan event is an occurrence in human history that is unprecedented and unexpected when it happened. 

It describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.

The implications for markets and investment can be drastic and need to be take extremely seriously.

The theory was developed by Nassim Nicholas Taleb in his book, "The Black Swan: The Impact Of The Highly Improbable"

 

Bull Market

The situation where the majority of shares are rising and the overall market is in an upward trend - A market in which prices have been rising for a prolonged period. The opposite of bear market.

 

Commodities

A commodity is a basic good used in commerce that is interchangeable with other resources of the same type.

The sale and purchase of commodities is usually carried out through futures contracts on exchanges.

Some traditional examples of resources include gold, silver, platinum, oil grains, beef, and natural gas.

If you’re interested in reading more about commodities, simply click here

 

Contract For Difference (CFD)

A contract for difference (CFD) is a contract between two parties in which one pays to the other a sum of money based on the difference between the current value of a security or instrument and its value on a specified future date.

If the difference is the opposite of that specified in the contract i.e. it is negative not positive, payment is made in the opposite direction.

For example, Party A takes out a contract with a Party B that a share price will rise by a certain amount by a certain date.

If the price is reached or exceeded then Party B pays Party A.

If the price falls Party A pays Party B.

CFDs allow investors to take long or short positions without having ownership of the security.

CFDs can be traded on indices, natural phenomena, such as the weather, or anything that is measurable.

If you’re interested in reading more about CFDs, simply click here!

 

Dead Cat Bounce

A short rally after a sharp decline is often referred to as a Dead Cat Bounce.

It could also refer to a share with a plummeting price, or a market trend.

There’s a popular old investment saying, “Even a dead cat will bounce if its dropped from high enough”.

 

Derivative

Derivatives are securities or financial instruments whose value is derived from the value of another, underlying asset.

They can be bought, sold and traded in a similar way to shares or any other financial instrument.

Examples include CFDs, single stock futures, options and warrants.

 

Dividends

A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits.

Dividends may be in the form of cash, stock or property and most secure and stable companies offer dividends to their stockholders.

Their share prices might not move much, but the dividend attempts to make up for this.

If you’re looking to become a profitable dividend investor, why not download our FREE Dividend report and learn how to pay yourself up to 10 work-free income cheques EVERY year! Click here to find out more.

 

Dove

A Dove is a policy maker who promotes monetary policies involving low interest rates.

They believe that inflation and its negative effects will have a minimal impact on society.

Statements that suggest that inflation will have a minimal impact are called "dovish".

 

ETF

ETFs (Exchange Traded Funds) are baskets of shares.

They’re a collection of specific types of shares you’d find on the stock market or within an index.

By putting your money into that ETF you’re exposing yourself to the specific collection of shares that make up that ETF ‘basket’.

You can read everything you need to know about ETF’s right here.

Alternatively, if you’re looking to become a profitable ETF investor, why not download our FREE ETF report and learn how to build an auto-pilot portfolio all whilst paying lower fees and no tax! Click here for more.

 

Financial Services Board (FSB)

This is the statutory body created to regulate all aspects of financial service providers in South Africa, excluding banks.

 

Forex

Forex (The foreign exchange market) is a global decentralized market for the trading of currencies.

The main participants in this market are the larger international banks, and in terms of trading volume, it’s by far the largest market in the world.

Get your hands on everything you need to know about Forex trading right here.

If you’re looking for a profitable Forex trading strategy, why not check out our 5 Power Profit Patterns FREE report, and kick your Forex profits up a notch! Click here for more.

 

Futures

A future is an undertaking to buy or sell a standard quantity of a financial asset or commodity at a future date at a fixed price.

Futures resemble forward contracts in that they involve buying or selling an item for receipt or delivery in the future, but are different from them in that they are standardised contracts.

Every futures contract has standard terms that dictates the minimum quantity and quality that can be bought or sold, the smallest amount by which the price may change, delivery procedures, contract months and so on.

They must be traded on a recognized exchange.

 

Gearing

Gearing, which is synonymous with leverage, refers to the amount of cash spent purchasing an option or a futures contract compared to the value of the position.

For example, to buy futures contracts worth R1 million an investor may be required to pay a percentage, say only 20 percent of the price.

The more highly geared the trading position the greater the risk that a small change in market prices will wipe out the investment.

It also means that a small change in prices can produce large profits.

For more info and detail about gearing check out “REVEALED: The World's Most Powerful Financial Tool”. Click here for more.

 

Hawk

A hawk is a policy maker whose concerned with interest rates and how they relate to fiscal policy.

A Hawk favors relatively high interest rates in order to keep inflation in check.

They are more concerned with recessionary pressure brought about by high inflation rates than economic growth.

A Hawkish statement describes that of the Federal Reserve which indicates that it may raise interest rates.

 

Hedging

The best way to understand this is to think of it as insurance. When people decide to hedge, they’re insuring themselves against a negative event.

This doesn’t mean the event itself isn’t going to happen, just that you’re protected, and the effect of the event is reduced.

That's why the best example of hedging is you if buy insurance.

With house insurance you’re basically hedging yourself against fires, tsotsi’s, floods or any other disasters…

Now when it comes to portfolio managers and investors, they use hedging to reduce their exposure to numerous risks.

However, what you need to keep in mind is that in the financial world it’s slightly more complicated that simply paying an insurance company a monthly or annual fee.

Basically hedging against investment risk means using financial instruments strategically to offset the risk of any adverse price movements.

In other words, investors hedge one investment by making another (Technically, to hedge you would invest in two securities with negative correlations).

 

IPO

An IPO (Initial Public Offering) is the first time a private company sells its stock to the public, and they do so by listing on an exchange.

Smaller companies look to go public in order to expand and raise capital, whilst bigger businesses do so in order to become publicly traded.

An IPO is also referred to as a public offering or a stock market launch.

 

Johannesburg Stock Exchange

JSE Limited (previously the JSE Securities Exchange and the Johannesburg Stock Exchange) is the largest stock exchange in Africa.

The JSE provides a market where securities can be traded freely under a regulated procedure.

It not only channels funds into the economy, but also provides investors with returns on investments in the form of dividends.

 

Long Position

A trader takes a long position in a share/derivative when he feels the share/derivative will increase in price.

A long single stock future position implies the holder wants the price of the underlying share to increase.

If you’d like to find out more about how you can trade the market, check out our trading section here!

 

Margin

The cash or securities contributed by a purchaser in part payment for the securities held in a margin account.

The remainder is normally loaned by the brokerage house through which the trade is made.

Securities bought, in part, with money loaned by a broker are said to have been bought 'on margin'.

When a trade is first made, the purchaser pays an initial margin.

To ensure that margin requirements keep pace with any subsequent losses account holders may have to pay variation margin to bring the account up to initial margin requirements.

This is calculated by revaluing all positions with reference to the previous day's closing price.

It is sometimes referred to as maintenance margin.

 

Market Maker

An entity which makes prices on an exchange.

 

Money Management

The act of a professional investment manager making investment decisions for larger funds or pension plans.

Also referred to as "investment management" or "portfolio management".

 

Offshore Investing

A range of investment strategies that seek to profit from opportunities offered outside of an investor's home country.

 

Passive Investing

Passive investing involves limited maintenance and limited ongoing buying and selling of shares. Passive investors predominantly focus on long-term growth.

This strategy is also known as buy-and-hold investing, or our personal favorite the ‘couch potato strategy’.

Passive investors don’t look to make money off short term fluctuations, but rather that in the long term the investment will be profitable. Passive investing requires good fundamental research as well as patience and a well-diversified portfolio.

One of the best ways to passively invest is with ETFS, find out more here!

 

PE Ratio

The PE Ratio is used to determine how much investors are willing to pay for a share relative to the company’s earnings.

It's calculated by taking the current price of the share and dividing it by the company’s earnings per share.

A PE Ratio is useful for comparing companies that operate in the same industry or sector. Some companies have high ratio's whilst others have relatively low ratio's, however no ratio can tell the whole story and price to earnings is just one of the many metrics investors use to evaluate a share.

 

Penny Share

Penny Shares are stocks with a relatively small market capitalization.

The definition of penny shares (also known as small caps) can vary among brokers, but generally it’s a company that sells for less than R2.

Penny Shares are near the low end of the publicly traded spectrum but have some of the most explosive profit potential!

 

Position Sizing

Position sizing is the size of the position (investment or trade) that an investor makes within a specific portfolio. It is the amount that an investor is going to invest or trade.

The investors account size and risk tolerance should always be taken into account when calculating the appropriate position size.

 

Revenge Trading

Revenge trading is when you make a loss, and you’re determined to make that loss back again so you try trade it back. In a nutshell it’s trying to recover your losses.

 

Risk Management

The process uncovering, analyzing and accepting uncertainty in investing.

It’s a two-step process whereby an investor determines the risks in a pending investment, and then the best way to handle those risk to achieve the investment objective.

Poor risk management leads to investment losses.

 

Risk Reward

Risk Reward is a ratio used by investors to compare expected returns of an investment by the amount they’re willing to risk in that investment in order to realize those returns.

This ratio is calculated by dividing the amount the investor stands to lose if the price moves in the unexpected direction (the risk) by the amount of profit the investor expects to make when the position is closed (the reward).

 

Selling Short

The act of selling share/derivative you do not own in the hope of buying them back at a lower price at some time in the future.

 

Sens

In August 1997, the JSE launched the real-time Stock Exchange News Service (Sens) to enhance market transparency and investor confidence.

Initially, it was optional for listed companies to use the service during its two-month trial period.

JSE listing requirements oblige companies to disseminate any corporate news or price-sensitive information on the service prior to using any other media outlet.

Sens is carried by all the major wire services.

 

Shares

A share (or a stock) is an ownership share in a company.

Each of these shares denotes a part ownership for a shareowner, stockholder, or shareholder, of that company.

Shares are traded on exchanges all over the world.

The JSE is the largest exchange in Africa whilst the New York Stock Exchange or NYSE is the largest in the world.

To learn more about the wonderful (and profitable) world of stocks and shares, simply click here!

 

Short Position

Describes the position a trader is in when he has sold more shares/derivatives than he physically owns, in the hope of purchasing these shares/derivatives at a future time for a lesser price.

 

Small Cap

See penny share

 

Stop Loss

An order with a broker to sell a security when it reaches a particular price to limit losses.

If a stop loss order is set 10 percent below the price paid for the security potential losses will be limited to 10 percent.

 

Tax Free Savings Account

Tax Free Investment Accounts were introduced to the market by the government to encourage South Africans to save for their retirement.

With your Tax Free Savings Account you can invest a maximum of R30,000 per year and a maximum of R500,000 over your lifetime. 

However, you need to keep in mind, as per the National Treasury, any amounts exceeding the annual limit will be taxed at a rate of 40%.

TFSA's allow you to invest without paying dividend, income or capital growth tax.

For the time being you can only invest in ETFs with your TFSA

If you’d like to find out how you can use a TFSA to help the government make you your first million, click here for more

 

Trading Strategy

A trading strategy is a fixed plan designed to achieve a profitable return by going long or short in markets.

A trading strategy includes specifications for what to trade, trade entries, trade exits, money management, timeframes and a number of other elements.

A solid trading strategy is fundamental to your trading success.

To learn more about strategies, you can use in your trading, have a look at our trading strategy section. Click here for more!

 

Unit Trusts

A unit trust is an easy, cost effective, collective investment scheme that gives you access to equity, money, bond and listed property markets.

They’re portfolios of assets where a number of people pool their money allowing them to spread their risk, all whilst getting the benefits of professional fund management.

Unit trusts are also referred to as funds.

Learn about the ins and outs of Unit Trusts right here.

 

Warren Buffett

Warren Buffett is an American business magnate, investor and philanthropist, and is widely considered one of the most successful investors in history!

He’s even referred to as “The Oracle of Omaha”.

Buffett’s investment philosophy of patience, value and discipline have help him consistently outperform the market for decades.

Following the principles set out by Benjamin Graham, he has amassed a personal multibillion dollar fortune mainly through investing in stocks and buying companies through Berkshire Hathaway.

Buffett has yet to write a single book, but among investment professionals and the investing public, there is no more respected voice. However, his annual letters to the shareholders in Berkshire Hathaway's annual report have also been viewed as a highly lauded & suitable substitute.

 




 


 

[FREE GIFT] Your Quick-Start Guide To Learning The Language of The Stock Market!

 

We know what it’s like to spend time you don’t have to in order to gain the knowledge you need.

That’s why we’ve put together our Stock-o-pedia Glossary, and linked it to terms that occasionally pop up in our articles.

All you need to do is hover over a blue underlined word and the definition should pop up (or you could visit our stock-o-pedia glossary right here).

Alternatively, we’ve put together a Terminology Cheat Sheet called 'The SMART Investors Handbook' that you can download for FREE!

Think of it as your quick-start guide to learning the language of the stock market. 

All you need to do is tell us where to send it!

Click here to get your hands on a copy today. 

Until then, here's to profitable investing. 

Lisa Meyer Signature

Lisa Meyer
Editorial Contributor
The Money Lab

PS: If you’d like to look at the lighter side of the stock market, why not check out something I wrote on 'The Devil's Financial Dictionary'. Trust me when I say it’s hilarious, and something every investor will get a chuckle out of! Click here to give it a read.