An annual report is a report prepared by a company that’s intended to impress shareholders. It contains tons of information about the company, from its cash flow to its management strategy. When you read an annual report, you’re judging the company’s solvency and financial situation.
Arbitrage refers to buying and selling the same security on different markets and at different price points. For instance, if stock XYZ is trading at $10 on one market and $10.50 on another, the trader could buy X shares for $10 and sell them for $10.50 on the other market, pocketing the difference.
When an investor buys more of a stock as the price goes down. This makes it so your average purchase price decreases. You might use this strategy if you believe that the general consensus about a company is wrong, so you expect the stock price to rebound later.
A measurement of the relationship between the price of a stock and the movement of the whole market. If stock XYZ has a beta of 1.5, that means that for every 1 point move in the market, stock XYZ moves 1.5 points, and vice versa.
Blue Chip Stocks
The stocks behind large, industry-leading companies. They offer a stable record of significant dividend payments and have a reputation of sound fiscal management. The expression is thought to have been derived from blue gambling chips, which is the highest denomination of chips used in casinos.
When the stock market as a whole is in a prolonged period of increasing stock prices. It’s the opposite of a bear market. A single stock can be bullish or bearish too, as can a sector, which I’ll describe later on.
Trading talk for the stock market being in a downward trend, or a period of falling stock prices. This is the opposite of a bull market.
The bid is the amount of money a trader is willing to pay per share for a given stock. It’s balanced against the ask price, which is what a seller wants per share of that same stock, and the spread is the difference between those two prices.
A portion of a company’s earnings that is paid to shareholders, or people that own that company’s stock, on a quarterly or annual basis. Not all companies pay dividends. For instance, if you trade penny stocks, you’re likely not after dividends.
When an order to buy or sell has been completed, the trader has executed the transaction. If you put in an order to sell 100 shares, this means that all 100 shares have been sold.
A benchmark that is used as a reference marker for traders and portfolio managers. A 10 percent return may sound good, but if the market index returned 12 percent, then you didn’t do very well since you could have just invested in an index fund and saved time by not trading frequently.
Low is the opposite of high. It represents a lower price point for a stock or index.
A margin account lets a person borrow money (take out a loan, essentially) from a broker to purchase an investment. The difference between the amount of the loan and the price of the securities is called the margin.
Trading on margin can be dangerous because, if you’re wrong about the direction in which the stock will go, you can lose significant cash. You must often maintain a minimum balance in a margin account.
A stock’s average price-per-share during a specific period of time is called its moving average. Some common time frames to study in terms of a stock’s moving average include 50- and 200-day moving averages.
An investor’s bid to buy or sell a certain amount of stock or option contracts constitutes an order. You have to put an order in to buy or sell 100 shares of stock, for instance.
Information on a stock’s latest trading price tells you its quote. This is sometimes delayed by 20 minutes unless you’re using an actual broker trading platform.
A rapid increase in the general price level of the market or of the price of a stock is known as a rally. Depending on the overall environment, it might be called a bull rally or a bear rally. In a bear market, upward trends of as little as 10 percent can qualify as a rally.
A group of stocks that are in the same industry belong to the same sector. An example would be the technology sector, which includes companies like Apple and Microsoft. Some traders prefer to trade in a specific sector, such as energy, because they know the industry well and can better predict stock price fluctuations.
This is the difference between the bid and the ask prices of a stock, or the amount for which someone is willing to buy it and the amount for which someone is willing to sell it. For instance, if a trader is willing to trade XYZ stock for $10 and a buyer is willing to pay $9 for it, the spread is $1.
A stock symbol is a one- to four-character alphabetic root symbol that represents a publicly traded company on a stock exchange. Apple’s stock symbol is AAPL, while Walmart’s is WMT.
The price movements of a stock or the stock market as a whole. Highly volatile stocks are those with extreme daily up and down movements and wide intraday trading ranges. This is often common with stocks that are thinly traded or have low trading volumes.
I’m a big fan of high-volatility stocks because I can make a big profit off spikes or dips, depending on how I’m trading, in a short period of time. High volatility often makes trading more exciting, but it’s also risky if you’re inexperienced.
The number of shares of stock traded during a particular time period, normally measured in average daily trading volume. Volume can also mean the number of shares you purchase of a given stock. For instance, buying 2,000 shares of a company is a higher-volume purchase than buying 20 shares.
Often refers to the measure of the return on an investment that is received from the payment of a dividend. This is determined by dividing the annual dividend amount by the price paid for the stock. If you bought stock XYZ for $40 per share and it pays a $1.00-per-year dividend, you have a “yield” of 2.5 percent.
When you short a stock you borrow shares from someone else with the promise to return them at a point down the road. You then sell the stock for a profit. It’s a way to take advantage of a stock that you believe will decrease in price. After you sell short, you can buy back the shares at the lower price point and take the difference in price as your profit.
A type of stock order that provides instruction to only execute at or under a purchase price or at or above a sale price. Always use limit orders, not market orders.
A market order provides instruction to execute, as quickly as possible, a transaction at the present, or market, price. Don’t use market orders.
Good Til Canceled Order
Also referred to as a GTC order. This order to either buy or sell a stock remains open until the order is either executed or until you cancel it. If you don’t manually cancel the order, it will be executed whenever the stock comes to your price — even if that’s weeks or months down the road.
An order that’s only good on the day that you place it. If not executed, it’s automatically canceled at the end of the day.
Market capitalization, or market cap, refers to what the market thinks a company’s value is.
This is the number of shares that are actually available to the public, after subtracting the shares controlled by insiders (like the company’s C-suite and early investors).
This is the total number of shares that a company can trade. It’s always larger than the public float.
IPO is short for initial price offering, which happens when a private company becomes a publicly traded company to raise money.
If a company’s stock is doing well, they may offer more shares to boost sales and raise more money.
Forex is short for foreign exchange and involves trading different currencies.
Hedge Funds/Mutual Funds
Hedge funds and mutual funds are two different types of investment accounts you can buy into. The fund manager will then invest your money in dozens, hundreds, or even thousands of stocks.
ETF is short for exchange-traded fund. ETFs are like stocks — you can buy and sell shares. They’re also like mutual funds because they track an index.
ADR is short for American depositary receipt. You can purchase ADRs like stock shares for foreign companies that trade in the U.S.
A balance sheet provides a snapshot view of a company’s assets, liabilities and equity at a given moment, showing the balance between income and expenditure. It is also known as a “statement of financial position.” When using a correct and precise balance sheet, a company’s owner can see what his company is worth, what he owns and what he owes all at a glance.
At The Money
A situation at which an options strike price is identical to the underlying price of the securities. Options trading activity tends to be high when options are at the money.
Day trading is perhaps the most well-known active trading style. It’s often considered a pseudonym for active trading itself. Day trading, as its name implies, is the method of buying and selling securities within the same day. Positions are closed out within the same day they are taken, and no position is held overnight. Traditionally, day trading is done by professional traders, such as specialists or market makers. However, electronic trading has opened up this practice to novice traders.
Some actually consider position trading to be a buy-and-hold strategy and not active trading. However, position trading, when done by an advanced trader, can be a form of active trading. Position trading uses longer term charts – anywhere from daily to monthly – in combination with other methods to determine the trend of the current market direction. This type of trade may last for several days to several weeks and sometimes longer, depending on the trend.
Trend traders look for successive higher highs or lower highs to determine the trend of a security. By jumping on and riding the “wave,” trend traders aim to benefit from both the up and downside of market movements. Trend traders look to determine the direction of the market, but they do not try to forecast any price levels. Typically, trend traders jump on the trend after it has established itself, and when the trend breaks, they usually exit the position. This means that in periods of high market volatility, trend trading is more difficult and its positions are generally reduced.
When a trend breaks, swing traders typically get in the game. At the end of a trend, there is usually some price volatility as the new trend tries to establish itself. Swing traders buy or sell as that price volatility sets in. Swing trades are usually held for more than a day but for a shorter time than trend trades. Swing traders often create a set of trading rules based on technical or fundamental analysis.
These trading rules or algorithms are designed to identify when to buy and sell a security. While a swing-trading algorithm does not have to be exact and predict the peak or valley of a price move, it does need a market that moves in one direction or another. A range-bound or sideways market is a risk for swing traders.
Scalping is one of the quickest strategies employed by active traders. It includes exploiting various price gaps caused by bid-ask spreads and order flows. The strategy generally works by making the spread or buying at the bid price and selling at the ask price to receive the difference between the two price points. Scalpers attempt to hold their positions for a short period, thus decreasing the risk associated with the strategy.
Additionally, a scalper does not try to exploit large moves or move high volumes. Rather, they try to take advantage of small moves that occur frequently and move smaller volumes more often. Since the level of profits per trade is small, scalpers look for more liquid markets to increase the frequency of their trades. And unlike swing traders, scalpers like quiet markets that aren’t prone to sudden price movements so they can potentially make the spread repeatedly on the same bid/ask prices.
Costs Inherent With Trading Strategies
There’s a reason active trading strategies were once only employed by professional traders. Not only does having an in-house brokerage house reduce the costs associated with high-frequency trading, but it also ensures better trade execution. Lower commissions and better execution are two elements that improve the profit potential of the strategies. Significant hardware and software purchases are typically required to successfully implement these strategies. In addition to real-time market data, these costs make active trading somewhat prohibitive for the individual trader, although not altogether unachievable
This is why passive and indexed strategies, that take a buy-and-hold stance, offer lower fees and trading costs, as well as lower taxable events in the event of selling a profitable position. Still, passive strategies cannot beat the market since they hold the broad market index. Active traders seek ‘alpha’, in hopes that trading profits will exceed costs and make for a successful long-term strategy.
Fading involves shorting stock after rapid moves upward. This is based on the assumption that (1) they are overbought, (2) early buyers are ready to begin taking profits and (3) existing buyers may be scared out. Although risky, this strategy can be extremely rewarding. Here, the price target is when buyers begin stepping in again.
This strategy usually involves trading on news releases or finding strong trending moves supported by high volume. One type of momentum trader will buy on news releases and ride a trend until it exhibits signs of reversal. The other type will fade the price surge. Here, the price target is when volume begins to decrease.