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Trading Lingo & Terminology

 

Bull / Bullish


Any terminology associated with this animal means that the trade or the individual or the market is inclined to rise in price. If you are bullish, then you buy a stock because you expect prices to rise. If it is a bull market, then prices are trending upward. This metaphor arose because bulls jab upward with their horns when they strike.


Bear / Bearish


Any thing to do with prices going down. If it is a bear market, then prices are declining. If you are bearish on a stock, then your expectation is that it is going down in price. Bears strike downward with their paws, hence the association with downward moving prices.


Cover / Covering


Refers to exiting a short trade. This means that you buy back the stock you had previously borrowed and return the shares to your broker.


Dividends


Some stocks pay you money. Companies often pay their shareholders money from their profits. These payouts are called dividends and they can be paid at any time by the company. They are a fixed dollar amount, frequently paid once every three months, with pay dates known well in advance.  Everything regarding dividends is at the discretion of the company. They can cancel, increase, or change dividends at will. Sometimes companies offer a special dividend - a one time payout of a large amount of money. Dividend paying stocks tend to be a bit more stable with respect to the stock price and, over time, re-invested dividends can significantly compound, improving overall returns.


Fundamental(s)


This term refers to the state of the underlying business associated with a share stock. It is concerned with how the company itself is performing, how much money it making, its sales, margins, etc.


Long / Going Long / Long Position


A type of trade that is profitable when stock shares rise in price. In a trade, you are long if you purchase a security with the expectation that it will rise in price. Your intention is thus to sell it later at higher price.


Margin / Margin Account / Margin Call


An account offered by your broker that allows you to borrow money or stock to buy or short securities is called a margin account. The broker charges interest when you borrow money and your securities serve as collateral. There are many complex rules regarding how much an investor can borrow and how much collateral (securities) the investor must maintain in their account. It is particularly tricky as the value of the collateral changes every minute. If the value of the collateral shrinks too much, then the investor must increase the collateral by either adding more cash to the account or selling stock - this is a margin call. You must set up a margin account with your broker in order to short stock. For a more in depth discussion of the calculations regarding margin accounts and shorting, click here to Investopedia or click here for some excellent step by step examples of how margin works.


A Security


A contract that has some inherent value and is traded in a market(s). Examples are stocks ( a contract which provides ownership in a company), bonds, and derivatives (options).


Short/Shorting


A type of trade that is profitable when stock shares decline in price. The mechanics of the trade are as follows: first, you borrow shares of a stock from your broker and then sell them on the market, pocketing the cash. At a later date, you buy the shares back, hopefully at a lower price, and return the shares to your broker. If you sold the shares for a high price and bought them back at a lower price, then your trade was profitable and you would have made money by the stock declining in price.


There are many requirements in order to conduct this transaction, but most people can set this up with a broker. It is not difficult, even with a small cash account. For a more thorough discussion of the details, see an expanded discussion of the mechanics of shorting here.


This is another excellent blog explaining how a short sale works, how returns are calculated, and how margin works.


Stop / Stopped Out


An order placed with your broker to exit a trade if  the stock reaches a certain price. The order is intended to limit losses on a trade when the stock price moves in an unfavorable direction.


Technical Analysis


The study of a security’s past price and volume patterns to better inform future investing decisions. This study often involves plotting security prices over time on a chart (hence ‘charting’). For an exhaustive article on the subject of technical analysis, why it works, and its limitations, click here.


Yield


In the context of trading stocks, yield refers to the percent return of the dividend relative to the stock price. For example if you own stock in a company that pays you dividends totaling $1 over the course of the year and the stock price is $100, then the yield is 1%. That is, the dividend total divided by the stock price.  Yields are often stated on an annualized based, thus, if the yield is 1%, then the stock will return 1% over the course of a year, often in the form of dividends paid out quarterly.