We’ve put together this collection of definitions and videos after receiving some suggestions from our readers that reminded us not everyone has the same level of knowledge in the stock market. While we still think of ourselves as unexperienced, sometimes we forget how much we’ve learned on our journey so far.
If there are definitions or videos that anyone would like to see added, just send us an email at firstname.lastname@example.org. We appreciate any feedback and thank you for your help in putting this knowledge center together!
Exchange – A marketplace where stocks, currencies, futures, etc. are bought and sold.
Bull Market – An extended time frame when the values of stocks are tending to increase, encouraging more buyers than sellers.
Bear Market – An extended time frame when the values of stocks are tending to decrease, encouraging more sellers than buyers.
Index – In market terms, an index is a statistical measure of change in a securities market, such as the Dow Jones or Nasdaq indexes.
ETF (Exchange Traded Fund) – ETFs are a collection of stocks that typically represent an index or industry. For example, the SPY is an ETF that mimics the S&P 500.
Stock – A form of a security referred to as a share that entitles the holder to a proportionate fraction of the issuing company’s profits and assets. There are two types of stock (common and preferred), but most of us only ever deal with common stock.
Ticker – The symbol (typically 3 letters but can be more or less) used to represent a company’s stock price in a market exchange.
Common Stock – Owners of common stock are entitled to receive company dividends and have voting rights at shareholder meetings.
Preferred Stock – Owners of preferred stock generally do not have voting rights, but have a higher claim on assets and earnings. This comes into play if a company goes bankrupt or is liquidated.
Options – Contracts that grant the holder the right (but not the obligation) to buy or sell a stock at a predetermined price. See trading terms for more details.
Gains (Realized/Unrealized) – Realized gains are the profit or loss that is earned when selling previously purchased shares.
–>Example: if 100 shares of XYZ are purchased at $10/share and are sold at $20/share, the realized gains are $1000 (100 x [$20 – $10]). The difference of current price vs purchase price is unrealized gains until the shares are sold.
Volume – The amount of shares that are traded over a given time frame, usually measured daily or averaged over 10 days.
Volatility – A measure of how much a stock price fluctuates in the near term. Stocks with higher volatility have more extreme changes in price.
Dividends – Money paid out to share holders, typically on a regular basis (quarterly or annually). Dividend payments are declared by the issuing company in advance and are subject to change.
Dividend ex-Date – Shareholders who own stock prior to the ex-Date are eligible to receive the dividend payout.
Margin – Money borrowed from the account broker that is used to purchase or short sell stock.
Margin Rate – the interest rates due to the brokerage for borrowing on margin. Accounts with higher values tend to get more favorable rates.
Maintenance Margin – Also referred to as the Minimum Balance Requirement, it is the minimum account value that must be maintained while borrowing money before being subject to a Margin Call.
Margin Call – Occurs when a brokerage account is low on funds while carrying a margin balance. The account holder must deposit additional funds or sell some securities to bring the account value above the Maintenance Margin minimum value. If no actions are taken, the brokerage will force the sale of your stocks (regardless of price) to raise the account balance above the threshold.
Shorting Stock – When a short position is created, a trader is selling shares of a stock which are not currently owned and must be re-purchased at a later date. Since the shares being sold have to be borrowed, the money received from this transaction is a loan and falls under the Margin requirements.
Stock Trading Terms
Bid/Ask (B/A)– The bid is the current offered price to purchase a given share, while the ask is the current offered price to sell that share.
Day Order – A purchase or sell order that expires at the end of the trading session if it is not executed.
GTC (Good til Canceled) Order – A purchase or sell order that stays active until it is canceled manually or a set expiration date is reached.
Market Order – An order to purchase or sell shares immediately at the current best offered bid or ask price.
Limit Order – An order to purchase or sell shares in which the price is specified in the order. These orders may not execute if the share B/A is out of range.
Stop Loss – An order to purchase or sell shares of a stock when it reaches an activation price set by the user. A stop loss order can be entered as a market order or a limit order.
–>Example: a limit order is entered to sell 50 shares of XYZ at $10/share when the stock price drops below an activation price of $10.05. If a market order is used, the trade will execute immediately at the best available price once the activation price is reached.
Trailing Stop – Similar to a stop loss, but the activation price moves up with the share price.
–>Example: shares of XYZ are trading at $50/share, and a 10% trailing stop loss is set. If the stock price drops to $45/share, the sell order is executed as a market order, protecting the share holder from further loss. If the stock price raises to $60/share, the activation price raises as well to $54/share.
Options Trading Terms
Options – Contracts that grant the holder the right (but not the obligation) to buy or sell a stock at a predetermined price. Each contract is for 100 shares of the underlying security. Contracts are traded similar to stocks, but they have an expiration date.
Option premium – The price of the contract on the market, determined by the intrinsic and extrinsic value. Options contracts have less volume than stocks, so the Bid/Ask spread is usually higher. When trading an options contract, the premium is multiplied by 100 since each contract is for 100 shares. So, a contract of XYZ with a premium of $2.60 per contract would actually cost $260 (plus fees) to acquire.
Intrinsic Value – The value an investor would get if a contract was exercised immediately.
–>Example: if XYZ was trading at $10/share, a call option with a strike price of $9/share would have $1 of intrinsic value.
Extrinsic Value – The value of an options contract above the intrinsic value, that is mainly determined by the value of time (how far away the expiration date is). There are many other things that factor into a contract’s extrinsic value, such as the stock’s recent volatility or upcoming events like earnings reports.
Call Option – A contract that grants the holder the right to purchase shares of a company at a predetermined price prior to the expiration date. Can be bought or sold.
Put Option – A contract that grants the holder the right to sell shares of a company at a predetermined price prior to the expiration date. Can be bought or sold.
Strike Price – The predetermined stock price that an option contract can be exercised at.
Expiration date – The last day an option contract can be exercised or traded. After this date, the contract will expire worthless if no action is taken. Call options that are below the strike price or Put options that are above the strike price do not.
Exercise (options) – When a contract is exercised, the underlying stock is purchased (or sold) at the strike price. Exercising options may require a Margin account if short positions are created or the account does not have enough funds to complete the transaction.
–>Example 1: if shares of XYZ are trading at $10/share and a trader exercises a call contract for that stock with a strike price of $8/share, he will be charged $800 dollars to his account and own 100 shares of XYZ worth $1000.
–>Example 2: if shares of XYZ were trading at $8/share and a trader executes a put contract with a strike price of $10/share, he will be credited with $1000 dollars and will own a short position of 100 shares of XYZ, which he then will need to purchase for $800 to close out the position.
Buying to Open – Purchasing the call or put options to open a position. The buyer pays the premium to the seller or underwriter in exchange for the contract in the underlying security. Risk to the buyer is limited to the premium paid for the contract.
Selling to Open – Similar to buying to open, except this time as the seller you become the underwriter of the contracts. The seller is paid the premium up front but then becomes liable to provide the shares if the contract expires in the money. Risk to the seller is not limited as is the case with the buyer and the premiums will change based on the risk to the seller.
Selling to Close – Selling contracts to close out an open position. If contracts in a security were previously purchased, they can be sold prior to their expiration date to close out the position. This is useful to recoup losses if the stock does not look like it will finish in the money at expiration, or to close the position prior to expiration if the account does not have the funds to purchase
Buying to Close – Purchasing contracts to close out an open position. If contracts in a security were sold previously, the position can be closed by buying the contracts back from another seller, hopefully at a profit.
Covered Calls – A bullish strategy where 100 shares are purchased for each contract sold in an underlying security. The proceeds of the sale of the contract are used to lower the price of the purchased stock. In this strategy, the maximum profit of the trade is limited in exchange for the lower cost basis to purchase the shares (i.e. lower risk). Risk is managed due to the fact that the shares are owned and will not need to be purchased on the open market if the sold contract expires in the money.
Example: Shares of XYZ trade at $10 per share and a call contract with a strike price of $12.50 expiring in one month is trading for $1.50. To execute a covered call, one contract would be sold for $150 ($1.50 x 100 shares) and applied to the purchase of 100 shares. The total cost to execute this trade would be a net debit of $8.50 per share, or ($10 – $1.50) x 100 = $850. If the contract is exercised in one month, the shares that were purchased would be sold at the strike price of $12.50 per share. The maximum profit is realized in this case of $400, even if the shares finish higher than $12.50 at expiration due to the obligations of the sold contract. This is the trade off for the reduced share price.
Bull Call Spread – A bullish strategy in which an call option contract is purchased while selling another call option at a higher strike price. The proceeds from selling the higher strike contract is applied to the purchase of the lower strike contract, lowering the total cost in exchange for limiting the maximum profit of the trade.
Example: Shares of XYZ are trading at $10 per share while the $10 and $15 strike contracts that expire in one month are trading at $2.50 and $0.50 respectively. To execute a bull call spread, a $10 contract is purchased at $2.50 while simultaneously selling a $15 strike contract at $0.50 for a net debit of $2.00, or ($2.50 – $0.50) x 100 = $200. If XYZ is above $15 per share at expiration, both contracts are exercised and the max profit of $300 is realized (100 shares are purchased at $10 per share, and are immediately sold at $15 per share for a total of $500, less the initial investment of $200.). If XYZ is between $10 and $15 at expiration, the $10 contract is exercised while the $15 contract that was sold expires out the money and no obligation is required from the seller.
Naked Calls/Puts – Selling call or put contracts without having a hedged position (shares or option contracts) in the underlying security. This is the riskiest strategy that can be used to sell options since there is no cap to potential losses.
Here are a collection of videos that cover some of the basics of the stock market. There’s a wealth of knowledge on YouTube that is free for anyone to take advantage of, but this should get you started.