Stock Terminology 101

Stock Market Terminology

Bull Market: A financial market condition where prices are rising or expected to rise. It indicates confidence and a strong economy.

Bear Market: The opposite of a bull market, a bear market signifies a decline in market prices by 20% or more and reflects widespread pessimism.

Correction: A market correction occurs when there is a 10% drop in the market prices from their most recent peak. It's seen as a temporary decline which adjusts overvalued stock prices.

Recession: A period marked by a decline in GDP for two or more consecutive quarters. It reflects a significant decline in economic activity across the economy.

Circuit Breaker: Regulatory measures designed to temporarily halt trading on an exchange to curb panic-selling. It's triggered when there's a large, rapid decline in a stock or the overall market.

Stock Technical Terminology

Market Capitalization: The total market value of a company's outstanding shares of stock. It's calculated by multiplying the stock's price by its total number of outstanding shares.

Trading Volume: The number of shares or contracts traded in a security or market during a given period. It matters because it indicates the activity level and liquidity of the market.

Bid Ask Spread: The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask). It reflects the liquidity of the market.

Volatility: The rate at which the price of a security increases or decreases for a given set of returns. High volatility means the price of the security can change dramatically over a short time period.

Stock Transaction Terminology

Stock Split and Reverse Stock Split: A stock split increases the number of shares while decreasing the price per share, making it seem "cheaper". However, it doesn't add real value, so it shouldn't be a sole reason to buy. A reverse stock split decreases the number of shares and increases the price per share.

Dilution: Occurs when a company issues new shares, reducing the ownership percentage of existing shareholders. It can dilute earnings per share, which might affect the stock price negatively.

Ex-Dividend Date: The date on which the stock starts trading without the dividend included in its price. To receive the next dividend, you must own the stock before this date.

Dividend Payout Ratio: The percentage of earnings distributed to shareholders in the form of dividends. A high ratio isn’t always positive, especially if it's unsustainably high, indicating that the company might not be reinvesting enough in its future growth.

Share Repurchases (Buybacks): When a company buys back its own shares from the marketplace, it reduces the number of outstanding shares. By reducing the number of shares outstanding, buybacks increase the ownership stake of remaining shareholders, which leads to a higher earnings per share and potentially increased share price. Share repurchases are a more tax-efficient way to return capital to shareholders compared to dividends, since dividends are taxed immediately as income, whereas buybacks are only taxed when shares are sold, often at a lower capital gains rate.

Spin-Off: A type of corporate restructuring where a parent company creates a new independent company by distributing shares of the new company to its existing shareholders. This process allows the spin-off entity to operate as a separate public company, potentially unlocking more value for shareholders as each business can focus on its specific operations and strategies.

Split-Off: A corporate strategy where a parent company's shareholders are given the option to exchange their current shares for shares of a subsidiary or division of the parent company, leading to the subsidiary becoming a separate, independent entity. Unlike a spin-off, not all shareholders of the parent company will receive shares of the split-off entity. This approach can help the parent company streamline its operations and allow the separated entity to pursue its own strategic goals with a more focused management team.

Stock Trading Terminology

Alpha: A measure of performance on a risk-adjusted basis. It represents the value that a portfolio manager adds or subtracts from a fund's return.

Beta: Measures the volatility of an investment compared to the market as a whole. A beta greater than 1 indicates more volatility than the market, and less than 1 means less.

Margin Trading: Borrowing money to invest in stock, amplifying both gains and losses. It's risky as you can be forced to sell at a loss if you face a margin call without additional funds.

Short Selling: Selling shares you do not own, hoping to buy them back at a lower price. It's risky due to potential unlimited losses and factors like short squeezes and borrowing costs.

Short Squeeze: Occurs when a stock's price increases sharply, forcing short sellers to buy shares to cover their positions, further driving up the stock's price.

Limit Order: An order to buy or sell a stock at a specific price or better.

Stop Loss Order: An order placed to sell a stock once it reaches a certain price, to limit an investor's loss.

Pump and Dump: A fraudulent scheme that involves inflating the price of a stock through false and misleading positive statements, in order to sell at a higher price.

Options, Futures, and Derivatives

Call Options: Contracts that give the holder the right to buy a stock at a specified price within a specific period.

Put Options: Contracts that give the holder the right to sell a stock at a predetermined price within a certain timeframe.

0DTE Options: Zero Days to Expiry options are extremely risky due to their very short life span and high volatility.

Futures: Contracts to buy or sell a particular asset at a predetermined price at a specified time in the future.

Derivatives: Financial securities whose value is derived from an underlying asset or group of assets.