Trading and Investing Terminology

In the world of Investing and Trading, there are many terminology and jargon that may confuse people. Here below we have listed a set of terms that should clear up the common terms that are used every day in the industry. Remember to consult Investopedia for more in-depth full definitions as the definitions we provide are merely for surface knowledge so you can somewhat understand what the basics of each term mean.

General terms

After-Hours - After-Hours trading starts at 4 pm EST after the market closes. This session can run until as late as 8:00 pm, however volume typically thins out much earlier in this session.

Amortisation - Amortisation has two meanings, firstly it is the practice of reducing the value of assets to properly reflect their value over time. Secondly, it can mean the servicing of debt in regular increments.

Assets - An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value.

B/C Share Scheme - Companies occasionally hand cash back to shareholders by issuing new types of shares, typically known as B shares and C shares. Each shareholder has the choice of which type of share they wish to receive. For example, BRK.A is the main voting shares of Berkshire Hathaway while BRK.B are additional shares at a drastically cheaper price for investors with lower capital.

Bearish - A bearish investor is someone who believes the market is headed downwards and will attempt to profit from the decline of stock prices. Bears are pessimistic about the state of a given market; therefore they 'borrow' shares from their broker who then sells them at the current market price. If the stock falls in price, the bear will return the shares to their broker and net a profit, this is called 'shorting'.

Bullish - A bull is an investor that thinks the price of a stock is subject to rise due to either technical or fundamental analysis. Investors with a bullish approach purchase shares under the assumption that they can sell it later for a higher price. Bulls look to profit from the upward movement of a stock.

Backwardation - If the current cash price for an asset slips above the price for forward delivery.

Currency Risk - This stems from the fluctuation of the exchange rate between two currencies. Companies that engage in cross-border operations are most exposed to currency risk. Such operations may experience unexpected profit or loss due to currency rate fluctuations.

Defensive Stocks - Defensive stocks are based on underlying assets which tend to be less prone to economic cycles. Considering this, they're generally invested in when traders see an economic slowdown approaching and want to hedge their portfolios.

Deflation - Deflation occurs when the nominal prices of goods and services drop. Deflation is a positive from a consumer's perspective as it directly boosts purchasing power. However, it can have a negative effect on the economy.

Depreciation - Depreciation is the accounting practice of spreading out the cost of a fixed asset over time and deducting it from taxable income.

Diversification - This is an investment strategy focused on risk mitigation, it calls for the creation of a portfolio that contains a variety of investments. The aim of this is to neutralize negative yields by the positive yields of other investments in the portfolio.

Interest Rates - An interest rate represents the amount of interest that is due per period in relation to the amount borrowed. Interest rates can refer to any period, but it generally takes the form of an annual percentage.

Leverage - Leverage occurs when using borrowed capital as a funding source when investing to expand the firm's asset base and generate returns on risk capital. This strategy involves using borrowed money to increase the potential return of an investment. Leverage can be referred to as the amount of debt a firm uses to finance assets.

Liabilities - A liability is something a person or company owes, usually an amount of money. Liabilities are settled over time via the transfer of economic benefits such as money, goods, or services, Liabilities include loans, mortgages account payable, and accrued expenses.

Liquidity - Liquidity is the term used to dictate the ease at which an asset or security can be converted into ready cash without affecting its market price. Liquidity describes the degree to which an asset can be quickly bought or sold in the market without it affecting its intrinsic value. Cash is considered the most liquid asset because it can most quickly be converted into other assets.

Shareholder - A shareholder or 'stockholder' is a person or company that owns at least one share of a company's stock, which is known as equity. Due to shareholders essentially owning a segment of a company, they reap the benefits of a business's success.

Fundamental Analysis Terms

10-K - the 10-K is a comprehensive report filed annually by a publicly traded company about its financial performance and is required by the SEC. This type of report contains much more detail than a company's standard annual report.

Acquisition - An acquisition is when one company purchases most or all another company's shares to gain control of that company. Purchasing over 50% of the available shares and assets allows the acquirer to make decisions about the newly purchased assets without the need of approval from the other shareholders of that company.

Altman Z-Score - This was created in the 1960s by Edward Altman, this score indicates the probability of a company entering bankruptcy within the next two years. It uses profitability, leverage, liquidity, solvency, and activity to predict the likelihood of a company becoming bankrupt.

Annual Report - An annual report is a document that public companies must provide to their shareholders annually, it describes their operations and financial conditions.

Arbitrage - This is a technique used to take advantage of differences in the price in substantially identical assets across different markets or instruments.

Balance of Payments - This refers to the accounts that sum up a country's financial position relative to other countries.

Balance Sheet - A balance sheet is a financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time. It provides a snapshot of what a company owns and owes as well as the amount invested by shareholders.

Cash flow - Cash flow is the net amount of cash and cash-equivalents being transferred into and out of a business. A company's ability to create value for shareholders is determined by its ability to generate positive cash flows.

Cash Flow Statement - A cash flow statement is a financial statement that provides aggregate data regarding all cash inflows a company receives from its ongoing operations and external sources of investments. It also provides cash outflows that pay for business activities and investments throughout a specific period.

Cash in/outflows - Cash in/outflows suggest the net amount of cash being transferred into (Cash inflow) or out of (Cash outflows) the company.

Exit Strategy - An exit strategy is a contingency plan that is executed by investors, traders, business owners etc. to liquidate a position in a financial asset once predetermined criteria have been met or exceeded. For day traders, a stop loss/limit is a form of exit strategy since they are choosing when to exit the trade based on a certain criterion (price) being met.

Float - Float refers to the regular shares a company has issued to the public that are available for investors to trade. A company's float is an important number for investors since it indicates how many shares can be bought and sold by retail investors (us!). Float does not include restricted shares, these are shares that are on a sale restriction, meaning that they may be owned by insiders of the company. The less shares in the market, the higher the volatility!

Fundamental investing - Researching a company and their revenue reports, data, headlines etc. and using this information to make an educated decision on a trade.

Income Statement - An income statement AKA 'profit and loss statement' is an important financial statement used to report a company's financial performance over a specific accounting period e.g., first quarter (Q1).

Information Ratio - Sometimes referred to as the appraisal ratio, works to measure the risk adjusted return of a financial asset portfolio (a collection of assets)

Price Earnings Ratio (P/E Ratio) - This is the ratio of a company's share price relative to its earnings per share.

SEC Form 10-Q - The SEC form 10-Q is a comprehensive report of a company's performance that must be submitted quarterly by all public companies to the Securities and Exchange Commission (SEC).

Sharpe Ratio - The Sharpe ratio is a way to determine how much return is achieved per unit of risk. It is useful to, and can be computed by, all forms of capital market participants to evaluate their performance from day traders to long-term buy-and-hold investors.

Trading Technical Terms

Alpha - Alpha is the measurement of the performance of an investment in relation to a benchmark index. It is often referred to as a percentage, an alpha of 1% means that the return on investment was 1% better than the benchmark.

Beta - Beta is a way to measure the relative risk of a share.

Bid-Offer Spread - This is sometimes called the bid-ask spread, it is simply the difference between the price at which you can buy a share and the price that it can be sold at. If the bid is $1000 and the ask is $1001 then the spread is $1.

Candlesticks - A candlestick is a form of price chart used in technical analysis that displays the high, low, open, and closing price of a stock within a specific timeframe. It originally formed by Japanese rice merchants and traders to track market prices and daily momentum hundreds of years before being a norm in the U.S.

Consolidation - From a technical analysis perspective, consolidation refers to the oscillation of an asset between a well-defined pattern of trading i.e., a consistent rate of up and down. Consolidation is interpreted as market indecisiveness, which ends when the asset prices either break resistance or support.

Correlation - This describes the mutual relationship between two independent values. In trading, it is used to find out whether there is a relationship between two variables and if there is, what kind of relationship there is. -1 represents a negative correlation, 0 implies no correlation, and 1 suggests a positive correlation.

Day Trading - Day trading is a form of trading whereby an individual will execute trades either long and/or short on intraday (within the day) market price action. A day trader will typically not have any open positions after the market closes.

Delta - Delta is the ratio that compares the change in the price of an asset, usually marketable securities, to the corresponding change in the price of its derivative. For example, if a stock option has a delta value of 0.65, this means that if the underlying stock increases in price by $1 per share, the option on it will rise by $0.65 per share.

Elliot Wave Theory (EWT) - This theory makes use of fractal and repetitive patterns to predict future market movements. It was developed in the 1930s by Ralph Nelson Elliot who recognized the fact that investors' psychology gives rise to certain 'wave' patterns in stock price action.

Exponential Moving Average (EMA) - An EMA is a type of moving average that places a greater weight and significance on the most recent data points relevant to your time frame. EMA's react more significantly to recent price changes than a simple moving average. It is used to create buy and sell signals based on the crossover and divergences from the historical average.

Gap Scanning - Gaps are areas on a chart where the price of a stock moves sharply up or down with little to no trading in between. As a result, the asset's chart shows a gap in the normal price pattern, these gaps can then be exploited for profit by traders.

Hedge - A hedge is an investment that is made with the intention of reducing the risk of adverse price movements in an asset. Typically, a hedge consists of taking an offsetting or opposite position in a related security. While hedging reduces the potential risk of losing money, it also chips away at potential gains.

Momentum Trading - Momentum trading is a strategy that looks to capitalize on a stock's momentum to enter a trend as it is picking up movement in a certain direction. Momentum refers to the price trend continuing either to rise or fall whilst considering the price and volume information.

Moving Average (MA) - Generally speaking, the moving average helps to identify average price data, by calculating the moving average, the impacts of random, short-term fluctuations on the price of a stock are mitigated as you have an understanding of the movement of a stock price.

Paper Trading - Paper trading is a simulated trade that allows new investors to practice their strategies without the risk of losing money. The term refers to when aspiring traders would practice on paper before making real trades with real money. Paper trading allows you to see whether your strategy is working.

Pattern Day Trader (PDT) *US ONLY- The PDT rule is regulation for traders using Financial Industry Regulated Authority (FINRA) regulated brokers that execute four or more-day trades over the span of five business days using a margin account. Pattern day traders are required to hold $25,000 in their margin accounts to bypass the PDT rule. Breaking this rule will result in a 90-day ban from your platform.

Resistance Line - The resistance line is the price at which an asset meets pressure from sellers at a general price zone. New information can change the market's attitude towards the price of an asset and can result in the price breaking the resistance line. The resistance line can be charted by drawing a line along with the highest highs for a specific time.

Scalping - Scalping is a trading strategy geared towards profiting from minor price changes in a stock's price. Traders that follow this strategy tend to make much more trades in a day when compared to a trader that trades gappers for example as they believe small movements in stock price are easier to catch than large ones.

Stock Screener - A stock screener is a set of tools that enable investors to quickly gather information about a range of stocks that relate to the investors search criteria. Some brokers offer stock screeners on their platform, however, there are independent stock screeners available. Stock screeners can convey the volume of a stock, price changes, float, and much more.

Supernova Pattern - The supernova is an explosion in stock price that creates many opportunities to buy on the way up and short on the way down. Supernovas can be triggered through world events, social media hype and company news. Stocks that experience supernovas hold massive volatility and liquidity and therefore are risky if investors join the hype too late (GME and DOGE coin as an example).

Support line - The support line refers to the price level that an asset does not fall below within a specific timeframe. The support level is created by buyers entering the market whenever the asset dips to a lower price. Using technical analysis, the support line can be identified by drawing a line underneath the lowest lows for the specific timeframe. The support line can be horizontal, slanted, or up and down following the price trend.

Swing Trading - Swing trading is a style of trading that attempts to capture short-term to medium-term gains in a financial instrument over a period of a few days to several weeks. Swing traders are more likely to use both fundamental and technical analysis to influence the execution of a trade.

Technical Analysis investing - Technical analysis focuses on understanding trends, price movement, and volume. Technical analysis is often used to generate short-term trading signals using charting tools, scanners, and indicators.

Time frame - A time frame refers to the type of time per open and close of a stock that traders use to determine trends in the market. Day traders typically use smaller time frames such as 1min and 5min as it is relevant to their trading style. However, it is important to also refer to longer time frames such as 1hour and 1day to get a better indication to the stock's overall trend.

Treynor Ratio - The Treynor ratio, also known as the reward-to-volatility ratio, is a measure that quantifies return per unit of risk. It is similar to the Sharpe and Sortino ratio.

Underlying Security - An underlying security is a stock or bond on which derivative instruments, such as futures, ETFs, and options are based. It is the primary component of how the derivative gets its value.

Volume - Volume is the amount of an asset or security that changes hands between buyers and sellers over a period of time. Trading volume and changes to volume over a period of time are a vital part of technical analysis

Product Terms

Annuity - An annuity is a product that can provide you with a lifetime income, typically on retirement. They are viewed to hedge against longevity risk, or the potential for one to outlive his or her invested assets. Social securities or defined pension benefits are examples of this.

Bonds - A bond is a type of debt instrument issued and sold by a government or company to raise money. Investors who buy bonds are paid interest which for bonds are known as a 'coupon'.

Commodity - A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Examples of commodities are Grains, Gold, Oil, and Natural gas.

Derivatives - This is the collective term used for a wide variety of financial instruments whose prices derives from or depends on the performance of underlying assets, markets, or investments

Equity - An equity represents the amount of money that would be returned to a company's shareholders if all the assets were liquidated, and all the company's debt was paid off in the case of liquidation. In the case of acquisition, equity is the value of company sales minus any liabilities owed by the company not transferred with the sale. Equity can be found on a company's balance sheet and is the most common data analyzed to assess the financial health of a company.

Exchange-Traded Funds (ETF) - These are baskets of securities that act like securities themselves. They track an underlying index (comprised of all the securities covered by the ETF) and they are marketable. There is no limit on what an ETF can contain, for example: stocks, bonds, and commodities.

Foreign Exchange Reserves (FER) - FERs are foreign currency funds and various foreign assets held by a country's central bank or other monetary authority. Their purpose is to allow the said authority to pay its liabilities as such liabilities may arise from the currency issued by the central bank

Futures - Futures are derivative financial contracts that obligate the parties to transact an asset at a predetermined future date and price. The buyer must purchase, or the seller must sell the underlying asset at the set price, regardless of the current market price at the expiration date.

Index/Indices - Market indices are a hypothetical basket of securities that provide a relevant snapshot of a given market. The value of an index reflects the values of its included securities.

Individual Savings Account (ISA) - Individual savings accounts are a way of saving and investing without paying income tax or capital gains.

Options - Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An option contract offers buyers the opportunity to buy or sell the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to

Security - Securities are negotiable financial instruments that hold some form of monetary value i.e., stocks.

Stock - A stock (also referred to as equity) is a security that represents ownership of a fraction of a corporation. The owner of the stock is entitled to a proportion of the corporation's assets in relation to how much stock they own. Units of stock are called 'shares'.

Options Terms

Breakeven - This is the price that an asset must hit in order to enable an option buyer to recover their premium

Call Options - These allow the holder to buy the asset at a stated price within the specified timeframe.

Premium - Premium can mean several things in finance, the first being the total cost to buy an option. A premium is also the difference between the price paid for a fixed-income security and the security's face amount at issue.

Put Options - These allow the holder to sell the asset at a stated price within the specified timeframe.

Risk Reversal - Risk reversal is an options strategy designed to hedge directional strategies. For example, a long position will be hedged two-fold in a risk reversal scenario.

Taxation Terms

Capital Gain - Capital gain is an increase in a capital asset's value. It is considered to be realized when you sell the asset. A capital gain can occur on any security that is sold for a price higher than the asking price that was paid for it. Capitals gains are realized once the asset is sold, unrealized gains

and losses demonstrate an increase or decrease in an investment's value but have not yet triggered a taxable event (exiting the trade).