Stock Market Definitions- 8 Terms Every Trader Needs to Know

If you are thinking about investing in the stock market but are confused by the many stock market terms used, then you will want to read on. Once you learn the most commonly used terms you will be able to make sense of the investment news you hear and the articles you read on stock market investing.

Stocks

Stocks are the publicly sold and traded shares of companies. If you own a share of a stock then you have a portion of ownership of that company who issued the stock. Stockholders are entitled to vote in stockholder meetings and are given advance notice of upcoming mergers, splits and the release of new stock shares.

Dividends

If a company experiences a particularly profitable quarter, additional payments are made to the stockholder, this is called a dividend. The stockholder then has the option of cashing the dividend or reinvesting the money automatically depending on the value of the dividend paid to the stockholder.

Bonds

Similar to stocks, bonds are usually issued by governments and are issued with a specific date at which they reach maturity. Once this date is reached the bonds are cashed out at their current value and paid to each bond holder. The longer a bond holder owns a bond, the greater the amount of money accumulated before the date of maturity.

Futures

Futures are, in a way, similar to stocks but are purchased against the future cost of commodities. If the actual price of the commodities is higher than the amount initially paid for the futures when futures mature, you make money. Money is lost on futures when the price of the futures, when mature, is lower than the amount paid initially.

Bull or Bear Market

This is a term used to describe trends in the stock market. A bull market indicates optimism among traders and will involve a rise in stocks over an extended period of time. A bear market is the opposite, meaning stock prices fall over an extended period of time and indicates a pessimistic market.

Index Trading

Index trading involves trading groups of stocks based on commodities or sectors of the market. Common indices include the gold market, the diamond market, healthcare, technology sectors and others.

Splits

Splits are a way for companies to reduce the value of individual stocks without reducing the value of the stocks as a whole. A common type of split involves a share of stock being split into two shares and is called a two-for one split. This will double the total amount of shares without affecting the amount invested, making an individual share worth half of its previous value. For a stockholder this bears no difference apart from owning twice as many shares but with the same amount invested.

Trading on Margin

Trading on margin occurs when you purchase stock shares for a fraction of the actual price and paying the remainder upon sale of the stock. The broker used for the trade must have your margin portion of the cost before placing the order, this is typically 50% of the price of the stock being purchased.