One of the biggest obstacles to understanding financial markets is the use of trading terms that can be difficult to grasp without prior knowledge. In this post, we’ll provide a simple explanation of 21 commonly used Trading Terms for Traders & Investors

Fundamental Terms For Traders and Investors

1. Fundamental Analysis

Fundamental analysis looks at factors such as the company’s revenue, earnings, assets, liabilities, and growth prospects to determine its financial health and potential for future growth.

However, it can be time-consuming and requires a deep understanding of financial statements and economic trends.

Fundamental analysis may not account for short-term market fluctuations or unexpected events that can affect a company’s stock price.

2. Technical Analysis

This type of analysis is often used by short-term traders who are interested in taking advantage of short-term price movements in the market.

Technical analysis is also commonly used by day traders, who buy and sell securities within the same day.

3. Market Cap

Market capitalization is a measure of how much a company is worth in the stock market.

It is calculated by multiplying the number of shares a company has issued by the current price of each share.

Market cap gives investors an idea of the company’s size and how much they would need to pay to buy the entire company.

4. Price-to-earnings (P/E) Ratio

This is a measure of how much investors are willing to pay for each dollar of earnings a company generates.

A high P/E ratio can indicate that investors expect strong earnings growth in the future, while a low P/E ratio indicates the opposite.

5. Earnings Per Share (EPS)

Earnings per share (EPS) is a measure of how much profit a company makes for each share of its stock.

A higher EPS indicates that the company is more profitable on per share, while a lower EPS means the exact opposite.

6. Dividend Yield

Sometimes, companies choose to share their profits with their owners (the shareholders) by paying out dividends.

The dividend yield is a measure of how much a company pays out in dividends relative to its stock price.

A high dividend yield can be attractive to investors who are looking for income, while a low dividend yield means that the company is reinvesting its profits back into the business instead of paying out dividends.

7. Beta

Beta is a measure of how much a stock’s price moves up and down compared to the overall market. It helps investors understand how risky a stock is.

• If the Beta is 1, it means that the stock moves in line with the market.
• If the Beta is less than 1, it means that the stock is less risky.
• If the Beta is more than 1, it means that the stock is more risky.

If a stock has a high beta, it means its price can move a lot in a short period. This can be good if it goes up but bad if it goes down.

If a stock has a low beta, it means it’s stable and may not experience large price changes.

8. Volatility

Volatility means how much the price of a tradable asset, currency or security changes over time.

If an asset has high volatility, its price changes a lot, and if it has low volatility, its price doesn’t change much.

Traders and investors usually use volatility as a measure of risk, with higher volatility assets considered riskier than lower volatility assets.

Common Trading Strategies and Techniques

9. Day Trading

Day trading is a type of trading where traders buy and sell assets, such as stocks or cryptocurrencies, within the same trading day.

The aim is to make a profit from the short-term price fluctuations of the asset. Day traders often use technical analysis to identify short-term trading opportunities.

Day trading can be risky and requires a lot of time, knowledge, and discipline.

Recommended: How to Be a Disciplined Trader

10. Swing Trading

Swing trading is a type of trading where traders hold an asset, for a few days to a few weeks.

These types of traders use technical analysis to identify trading opportunities and may also use fundamental analysis to support their decisions.

It’s less intense than day trading and allows traders to be more flexible.

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11. Position Trading

Position trading is a type of trading where traders hold an asset for a longer period, ranging from weeks to months or even years.

The aim is to earn profits from long-term price trends. It requires less attention than day trading and swing trading, making it a more relaxed strategy.

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12. Stop Loss

A Stop Loss Order automatically sells an asset if its price drops to a certain level, so you don’t lose more money than you’re willing to risk.

For example, if a trader/investor buys a stock at $50 and sets a stop loss at $45, the trade will automatically be closed if the stock price drops to $45.

This limits the loss to $5 per share.

Read Also: How to Deal With Trading Losses and Learn From Them

13. Take Profit

Take profit is a trading strategy used to lock in profits.

For example, if a trader/investor buys a stock at $50 and sets a stop loss at $65, the stock will automatically be sold if the price increases to $65.

This is a very wise risk management strategy to prevent traders from getting greedy and holding onto a trade for too long, risking the possibility of the price reversing and erasing their profits.

14. Trailing Stop Loss

This strategy is simple, yet complicated for beginners. Here’s a simple near real-life example.

Let’s say you bought a stock at $50 per share, and you want to set a trailing stop loss order at 5%.

This means that if the stock price falls by 5% (to $47.50), the order will be executed, and you will sell the stock to limit your losses.

However, if the stock price rises to $60 per share, the stop price of your trailing stop loss order will also increase to $57 per share, maintaining the same 5% below the current market price.

If the stock price then drops to $57, the order will be executed, allowing you to lock in profits and limit potential losses.

This is a very useful trading strategy that combines the functionality of both “Stop Loss” and “Take Profit.”

15. Margin Trading

Margin trading is a strategy that allows traders to borrow funds from a broker to increase their buying power and take larger positions in the market.

However, margin trading also increases the potential risk and losses, and the trader must pay back the loan and interest on the borrowed funds.

16. Leverage

When you use leverage, you are borrowing money from your broker or exchange to increase your buying power and the potential size of your profits.

For example, if you have a leverage ratio of 2:1, you can control $2 in assets for every $1 of your own money invested.

Note that you’re responsible for paying back the borrowed funds and any interest owed.

So What’s the Difference Between Leverage and Margin Trading?

Let’s say you want to buy $10,000 worth of stock, but you only have $5,000 in your trading account. Here’s how margin trading and leverage would work in this scenario:

Margin Trading

You can borrow the remaining $5,000 from your broker to make the full $10,000 purchase. Your broker may require you to put up $5,000 as collateral and lend you the rest.

If the stock increases in value, you can sell it for a profit and pay back the loan with interest. However, if the stock decreases in value, you may be required to put up additional collateral to cover the loss.

Leverage

Let’s say your broker offers a leverage ratio of 2:1, which means that for every $1 of your own money invested, you can control $2 in assets.

In this case, you could use your $5,000 to control a $10,000 position in the stock.

If the stock increases in value, you will make a profit on the $10,000 position, but if the stock decreases in value, you could lose your entire investment.

Recommended: 7 Incredible Ways to Get Funded as a Trader

Basic Terms

17. Bull Market

A bull market refers to a period when stock prices are rising and investors are optimistic about the economy.

It’s like a strong bull charging ahead, indicating that the market is doing well.

18. Bear Market

Bear Market: A bear market refers to a period when stock prices are falling, and investors are pessimistic about the economy. 

It’s like a bear hibernating, indicating that the market is not doing well.

19. Short Selling

Short selling is when a trader or an investor borrows a stock from a broker, sells it on the market, and hopes to buy it back at a lower price to make a profit.

20. Market Order

A market order is an order to buy or sell a tradable asset at the current market price.

It’s like going to the grocery store and buying a fruit at the current price without negotiating.

21. Limit Order

A limit order is an order to buy or sell a tradable asset at a specific price or better.

It’s like going to the grocery store and saying, “I want to buy this Orange, but only if it’s on sale for $10 or less.”

If the Orange is on sale for $10 or less, you’ll buy it, but if it’s more than $10, you won’t.

The Bottom Line

We started with common fundamental terms that every serious trader should know. Then we moved to common trading strategies and techniques.

We also mentioned basic trading terms that every beginner trader should know.

Being familiar with trading terms is essential for traders and investors looking to trade in the financial markets. Aside from increasing your knowledge as a trader, it’ll go a long way to helping you make brilliant decisions.

Increasing your trading knowledge in the financial markets is easy if you know where to start. With the tips in this post, both beginners, intermediate and serious traders can learn more and become better traders.

How to Increase Your Knowledge as a Trader or Investor

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