Jaguar8 wrote a post · Oct 27 11:47

Stock Trading 101: Part B Common Stock Terminologies - Dr Jaguar8

STOCK TRADING 101: PART B
COMMON STOCK TERMINOLOGIES

1. Bid and Ask Prices
• Definition:
The bid is the highest price a buyer is willing to pay, while the ask is the
lowest price a seller is willing to accept.
• Example:
If Stock A has a bid price of $100 and an ask price of $102, a trader can buy
at $102 or sell at $100.
• Importance:
Understanding the bid-ask spread helps traders estimate transaction costs and
liquidity. Narrow spreads indicate high liquidity and lower trading costs, which is essential for short-term traders.

2. Market Order
• Definition:
An order that executes immediately at the current market price.
• Example:
Placing a market order to buy 100 shares of Stock B will instantly buy at the current best ask price.
• Importance:
Market orders provide quick entry and exit, suitable for fast-moving markets but may result in slippage (buying/selling at a slightly different price due to
market fluctuations).

3. Limit Order
• Definition:
An order to buy or sell at a specific price or better.
• Example:
A trader places a limit order to buy Stock C at $50, meaning the trade only executes if the stock reaches $50 or lower.
• Importance:
Limit orders offer price control, helping traders avoid unfavorable price changes. They are beneficial for those aiming to buy or sell at precise price points.

4. Stop-Loss Order
• Definition:
An order to automatically sell a stock if it reaches a specified price, limiting potential losses.
• Example:
Setting a stop-loss order at $45 on a stock bought at $50 will sell the stock if it drops to $45.
• Importance:
Stop-losses are vital for managing risk and preventing significant losses, especially in volatile markets. They allow traders to maintain disciplined exits without constant monitoring.

5. Margin and Margin Call
• Definition:
Margin refers to borrowed funds from a broker to trade stocks. A margin call occurs when a broker demands additional funds to maintain a margin account.
• Example:
A trader uses $5,000 of margin to purchase $10,000 worth of stocks, amplifying
potential gains but also risks.
• Importance:
Margin can enhance returns but also increases risk. Margin calls may lead to forced selling, impacting strategy if the trader cannot meet requirements.

6. Short Selling
• Definition:
Selling borrowed shares with the intent to repurchase them later at a lower
price.
• Example:
Selling Stock D at $100, hoping to buy back at $90 to profit from a price drop.
• Importance:
Short selling offers profit opportunities in declining markets but comes with high risk if the stock price rises significantly, as losses can be unlimited.

7. Market Capitalization
• Definition:
The total value of a company’s shares, calculated as share price multiplied by outstanding shares.
• Example:
A company with a share price of $50 and 10 million shares has a market cap of $500 million.
• Importance:
Market cap helps classify companies into small, mid, and large caps, providing insights into potential risk and growth. Large-cap stocks are typically more
stable, while small-cap stocks may offer higher growth.

8. Earnings Per Share (EPS)
• Definition:
A company’s profit divided by the number of outstanding shares.
• Example:
If a company earns $1 million with 1 million shares outstanding, its EPS is $1.
• Importance:
EPS is an essential indicator of profitability and is often used in comparing companies within the same industry. Higher EPS typically signals a more profitable company.

9. Price-to-Earnings (P/E) Ratio
• Definition:
The stock price divided by EPS, used to determine a stock’s valuation.
• Example:
A stock trading at $50 with an EPS of $5 has a P/E ratio of 10.
• Importance:
The P/E ratio helps assess if a stock is over- or undervalued. High P/E can indicate high growth expectations, while a low P/E may suggest undervaluation
or lower growth.

10. Dividend Yield
• Definition:
The annual dividend per share divided by the stock price.
• Example:
A stock paying a $2 annual dividend with a $40 share price has a dividend yield of 5%.
• Importance:
Dividend yield is crucial for income investors, providing insight into cash returns from dividends relative to the stock price.

11. Volatility
• Definition:
Measures the extent of price fluctuations. High volatility indicates significant price movement, while low volatility suggests stability.
• Example:
Tech stocks often have higher volatility compared to utility stocks.
• Importance:
Understanding volatility helps traders anticipate potential price changes and adjust risk management accordingly. High volatility can mean high profit
potential but also increased risk.

12. Bull and Bear Markets
• Definition:
A bull market is characterized by rising prices, while a bear market involves falling prices.
• Example:
The stock market experienced a prolonged bull market from 2009 to 2020.
• Importance:
Recognizing market conditions helps traders align strategies. Bull markets favor long positions, while bear markets might encourage short selling or
defensive investments.

13. Moving Average (MA)
• Definition:
The average stock price over a set period, used to smooth price trends.
• Example:
A 50-day moving average helps identify the stock’s short-term trend.
• Importance:
Moving averages filter out noise, aiding in trend identification and supporting buy/sell decisions. Crossovers between short- and long-term MAs often signal
trend reversals.

14. Relative Strength Index (RSI)
• Definition:
An oscillator that measures overbought and oversold conditions on a scale of 0 to 100.
• Example:
An RSI above 70 indicates overbought conditions, potentially signaling a sell
opportunity.
• Importance:
RSI helps traders identify entry and exit points by showing momentum strength. High RSI suggests potential reversal from an overbought state.

15. Moving Average Convergence Divergence (MACD)
• Definition:
Shows the relationship between two EMAs to identify changes in momentum.
• Example:
When the MACD line crosses above the signal line, it may indicate a buy signal.
• Importance:
MACD is popular for identifying trend shifts, especially useful in confirming
bullish or bearish momentum.

16. Bollinger Bands
• Definition:
Bands set two standard deviations away from a moving average to reflect
volatility.
• Example:
Price breaking above the upper band may indicate overbought conditions.
• Importance:
Bollinger Bands help assess volatility and identify potential reversal points,
which is valuable in fluctuating markets.

17. Initial Public Offering (IPO)
• Definition:
The first sale of a company’s stock to the public.
• Example:
When a tech startup lists its shares on the NASDAQ, it’s conducting an IPO.
• Importance:
IPOs provide opportunities for early investment but can be volatile as the
market adjusts to new stock.

18. On-Balance Volume (OBV)
• Definition:
A volume-based indicator showing buying and selling pressure.
• Example:
Rising OBV suggests strong buying, while a decline indicates selling pressure.
• Importance:
OBV helps confirm trends; if price rises with increasing OBV, the trend is likely strong.

19. Support and Resistance Levels
• Definition:
Support is a price floor where demand prevents further declines, while
resistance is a ceiling preventing rises.
• Example:
If Stock E repeatedly drops to $20 but doesn’t fall further, $20 is a support
level.
• Importance:
Recognizing these levels helps traders predict price reversals and plan entry and exit points.

20. Beta
• Definition:
Measures a stock’s volatility relative to the market.
• Example:
A stock with a beta of 1.5 is 50% more volatile than the overall market.
• Importance:
Beta indicates risk level; high-beta stocks suit aggressive traders, while low-beta stocks may appeal to risk-averse investors.

21. Volume Weighted Average Price (VWAP)
• Definition:
The average trading price based on volume, used as a benchmark for intraday trading.
• Example:
VWAP can act as a support or resistance level in intraday trading.
• Importance:
VWAP helps traders assess if prices are above or below average levels,
influencing entry and exit during the trading day.

22. Circuit Breaker
• Definition:
A regulatory measure that halts trading temporarily when a stock’s price moves
too quickly, designed to curb panic-selling.
• Example:
If a stock falls 10% in minutes, a circuit breaker might activate, pausing trading to restore order.

23. De-SPAC: When a private company becomes
public by merging with a SPAC (Special Purpose Acquisition Company), bypassing the traditional IPO process. This is popular among companies that want quicker
public access without the IPO’s regulatory hurdles.

24. Free Float: The number of
shares available for public trading, excluding those held by insiders, which affects liquidity and volatility.

25. Turnover Ratio
· Definition
In stock trading, the turnover ratio measures the frequency of buying and selling within a portfolio over a specific period, typically one year. It reflects how actively a fund or portfolio is managed. A high turnover ratio indicates frequent trading, while a low turnover ratio suggests a more stable, long-term approach.

· Example
If a mutual fund has a turnover ratio of 80%, it means that 80% of the fund’s holdings were bought or sold during the year. This high activity level might signal an actively managed strategy focused on capturing short-term gains. In contrast, a fund with a 10% turnover ratio likely follows a buy-and-hold strategy, with minimal trading throughout the year.

· Importance

• Transaction Costs: A high
turnover ratio can lead to increased transaction costs, which may reduce net returns for investors. Actively managed funds with high turnover tend to have higher trading fees compared to passively managed funds.
• Tax Implications: Frequent
buying and selling can trigger capital gains taxes, impacting an investor’s after-tax returns. Lower turnover ratios usually mean fewer taxable events.
• Investment Style: Turnover
ratio reveals a fund’s strategy. High turnover suggests active trading aimed at short-term gains, while low turnover aligns with long-term, stable investment approaches, appealing to investors looking for less volatility.

26. Turnover in Day Trading for Retail Traders

· Definition
In day trading, turnover refers to
how frequently a retail trader buys and sells stocks within the same day. High turnover indicates many trades and a very active trading style, while low turnover means fewer trades during the day.

· Example
If a day trader buys and sells the same stock multiple times throughout the day, they have a high turnover. For example, buying Stock A at market open, selling it shortly after, and then repeating the process several times in a single day reflects high turnover.

· Importance for Day Traders

• Transaction Costs: High
turnover increases transaction fees and potential taxes, which can add up quickly for day traders. Lower turnover (fewer trades) can help manage costs.
• Market Responsiveness:

High turnover is essential for those aiming to capture small, quick price movements. But too much turnover without clear strategy can lead to “overtrading,” where transaction costs and potential losses outweigh gains.
• Effective Strategy: Tracking
turnover helps day traders analyze their activity and make more strategic decisions, refining which trades are genuinely worthwhile.

27.Volume in Day Trading

· Definition
Volume is the total number of shares traded in a stock during the day. High volume shows strong interest and liquidity, meaning the stock is easy to buy or sell quickly. Low volume suggests fewer traders and potentially less stability.

· Example
A stock that usually trades 200,000 shares daily but suddenly has 1 million shares traded is experiencing high volume, likely due to news, earnings, or other major events.
Day traders can capitalize on this increased volume for better trade
opportunities.

· Importance for Day Traders

o Liquidity:
High-volume stocks are easier to enter and exit quickly without affecting the stock’s price much, which is crucial for day traders aiming to capture quick profits. Low-volume stocks can have unpredictable price changes, which can be risky.
o Volatility and Opportunities: High volume often accompanies higher volatility, creating more price swings that day traders can exploit. Volume spikes can signal strong buying or selling momentum, helping traders identify potential entry and exit points.
o Market Sentiment:
Volume patterns provide insight into market sentiment, signaling strong trends.
Rising volume on an uptrend signals solid interest, while low volume on a
rising price may indicate a weak trend that could reverse.

28. Squeeze

· Definition
A squeeze happens when a stock’s price rises sharply, forcing traders who shorted the stock to buy shares to cover their positions, which drives the price even higher. A common type is a short squeeze, triggered by positive news or high demand that quickly pushes prices
up.

· Example
If many traders shorted Stock A at $10 expecting it to drop, but unexpected good news sends the price to $15, these traders may rush to buy shares and cut losses. This buying demand pushes the
price up further.

· Importance
A squeeze can create rapid price
spikes, making it profitable for long (buying) traders and risky for short
sellers. Understanding the potential for squeezes helps traders manage risk and spot quick profit opportunities.

29.Short Interest

· Definition
Short interest is the total number of
shares that have been sold short and are still outstanding (not yet bought
back). High short interest indicates significant bearish sentiment, with many traders betting on a stock’s decline.

· Example
If Stock B has 20% short interest,
this means 20% of its available shares are currently shorted, reflecting high bearish sentiment and potential for a short squeeze if the price rises.

· Importance
Short interest shows the market’s
outlook on a stock. High short interest can signal that a stock may face downward pressure, but it also raises the possibility of a short squeeze if sentiment shifts, leading to quick price increases.

30. Cost to Borrow

· Definition
Cost to borrow (also known as borrow fee or stock loan fee) is the fee charged by a broker to lend shares for short selling. This cost depends on stock availability and demand for borrowing.

· Example
If Stock C is highly in demand for
short selling but scarce in supply, the cost to borrow might be 15% annually. This makes shorting expensive, as short sellers must pay this fee on top of any potential losses.

· Importance
High borrowing costs can deter traders from shorting, as it eats into profits. For stocks with high borrow costs, shorting can be especially risky unless traders are highly confident in price declines.

31. Short Availability

· Definition
Short availability refers to the
number of shares available to borrow for short selling. When a stock has low short availability, it becomes harder (and often more expensive) to short.

· Example
If Stock D has very low availability,
short sellers may struggle to find shares to borrow, leading to higher
borrowing costs or preventing shorting altogether.

· Importance
Knowing short availability helps
traders assess the feasibility and cost of shorting a stock. Low availability can limit shorting options and increase the chance of a squeeze, as fewer
shares are available for new short positions.

32. Short Sale Restricted (SSR)

· Definition Short Sale Restricted (SSR) is a rule that restricts short selling on a stock when it falls 10% or more from the previous day’s close. Under SSR, short sales can only be executed on an uptick, meaning they must occur at a higher price than
the last trade. This rule is designed to prevent excessive downward pressure on a stock’s price during significant declines.

· Example If Stock A
closes at $100 on Monday but drops to $90 on Tuesday, SSR would be triggered, limiting short selling to upticks only for the rest of Tuesday and the entire trading day on Wednesday.

· Importance SSR protects
stocks from steep declines by limiting the impact of aggressive short selling during periods of high volatility. For traders, SSR signals potential challenges in shorting the stock and may lead them to reconsider their strategy, as they may not be able to short sell at any price.

33. Hard to Borrow (HTB)

· Definition
Hard to Borrow (HTB) is a designation for stocks that are in high demand for short selling but have limited availability. When a stock is classified as HTB, brokers may impose higher borrowing fees due to scarcity, and some traders may not be able to borrow shares at all.

· Example
If Stock B has high demand for shorting but limited shares available for borrowing, a broker might mark it as HTB. Traders interested in shorting Stock B might face higher fees or even be unable to borrow shares to short.

· Importance HTB stocks
come with higher costs and greater limitations for short sellers. Knowing if a stock is HTB helps traders assess whether the potential rewards outweigh the increased borrowing costs and availability issues. HTB stocks also have a higher risk of short squeezes, as limited availability can lead to rapid buying pressure if traders rush to cover their short positions.

34. SPAC Companies in Stock Trading

· Definition A SPAC (Special Purpose Acquisition Company) is a type of “blank-check” company created solely
to raise capital through an Initial Public Offering (IPO) to later acquire or merge with an existing private company. SPACs have no operations, products, or revenue when they go public. Instead, they exist as a “shell” that provides a pathway for a private company to become publicly traded without undergoing a traditional IPO process.

· Example
A SPAC is formed and goes public, raising $300 million through its IPO.
After the IPO, the SPAC seeks out a private company to acquire or merge with, typically within two years. If it finds a suitable target—say, a tech startup valued at $1 billion—the SPAC merges with it, enabling the startup to become publicly traded through the SPAC’s existing stocks

· Importance to Stock Traders

1. Access to High-Growth Companies: SPACs allow retail investors to access fast-growing private companies that may not have otherwise gone public.
Investors can participate in early-stage companies with high growth potential, which was once limited to venture capital or private equity investors.
2. Market Volatility and Speculation: SPACs can be highly
volatile due to their speculative nature. Stock traders can experience significant price swings based on merger rumors, announcements, or market
sentiment, creating both risk and profit opportunities. This volatility appeals to traders who thrive on quick, high-risk trades.
3. Efficient IPO Alternative: For the companies involved, SPACs provide a faster and potentially less costly alternative to a traditional IPO. This can create value for SPAC investors if the company is acquired successfully and grows, as the SPAC investors may benefit from a potential increase in stock
price once the merger is complete.
4. Potential for High Returns and High Risk: SPAC investments come with unique risks. If a SPAC fails to acquire or merge with a company within the required timeframe (usually two years), investors receive their money back
with minimal interest, which can be an opportunity cost. However, successful mergers can yield high returns for early SPAC investors if the target company performs well in the public market.

35.De-SPAC Process

· Definition and Explanation
“De-SPAC” refers to the merger phase where a private company becomes public by combining with a Special Purpose Acquisition Company (SPAC). In this process, the SPAC, already listed on a public exchange, merges with a privately held company,
effectively bypassing the traditional Initial Public Offering (IPO) path.

· Example
If a technology company wants to go public but finds the traditional IPO process too lengthy, it may merge with a SPAC, allowing it to reach public markets quickly.

· Importance
The De-SPAC process has gained popularity as a faster, sometimes less expensive route to public markets, offering private companies more control over valuation and
timing.

36.Market Capitalization vs. Market Value

· Definition and Explanation

• Market
Capitalization: This is calculated as the company’s share price multiplied by
its total outstanding shares, providing a snapshot of its equity value.
• Market
Value: Broader and more nuanced, this includes market capitalization but also
incorporates factors like price-to-earnings (P/E) ratios and other valuation metrics.

· Example
A company may have a high market capitalization but a lower market value if earnings are low, potentially making it overvalued.

· Importance
Understanding both terms helps investors gauge a company’s real worth and compare it with
competitors, allowing for more informed investment decisions.

37. Short Interest

· Definition and Explanation
Short interest represents the number of shares sold short and not yet repurchased. A high short interest may indicate market pessimism about a stock.

· Example
If Stock DEF has a 25% short interest, it suggests significant bearish sentiment, as many are betting on a price decline.

· Importance Short
interest can be a predictor of potential price swings. When short interest is
high, a stock is vulnerable to a “short squeeze,” where rapid buying by short
sellers drives the price up.

38. Dark Pools

· Definition and Explanation
Dark pools are private exchanges where large trades occur away from public exchanges, providing anonymity to buyers and sellers.

· Example
An institutional investor trading millions of shares in a dark pool prevents visible order impact on public markets, maintaining price stability.

· Importance
While dark pools help manage large trades, they can reduce transparency for retail investors, affecting market prices unpredictably.

39. Stock Minimum Price Compliance

· Definition and Explanation
The Nasdaq requires listed companies to maintain a minimum $1.00 stock price. If a stock remains below this for 30 days, it risks delisting but has 180 days to regain
compliance.

· Example
A company trading at $0.90 for 30 days receives a compliance notice and must reach $1.00 for 10 consecutive days within 180 days.

· Importance

This rule protects investors by ensuring stocks meet minimum price standards, fostering stability and encouraging companies to maintain responsible price levels.

40. Reverse Split in Stock Trading

· Definition
A reverse split reduces the number of
shares a company has outstanding while proportionally increasing the share price. This action consolidates shares, resulting in fewer, more valuable shares without changing the overall market value of the company.

· Example

In a 1-for-5 reverse split, a company
trading at $2 with 10 million shares outstanding would end up with 2 million shares trading at $10 each. An investor holding 50 shares would now have 10 shares, with the total value of their holding remaining the same.

· Importance

• Stock Exchange Compliance: Companies often use reverse splits to raise their stock price and meet minimum exchange requirements (such as Nasdaq’s $1 minimum share price), avoiding delisting.
• Perception of Value: Higher share prices can make the stock appear more appealing to certain investors, although traders should carefully assess the company’s fundamentals, as reverse splits can
sometimes indicate financiastruggles.

41. Forward Split in Stock Trading

· Definition
A forward split (or stock split) increases the number of shares a company has outstanding while proportionally decreasing the share price. This action makes each share less valuable but increases the total number of shares, keeping the company’s overall value the same.

· Example
In a 2-for-1 forward split, a company
with a share price of $100 and 1 million shares outstanding would end up with 2 million shares trading at $50 each. An investor holding 100 shares would now have 200 shares, though their total investment value remains unchanged.

· Importance

• Affordability: Forward splits make shares
more affordable for individual investors, potentially increasing demand and
broadening the investor base.
• Positive Signal: Companies typically do forward splits when share prices have risen significantly, which can be a positive sign of growth and stability. It can also increase liquidity, as more shares are available for trading.

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