From the outside, the trading world can feel like a foreign language, and in a lot of ways, it is. Trading is rife with industry terms that may make little to no sense to you. This lack of understanding is far from unusual, but it could stand in the way of your ever being able to make informed investment decisions. Unless, of course, you go back to basics and learn how to speak this new language from scratch.
Just as you would approach the practice of learning to speak French, it’s always best to begin by understanding the most essential words in the trading language. That’s why we’ve put together a simple glossary of the words you’ll definitely need to know before you can become fluent in trade.
Understanding Trading Styles
First and foremost, you’ll want to know about key trading types, which include:
- Day trading: Day trading is a fast-fire trading style that involves buying and selling stocks in a single day.
- Forex trading: Forex, or FX trading, is the process of buying and selling in the foreign exchange market to earn profits across conversion rate changes.
- Over-the-counter trading: Over the counter trading (OTC) involves direct trades on assets that exist outside of the central exchange, such as cryptocurrencies.
- Position trading: With position trading, investors hold stocks for long periods and focus on overarching market trends to pull a profit rather than short-term market fluctuations.
Basic Trading Terms
Regardless of your chosen trading style, you’ll likely come across a range of key terms when attempting to invest, such as:
- Dividend: A dividend is a portion of a company’s profits that it may pay to shareholders quarterly or annually.
- Price quote: Price quotes are the prices given to stock assets within the exchange market.
- Equity: Equity refers to the amount of stocks or shares an investor owns within a company.
- Bull Market: A bull market refers to market conditions in which stock value is expected to rise. Bullish also means that stocks are moving upwards.
- Arbitrage: Arbitrage means purchasing an asset from one market and immediately selling it in another where the selling price is higher.
Words for Risk Management
Much of investment is about managing risks, and there are a few different terms you’ll need to know before you can do this, including:
- Stop-loss order: With a stop-loss order, it’s possible to automatically close a market position once it reaches a certain price to limit losses.
- Implied volatility: Considering implied volatility metrics allows investors to predict how likely a market is to change over a certain period before investing in that market.
- Risk-reward ratio: A risk-reward ratio measures the potential profits of a trade versus its potential for losses and is again also typically considered before a trade.
There are countless new terms to learn within the trading industry, and as with any new language, getting to grips with all of them will take a fair amount of time. Still, these basic terms are sure to provide the step-up you need to get started in investments.