Starting to invest can be daunting for beginners, with many terms and concepts to understand. But the core idea of investing is simple: regularly put money into investments that have done well over time, and you’ll likely succeed. Knowing investment terms can boost your confidence. Keep reading to learn 51 stock market terms to help you get started.
Stock Market Terms Every Beginner Must Know
Asset Allocation: Refers to the various types of investments within your portfolio. A portfolio with only Microsoft stocks would have 100% asset allocation in stocks. However, diversifying with bonds, foreign currencies or Treasury bills can create a more varied allocation.
Diversification: The act of spreading investments across different asset classes and styles, effectively reducing risk. Essentially, it’s about not putting all your eggs in one basket.
Bull Market: A market phase where prices are rising or are expected to rise over an extended period.
Bear Market: Contrary to a bull market, it is characterized by falling prices, typically by at least 20%.
Capital Gain or Loss: Arises when an investment is sold at a different price than its purchase cost. If held for over a year, it’s termed “long-term” and can qualify for better tax treatments.
Momentum Investing: The strategy of purchasing assets (often stocks) that have shown high returns over the past three to twelve months, and selling those that have performed poorly.
Bid/Ask Spread: The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask).
Bond: Similar to a loan where the bond issuer borrows funds from investors with the promise of periodic interest payments and the return of the principal on maturity.
Stock: Represents an ownership share in a corporation, with its value fluctuating based on market dynamics.
Exchange-Traded Fund (ETF): A type of security that involves a collection of securities — such as stocks — that often tracks an underlying index.
Margin: A risky proposition for newbies, it allows investors to buy securities by borrowing money from a broker.
Short Selling: A strategy that involves selling borrowed stocks with the hope of buying them back at a lower price.
Real Return: The net return on an investment after adjusting for factors like inflation or taxes.
Investment Objectives: Outlines the goals you aim to achieve through your investments. These could be growth, income or capital preservation.
Risk Tolerance: Indicates how much investment risk you’re willing to withstand, influencing the types of investments you’re comfortable with.
Rule of 72: A quick formula to estimate the time required to double your investment. If you expect an 8% return, you’d double your investment in about nine years using this rule.
Dollar Cost Averaging: Involves investing a fixed amount at regular intervals, regardless of market conditions.
Yield: The returns from an investment, usually in the form of interest or dividends, relative to its cost or current value.
Secondary Market: Where investors purchase securities or assets from other investors rather than from the issuing companies themselves.
Capital Market: A market in which financial instruments like bonds and stocks are bought and sold.
Derivative: A financial contract that derives its value from an underlying asset, such as stocks, bonds or currencies.
Primary Market: Where new securities are issued to the public, often via an IPO.
Stock Market Index: Measures and reflects the market or a segment of the market’s performance.
Volatility: How much a security’s price changes over time.
Arbitrage: The simultaneous purchase and sale of a security in different markets to take advantage of price discrepancies.
Portfolio: A collection of financial investments, including stocks, bonds and cash equivalents.
Limit Order: An order placed with a broker to buy or sell a set number of shares at a specified price or better.
JSE:BID: Refers to the stock ticker symbol for Bid Corporation Ltd on the Johannesburg Stock Exchange.
Common Stock: Represents shares that give holders voting rights but do not guarantee dividend payments.
Blue Chip: Refers to nationally recognized, well-established and financially sound companies.
Stock Exchange: A venue where stock buyers and sellers trade company shares. Examples include the New York Stock Exchange and the Nasdaq.
Finance: The study of money management, including the creation, oversight and use of funds.
Dividend: A payment made by a company to its shareholders, typically from its profits.
Initial Public Offering (IPO): The first time a company’s stock becomes available for public purchase.
Market Liquidity: Refers to the ease with which an asset or security can be quickly bought or sold in the market without affecting its price.
Day Trading: The practice of buying and selling financial instruments within the same trading day, with the aim of making quick profits.
Broker: An individual or firm that’s licensed to buy and sell financial products on behalf of its clients.
Stock Market: The aggregation of buyers and sellers of stocks, representing ownership claims on businesses.
Market: A medium through which buyers and sellers of a specific good or service interact.
Asset: Anything of value owned by an individual or corporation that can be converted to cash.
Beta: A measure of a stock’s volatility in comparison to the market as a whole.
Leverage: Refers to the use of borrowed funds, usually from a broker, to amplify potential returns on an investment. However, it’s worth noting that while leverage can increase potential profits, it also magnifies potential losses.
Preferred Stock: A type of stock that has a higher claim on assets and earnings than common stock and often comes with dividend payments.
Growth Stock: Stocks of companies expected to grow at an above-average rate compared to other companies in the market.
Trading Volume: The number of shares or contracts traded for a security or an entire market during a given period.
Moving Average: A tool in technical analysis that averages prices over a period to reduce short-term fluctuations and show longer-term trends.
Futures Contract: A legal agreement to buy or sell a particular commodity or asset at a predetermined price at a specified time in the future.
Stockbroker: An individual or firm that’s licensed to buy and sell stocks and other securities for both retail and institutional clients.
Stocks: Shares in a company that signifies ownership and entitle the holder to a share of its assets and profits.
Equity: Ownership interest in a company, typically in the form of stock or shares.
Hedge: A strategy used to offset or reduce the risk of price fluctuations in an asset or investment, typically by taking an opposite position in a related security, such as an option or futures contract.
How To Start Investing
Once you are familiar with essential stock market terms, you might be wondering, “Where do I begin?” Taking the initial steps might feel daunting, but with the right approach, you can smoothly transition into the world of investing. Here are some steps you can take:
- Self-assessment: Understand your financial goals, risk tolerance and investment horizon. Are you investing for a short-term goal like a vacation, or a long-term goal like retirement? Your answers will guide your investment decisions.
- Start with a budget: Before you dive into investing, ensure you have a clear financial plan. Allocate funds for emergencies, short-term needs and long-term goals. The money you’re willing and able to set aside without needing it in the immediate future can be considered for investing.
- Open a brokerage account: Choose a reputable brokerage firm to open an account. Many online platforms offer commission-free trades and provide a plethora of resources for beginners. Research and select one that aligns with your needs.
- Begin with basics: For many beginners, starting with index funds or exchange-traded funds is a wise choice. They offer diversification and often come with lower fees than actively managed funds. As you become more comfortable, you can explore individual stocks, bonds or other investment vehicles.
- Educate yourself: Continuous learning is key. Attend webinars, read books or join investment communities. Platforms that are dedicated to finance and investing can be invaluable resources.
- Dollar-cost averaging: As a beginner, consider the strategy of dollar-cost averaging, which involves investing a fixed amount regularly, regardless of market conditions. It can help in reducing the impact of market volatility and lowers the pressure of timing the market perfectly.
- Stay updated: Markets change, and economic conditions evolve. Subscribe to financial news outlets, track market trends and stay updated with global events that could influence the market.
- Consult a financial advisor: If you’re unsure about making specific decisions, consider consulting a financial advisor. They can provide personalized advice, ensuring your investments align with your goals.
- Stay patient and persistent: Investing isn’t about getting rich quickly. It’s a long-term journey. There will be ups and downs, but historically, the stock market has trended upward over extended periods. Stay committed, be patient and refrain from making hasty decisions based on short-term market movements.
- Review and adjust: As you progress in your investment journey, your goals might change, or you might achieve some of them. Periodically review your portfolio and make necessary adjustments. Rebalancing your portfolio annually or when significant life changes occur can help in keeping your investments in line with your objectives.
Good To Know
The world of investing can seem complex, but by taking measured steps and making informed decisions, you can navigate it with confidence. Remember, every seasoned investor was once a beginner. The key lies in staying informed, being patient and committing to continuous learning.
The stock market, with its vast opportunities, can seem daunting, but knowledge truly is power. As you continue on your investing journey, always remember to stay educated, seek advice when needed and approach decisions with both caution and confidence. In the world of stocks, a little understanding goes a long way toward long-term success.
John Csiszar contributed to the reporting for this article.
Editor's note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates' editorial team.