5 Must-Know Terms to Improve Your Trading
You’re cruising along nicely with my 10 steps to succeed with penny stocks.
I know it’s a lot of information, which is why I’ve broken it down in segments for you.
The more educated you are on the subject, the more likely you are to succeed.
Let’s go through steps 3-5 for today.
3. What Are the Most Common Investment Types?
Investments are all over the place.
You probably see signs staked into the grassy medians at intersections advertising some get-rich-quick opportunity or another. Some investments are legitimate, while others turn out to be scams.
If you want to invest your money wisely, you need a legitimate outlet.
Think of it as the difference between getting a job/starting a business or hitting the casino. One option will generate profits, while the other will likely leave you destitute.
Penny stocks are one form of stock.
A stock is just a contract — a piece of paper — that gives you partial ownership of a company until you sell it. Companies raise money through the stock market to expand, hire more employees, create new prototypes, and fund other expenses.
As an investor, you buy shares of that company, which can drive up the price. If you make the right play, you sell when the price goes up (or down, if you’re short-selling) and take your profits.
Real estate, bonds, annuities, ETFs, mutual funds, and other types of investments exist, too. You can also invest directly in a company, such as as an angel investor, but that’s far beyond the scope of this article.
Stocks vs. Commodities vs. Derivatives vs. Real Estate
Types of investments can be boiled down into four basic categories: stocks, commodities, derivatives, and real estate.
Stocks, as I mentioned above, are pieces of a company.
You buy shares (pieces of the stock) at a set price, then sell them for a profit or loss.
Commodities, on the other hand, are physical substances that come from the earth, such as gold or wheat. They’re traded on an open exchange, with the most common commodity being oil.
Derivatives are types of investments that depend on something else for their prices.
For instance, options trading is a form of derivative. Instead of buying or selling a stock, you form a contract with the option to buy or sell a certain number of shares at a specific date.
Real estate is its own animal.
You can invest in real estate by flipping houses sold at auction, renting properties to tenants, and numerous other strategies.
It’s not my cup of tea, but lots of people generate significant profit from it.
Supply and Demand
Everything in the financial industry revolves around supply and demand. An increased supply reduces demand, but a decreased supply increases demand — and vice versa.
In the stock market, greater demand means more opportunities to sell shares of a stock at a higher price point. Similarly, greater supply allows you to buy in at a reduced rate.
Keep these terms in mind when you begin learning penny stocks.
They’ll fuel many of your strategies no matter your trading techniques.
Are you ready to dig into the nitty-gritty of penny stocks? The first thing you need to master is stock analysis.
On its face, stock analysis refers to the process of evaluating a stock based on fundamental and technical analysis. Fundamentals are things like profits, revenues, price/earnings ratio, and earnings per share.
You’ll learn more about those later in this guide.
On the technical side, you must learn how to read charts.
Instead of judging the company itself, you’re evaluating how the stock has performed historically and making an informed decision about its future in the market.
I read chart patterns constantly because I want to see how a stock has performed over weeks, months, or even years.
What patterns can I detect in those charts? What might influence forecasted performance?
4. Important Terms That You Need to Know About Penny Stocks
Later in this guide, I’ll define some critical penny stock terms in more detail.
For now, I want to give you a brief overview so you’re more educated about the details I mention.
- Moving averages: Average price per share of a given stock over a specific period of time
- Breakout: A stock that breaks through resistance to rise in price
- Breakdown: Stocks that break through resistance to decrease in price
- Resistance: A price point for a stock that doesn’t seem likely to move outside of a breakout
- Support: The same thing as resistance except that it’s supporting a lower price point below which the stock is unlikely to fall
Stock Market Terms
Whether you’re trading penny stocks or more expensive stocks, you need to be familiar with the most common stock market terms.
I’ll break them down into even further detail later, but here are some of the most common terms to memorize:
- Buy: Buying shares of a stock with the purpose of profiting off an increase in stock price
- Sell: Selling shares of a stock to make a profit or prevent further losses
- Short sell: Borrowing stock you don’t own for the purposes of profiting off a stock that dips in price
- Buy to cover: Buying back the shares of stock you sold short to profit
- Bid: The greatest price someone else is willing to pay for a stock
- Ask: The asking price for a share of stock
- Spread: The difference between the bid and ask prices
- Uptick: A situation where a subsequent trade is at a higher price than the previous one
- Downtick: The opposite of an uptick
I’ll also get into orders and other important stock market terms for you to understand.
5. How Wall Street Works
Wall Street is an actual road in lower Manhattan, but it’s more colloquially referred to as the financial center of stock market trading.
The most successful firms operate there.
You don’t need to be on the trading room floor to take advantage of the stock market, though — especially if you’re interested in trading penny stocks.
These stocks aren’t traded on the NYSE or NASDAQ. Instead, they’re traded through the pink/grey sheets, the OTC Bulletin, and the NASDAQ small-cap market.
How to Buy Penny Stocks on Market Exchanges
To buy penny stocks on market exchanges, you’ll need a brokerage account.
You deposit funds into your account and execute trades based on the money available.
Main Wall Street Players
Major investment firms are the major players on Wall Street, but don’t worry about them. They’re not concerned with penny stocks.
The most common players you’ll meet in pennystocking are amateurs.
They often fail to conduct research and are therefore more likely to fall flat on their faces.
Stock pickers tell you the stocks in which they think you should invest. In many cases, you can’t trust them, especially if they’re promoters, since they’re probably getting paid to “pump up” a stock, which means you can’t base your decisions on their advice.
Analysts and economists are worth listening to if you’re investing in huge companies, but they’re not likely to give advice on penny stocks.
I hope I haven’t lost you yet.
You’re halfway there — five more steps in my all-inclusive guide.
I’ll see you tomorrow to get started on step six.
— Tim Sykes
Editor, Penny Stock Millionaires