Terms Every Trader NEEDS to Know
Dear Penny Stock Millionaire,
A lot of people want to know how to invest in stocks… but few actually do it. Maybe it seems too complicated or people think they don’t have enough money.
Think again! You don’t have to have a trust fund to get involved in the stock market, and it doesn’t have to be overly complicated or scary.
To be clear: I’m a trader, not an investor. I’ve chosen to make a career out of day trading low-priced penny stocks, but that’s not the only option for getting involved in the stock market.
However, I think it’s important to educate you on some of the different styles out there so that you can get a better idea of what might work for you.
There are a lot of different approaches to the stock market and a lot of different ways to get your feet wet. Short-term trading, long-term investing, or any number of options in between… it’s all good, and it’s all about what works best for you.
Really, it’s mostly a matter of choosing the method that works best with your account size, risk tolerance, and overall goals.
In this post, I’ll educate you on some of the basics of stock market investing. I’ll include some foundational knowledge and an explanation of common modes of investing so that you can better determine which approach is best for you.
Let’s start with the basics.
What Is the Stock Market?
The stock market isn’t a single thing. It’s a series of stock exchanges or marketplaces where people exchange stock shares. These exchanges provide volume and liquidity to the marketplace.
Here are some key exchanges to know…
New York Stock Exchange
The NYSE is a big, famous market in New York where traders are physically on the floor. Not just any company warrants a spot on this exchange. They have to meet certain requirements to keep the market legit. The NYSE mainly has big, blue-chip companies.
Short for National Association of Securities Dealers Automated Quotations, the Nasdaq is an electronic exchange.
Here, market makers (MMs) have an inventory of listed stocks, and they’re ready to buy or sell, creating and moving the market.
Companies have to meet certain standards to be listed here, too. NASDAQ includes mostly small, medium, and large market cap technology companies, but it includes stocks from other sectors too.
Not all stocks meet the requirements of the big exchanges. It might be because they’re new companies or in emerging sectors.
Companies like these might be listed on over the counter (OTC) markets. These stocks are often lower in price … but higher in risk.
OTCBB (Over the Counter Bulletin Board)
On this electronic exchange, you’ll find companies that don’t meet the requirements of bigger exchanges, since there isn’t a minimum asset requirement. However, companies listed here must remain current with SEC filings.
OTC Pink Sheets
Stocks on this exchange aren’t required to submit or register SEC filings, so you can’t necessarily trust their reporting. And their volume and liquidity are often fairly low.
The lack of required reporting makes it super important to do your research when trading stocks on this exchange.
The stock market can seem like it comes with its own language… and it kinda does. Over time, you’ll start to pick up some of the common parlance, but to help get you started, here are some key terms to know.
Bear Market / Bull Market
- A bear market is a downtrending market characterized by pessimism and low confidence.
- A bull market is an uptrending market marked by optimism and high buyer confidence.
Breakout / Breakdown
- A breakout is a stock price that moves out of a support or resistance level with higher volume.
- A breakdown is a stock price that moves below a level of support with higher volume.
This is the sales agent who facilitates your stock buy and sell orders. It could be an individual or a firm. These days, many brokers are online. Some brokers provide financial advising or planning services while others just execute orders.
A catalyst or news catalyst is anything that can affect a stock’s price, like earnings, new products, etc.
A style of trading that involves entering and exiting a position within the same trading day.
Downtrend / Uptrend
- A downtrend refers to a security that’s moving lower in price over time.
- An uptrend refers to a security that’s moving higher in price over time.
Earnings reports are filings that public companies make. They’re issued quarterly and annually. The reports include things like net income, earnings per share, and the company’s forecast for the future. Earnings reports can help you gauge the financial health of a company offering a stock.
The number of shares available to the public for trading.
Fundamental Analysis / Technical Analysis
- Fundamental analysis refers to looking at the company behind the stock. This means looking at earnings reports, news, and other factors related to the company that could affect the stock price.
- Technical analysis refers to looking at a stock’s price action over time. This involves poring over the stock chart to look for trends in the price movement over time.
In the stock market, an index is a hypothetical portfolio of stocks that offers a benchmark for measuring the market. You can’t directly trade an index, but there are certain investment vehicles that follow indexes (that are generally purchased through qualified professionals).
Paper trading is virtual trading. You can execute buy or sell orders with actual tickers, but it’s simulated — you don’t actually risk money. It’s a way to test strategies before you put real money on the line.
In the stock market, a pattern is a repeating price movement that occurs with enough regularity that it’s identifiable.
A low-priced stock — in spite of the name, stocks that trade under $5-10 per share are considered penny stocks. These are the types of stocks I focus on as a trader.
With position trading, you hold positions for longer periods of time, holding out for major moves. This might involve holding a stock for months or longer.
A financial instrument with monetary value that can be traded. Stocks are one type of security.
A method of trading where you attempt to profit from a stock’s price going down. First, you borrow shares from a broker, then you sell them.
Your hope is that the price continues to fall, and you can buy them back at a lower price before giving them back to your broker, keeping the price difference as a profit.
If you are a new trader, I do NOT recommend short selling. If you don’t really know what you are doing, it’s a great way to lose your shirt.
A stock chart offers a picture of a stock’s historical price and trading volume. It’s expressed in either a line, bar, or candlestick chart.
A stock screener is a program that lets you filter for stocks based on criteria that you set. For instance, you might filter for the biggest gainers for the day. StocksToTrade is an example of a stock screener and the one that I use.
A trading method where you hold stocks for a short but unspecified amount of time — anywhere from overnight to a few months, or as long as it takes for the price to “swing” into profitable territory.
Also called a trading diary, this is a log where you record all your trade details, including entry and exit, time of day, notes on why you made the trade, and how it worked out.
This is your game plan for a trade, including your expected entry and exit points, risk/reward, and trading thesis.
The number of shares traded for the day or another time period.
The Bottom Line
Once you have committed these terms into your memory you have taken your first step toward monetary freedom. After all, if you aren’t able to speak the language, how are you going to be able to follow the ins and outs of the market successfully?
Tomorrow I’ll give you the foundational knowledge that you need to get started as a trader.
Until then, Study, up, study hard, and commit yourself to learning.
Editor, Penny Stock Millionaires