Trading terminology you need to know as a beginner
The trading world is one known for its jargon — surprisingly if someone says that they’re ‘bullish’ on a stock, they’re not referring to the animal. 🐂 If you’re a developer interested in trading, but have little to no experience in the latter, you’ve come to the right place. In this article, we’re going to explore some beginner trading terms to make sure you’re up to speed and can navigate the API with ease.
At lemon.markets, we’re fostering a community of developers looking to build their own brokerage experience, whether that be an automated trading strategy or a financial web application. The lemon.markets API provides the infrastructure to make your brokerage product come to fruition. But, before building, you might want a general overview of what to expect when you begin trading.
Setting the Scene: the ‘what’
The obvious place to start — what is trading? We consider trading to be active participation in financial markets by buying and/or selling instruments (not this kind: 🎻). You can trade in stocks (also known as ‘equity’ or ‘shares’), which represent fractional ownership of a corporation — in other words, if you own 100 shares of Apple, you have the right to 0.000000006%¹ of Apple’s assets and profits. You can expect the value of your stocks (and therefore their price) to oscillate due to different influence factors. But, you can also trade in:
- bonds, which are ‘loans’ taken out by companies or governments with the promise to pay them back to you within a given time frame;
- exchange traded funds (ETF), which can be traded just like a stock, but track an index, industry sectors or markets;
and other financial instruments beyond the scope of this article.
Platforms: the ‘where’ and ‘who’
The (stock) market is made up of various exchanges, which are venues where buyers and sellers of instruments come together. You might’ve heard of the New York Stock Exchange (NYSE) or NASDAQ. Sometimes you might not even be trading on a centralised exchange, but over-the-counter (OTC). This means that you’re trading directly with the seller without the supervision of an exchange.
As an individual, you can’t directly trade on an exchange, you need an intermediary to place your trades for you: a broker. Your bank might offer investing opportunities and act as your broker, or you might need to find yourself a broker. Perhaps you prefer a platform with a mobile app, like Robinhood or Trade Republic, or maybe you’re a developer looking to place trades through code, then the lemon.markets API is the perfect tool for you. No matter where you trade, you can expect some kind of transaction/commission fee. Make sure you do your research!
Participation: the ‘why’
Why would you want to trade? The stock market can be characterised as a ‘bear’ or ‘bull’ market — the former means that prices are, in general, falling whereas the latter signals the opposite: growth. Most of the time, a bull market lasts longer than a bear market, which is desirable for investors looking to grow their wealth through participation in the stock market. As such, many traders choose to trade according to (one or more) strategies, which are sets of rules that govern when to open and close trades. The trades that you make and the financial instruments you hold make up your investment portfolio. Usually, the recommendation is to diversify your portfolio as to minimise your risk exposure (i.e. the extent to which you’re vulnerable to price changes). The amount of money that you make with your trades is your portfolio yield. But how to make money on the stock market?
Execution: the ‘how’
You’ll need to place orders, which are requests to your broker to buy or sell a particular financial instrument on your behalf. There’s different kinds of orders you can place, see this article for a basic run-down. If you buy at a low price and sell at a higher price, you’ve made a profit. Sounds pretty easy, right? Do note that an exchange usually lists two prices, or quotes, the bid and ask quote. The bid quote is the highest price at which a buyer is willing to buy a number of shares of a stock at a point in time. The ask quote is the lowest price for which a seller will sell a stock. As an individual, you will usually buy stocks at the ask price and sell them at the bid price. The bid price is lower than the ask price and the difference between the two is called the spread.
You’ll need some intuition regarding price movements to ‘time’ this properly and obtain a profit, or perhaps you’ll opt for a buy-and-hold strategy (i.e. only place buy orders). This strategy utilises the idea that, in the long run, stock prices go up. With a properly diversified portfolio, a buy-and-hold strategy very often results in long-term yields. If you’d like some more inspiration on other trading strategies, check out our article on beginner-friendly trading strategies.
If you weren’t familiar with the trading world before, now you’re set to get started. Are there any terms that are still unfamiliar? Or concepts you’d like clarified? Let us know in the comments.
If you’re interested in automated trading, sign up to lemon.markets. We’d love to have you on board!
Joanne from lemon.markets 🍋
¹ As of 12 November 2021, Apple has 16,406M total shares outstanding.
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