Trading terminology you need to know as an intermediate Trader
A while ago, we published a blog post on trading terminology for beginners. Since we can safely assume that all of you have made decent progress since then, it is time to level up our game. In this blog post, we discuss and explain some intermediate trading terminology. So, if the term “Wall Street” does not make you think of a long wall and if you don’t think of cheap fruits when you hear the words “market opening”, then you are in the right place.
There are about a million and one trading terms to learn and there is no point in trying to create a complete list. But what you can do is start somewhere and try to structure your list as well as possible.
Company side of things
Let’s start with a few terms related to companies/organisations/corporations. In the end, many people’s motivation to start trading is to participate in the success of their favourite companies.
Initial Public Offering (IPO)
An IPO is probably one of the most exciting steps for a still relatively young company. In general, you can think of an IPO as the transition from a private to a public company, meaning that a company that previously only had a small number of shareholders (e.g. founders, early employees, business angels, VCs,..) now takes to the stock exchange to allow the public to become a shareholder as well. IPOs can be a chance for companies to raise additional capital and is usually initiated when the company has reached a certain growth/size and valuation (let’s use our beloved 🦄 as a benchmark). Some of the most anticipated IPOs of 2021 were those of 🇧🇷 Neobank Nubank or dating app Bumble 🐝 . Can you guess the company that globally raised the most money with their IPO?*
Let’s imagine a company successfully mastered its IPO, things are starting to become stable, the company is now regularly listed on a stock exchange and can be traded by the public. In order to reward loyal shareholders, a company could decide to give back a percentage of its earnings: that’s what is called a dividend. Depending on what the company decides, dividends can be paid out in different time intervals, e.g. monthly, quarterly, annually, […]. In general, dividends are a science in themselves and we don’t want to stretch it too long. But an important concept of dividends is the ex-date, which determines who receives a dividend and who doesn’t. So, if you bought shares before the ex-date, you are eligible for a dividend-payout. If you bought after the ex-date: well, better luck next time. You can imagine that many people base their trading decisions based on the ex-date. I lovingly call them dividend tourists 😃. But, in the end it makes total sense to monitor a company’s dividend dates closely. A great tool to do so is DivvyDiary, go check them out.
As soon as a company is listed on the stock exchange, you as a potential shareholder are obviously interested in finding out what a company is actually worth. A simple way to do so is to look at its market capitalisation. Behind the “market cap” stands a simple formula:
1Market Capitalisation = Stock price * # of outstanding shares
So, if a company had 10,000,000 outstanding shares, traded at €100 per share, then the market capitalisation would be €1,000,000,000. This may be very useful information for you as a trader, as you can generally assume that in many a higher market capitalisation means a bigger and more stable organization behind it. It will therefore probably will not come as a surprise to you when you find out what the cmpany with the highest global market cap is.
In the case of stock splits, the term is to be taken literally. A company can decide to increase the number of its outstanding shares while at the same time maintaining its overall dollar value. This is called a stock split. A typical scenario is when the share price of a company has increased significantly. Let’s say a company was traded at €100 a share a few months ago and is now traded at €1,000 per share. This may lead to a decreased incentive on the public side to become a shareholder. Therefore, a company could, for example, make a stock split at a 10:1 ratio, meaning that all shareholders who owned one share for €1,000 now own 10 shares for €100 each. The overall value for existing shareholders is the same, but the now lower price for one share may attract new shareholders. Tesla 🚗 is a famous recent example who announced a 5:1 stock split in August 2021. Quite the opposite is the holding company Berkshire Hathaway whose chairman is no other than investing legend Warren Buffet. As Berkshire Hathaway never performed a stock split, the stock price currently sits at ~€415,000 . Tempted to buy? 😏
Trader side of things
After talking companies for so long, let’s focus on you again: the traders. There are endless things you can do, strategies you can pursue, indicators you can analyse or techniques you can apply. Let’s dive into some of them:
Fundamental vs. Technical Analysis
Among experienced traders, this can very easily become an endless discussion, possibly ending in physical damage: what is the best way to analyse whether a share/company is worth buying? On a broader scale, there are two approaches that you can pursue (yes, yes, very simplified, I know):
- Fundamental Analysis assumes that a company’s value can be determined by looking at company-specific financial and general economic factors. This can be, for example, the balance sheet, a cash flow statement or (if you go into a more qualitative direction) the company’s business model, management team or general brand perception of the public.
- Technical Analysis on the other hand assumes that everything you need to know is already included in the company’s share price. Therefore, it would make more sense to analyse the share price development along with different technical criteria. This, however, opens a whole new ♾️ field, with many different approaches you can pursue. How about a mean reversion strategy?
If you want to dive deeper into specific trading strategies and base your buy/sell decisions on specific signals, you can use different indicators to do so. In many cases, an indicator is based on a specific technical analysis (although there are also some that have an economic nature) and will give you an indication (😏) on whether to buy or sell a specific instrument. While there are many, many different indicators you can use, some of the more well-known ones are the Weighted Moving Average (WMA) or the Relative-Strength-Index (RSI). If you are developing in Python, we collected a number of interesting packages you can use to easily calculate different indicators on a given share price dataset. Find the blog post here.
Cost averaging is one of the simplest, yet most frequently applied trading strategies and the idea behind it is easily explained: the risk of a stock purchase is diversified by investing small chunks of money at fixed intervals, therefore averaging out potential share price movements. You can think of it as a typical savings plan: each month you invest a specific amount of money into a stock or ETF. Sometimes prices are up, sometimes they are down, but in the long term the savings plan can participate in the long-term growth of the stock or ETF. Naturally, given its simplicity, many traders choose this concept for investing. In fact, we at lemon.markets created a cost-averaging strategy that you can very easily implement with the lemon.markets API. If you are interested, check it out here.
Market side of things
We talked about the company side and we talked about the trader side. What stands between them? Correct: the market 🎉
To finish up, we want to discuss some trading terminology that is specifically related to the market or stock exchange you are trading your instruments on.
If you ever stumbled across a bid and an ask price for an instrument and calculated the spread to inform your trading decision, chances are high that you were in touch with a market maker, even if you didn’t know it. In general, market makers are individuals or companies that bring liquidity into a market by offering quotes for tradable instruments. Market makers thereby offer a specific service to a market (the risk of holding and subsequently buying/selling securities to provide liquidity to the market).
Blue chip stocks vs. penny stocks
Of course, as with pretty much everything in the world, there are also large differences between the types of stocks you can buy. The probably highest discrepancy can be observed between blue chip stocks and penny stocks:
- Blue chip stocks in general are prestigious companies with a highly positive public reputation and an often year-, if not decade-long track record. Think Apple, Adidas, Microsoft and so on. If we think back to the market capitalisation described earlier, then these are mostly (if not exclusively) companies with a billion dollar and higher market cap. Many people stick to blue chip stocks for their investments, as they hope to protect themselves against market turbulences, which sometimes works, but not in all cases.
- Penny stocks on the other hand are companies that trade for vanishingly low prices (hence → penny) and are in most cases not listed on larger stock exchanges, but instead can be bought and sold via so-called over-the-counter (OTC) transactions. For the companies behind them, this may represent an option for additional funding. While in theory penny stocks may provide huge upside potential, given their low trading price, reality shows that there is actually quite a bit of risk associated with them. Remember the first hour of Wolf of Wall Street with Leo on the phone with wealthy people? That’s penny stocks 😉
Finally, let’s take a look at some market movement. The term rally may already suggest some kind of fast movement, and that’s pretty much exactly what it is. In general, when we observe a rally, then we observe very drastic upside movement for a security’s price in a comparatively small amount of time. In general, a rally develops/starts when there is an unusual demand for a specific security, eventually leading to increasing share prices. This unusual demand can be triggered by different things, e.g. breaking news about a company (remember when the BioNTech share price significantly increased, after news broke about the COVID-19 vaccine the company produces? This was a great example of a rally). What usually happens after a rally is a pullback (whereby “after” can mean a couple of days or sometimes a few months). This is a phase, where the upwards trend pauses or slowly reverses itself, and the stock price movement “normalises” again.
Alright, even though the list is nowhere near complete, we shall leave it at that for now. Was there anything missing for you? Do you want to add on to some terms? Or do you already have some ideas for the next content piece in this series, where we will tackle advanced trading terminology? Let us know. Until then, don’t forget to sign up for lemon.markets 🍋
*the largest IPO in history (as of February 2022) was Saudi Aramco with 25.6 billion USD dollar raised: Source.
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