Candlestick Trading Blog

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Today we will take a refresher course in common stock trading terms used by investors. Please read the stock trading terminology below and see if you learn something new!

Buy and Hold – This is an investment strategy where stocks are bought and then held for a long period of time, regardless of the market's fluctuations. This is based on the assumption that over time stock prices and the market will rise regardless of any short-term fluctuations due to inflation or other factors.

Equity – This term is the ownership interest in a corporation in the form of preferred stocks or common stocks. Stock trading terms such as this are also referred to as "net worth," "book value," or "shareholder's equity." It is also the total assets minus total liabilities and also as the value of securities in a brokerage account minus the margin requirements.

Growth Strategy – This investing strategy is based on investing in companies that are growing faster than other companies in the same industry. The goal is the generate capital gains instead of dividends.

Limit Order – This order is the maximum price that you are willing to pay for a particular stock. This order is typically used to avoid entering a position if the stock gaps up or down (gap analysis) at the opening and the investor wants to avoid entering at an extreme price. This order is often combined with other types of orders. These include stock trading terms such as "buy" or "sell on stop" orders.

Overbought/Oversold Indicator – This indicator is a technical analysis tool that tries to define when stock prices have moved too far and too fast in either direction. To calculate this technical indicator you must know the moving average and the difference between the number of advancing and declining issues over a specific period of time.

Risk Management – This is the process of analyzing exposure to risk and determining how to handle the exposure to risk. There are many other stock trading terms associated with risk management such as risk premium and risk reward ratios.

Short Selling – This strategy is the borrowing of a security or commodity futures contract from a broker and then selling it. It however must later be bought back and returned to the broker. This is one of the stock trading terms that is a technique used by investors who are trying to profit from the falling price of a stock. The profit using this technique is the difference between the price at which the stock was sold and the cost to buy it back. The investor's broker borrows the shares from a lender with the promise to return them later. In doing this strategy the investor sells the borrowed shares at the current market price. If the price of the shares drop then the investor "covers the short position" buy buying back those shares and the broker returns them to the lender.

Volatility – This is the last of the stock trading terms discussed today and it is a very important one. Stock price volatility is the rate in which the price of a security moves up or down. It is calculated by finding the annualize standard deviation of the daily change in price. If the stock price almost never moves then it has low volatility, but if it moves up and down rapidly over short time period, then it has high volatility.