Some Terms You Should Know and Understand as a New Stock Investor

Do you want to invest in stocks but don’t know where to start? Many terms need to be understood before investing. This article will help break down some of the most important ones so that you can invest with confidence. For instance, if someone is talking about GME short interest, you should know that short interest is the amount of shares that were sold short but have not yet been closed out or covered. There are so many more terms to learn and remember.

Investing in stocks successfully requires learning more about how the financial markets work and taking time to educate yourself so that your confidence increases over time. Learning about investing can be exciting if done correctly because every step brings new knowledge. Investing can be so easy now with the many apps that are there for investors.

Here are some terms you should get to know if you want to invest.

What are stocks – A share of ownership in a company or corporation. When an investor buys a stock, they essentially buy part of the company and become an owner.

The stock market –  The secondary marketplace where stocks are bought and sold. Companies go through an IPO (initial public offering) when they first offer their shares to the general public, which means you can buy them on a stock exchange like NASDAQ or NYSE. The price of each share will fluctuate depending on how investors feel about that company’s prospects.

Asset allocation – how you diversify your portfolio; it’s a mix of stocks, bonds, and cash used in different proportions depending on an investor’s goals.

Efficient market hypothesis – the idea that all information about a security is already built into its price. This means it is impossible to find mispriced securities because there are no undervalued or overvalued ones.

Bonds – an investment in which the investor loans money to an entity, such as a corporation or government. The borrower pays interest and at some point repays the loan principal.

Market capitalization – the market value of a company. It is calculated by multiplying outstanding shares by their stock price.

The currency pair – represents two different currencies; for example, USDCAD means one unit of U.S. currency exchanged for Canadian dollars.

Liquidity ratio – Liquidity ratios will let you know of a company’s ability to pay the debt that it owes and the margin of safety. It is done by figuring out the calculation of metrics. This would include the quick ratio, current ratio, and operating cash flow ratio.

Mutual fund – a collection of securities such as stocks and bonds or other assets bought by a group of investors. Professional managers make the investment decisions while individual shareholders own fractions of each security inside the fund.

ETF – stands for exchange-traded fund. ETF’s work like mutual funds but trade on exchanges throughout the day with fluctuating prices instead of at net asset value at the end of each day. ETF’s tend to have lower fees than mutual funds.

Index fund – a type of mutual fund or ETF that is passively managed and tracks a market index. These funds are cheap to invest in but often have lower returns than actively managed funds.

Dollar-cost averaging – when you invest the same amount of money at regular intervals. This is a great strategy for investing in stocks because it can help you ride out market highs and lows.

Block trade – an order that is so large in size or unusual in nature that trading will need to take place away from public exchanges. A broker will work with both sides of the trade to execute it.

Call option – This is where you have a contract between a seller and a buyer that you will purchase a stock at an established price until a stated expiration date.

The stock market can seem complex, but understanding some terms will help make investing less intimidating for beginners. The more educated you are as an investor, the more confident you will be in making decisions.

Investing in stocks successfully requires learning more about how the financial markets work and taking time to educate yourself so that your confidence increases over time. Learning about investing can be exciting if done correctly because every step brings new knowledge!