Have you ever listened to a podcast or read an article about investing and wonder why we use the words we do? Don’t worry, you’re not alone. I find myself Googling words or phrases just to keep up with the stock market language. Sometimes it feels like investing is a different language. But don’t worry, there’s no shame in not knowing what certain words or phrases mean. Especially if you’re new!
Why do a lot of the words and phrases we hear seem like they’re from a different era? Because they are! The U.S. stock markets date back to the nineteenth century. It’s not surprising that some of the terminologies that we still use today seem out of touch. So if you’re new to investing, or if you just want a refresher, I’m about to explain to you some of the more unique terms used on the stock markets.
We begin with some of the more commonly used stock market language that’s used to describe sentiment. And the overall behavior of the markets. These are words you’ll likely hear on a daily basis in the investing world. So it’s probably a good idea to get to know them.
Bulls and Bears: The two most commonly used words to describe market sentiment. A bull is a trader who believes the market will rise. A bear is a trader who believes the market will decline.
But where did these terms come from? It has long been believed that bulls and bears were used because of the way they attack a foe. A bull thrusts its horns upwards, while a bear swings its paws downward.
We have used the same terms for hundreds of years. And still, label any change in stock patterns as bullish or bearish. With just one word, we can understand exactly how an asset or market has been trading.
Blue-Chip Stock: Blue-chip is used as a way of describing high-priced stocks of well-established, foundational companies. The Dow Jones Industrial Average is often called the Blue-chip stock index because of the high number of elite and high-performance stocks.
But where does the term derive from? It is a gambling adage with a tip of the cap to poker chips which traditionally come in red, white, and blue. As you can imagine, the blue chips are the most valuable, which is why we use blue-chip stock to describe stocks with high market caps and prices.
Initial Public Offering: Often referred to as IPOs, this is stock market language that’s used when a company begins to trade on the public markets. When a stock goes public, it provides an initial public offering to investors to buy shares as they hit the market. IPOs have generally been like the shiny new toy for investors. Research has shown that the stock price will usually rise significantly following an IPO. This is because investors are enamored with the new stock and buy up shares at what is believed to be a low price. There are other ways companies go public including direct listings and SPAC mergers.
Short-Selling: Here is some stock market language that’s been a hot topic this year. Short selling has become a trading strategy with a negative connotation. A short seller isn’t cheering for a company to go bankrupt, but a short position does profit when the stock price falls. Short selling is usually seen as a bearish outlook on the stock. Most short sellers are actually institutional investors, like the hedge funds that were squeezed by Redditors in stocks like GameStop (NYSE: GME) and AMC (NYSE: AMC).
There are countless stock market language terms and phrases that we use when we’re actually trading as well. Before you head to the stock market to execute some trades, check out these widely used terms.
Bid and Ask: If you trade stocks online, then you’ve definitely seen the bid and ask prices mentioned as you execute your order. The bid price is the maximum price you’re willing to pay for a stock.
The ask price is the minimum price that the seller is willing to sell the stock at. The difference between the bid and ask for any asset is called the spread.
Learning how to read the bid and ask for a stock is crucial, and can save you from overpaying or underselling your shares.
Stock Split: Another popular phrase right now, stock splits occur when the company decides to split the number of shares outstanding. Most of the time, stock splits are creating more shares. But there are reverse splits as well.
Reverse splits consolidate shares and provide less to investors at a higher price. No matter how you slice it, stock splits don’t change the value of a stock.
Even though the price may go up or down, it’s relative to the number of shares. If we think of the outstanding shares as a pizza, a stock split is just cutting each slice in half or in thirds. The same amount of pizza, more slices to go around.
Stock Market Language Terms
Pump and Dump: One of the most malicious actions on the stock market. A pump and dump scheme is when a trader, usually a public figure or someone with a lot of power, pumps up a certain asset so the price rises. As the price hits a top, the pumper will sell those shares just as others are buying in. This creates a tidy profit for the pumper, although those who follow them will most likely end up losing. Pump and dump schemes are often seen with penny stocks and cryptocurrencies. Remember this stock market language!
Strike Price: For options traders, the strike price refers to the price that the contract is bought or sold at. If you’re buying a call option, the strike price is the price you think the stock will be at or higher than in the future. The strike price is generally only used for trading derivative like options. But a popular options contract strike price can be indicative of where investors believe the price will move to by a certain date.
What Are the Terms Used in Stock Market?
Options Expiry or OPEX: The jury is still out on how volatile OPEX weeks actually are. OPEX week is the third week in every month and is the week where options contracts expire. Forward-looking options chains usually only offer OPEX weeks to start as expiry dates for the contract. It’s widely believed that market makers try to pin stock prices above and below a popular call option strike price.
Taking it one step further, quadruple witching or quad-witch dates are the days of the year when stock index futures, stock index options, stock options, and single stock futures all expire on the same day. Quad-witching days happen four times per year, once in each quarter.
Market Cap: Hey, I’ll admit it. When I first started to get interested in investing, I had to look up what a market cap was. The market cap is the perceived value of the company in terms of shares outstanding.
The formula for calculating the market cap of a company is to multiple the number of shares outstanding by the price for the stock. Since it does not take into account things like assets or debt, the market cap is a crude calculation of what the public market believes the company is worth.
Moving Averages: You are definitely going to see a lot written about moving averages of the stock. The moving average is a calculation of the stock price over a set period of time. Trading above or below the moving averages can indicate whether sentiment for the stock is bullish or bearish. Common moving averages to use are 21-day, 50-day, and 200-day. You will hear about these a lot in technical analysis, as stock prices generally follow these moving averages as strong support and resistance levels.
The Bread and Butter of Trading
Support and Resistance: Another technical analysis term, the support and resistance levels are clearly seen on a stock’s chart. Support is the lower end or bottom of the stock’s price levels. Resistance is the higher end or top of the stock’s price levels. Support is generally good and means that the stock generally won’t go lower. Until of course, it meets a resistance level, which stops a stock from continuing higher.
As you can probably tell, the stock market is rife with unique terms and industry specific phrases. Learning these terms can go a long way in helping you understand what people are talking about! These words can also help in general market analysis and individual stock analysis as well. Before you dive head first into trading stocks, make sure you familiarize yourself and learn the language of the stock market!