A Few Simple Trading Terms For The New Trader

"Money is always an indicator of a job well done."
Roustam Tariko
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If you're a brand new trader, the stock market can seem like a daunting place. With all of the investment jargon and unfamiliar concepts, it's easy to feel overwhelmed right off the bat.


But don't let that stop you.


Once you understand some of the basics, trading can be an immensely rewarding venture. In this blog post, I'll break down a few key terms to get you started on your journey toward understanding the stock market.


Stock

A stock is a share of ownership in a company. When you buy a stock, you become a part-owner of the company and have the right to receive dividends (if any) and vote on important matters [depending on the class of stock you purchase]. The price of a stock depends on the supply and demand of the market, as well as the company's performance and prospects.


For example, here is a chart of Apple's (AAPL) stock price over the span of a year. You can see how the price fluctuated. That fluctuation was, ostensibly, based on various factors, such as earnings reports, product launches, news events, etc.




In reality, the price of any freely traded stock at any given moment is a reflection of just 1 thing. The collective perceptions of the stock and its future prospects of all traders who interact with the stock. More about that in a later post.

Exchange

An exchange is a marketplace where stocks and other securities are traded. There are many exchanges around the world, such as the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), and the Tokyo Stock Exchange (TSE). Each exchange has its own rules and regulations for listing and trading stocks.


For example, here is a list of some of the major exchanges and their market capitalizations (the total value of all the stocks listed/traded on them) as of April 2023.



Exchange

Market Capitalization [USD]

New York Stock Exchange [NYSE]

$24.5 trillion

London Stock Exchange [LSE]$4.6 trillion

Toronto Stock Exchange [TSE]

$3.891 trillion





Index

An index is a collection of stocks that represents a segment or a sector of the market. For example, the S&P 500 index consists of 500 large-cap U.S. companies, while the Dow Jones Industrial Average (DJIA) consists of 30 blue-chip U.S. companies. An index can be used as a benchmark to measure the performance of the market or a portfolio of stocks.


For example, here is a chart of the S&P 500 index over the past 10 years. You can see how it suggests/reflects the overall trend, direction, and turns of the U.S. stock market.



Bull Market

A bull market is a period of rising stock prices, usually lasting several months or years. A bull market is characterized by optimism, confidence, and positive expectations among traders.


Here's an interesting tidbit. The term "bull" comes from the way a bull attacks its opponent by thrusting its horns upward.



Bear Market

A bear market is a period of generally falling stock prices, usually lasting several months or years. A bear market is characterized by pessimism, fear, and negative expectations among traders. The term "bear" comes from the way a bear attacks its opponent by swiping its paws downward.



For example, here is a chart of the S&P 500 index from 2007 to 2009. You can see how it entered a bear market in late 2007 due to the global financial crisis and reached its bottom in early 2009.




Volatility

A measure of how much the price of a stock fluctuates over time. I also use the phrase jumpy... the "jumpier" a stock is, the more volatile it is. High volatility means that the price changes rapidly and unpredictably, while low volatility means that the price changes slowly and steadily. Volatility can be influenced by various factors, such as news events, earnings reports, economic data, sentiment, etc.


For example, here is a chart of Tesla's (TSLA) stock price over the past year. You can see how it experienced high volatility [jumpiness] due to various factors, such as product announcements, legal issues, tweets from Elon Musk, etc.




Dividend

A dividend is a portion of a company's earnings that is distributed to its shareholders on a regular basis. Dividends are usually paid in cash or in additional shares of stock. Dividends can indicate a company's financial health and stability and provide a steady income stream for holders of the stock.


Earnings

Earnings are the profits that a company makes in a given period, usually reported at least quarterly. Earnings are calculated by subtracting expenses from revenues. Earnings are one of the main drivers of perceptions of a stock, as they reflect a company's performance and growth potential.


P/E Ratio

The price-to-earnings (P/E) ratio is a valuation metric that compares the current price of a stock to its earnings per share (EPS). The P/E ratio indicates how much traders are willing to pay for each dollar of earnings. A high P/E ratio means that traders expect high future growth, while a low P/E ratio means that traders expect low future growth or that the stock is undervalued.


For example, here is a table of some of the popular stocks and their P/E ratios as of April 2023.


Stock

P/E Ratio

AAPL

27.82

AMZN

-387.873

FB

23.2

GOOG

22.84

MSFT

31.5233

NFLX

34.3317

TSLA

47.8658



Stock Market Indicators

Stock market indicators are tools or metrics that help traders analyze the price movements and trends of stocks and the overall market. Stock market indicators can be classified into two main types: fundamental and technical indicators.

Fundamental indicators are based on economic and financial data that reflect the performance and value of a company or a sector. Fundamental indicators can help evaluate the earnings, growth, profitability, valuation, and competitive advantage of a company or a sector. Some examples of fundamental indicators are earnings per share (EPS), price-to-earnings (P/E) ratio [seen above], dividend yield, return on equity (ROE), and market capitalization [also seen above in the exchange section].


Technical indicators are based on mathematical calculations and statistical formulas that use historical price and volume data to generate signals and patterns. Technical indicators can help identify trends, momentum, volatility, support and resistance levels, entry and exit points, and potential reversals. Most important, used properly, indicators do a great job of providing the single most important component for simple traders... context.  Some examples of technical indicators are moving averages, relative strength index (RSI), moving average convergence divergence (MACD), Bollinger bands, volume, and chart patterns.

Stock market indicators can provide useful information and insights for investors and traders, but they are neither infallible nor conclusive. They should be used in conjunction with other factors, such as risk management and trading psychology. Stock market indicators can also vary in their reliability and accuracy depending on the time frame, market conditions, and data quality. Therefore, traders should always control their exposure to and risk from false signals by managing their risk through position sizing.. 


Moving Average

A moving average is an indicator that shows the average price of a stock over a certain period of time. For example, a 50-day moving average shows the average price of the last 50 days. A moving average can help smooth out price fluctuations and identify trends and support and resistance levels.


For example, here is a chart of Netflix's (NFLX) stock price over the past year with a 50-day exponential moving average. You can see how the moving average acts as a dynamic support and resistance level, as well as a trend indicator.



In general, the longer the time period, the stronger the levels suggested by the moving average. That said, longer time periods also lead to less responsive tools.

Relative Strength Index (RSI)

The relative strength index (RSI) is an indicator that measures the momentum and strength of a stock's price movements. The RSI ranges from 0 to 100, with values above 70 indicating overbought conditions and values below 30 indicating oversold conditions. The RSI can help identify potential reversals and entry and exit points... especially when used to provide context.


For example, here is a chart of Amazon's (AMZN) weekly stock price over 2 years with a 14-day RSI. You can see how the RSI signals overbought and oversold conditions, as well as divergence and convergence patterns.




MACD

The moving average convergence divergence (MACD) is an indicator that shows the relationship between two moving averages of different lengths. The MACD consists of three components: the MACD line, which is the difference between a 12-day and a 26-day exponential moving average; the signal line, which is a 9-day exponential moving average of the MACD line; and the histogram, which is the difference between the MACD line and the signal line. The MACD can help identify trends and momentum changes, as well as potential buy and sell signals.


For example, here is a chart of Microsoft's (MSFT) stock price over the past year with a MACD indicator. You can see how the MACD line crosses above and below the signal line, indicating bullish and bearish crossovers. You can also see how the histogram changes from positive to negative, indicating momentum shifts.



I personally tend to prefer the MACD with just the histogram when I use it.

MACD w/Histogram


Bollinger Bands

Bollinger bands are an indicator that consists of three lines: a simple moving average (usually 20 days) in the middle, and an upper and a lower band that are two standard deviations away from the middle band. Bollinger bands can help measure the volatility and range of a stock's price movements, as well as identify potential breakouts and reversals.


For example, here is a chart of Meta's (META) stock price over the past year with Bollinger bands. You can see how the bands widen and narrow, indicating high and low volatility periods. You can also see how the price touches or crosses the bands, indicating possible breakouts or reversals.



Volume

Volume is an indicator that shows the number of shares that are traded in a given period of time. Volume can indicate the level of interest and activity in a stock, as well as confirm price trends and signals. High volume means that many investors are buying or selling the stock, while low volume means that few investors are trading the stock.


For example, here is a chart of Google's (GOOG) 



Conclusion

These are some of the most common stock market terms and indicators that you should know. Of course, there are many more terms and indicators that you can [and will] learn as you deepen your knowledge and skills in the world of trading. The key is to understand how they work and how to use them effectively in your analysis and decision-making.


Remember, no single term or indicator can guarantee success in the stock market. You need to combine them with other factors, such as fundamental analysis, risk management, and trading psychology.


Be profitable.



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