Trading Terminology: Understanding Stock Market Lingo

When you hear the word volume do you reach for the remote control rather than the financial pages? Does the word split bring to mind what happened to the couple next door? If so, you had better read on, particularly if you are thinking of acquiring a stock portfolio. The California Society of CPAs offers a basic glossary of stock market-related terms to bring you up to speed.

Ask Basics The price at which an investor will sell a security. The price a buyer is willing to pay for a security is the bid. The difference between the ask and bid price is the spread.

Bull Market A market in which prices are in an upward trend. Bear refers to a market on a downward trend.

Close The period at the end of the trading session. Also used to refer to the last price a stock sells for on a given day. The previous close is the price a stock closed at the previous day.

Commission A fee that covers the broker’s charge for processing a transaction. It is either added to the amount you pay when you buy securities, or deducted from the amount you get when you sell. Online and discount brokers charge lower commissions than traditional brokers, but offer limited investment advice.

Dividend A taxable payment given to shareholders from the company’s current or retained earnings.

High The highest price paid for a security in a certain time period (i.e. a day, week, month, year). For example, the high for the day was $23, but the high for the year was $41. The low represents the lowest price of a security in the given period.

Indexing A passive investment strategy in which a portfolio is designed to mirror the performance of a stock index such as the S&P 500 Stock Index.

Limit Order An order to a broker to buy a certain stock at or below a specified price, or to sell it at or above a specified price. For example, if you want to buy ABC Company stock at no more than $20 per share and it is selling at $25 now, you can place a limit order for $20 per share. Some brokers charge a higher communityission for limit orders than for market orders.

Margin, Buying on A transaction in which an investor borrows to buy additional shares, using the shares themselves as collateral. If the price of these shares drops below a certain level, the investor will get a margin call, meaning that he or she must deposit additional funds into their margin account. CPAs urge investors to use caution when buying on margin.

Market Order An order for immediate execution given to a broker to buy or sell at the best obtainable price.

Market Price The current selling price of a particular stock.

Mutual Fund A collection of securities in a portfolio that is managed by an investment company. The advantages are diversification and professional money management.

Price/Earnings (P/E) Ratio Ratio of market price to a company’s earnings per share.

Short Selling Borrowing a security from a broker and selling it, with the understanding that it later must be bought back, hopefully at a lower price and returned to the broker. The major danger in selling short is that if the price of the stock goes up, you will have to pay more than you sold it for in order to cover your short position.

Split Issuing additional stock to shareholders. The proportionate equity of each shareholder remains the same, but the market price per share drops proportionately. A company may declare a split if it thinks its stock is priced too high to attract investors.

Stop Order An instruction issued to your broker to sell when the price of a stock has gone down to a specific price. This limits your losses should your stocks tumble.

Volume The number of shares traded during a given period. A low volume trading day can adversely affect the price at which stocks are bought and sold.

If you’re thinking about entering the stock market, consult with a CPA. CPAs are expanding their practices to include investment advisory services.