Investing jargon explained | Stock market terms you need to know to profit from the market

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To be profitable in the stock market, we need to understand these terms, so we can do our own research diligently and won't be manipulated by the media. If you are a new investor and wanted to profitable in the stock market, please watch this video until the end as this is a very important video for you. Please take out your pen and make a note if necessary. Hopefully you will then be able to discuss the stock market with others easily.

Just a quick recap:

A share is the single smallest denomination of a company's stock. Shareholder is the person who owns a share of the company. Stock exchange is where the company list their share to trade publicly. IPO is the process by which a private company can go public by selling its stocks to general public to raise money to expand their business.

Let us understand the terms to describe the market condition. Probably these 2 terms are the one that you will be encountering very frequently.

The first term is bull market. Bull market refers to a market condition when prices continue to rise, or expected to rise.

By contrast, bear market refers to a market condition when prices continue to decline, or expected to decline. Technically, bear market happens when the price has fallen 20% or more from recent highs.

One of the commonly held belief about why “Bull” and “Bear” are used to describe the market condition is from the way the animals attack their opponents. A bull thrusts its horns up to the air, while a bear swipes its paws downward.

We can also use these 2 terms to describe our point of view. If I am bullish on this stock, means I have confident it will be going up. Bearish view means I expect the stock will be going down.

This is an example for a chart with an up-trend pattern. We can see that the overall movement of the price is going upward. We can also observe higher high and higher low along the trend.

By contrast, down-trend is a trend where the overall movement of the price is going downward. You can observe lower high and lower low along the trend.

Consolidation means the stock is neither move upward or downward in a clear direction. Instead, it remains range-bound. We will talk more about this in our technical analysis video.

Let us further look into the terms used to describe different phases of bull or bear markets.

This is a typical bull market- with an uptrend pattern. During the bull-market, the price is going higher.

This brings a new term: Rally. Bull market rally is a period of continuous increase in the stock price.

However, it does not move in a straight line, right? Do you notice there are periods where a short decline happened? This part is called “retracement”. In short, retracement is a temporary price reversal that takes place within a larger trend.

If the retracement is within 10-20% from the high, this is called “market correction”. If we refer to the Nasdaq in Feb and Mar this year (2021), the retracement was around 11%. This retracement is called “correction”.

If the stock price experience a 2-digit percentage drop within a short period of time, we can call this a “Market crash!” Some infamous examples of market crashes are below: the dotcom bubble burst in 2001, the 2008 financial crisis, and the most recent, COVID-19 pandemic in year 2020.

Now, the stock market has retraced 20% from its recent high. Bear market is coming. In a bear market with a down-trend, here are the terms we need to know.

When the stock price goes down, it does not move in a straight line too. Most of the time, downtrends are interrupted by brief periods of recovery, or small rallies, when prices temporarily rise. This part is also called “retracement” in a down-trend. However, there are also several specific terms used to describe them: Sucker rally, bear market rally or dead cat bounce. If you heard these terms in future, it generally signifies the up-ward movement is temporary, and people are expecting the price will continue to drop.

Reversal in stock market is a change in the major direction or trend of the stock price. But sometimes, a reversal is a false signal. A false reversal signals are called bull trap or bear trap depending on the trend.

Now, let us look at the terms generally used to describe stocks.

Stock index, is a basket of secruities that measures the price performance. Each country has its own major index. In the US, three major indices are:

Indices or benchmark are used to track the market performance. However, we could not buy or sell indices or benchmark. Instead, we can invest or trade the Exchange traded funds, (ETF) that tracks an index. Before we talk about ETF, let us first understand the terms used in investing and trading.

Investment is purchasing assets that have the potential to produce income or profit. In short, we invest in the asset that we expect the value will appreciate and grow our wealth gradually. In general, investment takes over an extended period like years or even decades through buying and holding.

By contrast, trading involves frequent transactions in a much shorter time-frame, it could be a quarter of year, a month, a week, a day, or even within a few minutes.

Buy or Long. When we buy a stock or long a stock, it signifies that we are buying a share and hoping for the price to go up. In this case, as a buyer, we “buy” a share to “open” the position. We then can sell the share to another buyer. In this case, we are the “seller”, we “sell” the share to “close” the position. In this case, if the selling price is higher than the buying price, the difference is called “profit”.

The increase in a stock value is called “capital gain”. If we do not sell it, it is called unrealized profit, or paper gain. If we sell the asset and pocket the money, it is called “realized profit”.

If the selling price is lower than the buying price, then the difference is called “loss”. Similarly, if we have not sold the asset at loss, it is considered as unrealized loss, or paper loss. If we sold the asset, then it is called “realized loss”.

Please watch my video at around 10 minutes mark for the example for a much better illustration.

Short selling is where we sell the shares to someone else, without holding the shares at the firstplace. So, we need to borrow the stock from someone else, for example, a broker. In this case, we are the sellers who sell the share to “open” a position. As we borrow the stock from the broker, we are obligated to return the share. Thus, we need to “buy” the share back and return it. So how do we profit from it?

Same, please refer to the video for a better illustration:
This is a general scheme to show how a trader can profit from the short-selling. As long as we buy back the shares at the lower price and return it to the lender, we are profiting!

Example 2: (Please refer to the video for a better illustration:)

A and B are good friends. A is going overseas for a year, so he asked B to take care of his brand new iphone 11. In this scenario, A is the owner while B is not. This means B is obligated to return A the iphone when A is back.

While A is away, B sell this iphone 11 at 1000 dollars. One year later, B is reminded to return A the iphone 11. At that time iphone 12 has already launched, so the market price for iphone 11 is therefore only around 600 dollars. So B purchases a new iphone 11 at 600 dollars and return it to A. A still gets his iphone 11 without knowing that B the short seller has profited 400 dollars in this process!

Please take note that the maximum we can earn as a short seller is when the stock price drops to 0, as it requires us 0 dollars to buy it back and return to the broker. But, the risk is unlimited, because in principle, the stock price can go infinitely high.

Here is the summary table to differentiate long buyer and short seller:

Now, let us talk about the terms related to the stock or company that we can buy on the stock exchange.

Let us first start with ETF or exchange traded funds.

Please refer to this table on the ETF that tracks the benchmarks:

Stock classfication:I

Next, let us look at the terms related to stock classification.

Next we touch on Market Capitalization or Market Cap. According to Investopedia, Market capitalization refers to the total dollar market value of a company's outstanding shares of stock. To calculate the market cap, we multiply the total number of outstanding shares of a company with its current traded price. For example, a company has one million shares trading at 50 dollars each, its market cap is 1 million x $50 = 50 million dollars. In general, a company with a market cap of > 10 billion dollars is considered large cap. Mid cap company has a market cap of 2-10 billion dollars. Small cap company has a market cap of 300 million to 2 billion dollars. Company with lesser than 300 million is considered micro-cap company.

Generally, market capitalization corresponds to a company's stage in its business development. Large cap companies are generally mature, well-known companies within established industries. They are very stable, and in general, is the least susceptible to economic downturn. Mid-cap companies are in the stage of experiencing rapid growth. Midcaps may offer more growth potential than large caps. Small caps are young companies and the most susceptible to the economic downturn.

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Next may be a term that you kept hearing, it is the “Blue Chip”. In general, blue chip stock refers to the well-recognized company with good reputation. Typically, they are large, well-established and financially sound companies that have operated for many years. They are often the market leaders in their respective industries. However, not all blue-chips are worth to invest. We still need to combine fundamental and technical analysis to invest in a good blue chip that is not in the sunset industry.

FAANG or FAAMG.

Other than classifying the stocks with their market cap, there are also several ways to classify the stocks. One of the ways is to classify them via different sectors, for example technology, finance, consumer staples, energy and etc.

Hopefully my post manages to give you some insight on the general terms used in investing. See you in my next post!