With 2020 the year of quarantine, it seems like everyone has decided to give stock trading a shot. Perhaps you want to join in on the action, but don’t know where to begin. I think that often times it can be intimidating for a woman to dive into learning about trading and finance, if that is not something they studied in school, since when they research or speak with those knowledgable on the subject, they are overwhelmed by complex sounding terms and strategies. Today I want to teach you 11 basic stock trading terms and strategies in a way that avoids unnecessary complication and allows you to gain control and understanding of the financial decisions made that impact your life.
Investing – In general, when people invest, they are betting that the price of an item is going to go up. For example, if the price of a particular purse is now $5,000 but based on trends and news, you think there will be a greater demand and in a year the price will go to $5,500, you can buy the purse now, keep it in its box, resell the purse next year and make $500. This is the basic strategy of investing, however there are many variations and strategies that people can employ to make even higher returns (another word for earnings or profit).
Long – This describes the position someone holds on a stock (a piece of ownership in a company) if they think the price of it is going to rise. If you think the price of the purse is going to go up, and you buy the purse at $5,000, this means you have taken a long position.
Short – A short position is taken when the investor thinks the value of a stock is going to decrease. While it may seem impossible to make money with the price of something decreasing, there is actually a strategy that people engage to profit off of this. Imagine you think that the price of a purse is going to go down, since it was extremely trendy for the time being and styles are beginning to shift. In order to profit off of this speculated decrease in price, you would do the following. First, you would borrow the same purse from a friend and promise to return it in a year. You would then sell it at the current price, of $5,000. A year from now, you buy the same purse at its new, lower retail price, which if you assumed correctly, would be $4,500. You then return this purse to your friend, and make an overall gain of $500.
The one issue with shorting a stock, is that in theory there is no limit to the losses that you may experience, if you do not employ any other strategies to mitigate this. For example, lets say you were wrong in assuming the price would go down, and instead the purse was sold the following year for $10,000. You would still need to buy this to return to your friend, so your loss would be $5,000. A great example of shorting stock can be seen in the movie The Big Short
Bullish – When someone says they are “bullish” on a stock or that we are in a “bull market” this means that they think that the price will keep going up, or that the prices are currently high. I remember this term by imagining a bull charging, gaining momentum. In addition, the bull statue in Wall Street also helps me remember this term, because I correlate stock prices rising to Wall Street investors making money.
Bearish – When someone says they are “bearish” on a stock or that we are in a “bear market” this means that they think that the price will go down, or that current trading prices are declining. I remember this term by thinking of bears during hibernation. They are slowing down go into their caves to sleep. The beginning of this year was a perfect example of a bear market. With the onset of COVID-19, stock prices plummeted. While it may seem counter intuitive, a bear market can be a great opportunity for investors. It allows investors to buy stocks while they are at low prices and resell them later on when the market swings back in the upward direction.
Options – Think of options like coupons that allow you to lock in the price of an item for a set amount of time. You can either lock in the price to buy an item or sell an item, by buying one of these “coupons” for a small fee (called a premium when trading stocks). The great thing about options is that you aren’t forced to use them, so if the retail price of something is more favorable than the price determined with the coupon, you can choose to go with the retail price. The only downside is that if the market (retail) price was more favorable, the price that you paid for the options (coupons) would have been lost since they are of no value longer.
IPO – IPO stands for Initial Public Offering, and is the first time that a stock is available to the public. While IPO’s may be exciting, often times they can be a trap for investors new to trading. When they are originally released, they often experience a large increase in price followed by a plummet in price. The stock price may or may not gradually then grow over time. This year, IPO’s have done particularly well, however if you are interested in buying into an IPO make sure to do thorough research, as most seasoned investors suggest to stay away from the initial “IPO hype.”
Portfolio – A portfolio is the word used to describe all of the investments that a person holds. For shoppers, it would be known as their closet. Portfolios are often discussed in terms of the overall value, or the different assets (another word for investments or items owned) within the portfolio. Speaking in terms of a closet, one might say they have a $1 million dollar closet, or that they have Chanel, Prada, Nike, and Adidas within their closet. Just replace the names of these brands with different stocks, and this is how a trader would describe their portfolio.
Fractional Shares – Fractional shares are pieces of one share of stock. By purchasing fractional shares, investors can buy pieces of top tier stocks that they typically would have cost them hundreds of dollars. Fractional shares are a great opportunity for new investors to invest in premium stocks without breaking the bank.
ETF – ETF stands for Exchange Traded Fund. ETFs are stocks you can buy, however within the ETF is a basket of stocks put together by the fund. Rather than buying an interest (ownership) in only one company, investors buy an interest in a pool of companies.
Bond – Companies and governments issue bonds to investors. When an investor buys a bond they give the value of the bond to the issuer of the bond. The issuer then pays them back a set amount of interest periodically until the bond maturity date. At the bond maturity date the issuer then pays back the initial amount given to them by the investor in exchange for the bond (known as the principal amount). Bonds are a low risk investment since the return is a set amount.
As a woman you should be familiar with these stock trading terms in order to be empowered with understanding of basic business concepts, and gain confidence in the business world around you, whether you are exposed to it from the news, friends, or colleagues. While it may seem intimidating to dip your toe into stock trading or investing, it is truly not as complicated as it sounds. Take some time to invest in yourself and take steps towards financial confidence.
XX Olivia
The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.
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