Trading & Investing Glossary
Over 96 trading and investing terms explained in plain language with real-world examples. Bookmark this page for quick reference as you develop your trading strategy.
A
Alpha
Excess return of an investment relative to its benchmark index. Positive alpha indicates outperformance.
Example: A fund with 12% return when the S&P 500 returned 10% has an alpha of +2%.
Ask Price
The lowest price a seller is willing to accept for a security. Also called the "offer price".
Example: If the ask is $50.25, you can buy the stock for at least $50.25 per share.
Asset Allocation
Strategy of dividing investments among different asset categories (stocks, bonds, cash) to balance risk and reward.
Example: A 60/40 portfolio allocates 60% to stocks and 40% to bonds.
Average True Range (ATR)
Volatility indicator showing the average price movement range over a period. Higher ATR means higher volatility.
Example: A stock with ATR of $5 typically moves $5 per day; useful for setting stop losses.
B
Backtest
Testing a trading strategy using historical data to evaluate how it would have performed.
Example: Backtesting a moving average crossover on 10 years of data shows a 15% annual return.
Bear Market
Market condition where prices fall 20% or more from recent highs, typically accompanied by widespread pessimism.
Example: The 2008 financial crisis bear market saw the S&P 500 drop 57% from peak to trough.
Benchmark
Standard or index used to measure the performance of an investment or portfolio.
Example: The S&P 500 is a common benchmark for U.S. large-cap stock funds.
Beta
Measure of volatility relative to the market. Beta >1 means more volatile than market, <1 means less volatile.
Example: A stock with beta of 1.5 tends to move 50% more than the market in either direction.
Bid Price
The highest price a buyer is willing to pay for a security.
Example: If the bid is $50.20, you can sell the stock for at least $50.20 per share.
Blue Chip
Stock of a large, well-established, financially sound company with a history of reliable performance.
Example: Apple, Microsoft, and Johnson & Johnson are considered blue chip stocks.
Bollinger Bands
Volatility indicator with bands above and below a moving average. Price touching outer bands suggests overbought/oversold.
Example: When price hits the lower Bollinger Band, it may signal an oversold condition.
Breakout
When price moves above resistance or below support with increased volume, potentially starting a new trend.
Example: A stock breaking above $50 resistance with high volume may signal a bullish breakout.
Bull Market
Market condition where prices rise 20% or more from recent lows, typically with investor optimism.
Example: The 2009-2020 bull market saw the S&P 500 gain over 400%.
C
Call Option
Contract giving the buyer the right (not obligation) to buy a stock at a specific price by a certain date.
Example: Buying a $100 call option profits if the stock rises above $100 before expiration.
Candlestick
Chart type showing open, high, low, and close prices for a time period. Body color indicates up/down.
Example: A green candle with a long body shows strong buying pressure during that period.
Capital Gains
Profit from selling an asset for more than the purchase price.
Example: Buying at $50 and selling at $70 generates $20 in capital gains per share.
Correction
Market decline of 10-20% from recent highs. Normal part of market cycles.
Example: A correction from $400 to $340 represents a 15% pullback.
Correlation
Measure of how two assets move together. +1 is perfect correlation, -1 is perfect inverse correlation.
Example: Gold and the dollar often have negative correlation; when dollar falls, gold rises.
D
Day Trading
Buying and selling securities within the same trading day. No positions held overnight.
Example: A day trader buys 100 shares at 10 AM and sells them at 2 PM for a quick profit.
Dividend
Portion of company earnings paid to shareholders, usually quarterly.
Example: A $2 annual dividend on a $100 stock yields a 2% dividend yield.
Dividend Yield
Annual dividend per share divided by stock price. Measures income return of an investment.
Example: A stock at $50 paying $2/year has a 4% dividend yield.
Diversification
Spreading investments across different assets, sectors, or geographies to reduce risk.
Example: Owning stocks, bonds, real estate, and commodities diversifies a portfolio.
Doji
Candlestick pattern where open and close prices are nearly equal, indicating indecision.
Example: A doji at a key level may signal a potential trend reversal.
Dollar-Cost Averaging
Investing fixed amounts regularly regardless of price, reducing timing risk.
Example: Investing $500/month in an index fund automatically buys more shares when prices are low.
Drawdown
Peak-to-trough decline in portfolio value. Measures downside risk.
Example: A portfolio dropping from $100K to $70K has a 30% drawdown.
E
Earnings Per Share (EPS)
Company's net income divided by number of shares. Key profitability metric.
Example: $10M profit with 1M shares = $10 EPS.
Exchange-Traded Fund (ETF)
Investment fund traded on exchanges like a stock. Holds baskets of assets.
Example: SPY ETF tracks the S&P 500 and trades throughout the day like a stock.
Ex-Dividend Date
First day a stock trades without the dividend. Must own before this date to receive dividend.
Example: Buying on or after the ex-dividend date means you don't get the upcoming dividend.
Expense Ratio
Annual fee charged by a fund, expressed as percentage of assets. Lower is better.
Example: A 0.05% expense ratio costs $5 per year on a $10,000 investment.
Exponential Moving Average (EMA)
Moving average that gives more weight to recent prices. More responsive than simple moving average.
Example: The 12-day EMA reacts faster to price changes than the 12-day SMA.
F
FOMO (Fear of Missing Out)
Emotional response driving investors to buy assets that are rapidly rising, often at poor entry points.
Example: Buying a stock at all-time highs because everyone else is, ignoring valuation.
Forward Test
Testing a strategy with real or simulated trades in current market conditions (not historical data).
Example: After backtesting, paper trade the strategy for 3 months as a forward test.
Fundamental Analysis
Evaluating securities by examining financial statements, management, competitive advantages, and economic factors.
Example: Analyzing P/E ratio, debt levels, and revenue growth to determine if a stock is undervalued.
Futures Contract
Agreement to buy or sell an asset at a predetermined price on a future date. Highly leveraged.
Example: An oil futures contract obligates delivery of 1,000 barrels at $70/barrel in 3 months.
G
Gap
When a stock opens significantly higher or lower than its previous close, creating a gap on the chart.
Example: Earnings beats expectations, stock gaps up from $50 to $55 at market open.
Golden Cross
Bullish signal when a short-term moving average crosses above a long-term moving average.
Example: The 50-day MA crossing above the 200-day MA signals potential uptrend.
Growth Stock
Stock expected to grow earnings faster than the market average. Often has high P/E and reinvests profits.
Example: Tech companies like Tesla and Amazon are considered growth stocks.
H
Head and Shoulders
Chart pattern signaling potential trend reversal, consisting of three peaks with the middle peak highest.
Example: After an uptrend, a head-and-shoulders pattern suggests the uptrend may reverse to downtrend.
Hedge
Investment made to reduce risk of adverse price movement in another investment.
Example: Buying put options to protect against stock portfolio decline.
I
Index Fund
Fund designed to track a specific market index like the S&P 500. Passive management, low fees.
Example: A total market index fund holds all stocks in the market weighted by market cap.
Indicator
Mathematical calculation based on price, volume, or open interest used to forecast price direction.
Example: RSI, MACD, and moving averages are popular technical indicators.
IPO (Initial Public Offering)
First sale of a company's stock to the public. Company transitions from private to public.
Example: Airbnb's 2020 IPO allowed public investors to buy shares for the first time.
K
Kelly Criterion
Formula for optimal position sizing based on win rate and risk/reward ratio. Maximizes long-term growth.
Example: With 60% win rate and 2:1 reward/risk, Kelly suggests risking 20% of capital per trade.
L
Large Cap
Company with market capitalization over $10 billion. Generally more stable than small caps.
Example: Apple, Microsoft, and Amazon are large-cap stocks.
Leverage
Using borrowed money to increase position size. Amplifies both gains and losses.
Example: With 2:1 leverage, a 10% gain becomes 20%, but a 10% loss becomes 20%.
Limit Order
Order to buy or sell at a specific price or better. Not guaranteed to execute.
Example: A buy limit order at $50 will only execute at $50 or lower.
Liquidity
How quickly an asset can be bought or sold without affecting its price. High volume = high liquidity.
Example: Apple stock is highly liquid; you can trade millions of shares without moving the price much.
Long Position
Owning an asset with expectation it will rise in value. "Buying long" or "going long".
Example: Buying 100 shares of Tesla is taking a long position.
M
MACD
Moving Average Convergence Divergence. Momentum indicator showing relationship between two moving averages.
Example: MACD crossing above signal line is a bullish signal.
Margin
Borrowing money from a broker to buy securities. Allows leverage but increases risk.
Example: With 50% margin, you can buy $10,000 of stock with $5,000 of your own money.
Margin Call
Broker demand for additional funds when account equity falls below minimum maintenance requirement.
Example: If leveraged positions lose value, you may get a margin call requiring $5,000 deposit.
Market Cap
Total market value of a company's outstanding shares. Share price × shares outstanding.
Example: $100/share × 1 billion shares = $100 billion market cap.
Market Maker
Firm or individual that quotes both buy and sell prices, facilitating liquidity in the market.
Example: Citadel Securities acts as a market maker, profiting from the bid-ask spread.
Market Order
Order to buy or sell immediately at current market price. Guaranteed execution but not price.
Example: A market buy order for 100 shares executes instantly at the current ask price.
Max Drawdown
Largest peak-to-trough decline in portfolio value over a period. Key risk metric.
Example: A strategy with 35% max drawdown means it dropped 35% from its highest point.
Momentum
Rate of price change. Stocks with strong upward momentum tend to continue rising.
Example: A stock up 50% in 3 months has strong positive momentum.
Moving Average
Average price over a specific number of periods. Smooths price data to identify trends.
Example: The 50-day moving average is the average closing price over the last 50 days.
O
Options
Contracts giving the right (not obligation) to buy or sell an asset at a specific price by a certain date.
Example: Call options profit from price increases, put options from price decreases.
Overbought
Condition where an asset has risen too far, too fast and may be due for a pullback.
Example: RSI above 70 often indicates an overbought condition.
Oversold
Condition where an asset has fallen too far, too fast and may be due for a bounce.
Example: RSI below 30 often indicates an oversold condition.
P
P/E Ratio
Price-to-Earnings ratio. Stock price divided by earnings per share. Valuation metric.
Example: A stock at $100 with $5 EPS has a P/E of 20.
Paper Trading
Simulated trading with fake money to test strategies without risking real capital.
Example: Practice day trading with a $100K paper account before using real money.
Pattern Day Trader
Trader who executes 4+ day trades in 5 business days. Required to maintain $25K minimum in margin accounts.
Example: Making 5 day trades in a week triggers pattern day trader status.
Pivot Point
Technical indicator used to determine support and resistance levels based on previous period's high, low, close.
Example: Price bouncing off the pivot point level may signal support.
Portfolio
Collection of investments held by an individual or institution.
Example: A diversified portfolio might include stocks, bonds, real estate, and commodities.
Position Sizing
Determining how much capital to allocate to a single trade. Critical for risk management.
Example: Risking 1% of $100K account = $1,000 max loss per trade.
Put Option
Contract giving the buyer the right (not obligation) to sell a stock at a specific price by a certain date.
Example: Buying a $100 put option profits if the stock falls below $100 before expiration.
R
Rally
Sustained period of rising prices after a decline.
Example: After a 10% correction, the market staged a 5-day rally recovering half the losses.
Range
Market condition where price moves between defined support and resistance levels without trending.
Example: A stock trading between $45-$50 for months is in a range.
Rebalancing
Adjusting portfolio back to target allocations by selling winners and buying losers.
Example: If stocks grew to 70% of portfolio from target 60%, sell stocks and buy bonds to rebalance.
Relative Strength Index (RSI)
Momentum oscillator measuring speed and magnitude of price changes. Ranges 0-100.
Example: RSI above 70 suggests overbought, below 30 suggests oversold.
Resistance
Price level where selling pressure historically prevents further price increases.
Example: A stock repeatedly failing to break above $100 has resistance at $100.
Return on Investment (ROI)
Profit or loss from an investment expressed as a percentage of the initial investment.
Example: Buying at $50 and selling at $75 yields a 50% ROI.
Reversal
Change in trend direction from bullish to bearish or vice versa.
Example: After months of decline, strong buying volume may signal a bullish reversal.
Risk-Reward Ratio
Ratio of potential loss to potential profit on a trade.
Example: Risking $100 to make $300 is a 1:3 risk-reward ratio.
Risk Management
Strategies to limit potential losses, including position sizing, stop losses, and diversification.
Example: Never risking more than 2% per trade is a common risk management rule.
S
Scalping
Trading strategy making many small profits from minor price changes, often holding for seconds or minutes.
Example: A scalper buys at $50.10 and sells at $50.15, repeating this 100 times per day.
Sharpe Ratio
Measure of risk-adjusted return. (Return - Risk-Free Rate) / Standard Deviation. Higher is better.
Example: A Sharpe ratio of 2.0 means excellent risk-adjusted returns.
Short Position
Borrowing and selling an asset with expectation to buy it back cheaper. Profits from price declines.
Example: Shorting 100 shares at $50 and buying back at $40 yields $10 profit per share.
Short Squeeze
Rapid price increase forcing short sellers to buy back shares to cut losses, fueling further gains.
Example: GameStop 2021 short squeeze saw price rocket from $20 to $480 in weeks.
Simple Moving Average (SMA)
Average price over a period where all prices have equal weight.
Example: The 20-day SMA is the average closing price over the last 20 days.
Slippage
Difference between expected trade price and actual execution price, often due to low liquidity or volatility.
Example: You expect to buy at $50 but fill at $50.15 due to fast market movement.
Spread
Difference between bid and ask prices. Tighter spreads indicate more liquid markets.
Example: Bid $50.00, Ask $50.05 = $0.05 spread.
Stop Loss
Order to sell a security when it reaches a certain price, limiting potential losses.
Example: Buying at $50 with a stop loss at $48 limits max loss to $2 per share.
Strike Price
Price at which an option can be exercised. Also called "exercise price".
Example: A $100 call option gives the right to buy the stock at $100.
Support
Price level where buying pressure historically prevents further price decreases.
Example: A stock repeatedly bouncing at $90 has support at $90.
Swing Trading
Holding positions for several days to weeks to profit from expected price swings.
Example: Buying on Monday and selling on Friday based on weekly price patterns.
T
Technical Analysis
Analyzing securities using chart patterns, indicators, and price/volume data to forecast future movements.
Example: Using RSI, MACD, and support/resistance to time entry and exit points.
Trailing Stop
Stop loss that adjusts automatically as price moves in your favor, locking in profits.
Example: A 10% trailing stop on a $50 stock rises to $54 if price hits $60.
Trend
General direction of price movement over time (uptrend, downtrend, or sideways).
Example: A series of higher highs and higher lows indicates an uptrend.
V
Value Stock
Stock trading below intrinsic value based on fundamentals. Often has low P/E and pays dividends.
Example: Warren Buffett focuses on value stocks like Coca-Cola and Bank of America.
Volatility
Degree of price variation over time. Higher volatility means larger price swings.
Example: A stock moving ±5% daily is more volatile than one moving ±1% daily.
Volume
Number of shares or contracts traded during a period. Higher volume indicates more interest.
Example: A breakout with 10x average volume is more significant than low-volume breakouts.
W
Wash Sale
Selling a security at a loss and buying it back within 30 days. IRS disallows the tax deduction.
Example: Selling Tesla at a loss on Dec 20 and buying it back Jan 5 triggers the wash sale rule.
Whipsaw
When price quickly moves in one direction then reverses, triggering stop losses.
Example: A false breakout that triggers your buy, then immediately reverses and stops you out.
Y
Yield
Income return on an investment, typically expressed as annual percentage.
Example: A bond paying $50/year on $1,000 principal has a 5% yield.
Ready to improve your trading?
Check out our interactive trading calculators and investment guides.
Explore Trading Tools