Financial Markets 101
20 concepts you need to know about the market before trading or investing:
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Investing vs. Trading
Investing and trading are two very different methods of attempting to profit in the financial markets. Both investors and traders seek profits through market participation. In general, investors seek larger returns over an extended period through buying and holding. Traders, by contrast, take advantage of both rising and falling markets to enter and exit positions over a shorter time-frame, taking smaller, more frequent profits.
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Swing Trading
Swing trading is a style of trading that attempts to capture short- to medium-term gains in a stock or ETF (or any financial instrument) over a period of a few days to several weeks. Swing trading is the process of identifying where an asset's price is likely to move next, entering a position, and then capturing a chunk of the profit if that move materializes. Swing traders can take profits utilizing an established risk/reward ratio based on a stop loss and profit target, or they can take profits or losses based on a technical indicator or price action movements.
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Brokerage Account
A brokerage account is an investment account that allows you to buy and sell a variety of investments, such as stocks, bonds, mutual funds, and ETFs. Whether you're setting aside money for the future or saving up for a big purchase, you can use your funds whenever and however you want. Although the brokerage executes the orders, the assets belong to the investors, who typically must claim as taxable income any capital gains incurred from the account. Online brokerage platforms have given people greater access to the financial markets. Online brokerages are free or charge lower fees and suit investors who wish to conduct their own trades. Examples of Online brokerages are Robinhood and TD Ameritrade in the US, eToro in the European Union, and TD Direct Invest in Canada.
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Pattern Day Trader (PDT) Rule
Day Trading is buying and selling a stock, ETF or other security on the same day. Small accounts are limited to 3 day trades in the span of five trading days. FINRA has established a PDT rule that requires that all PDTs have a minimum of $25,000 in their brokerage accounts in a combination of cash and certain securities as a way of reducing risk. If the cash equity in the account drops below this $25,000 threshold, the PDT can no longer complete any day trades until the account is back up above that point.
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Stock
A stock is a form of security that indicates the holder has proportionate ownership in the issuing corporation. Corporations issue (sell) stock to raise funds to operate their businesses. Stocks are bought and sold predominantly on stock exchanges, though there can be private sales as well. Historically, stocks have outperformed most other investments over the long run.
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Stock Market Index
An index is a method to track the performance of a group of assets in a standardized way. These could be a broad-based index that captures the entire market, such as the Standard & Poor's 500 Index or Dow Jones Industrial Average (DJIA), or more specialized such as indexes that track a particular industry or segment.
The S&P 500 is a stock market index that measures the stock performance of 500 large companies listed on stock exchanges in the United States. (About 25% of S&P 500 are large Tech companies)
The Dow Jones Industrial Average is a price-weighted index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange and the NASDAQ. (Dow accounts for more of the cyclical sectors of the economy like Energy, Financials and Transport)
The Nasdaq is a global electronic marketplace for buying and selling securities. The term, “Nasdaq” is also used to refer to the Nasdaq Composite, an index of more than 3,000 stocks listed on the Nasdaq exchange that includes the world’s foremost technology and biotech giants. (About 50% of the Nasdaq are large Tech companies)
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Ticker Symbol
A ticker symbol or stock symbol is an abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. A stock symbol may consist of letters, numbers or a combination of both.
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Catalyst
A catalyst in equity markets is an event or other news that propels the price of a security dramatically up or down.Catalysts can be anything that leads to a drastic change in a stock's current price trend. The most common catalysts come in the form of new, often unexpected, information that causes the market to reevaluate a company's business prospects. Some investors look for catalysts to create short-term opportunities for profit.
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Fundamental Analysis
Fundamental analysis attempts to measure a security's intrinsic value by examining related economic and financial factors including the balance sheet, strategic initiatives, microeconomic indicators, and consumer behavior.
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Technical Analysis
Technical analysis is a trading discipline employed to evaluate investments and identify trading opportunities in price trends and patterns seen on charts. Technical analysts believe past trading activity and price changes of a security can be valuable indicators of the security's future price movements. Technical analysis may be contrasted with fundamental analysis, which focuses on a company's financials rather than historical price patterns or stock trends.
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Momentum
Momentum investing is a trading strategy in which investors buy securities that are rising and sell them when they look to have peaked. The goal is to work with volatility by finding buying opportunities in short-term uptrends and then sell when the securities start to lose momentum.Risks of momentum trading include moving into a position too early, closing out too late, and getting distracted and missing key trends and technical deviations.
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ETFs and Leveraged ETFS
An exchange traded fund (ETF) is a basket of securities that trade on an exchange, just like a stock. ETF share prices fluctuate all day as the ETF is bought and sold. ETFs can contain all types of investments including stocks, commodities, or bonds. A leveraged exchange-traded fund (ETF) uses financial derivatives and debt to amplify the returns of an underlying index. While a traditional ETF typically tracks the securities in its underlying index on a one-to-one basis, a leveraged ETF may aim for a 2:1 or 3:1 ratio. Leverage is a double-edged sword meaning it can lead to significant gains, but can also lead to significant losses.
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Options
Options are financial instruments that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date. Call options allow the holder to buy the asset at a stated price within a specific timeframe. Put options allow the holder to sell the asset at a stated price within a specific timeframe. Each option contract will have a specific expiration date by which the holder must exercise their option. The stated price on an option is known as the strike price. Traders use Call options and put options to monetize price movements in stocks and ETFs because of how sensitive they are. Although there are many opportunities to profit with options, investors should carefully weigh the risks. We can teach you Options via our ZOOM sessions.
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Main Types of Orders
A market order is an order to buy or sell a security immediately. This type of order guarantees that the order will be executed, but does not guarantee the execution price. A market order generally will execute at or near the current bid (for a sell order) or ask (for a buy order) price. However, it is important for investors to remember that the last-traded price is not necessarily the price at which a market order will be executed.
A limit order is an order to buy or sell a security at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. Example: An investor wants to purchase shares of ABC stock for no more than $10. The investor could submit a limit order for this amount and this order will only execute if the price of ABC stock is $10 or lower.
A stop order, also referred to as a stop-loss order is an order to sell a stock once the price of the stock reaches the specified price, known as the stop price. When the stop price is reached, a stop order becomes a market order.
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Pullback
A pullback is a pause or moderate drop in a stock or commodities pricing chart from recent peaks that occur within a continuing uptrend. A pullback is very similar to retracement or consolidation, and the terms are sometimes used interchangeably. The term pullback is usually applied to pricing drops that are relatively short in duration - for example, a few consecutive sessions - before the uptrend resumes. Pullbacks can provide an entry point for traders looking to enter a position when other technical indicators remain bullish.
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Sell-Off
A sell-off occurs when a large volume of securities are sold in a short period of time. Due to the law of supply and demand, this causes a corresponding decline in the price of the security. There are several potential causes of a sell-off. In the stock market, common causes include the release of disappointing earnings reports, fears of increased competition, or the threat of technological disruption. Broader causes, such as macroeconomic concerns or natural disasters, can also trigger sell-offs. Although sell-offs are dramatic to behold, they are generally short-lived declines which stabilize or reverse themselves relatively quickly.
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Volatility
In the securities markets, volatility is often associated with big swings in either direction. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a "volatile" market. Volatile assets are often considered riskier than less volatile assets because the price is expected to be less predictable.
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Market Risk
Market risk, or systematic risk, affects the performance of the entire market simultaneously. Because it affects the whole market, it is difficult to hedge. Market risk may involve changes to interest rates, exchange rates, geopolitical events, or recessions.
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Bull Market
A bull market is a market that is on the rise and where the economy is sound; Although some investors can be "bearish," the majority of investors are typically "bullish." The stock market, as a whole, has tended to post positive returns over long time horizons.
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Bear Market
A bear market exists in an economy that is receding, where most stocks are declining in value.A bear market can be more dangerous to invest in, as many equities lose value and prices become volatile. Since it is hard to time a market bottom, investors may withdraw their money from a bear market and sit on cash until the trend reverses, further sending prices lower.