Trading is the buying and selling of securities, such as stocks, bonds, and commodities. Learn the nuances of trading in different markets and strategies to profit from.
Day trading refers to buying and selling or selling short and then buying the same security on the same day. Day traders aim to take advantage of intra-day price fluctuations. The most common markets for day traders are stocks, forex, and futures. Day trading is risky, and even experienced traders don’t make consistent profits. There are strict regulations and capital requirements for pattern day traders.
An option is a derivative contract that gives its owner the right to buy or sell securities at an agreed-upon price within a certain time period. Traders buy and sell options based on their expectation of where the price of the underlying security is headed. Options can be used as a hedge and can have potential for big profits. But trading options is risky, in some cases, traders may face unlimited losses.
Margin trading means borrowing funds from your broker to trade securities. For example, on a 50-to-1 margin, for every $1 in your account, you can trade $50. You need a margin account for that in which your broker requires a minimum balance. If the balance drops below that limit, your broker can trigger a margin call which means you either need to deposit more funds or they can sell your holdings.
The NYSE and Nasdaq are open for trading from 9:30 a.m. to 4 p.m., Monday through Friday. However, you could still put in trade orders for stocks between 4 p.m. and 8 p.m. in what is called after-hours trading. It allows traders to respond to news (like earnings) outside of market hours, though lack of liquidity could cause trades to remain unfulfilled. Brokerages may also have restrictions for after-hours trading.
Swing trading means trying to profit from a security’s price fluctuations over a minimum of one day and a maximum of several weeks. It has a longer view than day trading and a shorter view compared to long-term investing. That means it requires some degree of active management of trades, although less than day trading and more than long-term investing.
Scalping is an ultra-short term trading strategy that takes advantage of small price movements. It aims to profit from a large volume of trades instead of a big gain on each trade. Such trades could occur within minutes as scalpers believe it's less risky to make small gains than wait for big price moves. Though disadvantages of scalping include the need for a margin account and high commission cost due to high trade volume.
Paper trading essentially means practicing trades without putting down actual money. You could write your trades on a piece of paper and follow how they perform in the markets. You could also do that with a simulator or demo account offered by your broker. While paper trading helps you hone your skills, it has limitations. It does not account for factors like emotions, transaction costs, and the impact of broader markets.
Dark pools are trading systems that allow participants to place trades without publicizing the size or price of the order to the general market or other participants. They are also called alternative trading systems. Typically used by institutional investors, the benefits of dark pools include the ability to trade a large volume of stocks while minimizing information leakage. However, no disclosure of large volumes traded in dark pools means the supply and demand in open markets may not be accurate.
Arbitrage involves buying and selling two related assets in two different markets in order to leverage the price or rate differential between the markets into risk-free profits.
A price target is an estimated value of a security based on an individual investor’s or professional analyst's assessment. It is a representation of what the investor or analyst believes the security to be worth.
A forward contract is an agreement between two parties to conduct a transaction at a specified rate and on a specified future date. Often, they are used in the commodity or foreign exchange market to let companies hedge against future price changes.
The CBOE Volatility Index (also called the VIX) is an index designed to track the volatility of the United States stock market. Specifically, it aims to track the expected volatility of the S&P 500 through call and put options.
Tracking error is the variation between the performance of a portfolio and the performance of the portfolio’s benchmark over time. It’s calculated as the standard deviation of the difference of a sequence of portfolio returns and index returns.
In financial markets, a tick measures the smallest possible price fluctuation for any particular asset. One tick is worth a specific amount of money, and this amount—the tick size or tick value—varies according to the asset being traded.
Adjusted closing price is the closing price adjusted for corporate actions such as dividend payouts, stock splits, or the issuance of more shares. While the closing price of a stock tells you how much investors were paying for shares at the end of a trading day, the adjusted closing price gives you a more accurate representation of the stock’s value.
A pip, which stands for either "percentage in point" or "price interest point," represents the basic movement a currency pair can make in the market. For most currency pairs—including, for example, the British pound/U.S. dollar (GBP/USD)—a pip is equal to 1/100 of a percentage point, or one basis point, and pips are counted in the fourth place after the decimal in price quotes.
A penny stock, more formally known as a microcap stock, is a share of a company that typically has a market capitalization of less than $300 million. Nanocap stocks, also a type of penny stock, are issued by companies that typically have a market capitalization of less than $50 million. Penny stocks usually trade for less than $5 per share.
A short position is a trading strategy where an investor aims to earn a profit from a falling share price. Investors can borrow shares from a brokerage firm in a margin account and sell them. Then, when the share price drops, they can buy the shares back at the lower price and return them to the broker, earning the difference in share price as profit
A brokerage trade confirmation is a financial document that reports the details of a trade completed through your account. It is issued by your brokerage after each trade; it is separate from your account statements.
The trade date is the specific day on which buying or selling a security—e.g., a stock—occurs. However, the trade date is not necessarily the same day as the settlement date, which is when the trade finalizes.
The 52-week high/low is a stock’s highest price per share and lowest price per share within the past 52 weeks. The high and low numbers are based on the daily closing share price. They do not reflect intraday highs or lows that may be reached.
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