How to day trade: terms to start your research
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A brief look at the terminology commonly used by stock market
day traders.
The investment firm commercials are frequently run on financial
and news channels, and the life of a day-trader appears to be an
attractive one. You've made up your mind to give it a try and
commit yourself to learning all that you must in order to be
successful. A great place to start is to become familiar with
the most commonly used terms you will encounter on a daily,
perhaps hourly, basis.
Since traders use hundreds of market-specific terms and phrases,
with more being frequently introduced, we will cover the more
basic and broadly used. First, we will define 'the market'. When
this term is used, it is a generic reference to the exchanges
where stocks and bonds are traded, such as the New York Stock
Exchange, American Stock Exchange, and the NASDAQ, much like any
other market.
As you begin looking at specific stocks to purchase, you will
become acquainted with price/earnings ratios, commonly referred
to as the P/E. This simple equation compares the price of the
stock with the company's earnings per share. This term describes
a ratio you will surely make frequent use of as a stock trader.
You settle on a few stocks that look attractive to you. If you
are looking at the stock's symbol in the newspaper, there will
be listed the bid price and the ask price. There are typically a
few pennies separating the two numbers, which is referred to as
the spread. The ask price is what a trader will sell his stock
for and the bid price is what a trader will be willing to
purchase a stock for.
When you have decided to purchase a specific stock, you will
start by placing an order. There are several types of orders,
including a market order, a limit order, and a stop order. A
market order is made when you wish to purchase a stock at the
price at which it is currently trading, as quickly as it can be
executed. A limit order is made when you want to buy or sell a
stock at a specific price. For example, if you want to buy
Wally's Widgets at ten dollars per share even though it is
trading at twelve dollars per share, you can put in a buy limit
order at ten, which will be executed only when the stock falls
to ten dollars per share or below. Conversely, if you own
Wally's Widgets stock, which is trading at ten dollars per share
and you want to sell it, but not for less than twelve dollars
per share, you can put in a sell limit. The limit order will
only be executed if the stock rises to twelve dollars or more.
Limit orders typically have a slightly higher commission fee
attached.
We've discussed just a few of the terms you will encounter on a
daily, if not more frequent, basis as a trader. The stock market
is continually changing, offering new products and new systems
within which to trade. It is worth the effort to keep abreast of
these changes and the new terminology associated with them.
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