How To Day Trade: Terms To Start Your Research

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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