Stock Trading Terms & Meaning
Some stock trading terms are widely used by traders because they apply to the most typical trading situations. Others terms are typically only used and understood by small groups of professionals who specialize in a specific area of the market. It pays to understand the key terms because you are likely to encounter them regardless of your trading method.
Other People Are Reading
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Buying
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Many traders base their decisions on stock action. Some buy "breakouts"--stocks that stage strong moves out of a consolidation area. Other traders prefer to "buy on a pullback"--after a rapid advance, a stock may retrace 20 to 40 percent of the gain, which is considered a good place to buy. Some novice traders who are too anxious to buy a stock that is rapidly advancing are said to be "chasing the stock"--or willing to buy at whatever price they can get because they are afraid that the stock will "run away" from them.
Gaps
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When a stock closes at one price and opens the next day at a much higher or lower price, with no trades at prices in between, it is said to "gap up" (or down). Gaps are typically caused by some important company news released outside of market hours. Many traders believe that most gaps "close" or "fade," meaning prices eventually drift toward the pre-gap levels.
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Stops
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A stop loss is an order to sell a stock if its price declines below a certain level. "Stops" are entered below the current stock price. If a stop is executed, the trader is said to be "stopped out."
Selling
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Sellers obviously want the highest price for the stock, which they offer at their asking price, or the "ask." Buyers, on the other hand, want to get the lowest price, so they offer their "bids." The bids and the asks eventually come close enough to each other for them to be matched and executed. But if a stock is dropping fast, the sellers may be happy to sell at any price, so they "hit the bid"--sell the stock at whatever current bids are available from the buyer, essentially selling on buyers' terms.
Falling Knife
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"Trying to catch a falling knife" refers to the danger of trying to buy a falling stock on the premise that it is now a bargain. Since you never know how far a stock will fall, it's better to wait for it to stop falling, or for the falling knife to hit the floor, to avoid being hurt. When a stock is falling, buyers may withdraw their offers to buy, or "yank the bids."
Short Selling
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To "sell a stock short" or to "short a stock" is to borrow from your broker shares of a stock you don't own, sell them and buy them back later at a lower price, profiting from a price decline. Traders who sell shares short are called "shorts." To "cover" or "close out a short position" is to buy back shares sold short. A strong upward move in a heavily shorted stock that forces shorts to cover by buying at whatever price they can get is called a "short squeeze."
Other Frequent Trading Phenomena
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A "shakeout" is a violent intraday drop in the price of an advancing small-cap stock that usually reverses by the end of the day. A sudden and steep price decline forces "weak hands" to sell, "shaking them out" of their holdings. A trader is said to be "whipsawed" when he sells in a shakeout and has to buy back, often at a higher price.
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