Finance - All Definitions You Need To Know
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Finance – All Definitions You Need To Know

In this post, we will look at the world of investing and some of the specialized language that is commonly used. You will need to know this language if you work in finance or read the ‘Business News’.

What are ‘Bailouts’?

This is when a company gets into financial trouble and they are rescued (usually by the government). This happened in 2008 when the US, European, and UK banks were ‘bailed out’ by their governments after getting into serious financial trouble.

What is a ‘broker’?

A broker is someone who buys or sells shares for you. Some of them offer advice, while others just do what you tell them to (this is sometimes called ‘execution only’). You can also not use a traditional broker and just buy on an ‘online share dealing account’ instead.

What is a ‘bull market’ or a ‘bear market’?

A ‘bull market’ is when on average all company shares are going up in price. A ‘bear market’ is when on average all shares are going down in price.

What is ‘contrary investing’?

This is when you invest in the opposite direction of everyone else. So if everyone is buying a stock, then you are selling it. This is based on the idea that the ‘crowd’ is often wrong.

What is ‘diversification’?

This is when you buy stocks in lots of different sectors. So, for example, you buy in technology, property, and finance. This means that you have spread your risk around, so if something goes wrong in one sector you will not lose all of your money.

What are ‘dividends’?

This is when a company pays out a percentage of the profits to the shareholders.

What is ‘dollar cost averaging’?

Dollar-cost averaging is when you buy a stock or commodity every month at the same time. You don’t worry about the price, you just buy it. This is because the price is constantly going up and down so if you buy consistently throughout the year you will get an average price in the long term. This is easier than always trying to get the lowest price, as it’s often impossible to guess.

What are the ‘floor’ and ‘ceiling’ of a stock?

When people think that a stock will not go any lower in price, they say that it has reached a ‘floor’ (support). When they don’t think that it will go any higher they say that it has reached a ‘ceiling’ (resistance).

What is ‘Front Running’?

This is a crime in most countries. This is where the broker is asked by a client to buy or sell a huge amount of shares. Because the broker knows the price of the share will be affected by such a big action, they then buy or sell some shares for themselves to profit.

What is the ‘gold/silver ratio’?

This is basically a comparison of the gold and silver price. How many ounces of silver could you buy for the price of an ounce of gold.

What is ‘Insider Trading’?

This is also a crime in most countries. This is where people get information about a share that is not public knowledge and then use that information to profit from it.

What is an ‘IPO’?

An ‘Initial Public Offering’ or as it is commonly known, an ‘IPO’ is when a company’s stock is first sold on the stock market.

What is going ‘long’?

This is when you buy a stock or commodity that you think will go up in value. It is the opposite of being ‘short’.

What is a stock ‘portfolio’?

A portfolio is the collection of all of your different stocks. So if you have the technology and mining stocks, then your portfolio contains technology and mining stocks.

What is a ‘position’?

If you buy some shares in a certain company, sector, or commodity then you have a ‘position’ in that company, etc. For example, if you buy some gold then you have taken a ‘position’ in the gold market.

What is ‘short selling’?

This is a quite complicated technique. However, what it basically means is that you profit when a stock goes down in price. It is usually called ‘shorting’ a stock.

Note: There is an illegal version of this called ‘naked short selling’. This is when you sell shares that you don’t actually have.

What is a ‘Stop’ and a ‘Limit’?

Stop Loss Order.

A ‘stop-loss order’ is when you buy a stock and then set a limit on how much of a loss you are willing to make. So for example, you buy a stock for $5 and think it will go up in price. Unfortunately, it starts going down in price. If you put a ‘stop’ in at $4 then you will automatically sell the stock at that price. If you have no ‘stop’ then you could keep losing money if the stock continues to go down. This is sometimes called a stop order.

Limit Order.

A ‘limit order’ has two uses.

One) it can be used to set the maximum price you want to pay for a stock.

Two) It can also be used to set how much you want to sell the stock for. So for example, if you buy a stock for $5 and set the ‘limit’ for $7 then the stock will automatically be sold at that price.

What is ‘trending’?

When a stock is ‘trending’ it is moving steadily in the same direction. Some investors ‘follow trends’ which means that they don’t look at the details of the company, they just look at whether the stock is going up or down over a certain period of time and then invest in that direction.

What is a ‘troy ounce’?

Precious metals such as gold and silver are often sold in ‘troy ounces (oz)’. This is 31.1 grams rather than the ‘standard oz’ which is only 28.3 grams.

What is ‘upside/downside’?

This usually means that the stock has the possibility of going much higher or much lower. For some reason, you think that the stock is under or overvalued and could go a lot further in a certain direction.

What is ‘value investing’?

This is when you buy a stock because you have had a very good look at the company and feel that the stock is undervalued. You feel that the fundamentals are good and that over time the price of the stock will rise.

What is an ‘audit’?

This is when the tax office or another outside agency comes into your company to check that your financial records are correct.

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