Day Trading Terminology: The Basics

Professional Day Trader #

A professional day trader can informally be considered somebody who day trades for a living, but from a regulatory perspective, it refers to a trader who is licensed with either their Series 6, 7, 63, 65, or 66. Traders who are licensed pay higher fees for market data. That’s why when you open an account you have to tell them if you are a professional (licensed) trader. Day traders are not required to be licensed if they are trading their own money.

Pattern Day Trader Rules #

The Pattern Day Trader (PDT) Rule states that if a trader takes 3 or more day trades in a 5 day period, they are a day trader and they must maintain a minimum account balance of $25,000 USD. Many traders who are unable to maintain that balance will trade at either a Prop Firm (see below), or at Suretrader / Tradezero.

Swing Trading #

Swing Trading, in contrast to Day Trading, requires overnight hold times. Swing traders will hold stocks for at least 1 night, but perhaps many nights. These are very short-term investments.

Stock Market Hours #

The market is open from 9:30am -4pm EST Monday –Friday. There are holidays when the market is closed or closes at 1pm. Pre-market and after-hours trading is available but liquidity is often very low because there aren’t a lot of buyers or sellers trading after hours.

Bull or Bullish #

This term refers to a strong market of stocks moving up. This can even be used to reference a specific position the trader is taking. If they are bullish, they expect the stock to go up.

Bear or Bearish #

This term refers to a weak market. This means traders think the price of stocks or a specific stock will be going down. If they are bearish, they may sell their bullish positions or even take short positions.

Initial Public Offering (IPO) #

When a company does an IPO, they sell a fixed number of shares onto the open market to raise money. This could be, for example, 10 million shares. If those shares are priced at $10/share, they will raise $100 million from the IPO. This money gets invested into the company for future growth (building factories, strategic investments, etc).

Float #

Float refers to the number of outstanding shares available to trade. When the company did the initial IPO, they released shares. That number is typically the float, although there are 3 ways the number of shares can change. The Float is equal to the supply level. Stocks with limited supply and high demand are the ones that move up or down the fastest.

Share Buy Back #

A Share Buy Back program is when a company buys back shares that were sold during the IPO. By doing this they are reducing the number of shares available to trade and everyone holding shares of the company will see their shares increase in value. Share Buy Backs will decrease the float.

Secondary Offering #

A secondary offering is an offering that is given after the Initial Public Offering. Even if a company performs multiple secondary offerings, they are always called secondary (not third, fourth, etc). A secondary offering will raise money for the company by selling more shares. This increases the supply of shares on the market and decreases the value of those shares. This is generally not something long term investors like to see.

Stock Splits #

Stock Split can change the price of a stock. Apple did a 7:1 stock split. The $700 stock multiplied all shares x 7 to reduce the price of the stock to $100. This means if you held 1,000 shares at $700, you now own 7,000 at $100. This increased the float. Some companies will perform a REVERSE stock split. A 10:1 reverse stock split will take a stock trading at $1.00 and turn it into $10.00. If you were previously holding 1,000 shares at $1.00, you would only be holding 100 shares at $10 after the split.

After Hours Trading #

After hours trading is done through electronic communication networks (ECNs) that are programmed to match buyers and sellers automatically and is done outside of normal market hours (930AM -4PM EST)

Day Trade #

When a trader places an opening and closing trade on the same stock, on the same day, they are making a day trade and are subject to special rules.

Beta #

Beta is a numeric value that is used to measure the fluctuation of a stock against changes happening in the stock market.

High Frequency Trading #

High Frequency Trading (HFT) is when a trader or institution utilizes powerful computers to automate trading and execute large orders an very high speeds.

Freeriding #

Freeriding describes an instance where an investor purchases a security and sells it before settling the original purchase.

Lagging Indicator #

A lagging indicator are technical factors known to trail the price action of an underlying security.

Leading Indicator #

Leading Indicator refers to measurable factors of economic performance that shifts ahead of the economic cycle before it begins to follow a specific pattern.

Crossed Market #

A crossed market refers to a temporary situation where bid prices associated with a particular asset or security is higher than the asking price.

Dividend #

A dividend is money paid out to shareholders who hold shares of the company through the ex-dividend date as a way of sharing the company’s success.

Divergence #

Divergence is a trading concept that forms when a stock’s price diverges from a momentum oscillator which typically indicates a reversal.

Earnings Per Share #

Earnings Per Share (EPS) definition is a portion of a company’s profit allocated to a person’s share of the stock and is a major metric for analysts.

Market Cap #

Market Capitalization is a measurement used to classify a company’s size, which can be categorized between small, medium or large cap, and is based on the market value of the total shares outstanding.

NYSE Tick Index #

The NYSE Tick Index is calculated by taking all the stocks on NYSE that have had an uptick minus all the stocks that had a down tick and then the result is displayed on a chart.

Merger #

Merger are deals that unite two separate companies into a single new company. There are a number of different types of mergers.

Penny Stocks #

According to the SEC, penny stocks are considered to be any stock trading below $5 per share and can be a listed security or trade Over The Counter (OTC).

Profit/Loss Ratio #

A profit/loss ratio is a measure of the ability of a particular trading system to generate profit instead of loss and is based on a percentage basis.

Regulation T #

Regulation T is a collection of protocols formulated by the Federal Reserve Board that governs investors margin and cash accounts.

Return on Investment (ROI) #

Return on investment (ROI) refers to a metric that measures profit or loss generated by an investment in relation to the invested funds.

Shares Outstanding #

Shares outstanding refers to the stock of a company that is currently held by all shareholders including restricted shares and institutional shares.

Market Trend #

Market trend represents the general direction in a market or a security over a given period time, which can last from a couple days to many months or years.

Volatility #

Volatility is a measure of the security’s stability and is usually calculated as the standard deviation derived over a given period of time.

Support Level #

A support level is the price level whereby demand of a security is strong enough that it prevents the decline in price past it.

Resistance Level #

A resistance level is the price level at which selling of a security is deemed strong enough to eliminate the increase in price.

Stock #

Stock is a type of asset that gives you ownership in a company, allowing you a claim on the company’s assets and earnings.

Price Target #

A price target is the projected price of a financial instrument as provided by an analyst and is used determining under and overvalued stocks.

Pump and Dump #

Pump and dump is an investment scheme where untrue statements are made public about a stock with the purpose of artificially increasing the stock price.

Recession #

A recession refers to the moment when a country’s economy experiences decline as a result of different factors over a specific period of time.

OTC Market #

The OTC market allows for the trading of assets without the formal structure of an official exchange and is considered a risky area to invest.

Mutual Fund #

A mutual fund an investment vehicle whereby funds are pooled together with the goal of investing into securities like stocks and bonds among others.

Hard To Borrow #

Hard to borrow list refers to an inventory of securities the brokerage firm is unable to provide for short selling and would only be available for buying.

Cryptocurrency #

Cryptocurrency is a digital currency that utilizes cryptography for security and can be sent from one person to another anywhere around the world.

Derivative #

Derivatives are securities with prices that are dependent on, or derived from, one or more separate underlying assets such as options or future contracts.

Equity #

Equity refers to the ownership of assets after liabilities and debts have been settled or it can refer to stock or ownership of shares in a public company.

ETF #

An exchange traded fund, or ETF, is a marketable security tracking bonds, commodities or other baskets of assets, such as an index fund.

Ex-Dividend #

Ex-Dividend is one of the most important dates to pay attention to once a company announces a dividend because that is the date that you have to own the stock before in order to be eligible to receive the dividend.

Blue Chip #

Blue chip stocks are companies that are often worth billions of dollars, pay dividends and have a long history of reliable operations.

Bond #

A bond is a debt investment where investors loan funds to a corporate or government for a particular period of time and at a variable or fixed interest.

Capital Gains #

Capital Gains is a taxable event that occurs when an asset like a stock or option is sold for more than the original purchase price.