For the rookie investor, there may be terms which are used widely in the stock market which are unfamiliar. Here is a list of ten commonly used terms in the stock market and what they mean.
1.Dead cat bounce
This is commonly used slang in the financial markets. It occurs when the there is a short-term rally in a stock price which had previously suffered large falls. The stock price jumps higher for a brief moment, only to fall further again. The dead cat bounce can mislead traders into thinking the stock price has bottomed but it is a continuation of a stock price reversal. That is, the cat is not bouncing off the floor because it is alive.
This term means the market is trading on exuberance and there is a pervasive opinion that this cannot continue much longer. Hence investors believe the share market is too expensive and over valued and there may be a drop in share prices in the imminent future.
3.Catching a falling knife
This common jargon is used to mean when a price of a stock falls, that is can fall further. So the term “don’t catch a falling knife” means the share price may drop further. Trying to catch a knife that is falling is, of course, a dangerous thing to do and could lead to some bloodshed. Therefore, wait for the stock price to bottom or you could incur further losses.
This term means panic in the market which causes market wide selling. It is a downwards momentum in a stock price. It can occur when there is a drop in share price and maybe due to weak economic indicators investors think it will drop further so there are high volumes of selling. Capitulation occurs when even the strongest of holders finally give up and dump their shares into a market with very few buyers left.
Investors can see how risky a stock is in comparison to the market by measuring the beta. A beta of greater than 1 means the stock moves more than the market and is riskier. A beta of less than one means the stock moves less than the market so is less risky but may generate lower returns.
6.Resistance and support
Technical charts can indicate caps and floors for prices. A resistance level is a ceiling that in the price that traders think the stock will fail to push through at that moment in time. Often it has been a previous peak and those unfortunate investors who bought at that peak and have been underwater since day 1, finally have a chance to “break even”. This psychological effect of getting their money back causes selling pressure at an old peak. A support level is floor that the stock price will hold in at that point in time. It can come about for a variety of reasons, sometimes it might be a round number that or a valuation metric that in the past has seen investors happy to pay for that particular company. Resistances and support levels change depending on how the stock is trade.
Reflation occurs when the price level is increased to return to the long-term trend. Reflation is higher inflation, but to restore the economy to the targeted level. It is different from inflation as that it occurs when it is above the long-term trend. In this case, governments would then need to slow growth down to get the general level of prices down. To read further on this topic refer to “Reflation: What is it, and why you need to understand it”.
A laggard is a stock which performs poorly in comparison to other stocks in the same sector or to the overall market. Laggards drag down an investor’s portfolio. Therefore holding onto a poor performer can cost you in that there is an opportunity cost of not investing elsewhere.
This is a technical term for short term reversal of stock prices against a long-term trend. If a share price is trending higher, then a retracement simply refers to a shorter term pull back against the longer term uptrend. After a retracement the stock will revert back to its previous trend.
This refers to the general attitude or opinions of the investors and traders in the stock market.
Lauren Hua is a private client adviser at Fairmont Equities.
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