Skip to content
 

Stock Market Lingo Every Worried Investor Needs to Know

Circuit breakers? Stock corrections? Bear markets? Key terms explained

word cloud of various investment terms

iStock / Getty Images

En español | Wall Street throws fits periodically, and as you watch the market see and saw, you might be hearing some unfamiliar words — as you mutter some very familiar ones under your breath. Let's take a look at some of the most important terminology.

Algorithmic trading: Computer programs that buy and sell vast amounts of stock at lightning speeds based on proprietary formulas.

Bear market: A decline of 20 percent or more from a recent high by a major stock market benchmark such as the Standard & Poor's 500 index. The median bear market — half higher, half lower — since 1945 has clawed the S&P 500 for a 33 percent decline and lasted 14 months. Months to recovery: 25.

Circuit breaker: When there's a surge in selling and the stock market plunges too far, too fast, rules kick in that temporarily halt trading — akin to a circuit breaker in a home's electric panel that trips when there's a surge in electricity. This gives investors a few minutes to cool off and rethink their next trades. The first circuit breaker is a 15-minute halt, triggered by a 7 percent decline during the trading day, that occurs before 3:25 p.m. The second level is a 15-minute halt at a 13 percent drop, and the third level is a halt at a 20 percent decline, which will last the rest of the trading day.

Correction: A 10 percent decline from a recent high in a major stock market benchmark such as the S&P 500. A correction becomes a bear market when the decline hits 20 percent.

Dollar-cost averaging: An investing approach that calls for making regular investments in a stock or mutual fund at regular intervals. If followed, the strategy takes emotion and market timing out of the equation, spreads out risk and decreases the likelihood of investing all of your money when prices are highest.

ETFs: Short for exchange-traded funds, which are diversified portfolios of securities that trade on a stock exchange throughout the day, much as stocks do. Mutual funds are also diversified portfolios of securities, but they only trade once a day at the end of the trading day.

Fed funds rate: This is a target range set by the Federal Reserve for the interest rate charged on short-term (often overnight) loans between banks. Banks are required to hold a certain percentage of their deposits in reserve with the Fed. In terms of monetary policy, the Fed lowers the fed funds rate to stimulate the economy by encouraging borrowing; rates are hiked to slow an overheated economy and restrain inflation. The fed funds rate can influence other interest rates. You can find the current fed funds rate online.

Long bond: The 30-year Treasury bond. Most observers, however, pay more attention to the 10-year Treasury note, currently near historic lows. Bond yields move in the opposite direction of bond prices. Generally speaking, when investors are fearful they flock to the relative safety of bonds, which drives up prices and drives down yields. When investors are optimistic, the reverse tends to happen. Expectations about future inflation also affects bond yields. The 10-year Treasury yield influences everything from mortgage rates to credit card annual percentage rates (APRs). You can find the current rate for Treasury securities online. 

Long: Often referred to as “going long,” which is making a bet that prices will rise. If you own stocks or mutual funds, you are long on the market.

Moving average: Some market-watchers look at average prices over time, which helps smooth out the daily up-and-down movements. When the stock market breaks below its 200-day average price, for example, some believe there's more pain to come.

Safe havens: Investments that investors view as being good places to park money in a downturn. Short-term Treasury bills, for example, are guaranteed by the U.S. government, and if you hold them until they mature, you'll get your money back plus a tiny bit of interest. Some people see gold as a safe haven, although it's possible to lose money in gold, so there's no guarantee.

Shorting: The opposite of going long, shorting is making a bet that the price of a security (a stock, for example) will fall in a given time frame. Shorting is a risky investment strategy because your losses can be steep if the security goes up in price.

VIX: Commonly called the “Fear Gauge,” the VIX is a numerical measure of stock market volatility. The wilder the swings, the higher the VIX.

Editor’s Note: This article was originally published on March 9, 2020. It has been updated to reflect recent information.

Join the Discussion

0 | Add Yours

Please leave your comment below.

You must be logged in to leave a comment.