Hot Off the Press: 10 Newsworthy Investing Terms Explained

There are a lot of things happening in markets right now that can be confusing for novice and veteran investors alike. To help you navigate the headlines, we've put together a list of straightforward definitions for some of the top trending investing concepts.

Short Selling

In a short sell, investors borrow shares from a brokerage and sell them immediately, in the hopes of buying them back later at a lower price (called short covering). If the short is successful, the shares are purchased at that lower price, returned to the brokerage, and the investor keeps the difference in price (minus costs). If the short is unsuccessful, meaning the price of the stock is rising, the investor must buy the shares back at a higher price and realize the loss. Learn more about how it works in What is Short Selling and How Does it Work?

Short Squeeze

When the price of a security that has been highly shorted (see short selling above) jumps sharply upward, a “squeeze" may occur: As the price climbs, short sellers are forced to purchase shares back at a loss, which can drive the price of the security even higher. This rise, in turn, can force more short sellers to buy back their shares at an even larger loss. The short sellers are, in effect, being squeezed out of their positions. Learn more in What Is a Short Squeeze?

Short Interest

Short interest refers to the number of shares of an investment that have been sold short but haven't yet been repurchased, or covered. Some investors look to short interest to help gauge current market sentiment toward a stock: Big changes may indicate investors are turning more bearish or bullish on a stock. A detailed quote will often show short interest as a percentage of float, which is the percentage of a company's stock that has been shorted compared to the number of shares available for public trading. While short interest may provide some insight into a security, it's important to understand an investment more fully to determine if it's right for you. Find out more in 3 Steps to Thinking Like an Equity Analyst.

Shares Outstanding and Public Float

Every publicly traded company issues shares. Some of these shares are available for trading, while others are subject to restrictions. Shares outstanding refers to the total number of shares a company has issued, while the public float — also referred to as floating shares or "the float" — are shares that are publicly owned, unrestricted and available on the open market. Find out more in An Investor's Guide to Shares Outstanding vs Public Float.

Margin Calls

First, a bit about margin accounts in general: A margin account is a brokerage account which allows you to borrow money against the margin-eligible investments in your account. The outstanding value of that loan is generally based on the market. This means that each day, as the value of your holdings and cash balance change in your margin account, the amount you are able to borrow against them will vary. If the loan value (based on current market prices) is less than the loan value extended to you when you purchased the stock (i.e., the stock price has dropped), you could be faced with a margin call. This is when a brokerage requires you to bring your account back to a margin excess position. To do so, you may need to place a sell order, deposit money or transfer in margin-eligible securities.

SPAC

Special Purpose Acquisition Companies, or SPACs, have gained in popularity in recent years. Also known as "blank cheque companies," SPACs are companies without any commercial operations, which are formed with the sole purpose of raising capital through an initial public offering, or IPO. With the funds raised through the IPO, a SPAC then aims to purchase (or merge with) another existing private company, which is operational. Find out more in What Is a SPAC?

Options

Options are essentially contracts between two parties that give holders the right to buy or sell an underlying asset at a certain price within a specific amount of time. There are two main types of options contracts: calls and puts. Owning a call gives you the right to buy the underlying asset; owning a put gives you the right to sell that underlying asset. An easy way to keep them straight is to remember that a call would allow you to "call" an asset away from someone, while a put would allow you to "put" it to someone else. Learn more in Types of Options: Calls and Puts Explained and find additional information, including how to practice trading options, in our Options Trading Guide.

Stock Index Futures

First, a refresher on futures: Futures are contracts between a seller and buyer in which the two parties "lock in" an agreed-upon price to buy or sell an asset at a future date. Futures are a type of derivative because their value is derived from the value of an underlying asset, such as commodities, currencies or precious metals, to name a few. Stock index futures are based on a stock index and are settled in cash (since there's no physical asset to be delivered). Index futures are used to speculate on the price direction of an index and to hedge against potential losses. They're often used as a premarket indicator to gauge how an index or market will move in the trading session ahead.

Market Maker

In order to ensure that there are shares readily available to buy, and someone available to purchase those shares – that is, liquidity – stock exchanges have something called market makers. Most commonly a brokerage house, a market maker may be member firm of an exchange or an individual market participant. The market maker buys and sells securities based on bid (buy) and ask (sell) prices it displays on the exchange. The market maker faces risk by holding assets, which may decline in value; for that, there is compensation from profit between the bid/ask spread.

Day Trading

Day trading is just what it sounds like – buying and selling the same securities on the same day, or within a very short timeframe. The goal is generally to make multiple small profits, with the idea that those small profits will add up over time. Day traders are ultimately concerned with what's happening currently rather than over the long term – which is more risky than other strategies that may be employed by investors taking a long-term view.

BONUS TERM

Hedge Funds

Generally, a hedge fund is described as an investment pool that uses advanced strategies not normally allowed for traditional mutual funds, such as leverage, long and short positions, and derivatives – with the goal of generating high returns. Like mutual funds, hedge funds pool money from a number of investors and a fund manager manages it. Typically, hedge funds are bought by sophisticated investors who can withstand significant risks to their investment. Regulations may mandate certain investor criteria for hedge funds sold without a prospectus – such as requiring that investors meet net income or financial asset tests (i.e. accredited investors) and/or completing risk acknowledgments.

While understanding the terms associated with current market conditions can help equip you in your investing conversations, it's key to remember the importance of doing your own research when it comes to investing ideas and strategies. What's right for others may not always be right for you. Find out more in Simple Principles for Successful Investing, or explore the Investing Academy for more resources.