Day Trading Lingo, Decoded

Securities: Financial assets that can be assigned value and traded. Typical securities include stocks and bonds.

Derivative: A dependent security whose price is derived from one or more underlying assets and whose value is determined by fluctuations in the underlying asset. Futures contracts are a common type of derivative.

Stock: A type of security that gives the holder ownership rights in a corporation. If you own a company's stock (or own shares), then you are a shareholder.

Index: An imaginary portfolio of securities representing a particular market or a portion of it. The Standard & Poor's 500 is a well-known index.

Trade: To buy or sell financial assets in any of the financial markets.

Trader: A person who buys or sells financial assets for himself or for others. Traders generally hold assets for a much shorter time than investors.

Broker: A middleman who facilitates trades between buyers and sellers.

Leverage: The use of borrowed money to increase potential returns.

Initial Public Offering (IPO): The first sale of a corporation's stock. Such a company is said to be "going public."

Liquidity: The ability to buy and sell an asset without affecting price levels.

Volatility: A measure of how much the price of a security will vary over time.

Closing Out: The process of completing all transactions at the end of a day. To reduce exposure to risk, day traders typically won't hold a position overnight.

The short answer is probably not. The longer answer requires that you look past the hype to gain an objective picture of how day trading works, who's doing it and what motivates them. When you do, you'll discover that most successful day traders are not greedy bandits and that day trading itself, although much maligned, is neither illegal nor unethical. However, it's risky business and should only be undertaken by people who fully understand the process.

The first step in understanding day trading is defining it in the context of other types of market strategies, which we'll do in the next section.