Key terms to know about online share trading

Online share trading can be an effective way to invest money and grow your wealth. And since all you need to get started is an internet connection and a computer or mobile device, you can start making decisions and trading shares from anywhere.

But before you get started, and even before you choose which online trading platform you’ll use, it’s important to understand some of the terminology.

We’ve developed a guide to the common key terms you should know when researching online share trading.

Ask/offer

This is the price the owner of shares is willing to sell them for. When you start online share trading, you’ll see the offer or asking price of each share listed.

Bid

This is the highest price a potential buyer is willing to offer for a share.

Blue chip stock

A blue chip stock is a share in an established company that has a proven earnings history. The opposite of a blue chip stock is a speculative share. Generally, blue chip stocks offer stability and sometimes a regular dividend payment. For this reason, they’re usually considered low risk. However, because investors tend to factor this into the price they will buy or sell for, blue chip stocks won’t always offer the same opportunity for high growth as speculative shares. Keep this in mind when considering which shares to buy.

Dividend

A dividend is a payment a company makes to shareholders out of its profits. While they often take the form of cash payments, dividends may also be extra shares. Shares that pay a regular dividend are highly prized by investors looking to make an income. Alternatively, investors looking for long-term growth often choose to reinvest any dividend payment by buying more shares.

Diversification

A strategy used to reduce risk, diversification is the act of buying investments with different underlying characteristics in the hope that they won’t rise and fall at the same time. For instance, you can diversify by buying shares from different regions, sectors or industries.

Loan to value ratio (LVR)

This measures the amount of a loan compared to the value of the security it’s borrowed against. When you take out a margin loan, your lender will have a maximum LVR it allows.

Margin call

If you take out a margin loan and the value of your security (your shares) falls so that you owe more than the maximum LVR plus a buffer, you will face a margin call. When this happens, you usually have 24 hours to bring your LVR back under the maximum by contributing more cash, offering more security or selling shares.

Margin loan

A margin loan lets you borrow money to invest in shares, managed funds or other assets. Generally, you’ll need to offer those investments – and potentially cash – as security for the loan.

Option

This gives you the right to buy (a call option) or sell (a put option) a share at a specific price for a set period of time. You can buy a call option if you think the price of a share will rise and a put option if you think the price will fall.

Price/earnings (P/E) ratio

This measures a share’s price compared to the company’s earnings for the previous 12 months. Generally, companies expected to achieve high growth will have a high P/E ratio, whereas those that have more stable earnings will have a lower P/E ratio.

Share portfolio

Your share portfolio refers to the total of the shares you hold.

Looking to start online share trading? InfoChoice can help you search and compare online brokers by providing useful information such as monthly account service fees and accessibility.

InfoChoice recommends that, before you make any financial decision, that you seek professional advise from a qualified adviser. For further information please read our InfoChoice Financial Services & Credit Guide.