A stock represents ownership in a company. A share is one unit of that ownership. Shareholders may benefit if the price rises or the company pays a dividend, but they can lose money if the price falls.

Example: You buy 10 shares at $20 each, investing $200. If the price rises to $24 and you sell, your gain is $40 before fees and taxes. If it falls to $16, your position is worth $160, a $40 loss.

Going long means buying an asset because you expect its price to rise. Your maximum loss on fully paid shares is generally the amount invested.

Example: You buy 5 shares at $50 for $250. Selling later at $60 produces a $50 gain before costs. Selling at $40 produces a $50 loss.

Short selling means borrowing shares, selling them, and hoping to buy them back later at a lower price. The repurchased shares are returned to the lender. Short sellers may pay borrowing fees, must meet margin requirements, and may have to cover dividends.

Example: You borrow and sell 10 shares at $30, receiving $300. If the price falls to $22, buying back the shares costs $220, leaving an $80 gain before costs. If the price rises to $45, buying them back costs $450, creating a $150 loss before costs.

Unlike a long share position, a short position has theoretically unlimited loss because a share price can keep rising. A broker can also require the position to be closed early.

The bid is the highest current price a buyer offers. The ask is the lowest current price a seller accepts. The spread is the difference between them.

Example: A stock has a $19.90 bid and a $20.00 ask, so the spread is $0.10. A market buyer will usually pay near $20.00, while a market seller will usually receive near $19.90.

A market order seeks to trade immediately at the best available price, but the final price is not guaranteed. A limit order sets the highest purchase price or lowest sale price you will accept, but it may never execute.

Example: A stock is quoted at $25.00–$25.10. A market buy may execute around $25.10 or another available price. A buy limit at $25.00 executes only if sellers become available at $25.00 or less.

Diversification means spreading money across different investments so one poor result has less effect on the whole portfolio. It can reduce company-specific risk, but it cannot prevent every loss.

Example: A $1,000 portfolio invested in one company loses $500 if that company falls 50%. If the money is divided equally among five unrelated companies and only one falls 50%, the portfolio loses $100, assuming the other prices do not change.

Volatility describes how sharply and frequently a price moves. Higher volatility usually means greater uncertainty and risk, not necessarily a higher return.

Example: Stock A moves between $98 and $102 during a month, while Stock B moves between $70 and $130. Stock B is more volatile.

A dividend is a payment a company may make to shareholders, often from profits. Dividends are not guaranteed and may be reduced or stopped.

Example: You own 50 shares and the company declares a $0.40 dividend per share. You receive $20 if you meet the eligibility rules, before any tax.

A price return measures the change in an investment's price. Total return also includes income such as dividends.

Example: You buy a share for $100, receive a $3 dividend, and sell it for $108. The price return is 8%, while the total return is 11% before costs and taxes.

An option is a contract that gives its buyer a right, but not an obligation, to buy or sell an underlying asset at a set strike price by an expiration date. The buyer pays a premium to the seller. One standard US equity option contract commonly represents 100 shares, although contract terms can vary.

Options can expire worthless. Selling options can create losses much larger than the premium received, so beginners should understand the contract and its risks before using them.

Call options

A call option gives the buyer the right to buy the underlying asset at the strike price. Call buyers generally expect the price to rise.

Example: A stock trades at $50. You pay a $2 premium per share for one call with a $55 strike, costing $200 for a 100-share contract. At expiration:

• If the stock is $65, exercising lets you buy at $55. The option's value is $1,000, so the gain is $800 after subtracting the $200 premium, before other costs.
• If the stock remains below $55, the option expires worthless and the buyer loses the $200 premium.

The buyer's expiration break-even price in this simplified example is $57: the $55 strike plus the $2 premium.

Put options

A put option gives the buyer the right to sell the underlying asset at the strike price. Put buyers generally expect the price to fall or use puts to limit downside risk.

Example: A stock trades at $50. You pay a $3 premium per share for one put with a $45 strike, costing $300 for a 100-share contract. At expiration:

• If the stock is $35, the right to sell at $45 is worth $1,000. The gain is $700 after subtracting the $300 premium, before other costs.
• If the stock remains above $45, the option expires worthless and the buyer loses the $300 premium.

The buyer's expiration break-even price in this simplified example is $42: the $45 strike minus the $3 premium.

Intrinsic and time value

An option's intrinsic value is the value it would have if exercised now. Any premium above intrinsic value is generally called time value, reflecting the possibility of favorable movement before expiration.

Example: A call with a $40 strike costs $7 when the stock is $45. It has $5 of intrinsic value and $2 of time value.

Leverage uses borrowed money or contracts to create exposure larger than the cash paid. Margin is collateral required by a broker for certain trades. Both can magnify gains and losses, and a broker may demand more collateral or close positions.

Example: You use $500 of your money and borrow $500 to buy $1,000 of stock. A 10% price rise adds $100, equal to 20% of your original $500 before interest and costs. A 10% fall similarly removes 20% of your money.

A bull market is a period of broadly rising prices and optimism. A bear market is a period of broadly falling prices and pessimism. These labels describe trends, not what will happen next.

Example: A broad market index rising from 1,000 to 1,250 over an extended period may be described as bullish. A sustained fall from 1,250 to 950 may be described as bearish.

Potential return usually comes with risk. Before any trade, consider how much could be lost, how easily the asset can be sold, and whether the position fits the investor's goals and time horizon.

Example: Keeping $1,000 in a diversified fund and placing $1,000 in one volatile stock expose the investor to different kinds and levels of risk, even though the starting amounts are equal.