This section is the 100 most commonly asked questions about investing. Anything that is not provided below please feel free to send an email & we’ll be sure update this page soon as possible. Thanks, from all of us here at MFW Lifestyle, LLC.

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Stock Trading FAQ — Questions & Answers

1. What is a stock?
   A stock (or share) represents ownership in a company. When you own a stock, you own a “piece” of that company and may share in its profits (via dividends) or losses. 

2. What is the difference between common stock and preferred stock?
   Common stock usually gives voting rights and variable dividends; preferred stock typically gives fixed dividends and priority in claims, but usually no voting rights.

3. How do stocks generate returns for investors?
   Returns come via capital gains (selling the stock at a higher price) and dividends (periodic payments made by the company).

4. What are dividends?
   Dividends are payments made by a company to shareholders out of its profits, usually on a quarterly or annual basis.

5. What is capital gain / capital loss?
   A capital gain is when you sell a stock for more than you bought it for; a capital loss is when you sell for less.

6. What is a stock exchange?
   A stock exchange is a marketplace (physical or electronic) where stocks are bought and sold (e.g. NYSE, NASDAQ).

7. How do I buy stocks?
   You typically open a brokerage account, deposit funds, and then place buy orders (market or limit) through that broker.

8. What is a brokerage account?
   A brokerage account is an account with a broker (online or traditional) that enables you to buy and sell securities (like stocks).

9. What types of orders exist?
   Common order types include: market orders, limit orders, stop orders, stop-limit orders, and others.

10. What is a market order?
    A market order is an instruction to buy (or sell) a stock immediately at the best available current price.

11. What is a limit order?
    A limit order is an instruction to buy (or sell) a stock only at a specified price (or better).

12. What is a stop order (stop-loss)?
    A stop order triggers a market order once the stock reaches a specific “stop” price, often used to limit losses.

13. What is a stop-limit order?
    A combination: once the stop price is reached, a limit order is placed (rather than market order).

14. What is margin trading?
    Margin trading means borrowing funds from your broker to trade securities, allowing you to leverage your capital.

15. What is short selling (shorting)?
    Shorting is selling shares you’ve borrowed (from broker) with the expectation that the stock price will fall so you can buy back cheaper.

16. What are the risks of short selling?
    Risk is theoretically unlimited (stock price can rise without bound), and you may incur margin costs, recall of shares, etc.

17. What is a “day trader”?
    A day trader buys and sells securities within the same trading day, closing out positions before market close.

18. What is swing trading?
    Swing trading holds positions for several days to weeks to capture intermediate price moves.

19. What is long-term investing vs. trading?
    Long-term investing holds assets for years or decades; trading focuses on shorter time frames and frequent transactions.

20. What is diversification and why is it important?
    Diversification means spreading investments across assets (stocks, sectors, regions) to reduce risk.

21. What is portfolio allocation?
    The distribution of funds across different asset classes (stocks, bonds, cash) or sectors.

22. What is a stock index?
    A stock index is a benchmark composed of multiple stocks (e.g. S&P 500, Dow Jones) used to track performance of a segment of the market.

23. What is an ETF (exchange-traded fund)?
    An ETF is a fund that holds a basket of assets (stocks, bonds, etc.) and trades on an exchange like a stock.

24. How is an ETF different from a mutual fund?
    ETFs trade throughout the day like stocks; mutual funds are priced only at the end of each trading day and often have minimums/fees.

25. What is liquidity?
    Liquidity is how easily a stock can be bought or sold without significantly affecting its price.

26. What are bid and ask prices?
    The bid is the highest price a buyer is willing to pay; the ask is the lowest price a seller is willing to accept.

27. What is the spread between bid and ask?
    The spread is the difference between the ask and bid prices. It reflects transaction cost and liquidity.

28. What is volatility?
    Volatility is a measure of how much (and how quickly) a stock’s price fluctuates over time.

29. What is beta?
    Beta measures a stock’s sensitivity relative to the broader market: beta >1 implies more volatility than market; <1 implies less.

30. What is P/E ratio (price-to-earnings)?
    The P/E ratio equals current share price divided by earnings per share; used to value stocks.

31. What is EPS (earnings per share)?
    EPS = (Net Income – dividends on preferred stocks) / Number of outstanding shares.

32. What is PEG ratio?
    PEG = P/E divided by expected earnings growth rate; attempts to adjust P/E for growth expectations.

33. What is book value / price-to-book ratio?
    Book value is the company’s net asset value; price-to-book compares share price to book value per share.

34. What is free cash flow?
    Free cash flow is cash a company generates after accounting for capital expenditures. It’s a key financial metric.

35. What is fundamental analysis?
    Fundamental analysis studies financials (earnings, balance sheet, cash flow), industry, macroeconomics to value a stock.

36. What is technical analysis?
    Technical analysis studies price charts, volume, patterns, indicators to forecast future price movements.

37. Do technical indicators work?
    They can be useful, but they are probabilistic tools, not guaranteed signals. Their effectiveness depends on market conditions, discipline, and risk management.

38. What is support & resistance?
    Support is a price level where demand typically prevents the price from falling further; resistance is where supply usually prevents it from rising further.

39. What is a moving average?
    A moving average smooths price data over a specified period (e.g. 50-day MA) to help identify trends.

40. What is RSI (Relative Strength Index)?
    RSI is a momentum oscillator that measures overbought/oversold levels (typically on a scale 0–100).

41. What is MACD (Moving Average Convergence Divergence)?
    MACD is a trend-following momentum indicator showing the relationship between two moving averages.

42. What is volume, and why does it matter?
    Volume is the number of shares traded in a period. High volume can confirm trends; low volume may suggest weak moves.

43. What is a chart pattern?
    Patterns (e.g. head & shoulders, triangles, double bottom) are formations in price charts used to anticipate future moves.

44. What is a gap?
    A gap occurs when price jumps from one level to another without trading in between (often due to overnight news).

45. What is slippage?
    Slippage is the difference between the expected price and the actual execution price, often in fast-moving markets.

46. What is order fill / order execution?
    Order fill is when an order is matched and executed. Partial fills may occur if there isn’t enough liquidity.

47. What is extended-hours trading?
    Trading outside regular market hours (pre-market or after-hours). Liquidity tends to be lower and spreads wider. 

48. What is T+1 settlement?
    The "trade date plus one" — in many markets, trade settlement (transfer of shares and money) happens one business day after trading.

49. What is freeriding (in a cash account)?
    Freeriding occurs when you buy and then sell securities before the funds to pay for them have settled. This can lead to account restrictions. 

50. What is a margin call?
    If your account equity falls below a required level, the broker may demand additional funds or liquidate positions to cover losses.

51. What is leverage?
    Leverage is using borrowed funds (margin) to increase potential gains (and losses).

52. What are the risks of leverage?
    Leverage magnifies losses, may lead to forced liquidation, interest costs, or margin calls.

53. What are trading fees, commissions, and transaction costs?
    These are costs you pay when buying or selling (broker commissions, spreads, exchange fees, etc.).

54. What is an IPO (initial public offering)?
    An IPO is when a private company sells shares to the public for the first time.

55. What is a secondary offering?
    When a company that’s already public issues additional shares to raise funds.

56. What is dilution?
    Dilution occurs when new shares are issued, reducing existing shareholders’ percent ownership.

57. What is insider trading?
    Insider trading is trading based on non-public, material information. Illegal when done unlawfully.

58. What are SEC filings and why do they matter?
    Public companies must file periodic reports (10-K, 10-Q, 8-K) disclosing financials and material events.

59. What is the SEC’s EDGAR system?
    It’s the electronic database where U.S. public companies’ filings are published.

60. What are stock splits and reverse splits?
    A stock split increases number of shares while reducing price per share proportionally; a reverse split does the reverse.

61. What is a dividend reinvestment plan (DRIP)?
    DRIP automatically uses dividends to buy more shares rather than paying them out in cash.

62. What is a blue-chip stock?
    Shares of large, well-established, financially solid companies with a history of steady performance.

63. What is a penny stock?
    Stocks that trade at a very low price per share (often under $5). They tend to be high risk and low liquidity.

64. What is market capitalization (market cap)?
    Market cap = stock price × number of outstanding shares. It’s a measure of company size.

65. What are large-cap, mid-cap, small-cap stocks?
    Categories of companies by market capitalization (large, medium, small).

66. What is risk tolerance?
    The investor’s willingness and ability to withstand losses or volatility.

67. What is time horizon?
    The length of time you expect to hold an investment before needing the funds.

68. What is compounding?
    Earnings (dividends or capital gains) reinvested to generate additional returns over time.

69. What is dollar-cost averaging?
    Investing a fixed amount at regular intervals regardless of price, reducing the impact of volatility.

70. What is passive vs. active investing?
    Passive investing (e.g. index funds) seeks to replicate market indexes; active investing tries to outperform via stock picking.

71. Why index funds are popular?
    They offer diversification, low costs, and historically competitive returns.

72. What is rebalancing a portfolio?
    Adjusting asset weights periodically to maintain target allocation (e.g. selling overweight positions, buying underweight).

73. What is a drawdown?
    The peak-to-trough decline in the value of a portfolio or stock over a period.

74. What is a circuit breaker / trading halt?
    Exchanges may temporarily pause trading when price moves are extreme or volatility is too high.

75. What is a tick size?
    The minimum price increment in which a stock can move.

76. What is delisting?
    Removal of a company’s stock from an exchange, often due to failure to meet regulations or financial distress.

77. What is a shell company?
    A company with little or no operations or assets. Sometimes used for reverse mergers.

78. What is a SPAC (special purpose acquisition company)?
    A “blank check” company formed to raise capital and later merge with a private company to take it public.

79. What is a green shoe option?
    A clause in an IPO allowing underwriters to buy extra shares to stabilize price.

80. What is a lock-up period?
    A period post-IPO during which insiders (founders, early investors) can’t sell their shares.

81. What is a shareholder proxy?
    Authorization that allows someone else to vote your shares at shareholder meetings.

82. What is corporate governance?
    The system of rules, processes, and practices by which a company is directed and controlled.

83. What is an activist investor?
    An investor who buys a stake in a company to push for changes in management or operations.

84. What is technical resistance breakout?
    When a price moves above a resistance level, which can signal further upward momentum.

85. What is a false breakout / fakeout?
    When price appears to break support or resistance but then reverses, trapping traders.

86. What is a trailing stop?
    A stop order that moves with the price (e.g. a percent or dollar behind) to lock in gains.

87. What is position sizing?
    The practice of determining how much capital to allocate per trade to manage risk.

88. What is risk-reward ratio?
    The ratio comparing potential profit (reward) to potential loss (risk) for a trade.

89. What is backtesting?
    Testing a trading strategy on historical data to see how it would have performed.

90. What is forward testing / paper trading?
    Running a strategy in real-time but with simulated funds (no real money) to assess viability.

91. Can trading be like gambling?
    If done without discipline, strategy, or risk control, trading can resemble gambling.

92. How much capital do I need to start trading?
    Some brokers allow very small accounts. However, to meaningfully trade with risk control, many experts suggest at least a few thousand dollars.

93. How often should I trade?
    Frequency depends on your strategy, the costs, and your ability to manage risk and analyze setups.

94. Can I trade full time and make a living?
    Some do, but it’s very challenging and requires discipline, capital, consistency, risk management, and emotional control.

95. What mistakes do new traders commonly make?
    Common errors: overtrading, poor risk management, chasing trades, ignoring discipline, inadequate education.

96. What is emotional discipline in trading?
    The ability to follow your strategy without being swayed by fear, greed, or impulses.

97. What is slippage risk during earnings or news?
    Prices can gap unexpectedly, and your orders may execute at much worse prices than expected.

98. Should I follow analysts’ stock picks?
    Analyst opinions may provide useful perspectives, but shouldn’t be blindly followed without your own research.

99. How do I evaluate a company’s financial health?
    Examine income statements, balance sheets, cash flow, debt levels, profitability, growth, and industry conditions.​

100. Where can I find reliable data and tools for stock research?
     Resources include the SEC’s EDGAR, brokerage research tools, financial news sites, financial statement databases, and independent research firms.

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