Defining the Terms of the Stock Market

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Over the next few months, we are going to be diving into the stock market.  Today, we’re going to talk about the terms spoken everyday on the trading floor.  As the weeks progress, the topic will become more and more advanced.  Hopefully, you’ll have completed a crash course in understanding the stock market, which will better prepare you for the day you decide to invest.  Each post will be linked to the previous ones, so if you come in halfway, we’ve got you covered.

The United States stock market acts like most other businesses in that it uses lingo and terminology specific to it’s industry.  Words like ticker symbol and market order are likely to be heard when trading stocks and are unlikely to be heard anywhere else.  To help you better understand what it is Jim Cramer is screaming about everyday, we’ve compiled 25 of the most used terms when buying and selling stock.   Please feel free to add your own in the comments of this article if you feel I’ve missed an important one.

After-Hours Trading – Stock trading that occurs when the major stock exchanges are closed.  In the United States, the trading floor is open from 9:30amET to 4:00pmET.  Any trading done outside of these hours would be considered after-hours.

Ask Price – The price you are asked to pay when you buy a stock.  Generally, ask prices are slightly higher than the current value of a stock so if you see a stock valued at $38.50 per share right now, you may be asked to pay $39.00 or higher per share to buy it.

Bear Market - A period of time when most stocks are declining in value.  The word “bear” was chosen to describe this type of market because bears are said to always be looking down.

Big Board – Anytime someone references the “big board” they’re talking about the New York Stock Exchange. (NYSE)

Bid Price - The price that is offered by a potential buyer for a stock.  When a bid price and an ask price are met up, a trade is executed for the desired number of shares.

Bull Market – A period of time when most stocks are increasing in value.  The word “bull” was chosen because when bulls attack with their horns, they motion upwards to do so.  Also, bulls are said to run in packs and never look behind them which one could interpret meaning always looking toward the future.

Call Option – An option to buy shares of a specific stock at a pre-determined price.  Both the buyer and seller agree to make the transaction on a certain date, at a certain price per share, with a certain fee (or premium) which is paid to the seller.  The seller, must sell the stock if the buyer wants it and cannot back out of the deal before the expiration date.

Commission – The fees paid to a stock broker for executing an order.  Different brokers have different fees and some of the lowest you’ll find come in the form of online discount brokers.

Daily Volume – The amount of shares that are traded in a day.  Each stock has it’s own daily volume chart so you can track how “active” they have been in the market.

Discount Broker – A discount broker is one that offers trading for a discounted price.  Most of the discount brokers you’ll find today do their business online and you won’t find one that gives investment advice.  They are simply there to facilitate trades, not to make you millions.

Dividends – Cash or stock paid to investors.  If a company pays dividends, it means that the profit made is split between all of it’s shareholders.  Every single share of stock would receive a dividend and the more shares you own, the higher the amount you will receive.  Generally, dividends are paid out every quarter (meaning four times a year).

Earnings per Share – The amount of money each share has gained or lost in dividends over a 12-month period.  This number is calculated by taking the company’s earnings the last 12 months and dividing it by the total number of shares.  After tax of course.

Fiscal Year – A 12-month period designated by a company as their accounting year.  A fiscal year can begin at anytime for a company but once it is determined, it cannot be changed.

Index – A composite representing the value of a group of stocks.  The Dow Jones Industrial Average is the most famous of indexes, representing the value of 30+ of the largest companies in America.

Limit Order – Limit orders are given by both buyers and sellers when they do not wish to make a “real-time” trade.  Buyers can place a limit order to buy a stock when it drops to a certain point (buy low) and a seller can place a limit order to sell a stock when it rises to a certain point (sell high).

Margin – Some brokers will allow you to borrow money to buy stock.  This is known as buying stock on a margin.  You won’t earn as much money as if you purchased the stock with your own money but many investors take advantage of this opportunity if they see a deal they don’t have the immediate cash to pay for.

Market Order – A marker order is to be executed immediately, at the current price of the stock.  Market orders make up for the majority of trades and if you’re new to investing, this is usually the type of transaction you’ll become the most familiar with to start.

Put Option – The opposite of a call option, a put option give the power of a trade to the seller.  A buyer and seller can agree on a put option expiration date and the seller can sell his stock at anytime to the buyer before the expiration date occurs.  The seller pays the buyer a fee (known as a premium) for the option to sell his stock.  If the seller chooses not to sell, the premium is still paid to the buyer.

Price To Earnings Ratio – Simply put, the PE ratio is the price of a stock, divided by it’s earnings per share.  The higher the earnings, the lower the PE ratio, so this has always been a good indicator of a stocks strength.

Portfolio - A portfolio is a collection of investments held by a company or an individual.  The only stock I own right now is Blockbuster, so if someone asked me what was in my current portfolio, I would reluctantly say “Blockbuster.”

Preferred Stock - Preferred stock holds a higher value to investors than common stock because dividends are payed out first and sometimes at a higher rate.  Preferred stock is usually the result of a negotiation between the company and the investor and owners of preferred stock have no voting rights within the company. (Unlike owners of common stock).

Quote - The current price of a stock is known as a stock quote.  Depending on the website you use, quotes can be given in real-time or with a time delay of around 15 minutes.

Short Sale - If a seller wishes to sell a stock they do not own, they can sell it short, also known as a short sale.  The idea behind a short sale is that an investor can sell a stock in the hope that it declines.  If the stock declines, the investor can buy the stock back at a lower price than they sold it, making a profit.  If the stock increases, the investor will have to buy it at a higher price, losing money.

Ticker Symbol - A ticker symbol is a unique abbreviation of a company that is publicly traded in a stock exchange.  Ticker symbols are usually 1-5 characters and contain letters in the companies name.

Yield -The annual dividend as a percentage of the price of a stock.  For example if the price of a stock is $50.00 and the annual dividend was $1, the stock yield would be 2%.

Published or Updated: December 8, 2011

Comments

  1. Good post overall. A few points though:
    1. The Dow is composed of 30 Stocks, not 300+.
    2. Buying on margin will generally allow an investor to make more money, as margin tends to amplify returns. Along with that though is the increased risk of loss, too.

    • Michael says:

      Thanks for looking out Latter-Day Saver. I’ve corrected the error to show 30+ now. :)

  2. sarenjo says:

    How have you responded to market volatility?

    I’m conducting research of how the stock market’s volatility has impacted the asset mix of household investment portfolios over the past two years. The link below will take you to a brief survey. Once you have completed the survey, you will see a graphic of the average investor allocation at 3/31/2010.
    https://www.surveymonkey.com/s/investments1

    Thanks to the 400+ respondents that have completed the survey so far. Some interesting tidbits…

    1. A plurality of respondents report having an above average willingness to take investment risk.

    2. Less than half of respondents were net purchasers of equity over the past year.

    Please note: none of the questions ask for identifying information (e.g., name, social security #s, bank/brokerage accounts #s)

  3. Austin says:

    I have a Roth now through a Vanguard index fund, but learning about these terms is something on my “To-Do” list.

    Sometimes the market’s a little too complex, but you summed it up nicely here.

    Austin @ Foreigner’s Finances

  4. David Wilson says:

    Thanks for the post, great information to have.

  5. ASEAN ETF says:

    The Global X FTSE ASEAN 40 ETF targets the 40 largest companies in the five ASEAN countries: Singapore, Malaysia, Indonesia, Thailand and Philippines.

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