Like anything new, we can’t start it blindly. We need to know at least the basics before we start.
My intention with this list of stock market terms is to get you started on your path to mastery as quickly as possible of stock market investing.
Investing in the stock market is like any other field, it has its own jargon. Obviously, you don’t have to know everything, but what I’m going to cover here will suffice.
Whether your goal is to invest on your own or to understand what your advisor is telling you, the information provided here will help you.
General stock market terms
An index gives you the pulse of a stock exchange. People trade stocks all day and the stock index gives us the trend. Some famous stock markets in the US are S & P500, NASDAQ, DOW JONES, and the TSX in Canada. In other words, it is the average change in the stock price of all the companies included in a stock market.
The initial public offering is an event, where the shares of a company are traded or put into the market for the first time.
- Stock Dilution:
A dilution occurs mainly when a company puts into the market additional stocks.
- Bear market:
If we say the market is bearish or someone is bearish, it means that there is a pessimistic view on the future of the stock market.
- Bull market:
In contrast, when we say that the market is bullish or someone is bullish, it implies that there is or he has an optimistic view of the future of stock prices.
- Fundamental Analysis:
A method that evaluates a stock price and it’s evolution by analyzing the company’s financial reports.
- Technical Analysis
A method that evaluates a stock price and its evolution by analyzing a company’s historic price.
- Passive management:
It’s a style of managing a portfolio where you put it on autopilot. Meaning you do not try to do abnormal returns
- Active management:
In this kind of management, you’re trying to beat the market by regularly using different kinds of transactions.
- Mutual fund:
This is a portfolio made up of the pooling of many individual investors’ money. Since it could take a large investment to form a personal portfolio, mutual funds are an easy way to access the stock market.
- Segregated Fund:
We could say that this kind of fund is a mutual fund with guarantees. It can be bought only with insurance companies.
- Index fund:
It’s a fund that tries to match the performance of the stock market.
- Exchange-traded fund:
It can be defined as an index fund that can be traded like a stock. If you want an in-depth definition and an in-depth comparison with the index fund you can read it here: https://theaddictedreader.com/index-fund-or-an-etf-which-one-is-for-you/
Individual stocks characteristics
- Market cap (Market Value) :
The total value of a company on the stock exchange is its market capitalization.
- Stock split:
A maneuver where a company normally divides its shares into 2 in order to reduce its price on the stock market.
- Book Value:
It is the value of the company based on its financial statements.
- Intrinsic Value:
The value of a share based on some calculations. The aim is to check whether the price of a company’s stock is being sold at a fair price. That is to say, the price we have arrived at with our calculation. If there is a divergence, that is, if the stock price is below, we are going to want to buy it.
Ways to buy stocks
- Limit Order:
It’s a request transmitted to the stock market to buy or sell a stock at or below a stipulated price.
- Market Order:
It’s a request send to the stock market to buy a share at its current price.
- Margin Account:
Helps you buy stocks by borrowing money. So when we say that someone bought a stock on margin. It means that the individual investor borrows some money to buy his shares. Normally investors can borrow up to 70 percent of the purchase price.
- Margin Call
If in the margin account the invested portion of the individual investor goes below 30%, the broker will issue a margin call. This means that he is requesting the investor to put back money into the account so he reaches at least 30%.
- Short selling:
This is a transaction, where you sell stocks that you don’t have. It is done by borrowing the stocks and not money from a stockbroker.
Types of stocks
- Common stock:
It is a type of stock that gives the privilege of being able to vote on important matters like the board of directors or stock splits.
- Preferred Stock:
A type of shares that gives the right to have priority over the holders of ordinary shares for dividends.
- Blue Chip:
Well-established companies that have a good track record for decades.
- Defensive stocks:
Stocks that are little or not affected by the tendency of the stock market index.
- Income stocks:
Those are stocks that have been paying dividends for decades, 50 years, and more.
- Growth stock:
Those are companies that invest heavily in research and development. Individual investors investing in this type of stock expects to generate capital gains.
- Value stock:
Those are established companies that may be facing some turbulence, meaning that the company might be facing some hard times but will come back since it is mature enough to hold on. This creates opportunities to buy mature companies at discount.
- Cyclical Companies:
These are companies that have a strong relationship to the direction of their index.
Differents indicators of stock attractiveness
- P/E ratio:
The ratio takes the share price of a company and divides it by its earnings per share. It tells you how many times you’re paying for the earnings of a company. It is the most famous ratio for evaluating stocks.
- Dividend Yield:
The percentage represents the return an investor can get from the payout of a dividend. It is measured by dividing the annual dividend payment by the current market price of the stock.
- Capital gain (loss):
It is the gain or loss that you get from the appreciation or depreciation of your stock.
Thus the total return of an investor is calculated by adding the dividend yield to the capital gain (loss).
It’s a measure of risk. It tells you how strong is the relation of a stock compared to its stock market index.
- Standard deviation:
It is also a measure of risk, which indicates the volatility of the price of a stock. In other words, it gives us the extent of variation you can expect from the stock. The higher the standard deviation, the more the share price fluctuates.
- Sharpe ratio:
It tells you the extra or additional return you get for taking risk beyond a risk-free asset. So it helps you to see if the additional risk you might be taking for investment is well compensated with the additional return.
You can calculate the Sharpe ratio by subtracting the risk-free rate from the return you expect from an investment and dividing the result by the standard deviation associated with the investment.
- Dividend Payout ratio:
It is the portion or percentage amount of its profits a company pays as dividends.
This is the percentage of excess return/gain that you have achieved over and above the expected return on investment. In other words, how well you’ve beaten the market.
As I mentioned at the beginning, my intention is to get you started as quickly as possible.
Obviously, there are many more terms and advanced concepts but as you progress in your journey you can add them to your knowledge base.
I am confident that with this list you will be able to understand what will be said about the stock market and even start talking about it yourself.