Stock Market Glossary
Stock Market Terminology
It is naturally important to learn the lingo before engaging in stock market activity, especially for stock market newcomers. Listed below are some stock market terminology which you many encounter in your stock market ventures:
Capital stock or Stock. The capital stock is the original capital invested in the business by its founders. Unlike property, assets or profits of a business, the capital stock does not increase or fluctuate in value. It can be divided into shares with a declared value, or "par value". The plural form "stocks" and the term shares are commonly used as synonyms of each other.
Different Kinds of Stocks
There are two kinds of stock:
- Common stock. The owner of a common stock is entitled to dividends amounting to a percentage of the assets and profits of a company. The dividends can be given out as stock, money or property. It also confers voting rights to the stockholder.
- Preferred stock. The owner of a preferred stock is similarly entitled to dividends. However, they are given a certain amount of dividend payments earlier than common stockholders. Dividends are also always given in the form of money, and always at the same amount. On the flipside, the preferred stockholder does not get any voting rights. Some preferred shares, called "convertible preferred shares", can be converted to common shares after a pre-determined date.
Useful Stock Market Terms
- Share. Shares are the "goods" which are bought or sold in the stock market. A share represents the part of ownership that you have in a company. You earn from your shares through your dividends and your capital gain, i.e. the increase in the value of the stock since your purchase. You also risk losing money by selling your stocks at a price lower than the amount you bought it with. The share price does not necessarily reflect the actual worth of the company; instead, it reflects what the investors think of the company. For example, a new company perceived to be on the rise will be traded at a higher price than what it is actually worth.
- Exchanges. These are the venues where brokers, sellers and investors trade stocks. Some popular exchanges in the US include the NASDAQ and the New York Stock Exchange (NYSE).
- Stock-split. Companies "split" their stocks when share prices rocket to a price range that may be unfordable by smaller investors. The most common type is a two-for-one stock split. For example, if a company has 300 shares with $50 per share, the company may opt to split its shares into 250 to lower the price to $25 per share.
- Ten bagger. A ten bagger is a stock worth ten times of its original purchase price.
- Market capitalization. The Market Cap is the total value of the stocks in a company. This is computed by multiplying the share price with the total number of shares outstanding.
- Initial Public Offering (IPO). A company new to the stock market will offer IPOs. These are common stock or shares issued publicly for the first time, usually at a price set by the company. An IPO is a recourse for companies looking to expand their capital. Most stock market tips gauge IPOs to be a risky investment, since new companies still have a very uncertain future and often go through transitory periods.
- Bull market. This is a market trend where stock prices are expected to rise due to anticipated capital gains. Bull markets reflect investor confidence; it is often associated with a strong or recovering economy.
- Bear market. Conversely, bear markets refer to a downward trend in the stock market. In a bear market, share prices fall and investor confidence is low. While there is no agreed measure of a bear market, the term is generally applicable to situations where prices decline to more than 20%.