Stock market definitions for dummies and beginners
|May 16, 2012||Posted by John Border under Stock Market Explained|
If you are starting new or you are teaching your kids then here are some of the basic stuff that you need to know before you take a plunge into the stock market.
Some basic terminology that is needed
Stock – This is the basic unit which you hold as proof that you have small share in the company. The more number of stocks that you hold the higher your ownership in the company goes. The stock is what is traded on the stock exchanges.
Stock market – The market where you can purchase or sell stocks is known as the stock market. In today’s world it means all sorts buying and selling including index funds and stocks and ETF’s and any other trade-able instruments
Stock Exchange – It is the exact marketplace where you can buy or sell shares or stocks in a variety of companies. Each company who wants to sell their shares to the public must list here so that public that is holding the stocks can trade here. In this marketplace the buyers and the sellers come at a common place and place their bids.
Dow Jones Industrial average – this is the weighted average price of the most commonly traded top 30 stocks on the exchange, Typically these are the best blue chips available in the exchange.
Let us now examine a few terms that will help you understand the stock market better and the trading better
Book value – this is the actual value of the stock in the books of the company. Which means the assets minus the liabilities and the common stock value on the books. Note that this may not be the price the share is being traded. The share will be traded at a value higher than that if the market thinks that shares will be worth more later based on profit projections etc.
Blue chip – This is the company which are most respected on the stock exchange and is based on years and years or good financial performance and the management performance.
Bear market – This is the term that is used by traders when there is overall selling in the market and there are a few buyers in the market. It is typically a mass selling that will happen when the market is in the grip of bears.
Bull market – This is a market situation when there a mass buying of shares and there a few sellers. This will happen as there will be less supply of shares and the demand will be more. That is typically a very good thing as that means you will make money in the stock market.
Broker – A broker is someone who will help you buy and sell stocks. That means that you cannot biuy or sell the shares by yourself on the exchange. Typically you will have to go via a broker. The broker will charge a commission or a fee and he will then sell or buy stocks from you.
Market capitalization – This is something that you will keep hearing a lot in the news. This is arrived by multiplying the stock price with the number oif outstanding shares in the market i.e the exchange. It tells how big the market value of the company should someone were to buy this company.
Price to Earnings ratio or p/e ratio – Now this is something which is definitely asked by a lot of people and it is the most important ratio used by analyst to see what price will be there given that you know the average ratio and the earnings. It is arrived by dividing the price by the earnings of the company.
S&P 500 – This is the weighted index which is much broader than the Dow 30 mentioned above. It tracks the price of the shares of 500 largest US corporations.