The stock market can be a great investment tool, but many people
find themselves unsure of whether or not to invest in the market
because they are unfamiliar with some of the more common terms
associated with market trading. If you are one of these people,
don't despair; below you'll find several of the more common
terms associated with the stock market defined so as to help you
make sense of the investment news that you hear.
Stocks
Stocks are obviously one of the most commonly traded items in
the stock market... they are the publicly sold and traded shares
of companies. Each share of a stock is a portion of ownership in
the company that issued the stock, and the stockholder is
usually entitled to vote in stockholder meetings. Stockholders
are also often given advance notice of upcoming splits, mergers,
and the release of new stock shares.
Bonds
Bonds are similar to stocks, but are more often issued by
governments than by individual companies. Bonds are issued with
a specific date set at which they reach maturity, after which
point they are cashed out and their current value is paid to the
bond holder. The longer a bond holder owns a bond before
maturity, the more money they have accrued in the bond and the
more they get upon maturity.
Dividends Dividends are additional payments that are made to
stockholders after a particularly profitable quarter. Many
people automatically reinvest their dividends, getting more
shares of stock equal to the amount of the dividend that was
paid.
Futures
Futures are traded along the same lines as stocks, but are
purchased against the future cost of commodities. When the
futures mature, money is made if the actual price of the
commodities is higher than that which was paid for the futures
and money is lost if the price is lower than that which was
paid.
Index Trading
Groups of stocks based upon commodities or sectors of the market
can be purchased and traded as an index; common indices include
the diamond market, the gold market, technology sectors,
healthcare, and other such groupings.
Trading on Margin
Trading on margin is similar to making stock trades with
borrowed money... you can purchase the stock shares for a
portion of the actual price, with the remainder due at a later
date or upon sale of the stock. The broker which places the
order must have your margin portion of the cost before placing
the order, which is typically 50% of the cost of the stock.
Bull or Bear Market
Bull markets and bear markets are terms used to describe trends
in the stock market. A bull market is one in which stocks
continue to rise over an extended period of time, and is
considered to be an optimistic market. A bear market is one in
which stocks fall in price over an extended period of time, and
is considered to be a pessimistic market.
Splits
Splits are a way that companies reduce the value of their
individual stocks without reducing the value of their stocks as
a whole. The most common type of split is a two-for-one split,
in which each share of stock is divided into two shares... this
doubles the total amount of shares, though the total amount
invested remains the same and each individual share is worth one
half of its previous value. Stockholders end up owning twice as
many shares after a two-for-one split, though the total amount
that they have invested remains the same.
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