The stock market can be a great investment tool, but many people find themselves unsure of whether 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 to help you make sense of the investment news that you hear.
Stocks are obviously one of the most commonly traded items in the stock market; they are 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 are similar to stocks but are more often issued by governments than by individual companies. Bonds are issued with a specific data set at which they reach maturity, after which point they are cashed out and their current value is paid to the bondholder. The longer a bondholder owns a bond before maturity, the more money they have accrued in the bond and the more they get upon maturity.
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 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.
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 the 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 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.