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Market Basics
Key Terms In Investing 101
The first thing a beginner investor needs to do is learn the "market talk." The following are common investment terms used when referring to stocks and the stock market.
Ask Price (or "offer" price): The price at which a Market Maker is willing to sell a security.
*Assets: Any possessions that have value on an exchange. Assets include tangible items such as inventories, equipment, or real estate, as well as intangible items such as property rights or goodwill.
Bear Market: A bear market is one in which prices are low or declining.
Blue-chip stocks: A term generally applied to stocks of well-established companies that are known for their long-standing track records.
Broker: An individual or a firm that brings together buyers and sellers but does not take a position on the asset to be exchanged.
Bull Market: A bull market is one in which stock prices are high or rising.
IPO: A company's first sale of stock to the public. Companies making an IPO are seeking outside equity capital and a public market for their stock.
Earnings: Income of a business (revenue minus expenses).
*Earnings per share or EPS: Income (or earnings) for a specific period (usually a quarterly or a fiscal year period) divided by the average number of shares outstanding during that period.
Market Maker: A broker/dealer that maintains a firm bid and offer price in a given security by standing ready to buy or sell at publicly quoted prices.
Stock: Ownership of a company or corporation, represented by "shares" of stock that claim ownership on the company's earnings and assets.
Dividend: Distribution to shareholders of cash or stock declared by the company's board of directors
Stock Split: The division of outstanding shares of a corporation into a larger number of shares. For example: in a 3-for-1 spilt, each holder of 100 shares before would now have 300 shares, although the proportionate equity in the company would remain the same.
*Reverse Stock Split: A proportionate decrease in the shares of stock held by stockholders. For example, a 1-for-3 split would result in the stockholders owning 1 share for every 3 shares owned before the split. A company generally institutes a reverse split in order to increase the market price of its stock.
The Over-The Counter Market:
Over-The-Counter Stock: A stock that is traded electronically among a group of broker/dealers instead of an exchange like the NYSE or AMEX. The Over-The Counter Market is currently divided into four 'tiers".
• The NASDAQ National Market: This the trading venue for the largest, most liquid stocks, like Intel or Yahoo!
• The NASDAQ Smallcap Market: This market hosts up-and-coming companies. Both NASDAQ Smallcap and NASDAQ National Markets offer wide distribution of quotes, news, and company information.
• The OTC Bulletin Board: (OTCBB) Offers electronic distribution of quotes, but is considered to be a lower-level tier.
• The Pink Sheets: These are the bottom-tier stocks, with limited distribution of electronic quotes. Companies that trade here aren't required to file financial information with the SEC.
Exchanges, Indexes and averages:
Exchange: An organized marketplace in which stocks, common stock equivalents, and bonds are traded by members of the exchange, acting both as brokers and dealers/traders. Such exchanges have a physical location where brokers and dealers meet to execute orders from institutional and individual investors and to buy and sell securities.
NYSE: New York Stock Exchange. The NYSE is the oldest, largest and most honored exchange in the United States. The NYSE is sometimes referred to as the Big Board. Thousands of larger companies are listed on this exchange and it has many operating divisions composed of marketers, legal experts, developers, planners, and economists. The NYSE is considered to be one of the more economic "indicators."
AMEX: The American Stock Exchange© is the second largest floor-based securities exchange in the United States. It has significant presence in both listed equities and derivative securities. Amex had long been on the leading edge of exchanges worldwide in trading-floor technology, service to its listed companies, and innovative new product development. The National Association of Securities Dealers, Inc., in 1998, acquired it.
NASDAQ: The National Association of Security Dealers Automated Quotations. The NASDAQ is a computer operated and owned by NASDAQ that provides dealers with price quotations for stock and securities traded on the NASDAQ. Stocks on the NASDAQ feature many new and volatile corporations and many of them relatively new.
INDEX: A market indicator, such as the NASDAQ Composite or the Dow Jones, that represents a measure of the relative value of a combined group of stocks.
S&P 500: (Standard & Poor's Corporation) A company well known for its rating of stocks and bonds according to investment risk (the Standard and Poor's Rating) and for compiling the Standard & Poor's Index-commonly called the Standard & Poor's 500-that tracks 400 industrial stocks, 20 transportation stocks, 40 financial stocks, and 40 public utilities as a measurement indicative of broad changes in the market.
Dow Jones Industrial Average (DJIA): The Dow Jones Industrial Average Index (DJIA) is a price-weighted average of 30 actively traded blue chip stocks, primarily industrials but including American Express, AT&T, and as of 2000, Microsoft. Prepared and published by Dow Jones & Co., it is the oldest and most widely quoted of all the market indicators. The components, which change from time to time, represent between 15 and 20 percent of the market value of NYSE stocks. The DJIA is calculated by adding the closing prices if the component stocks and by using a divisor that is adjusted for splits and stock dividends equal to 10 percent or more of the market value of an issue, as well as substitutions and mergers. The average is quoted in points, not in dollars.
Dividends, splits and adjustments
Mutual Funds:
Mutual Fund: Fund operated by an investment company that raises money from shareholders and invests it in stocks, bonds, options, commodities or money market securities.
Portfolio: The combined holdings of more than one stock, bond commodity, real estate investment, or other assets by an individual or institutional investor.
Sources: * denotes that definition was abstracted from Wall Street Words. The remainder of the definitions were taken from Glossary of Investing Terms by NASDAQ.
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