Understand stocks

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Words to Know to Understand the Stock Market Today

Words to Know to Understand the Stock Market Today

Sorry, we will not be decoding those cool hand signals
Understand stocks

Mario Tama/Getty Images

To those outside of it, the stock market can be a bit of a black box. But as elusive as the stock market may seem, growing your knowledge takes understanding just over a dozen words and their relation to each other. People buy stocks to multiply their monetary supply. Companies issue stock to pay off debts, launch new products or enter new markets. It’s a bit more complicated than that, but for stock market beginners, these 15 words will surely better your understanding of the market.

Stocks

Stocks

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First, what even is stock? Purchasable stock signifies an ownership position in a corporation. After buying stock, people have a claim to a proportional share of the corporation’s assets and profits. By owning stock, individuals may earn voting rights proportional to the amount of stock they own. To keep corporations accountable, some may vote in corporate decisions like the election of directors or board members.

Stock price vs. stock value

Stock price vs. stock value

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A stock’s price is the amount of money it currently costs to purchase shares. This is also called a company’s market value. However, a stock’s value may be much higher than what it’s price suggests. Market forces may result in a stock being undervalued. These are the ones investors look for to maximize returns.

Shares

Shares

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In the U.S., stock is divided into a unit of measurement called shares. For example, you may own 100 shares of Starbucks, one of the world’s biggest businesses. The number of shares a shareholder owns determines how much of a claim they have on the corporation’s assets and profits and, if applicable, the weight of their vote.

Dividends

Dividends

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Why buy stock? Easy, dividends. Public companies pay shareholders a portion of the company's profits known as dividends. These payments are usually issued on a fixed schedule, making for simple consideration when planning a budget. But dividends can still be issued at any time. Special or extra dividends are payments given at an unscheduled time.

Common vs. preferred stock

Common vs. preferred stock

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There are two sorts of stocks for investors to purchase: common and preferred. All corporations big and small issue common stock. An advantage of holding common stock is that each share translates to one vote, meaning more effective ownership. However, the disadvantage is that shareholders have a minimal claim on company earnings. Why? Holders of preferred stock are entitled to receive dividends before holders of common stock.

Bond

Bond

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Stocks are not all you need to understand in the stock market. There are also bonds. When buying a bond, investors are lending money to an issuer. The issuer, whether a government, municipality or corporation, promises to pay the investor a rate of interest on the bond as well as the par value (face value) when it matures. Together, bonds and stocks are known as securities and may be traded.

Stock exchange

Stock exchange

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Stock exchanges are formal systems that facilitate the trading (selling and buying) of securities. Each exchange is made up of several corporations and each nation has one or more exchanges. The U.S. is home to several exchanges, the most important being the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ.) While the NYSE is based on Wall Street in New York City, NASDAQ is the largest electronic screen-based exchange.

Stock market

Stock market

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Unlike specific stock exchanges, the stock market is a general term used to describe the organized trade of stocks through stock exchanges, over-the-counter and computerized trading venues.

Initial public offering (IPO)

Initial public offering (IPO)

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To make it onto the general public stock market, an entrepreneur must sell the first of their company’s shares to the public. This trade is called an initial public offering or IPO. An IPO is considered “hot” when the demand for securities greatly exceeds the supply of shares.

Primary market

Primary market

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Stocks are traded in two markets, the first being a primary market. In primary markets, newly issued stocks are sold to investors and the company receives the proceeds. However, stockholders are always on the lookout for ways to increase the return on their investments. So instead of just waiting for scheduled dividend payments and buying off the primary market, stockholders may also consider selling stocks on the secondary market.

Secondary market

Secondary market

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So what is the secondary market? Already-existing stocks are bought and sold in secondary markets. On the secondary market, none of the money made from trades returns to the company. It instead goes to the seller with some commission for a broker. Market crashes predominantly affect the values of stocks in the secondary market. While the value of a company may remain unchanged in a crash, the stock value may drop.

Capital appreciation and capital gains

Capital appreciation and capital gains

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Capital appreciation and capital gains are other reasons to add investing to your list of financial goals. When the price of stock in the corporation someone has invested in increases, they earn capital appreciation. Once the investor sells the stock, that capital appreciation turns to capital gains. The stockholder makes a profit when they sell shares for more than they initially paid.

Broad-based indexes

Broad-based indexes

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Broad-based indexes track the performance of a collection of stocks. Like a financial check-up, these indexes track the average price moves of the selected stocks over time. Some of the most common broad-based indexes used today include the Dow Jones Industrial Average and S&P 500 Index.

Bull market

Bull market

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According to the broad-based indexes, the stock market may occasionally be in one of two states: bear or bull. In a bull market, prices are rising, sentiments are optimistic and there is an at least 20% increase in a broad-based index over two months.

Bear market

Bear market

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In a bear market, stock prices are declining and sentiments are pessimistic so much that the index falls by 20% in the span of two months. Markets can coincide with other rises and falls in parts of the grander economic scheme from retirement funds to unexpected unemployment. In March 2020, stock markets around the globe descended into bear market territory due to the coronavirus pandemic. In the two weeks from March 22 to April 4, 2020, in the U.S., 12 million people applied for unemployment relief.

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