The ups and downs of the stock market are all over the news, but such news can be confusing and intimidating to beginning investors, who may not understand the lingo. Here is a rundown of some common stockmarket terminology every investor needs to know.
Stock: This is the single most important stockmarket term for beginners. Stocks are shares in a company or corporation. A privately owned company becomes publicly owned by issuing stocks, which represent small shares of ownership in that company. The company then holds an IPO (initial public offering), and its stocks are sold on the stock exchange. When an investor buys a stock, he is buying a small share of ownership in the issuing company.
Index: A market index is a tool used to measure the performance of a certain sector of the stock market. The Dow and the NASDAQ are two of the best-known market indices. The Dow is an average of the prices of the stocks of 30 of the largest companies in the United States, while the NASDAQ is an average of the stocks of a large group of technology companies. While the Dow is often used as a benchmark for the performance of the entire stock market, it is actually a rather narrow measure. The S&P 500 is a much larger index, and is a better indicator of total stockmarket performance.
Bear or Bull Market: When the market is down, especially if it is performing poorly for a long period of time, that is known as a bear market. Conversely, if the market performs well for a long period, that is a bull market. If you have trouble remembering which is which, think of the large bronze statue of a bull that is a distinguishing feature of New York City's Financial District. They wouldn't have built a monument to an animal that represented bad market conditions!
Large-cap or small-cap: These labels refer to the size of the company that issues a given stock. Although the exact definition of cap size varies between financial institutions, large-cap companies are typically those with a market capitalisation (value) of more than £6 billion. Small-cap companies have a market capitalisation of £195 million to £1.3 billion. Anything in between is referred to as mid-cap, and anything smaller than £195 million is known as micro-cap.
Value or Growth Stocks: In addition to market cap, stocks are also labelled as growth or value, depending on the stability of the issuing company. Value stocks are typically from less-stable or less-established companies, and their prices are lower in relation to the value of the company. They are considered "good buys," but their performance can be volatile. Growth stocks are issued by more stable companies, and although their prices are relatively higher, they make up for it with more stable performance and often pay dividends, guaranteeing some income even in bear markets.
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