For the layman, there are many terms used during transactions at the stock market that have filtered down to our everyday world. We heard them, we understand some of them, we use some of them – yet, we know little what they mean in their real business context.
The following are some of the more widely-used terms used in the transaction of deals at the stock market, be it at the old stock exchange floors, or at some terminal of some electronic stock market network.
Stock exchange
This is the central market for buying and selling stocks. The price is determined through supply-demand mechanisms. Individuals and institutions buy and sell the stocks in an auction-like forum.
Initial public offering (IPO)
This is the first public stock offering undertaken by a company.
Primary market
This refers to the market in which shares in a company are sold to the public for the first time.
After market or secondary market
A term referring to stocks which have been bought and sold by investors after they have made their debut on the primary market. (A similar concept is new home sales versus resale. A home can only be sold "new" once. After that, it becomes a resale.)
Market value
This is the price investors are willing to pay for a stock. This is after being given information on the stock and its anticipated future earnings projections and dividend streams.
Depository
This refers to the centralized clearinghouse and repository for securities where securities are actually stored. This is also where the electronic day-to-day movements of those securities are facilitated. (The Depository Trust Company, located in New York, is the largest and most important depository in the U.S.)
Cash account
An account maintained at a brokerage in which an investor deposits cash that can be used to buy securities.
Long position (buying long)
This refers to the practice of buying and holding stock, expecting that the price of the stock will rise over time.
Preferred stock
This is a specific class of stocks which is senior to (and receives preferential treatment over) the company's common stock. Also, preferred stockholders receive preference in the payment of dividends and on claims of company assets in the event of a bankruptcy.
Blue chip stocks
This refers to the stocks of large and stable public companies with a solid history of profitable growth and a steady stream of dividend payments.
Par value
This is an arbitrary value assigned to common stock shares at the time a stock is issued in a public offering. Par value typically has no relationship to actual market value.
Capital gain
This refers to the profit or gain made when a stock is sold for a higher price than was paid for the stock. If a stock is bought for $10 and was sold a year later for $11, the capital gain on that sale is valued at $1.
Dividends
These are the cash payments paid to shareholders. Dividends represent a certain percentage of a company's total profits after taxes. Not all companies pay dividends.
Dividend yield
This refers to the annual percentage return represented by the annual dividend stream compared to the price of the stock.
Just like any other profession or trade, the stock market has its own set of names and terms unique to its kind of business. The above-listed ones are the most commonly-used.
For outsiders, the stock market is a reliable indicator of the actual value of the companies which issue stocks. Verifiable financial data such as growth, assets, and sales figures form the basis of the value of stocks.
Moreover, the stock market is considered a good choice for long-term investments. This is based on the assumption that well-run companies continue to grow within the stock market and pay handsome enough dividends for their stockholders.
Fluctuations
The same opportunities are also afforded on short-term investors in the stock market. Market jitters, even those without basis, can cause rapid price fluctuations.
General investor psychology, likewise, can trigger the prices of stocks to either fall or rise. Investor suspicions about a company’s value can be set off by news reports, economic conditions and rumors.
Earning opportunities
When there is a sharp rise or drop of a stock price, some investors quickly jump on the bandwagon and activate an even faster acceleration. (The market will correct itself later, though.)
In the meantime, knowledgeable investors whose keen eyes are watching the market see these kinds of situations as great opportunities for profitable trading.
These opportunities depend, of course, on the types of short-term traders. There are three categories in short-term trading – position trading, swing trading and day trading.
Position trading
Compared with the other styles, the stocks in position trading can be held at a relatively longer period. Position traders are expected to hold on to their stocks from 5 days to six months at most.
The reason: they are watching out for the fundamental changes in the stocks’ value. However, position trading does not need much time.
Studying the stock market can be as short as 30 minutes a day and it can even be done outside regular working hours. This type of trading is ideal for those investors who want to supplement their income.
Swing trading
Compared with position traders, swing traders hold their stocks for a much shorted period of time, which generally lasts for about one to five days. Swing traders are mostly driven by emotions rather than by fundamental values.
This type of trading needs more time in researching on stocks and thinking of strategies because swing traders need to identify trends so they can pick out the best trading opportunities.
As it is, swing traders tend to rely on daily and mid-day charts to plot stock movements. However, this type of trading usually brings out greater paybacks after sometime.
Day trading
From a consensus, this is considered to be the riskiest way to play the stock market. To be fair, this could be true only for the slightly uneducated trader but not for an experienced one.
What everyone is afraid of is the fact that day trading generally takes less than a day and can be as short as a few minutes. By this token, day traders have to stay rational and analytical to survive this type of trading.
Day traders have to make out strategies when to get in and out of a position relying mostly on information that can influence stock price movements. All in all, day trading needs to be done full-time because it requires paying close attention to the many different stock market conditions.
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