I'm often hesitant to speak to some groups of new investors because I'm afraid of making their heads explode with Wall Street jargon, and I certainly don't mean to confuse anyone -- it just happens. I may scratch my head trying to understand a room full of doctors talking about medical terms, and frustration may prevent me from learning. When it comes to investing, it is technical, but you should not give up understanding -- it can be easy if you ask the right person to explain it to you.
Understanding the jargon of the market is going to be highly important as we move further away from the recession of 2008 -- volatility is coming back. Some may recall that in early February, the US stock market dropped by about 4% in a single day. Granted, the market is higher so the loss wasn't as impactful as it was in 2008, however don't expect this to be a one-off: the market is going to be volatile in the near term since it simply can't stay on the rise uninterrupted forever.
If you want to know where to start, consider the following terms as bare bones basics. And if you want to keep learning, keep coming back to GradMoney -- we would love to help you understand and elaborate on anything you'd like.
Stock, an individual unit of which is called a share, (basically) represents an ownership stake in a company. If you gobble up more than half of a company's shares, you're the majority owner; all of them, and you own the company outright. Stock is also called equity: just as you can have equity in a house, you can have equity in a company. Shares often come with additional goodies: they commonly confer voting rights in elections to the company's board and on issues of company policy. Also common are dividends: cash payments the company makes to shareholders on a monthly, quarterly, annual or when-they're-feeling-flush basis. These payments are made on a per-share basis; votes are counted the same way.
Bonds are a different story. They are essentially loans the company takes out from bondholders, who can be retail investors – the little guy, you and me – or whoever else: pension funds, central banks and sovereign wealth funds are big bond buyers. Bonds don't give their holders an ownership stake; they represent a debt owed by the company, which makes interest or "coupon" payments until the bond has matured – expired, essentially. Then the company pays back the face value. (This is a generic example; the exact terms vary.)
When things are running smoothly, shareholders have more clout than bondholders, due to their voting power. When a company goes into bankruptcy, however, the bondholders (or "creditors") get first dibs on the company's assets, while the once-mighty owners receive their cut of whatever's left, if anything.
Governments can also issue bonds, though not shares. U.S. federal government bonds are issue by the Department of the Treasury and referred to as Treasuries.
Companies sell their stocks to investors in initial public offerings (IPOs); there's no fun acronym for issuing bonds. They take in whatever cash those sales earn, and then they're largely out of the picture, interest and dividend payments aside. Stock markets and bond markets are what are known as secondary markets, where people trade securities (stocks and bonds) among themselves.
This is where the value of shares and bonds goes up and down, where retail investors and hedge funds alike make their fortunes or meet their ruin. What happens on the secondary markets reflects the state of companies more than it affects them, but if a stock is tanking, shareholders are likely to get upset and vote the bums – the board members – out.
A note about pricing. Stocks are quoted in price per share. A share of Apple Inc. (AAPL is the ticker symbol) at the time of this piece is worth $156.94. Companies can issue any number of shares: Apple has 5.37 billion shares outstanding. Multiply those to get the "market capitalization": what the stock market says the whole company is worth. Currently that's $839.9 billion.
Bonds are a bit more confusing. A bond has a price and a yield. Both move up and down in response to market sentiment, but in opposite directions. That's because the company or government makes fixed interest payments, so if the price of the bond goes up, the yield – the payments as a percentage of the price – goes down, and vice-versa. So if you see that bond yields are "spiking," that means the market is bearish on bonds.
What are 'Bulls' and 'Bears'?
Sorry, bearish? Two totems dominate the market pantheon: the bull, the patron beast of rising prices, exuberance, greed, health and good cheer; and the bear, the patron beast of falling prices, fear, weeping and gnashing of teeth. A bull market is one in which prices are rising. A bull (person) is an individual who expects them to begin or keep doing so. You can be bullish on Apple, on 10-year Treasuries, on the entire stock market. It can be a permanent disposition or specific to a given security at a given time.
A bear market denotes a fall of at least 20% from the market's recent peak. A 10% fall is called a correction; smaller declines go by a set of clichés including "wobbles," "slumps," "swoons," "gyrations" and "williwaws" (okay not that last one). Truly painful plunges of 40%, 50% and 60% are crashes. In general, bull markets begin gradually, building momentum over time, but always – as an old Wall Street adage goes – "taking the stairs." Bears, by contrast, "jump out the window." Once the market hits its lowest point and begins to rise again, a new bull begins.
Note that if you're bearish on a given stock, that doesn't mean you have to sit on the sidelines. You can short a stock and profit if it goes down by borrowing a share, selling it, then buying it back later at a lower price and giving the share back. There are a couple of problems with this approach, though, originating with the fact the price of the stock can go up despite your most fervent wishes. And there is no limit to how far up.
When you buy a stock in the regular way (long), the worst-case scenario is that it goes to zero, and you lose your entire initial investment. With a short bet, you can lose far more, since the stock can keep going up and up and up and up. Worse, when you borrow a share, as with anything you hold without owning, you pay interest until you return it. Shorting is a dangerous game: even if you're right, so long as you're early, you're still broke.
What is it: 'Indexes'? 'Indices'?
It's easy enough to quantify what Apple's stock did in a given day (market hours are 9:30 a.m. to 4:00 p.m. ET, by the way), week or year. There's just one price, unless of course you want to get into the nitty-gritty of bids and asks. But what about the stock market as a whole?
It's impossible, in a strict sense, to trade a share of "the market," so it's equally impossible to assign a price to it. The market is just the aggregate of all the stocks available to trade. But of course this aggregate experiences up-and-down movements which are useful to capture.
This is where indexes (or indices) come in. The most famous index is the Dow Jones Industrial Average – just the Dow in casual settings – and it is garbage. You should ignore it. It was designed in the 1890s using methods so shoddy that they boggle the statistically-inclined mind. Worse than its terrible architecture is the use the media makes of it. Pundits have a habit of referring to the Dow's "points," leading them to say things like, "today, the Dow fell as much as 1,579 points – the largest intraday-point drop in the history of the index."
For reference, on that date, Feb. 5, 2018, the Dow fell 1596.65 from an intraday high of 25,520.53 points: the intraday low was 6.3% below the high. On Oct. 19, 1987, the Dow fell by far fewer meaningless "points" – just 508 – but from a level of around 2,000 points – not 25,000. Black Monday, as the 1987 flash crash is known, saw a 22.6% drop. Feb. 5, 2018 saw a 4.6% drop. What kind of "record" is that?
The media will mention the Dow every chance they get. Ignore them. There are a number of sensible, useful indices you can use to track the performance of the U.S. stock market. The most popular is the Standard & Poor's 500 Index (S&P 500). No one would blame you for favoring the Russell 3000.
Keep all these in mind during times of market volatility and you'll be fine.
To learn more about all kinds of stocks and investing terminology, be sure to visit Investopedia by CLICKING HERE.
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