Stock Investing Series 2/4
Investing in the stock market can seem complicated, like something only someone with specialized knowledge should dip his/her toe in. However, it is very easy to learn the basic concepts involved in the stock market and start off by investing conservatively. Here are some key concepts and terms that you must know before you get involved in investing in the stock market.
A person who has experience in analyzing financial investments, conducting research, and making recommendations to buy, sell, or hold a stock.
The price at which a market maker is willing to sell a security. While trading stocks on the stock exchange, this is the lowest price that the seller is willing to accept. For over-the-counter stocks, this is the best-quoted price that the market maker is willing to sell a stock for.
A bear market is when stock prices are low, or falling. It is defined over a period of time. At this time, the investor confidence in the market is decreasing. One sign of this is a decrease in price of over 20% in a 2-month period.
The amount of money that a buyer is willing to pay for a security.
Blue Chip Stocks
A term used for stocks of well-established companies that are known to have good track records on the market. It is defined by the New York Stock Exchange as being a company that has a reputation for reliability and quality, and has shown to be profitable in both good times and bad. The Dow Jones Industrial Average is an index that follows U.S blue chip stocks, using a price-weighted average of 30 stocks. It is used as an indicator of market conditions.
A person or company that brings buyers and sellers together but does not have a stake in the asset being traded.
A market in which stock prices are rising. It is associated with an increase in investor confidence, and an overall increase in investing in the market.
Dividend is a distribution of profits to shareholders. The dividend is declared by the company Board of Directors and is usually paid quarterly. The Board of Directors can choose to do two things with a company profit: either re-invest it, or distribute it to shareholders. It can be distributed in the form of share repurchases or dividends. The dividend is a fixed amount per share, so people with more shares receive more money. For example, and $2 dividend per share would mean $2000 for someone with 1000 shares. While dividend is usually issued every quarter, a special dividend can be issued at any time.
IPO, which stands for Initial Public Offering, refers to the first sale of a company’s stock to the public. The company is looking for capital from the outside, and therefore selling part of its company’s ownership on the public market. This takes it from being a private company to a public company. The cash raised is usually used for expansion or invested back into the company. While there are many advantages to an IPO, the most significant being the increase in company value, there are also disadvantages. It is an expensive process, and the company is required to disclose financial statements to publics, which could provide an advantage to the competition.
This is the possibility that the actual return you get on an investment will be different than what you had expected. You could lose all, or some, of your investment. Risk can be calculated by looking at historical returns or average returns over a period of time. The larger the amount of risk that you are willing to take, the higher the potential return. This is to reward investors you are willing to take on additional risk by offering them a better return on their investment. For example, a U.S. Treasury bond is an extremely low-risk investment, compared to a corporate bond, but also has a lower rate of return.
A stock signifies part ownership of a company. There are types of stocks (preferred and common).
Common stock carries with it the right to vote for the company Board of Directors. It is usually paid off after the preferred stock has been paid dividends, and is also lower priority when it comes to paying off claims in the case of a bankruptcy.
It ranks over common stock, getting paid dividend first and also getting paid-off first in case of a bankruptcy, but it does not have voting rights.
When stocks are divided into a larger number, it is known as a stock split. For example, in a 4-for-1 split, everyone holding 100 shares now has 400.
*Reverse Stock Split
This is a proportionate decrease in the shares of stock. A 1-for-4 split means that everyone owning 100 shares now only has 25. This is usually done to increase the value of the stock.
Volatility refers to the amount of risk, or uncertainty, regarding the changes in a security’s value. Higher volatility refers to the chance that the security’s value can be spread over a large range, which means the price can dramatically change in a short amount of time. This is measured by looking at its beta. Comparing the security’s return against that the return of a benchmark, like the S&P 500, does this. For example, a stock with a beta of 1.2 has moved 120% for every 100% move in the benchmark.
These concepts are just the tip of the iceberg, and someone interested in investing in the stock market should read up more on the process and risks before going ahead with it.