As much as trading in stocks can earn you a lot of money, some of us can have a totally wrong idea about it. Trading in stocks is not to be viewed as a short term investment that will churn out a lot of revenue in no time. You can ask people who have experience. It is not that easy. The stock market is unique and a good grasp of the fundamentals is necessary for success. You would likely be concerned about how anybody would want to share a part of their company. Companies sell shares in order to raise money for their start-up or for expansion. This process of raising money is called equity financing. Let’s now take a brief look at some basic terms that you should have down if you will be dealing in the stock market.
Basic terms used in the stock market
A share of a stock is simply defined as a fraction of the ownership of a given company. Each share unit is sold at a given price which is the worth of that share. Buying shares of a company makes you share in the ownership of some of their assets and earnings.
This is your share of the earnings that the company of which you own a share makes. Only companies that have been around long enough pay yearly. The company makes these earnings from selling their products or offering services.
Somebody who buys and sells stock on your behalf is called a broker. They do this for a fee which is called a commission.
- Stock Exchange
This is the place where buying and selling of stocks is done.
- Initial Public Offering (IPO)
This is the term for the first time a company puts its shares up for sale. This follows a decision by the company to go public. This results in a transition from private ownership and few investors to public ownership.
This is simply the time when the stock exchange opens for trading. It varies from one stock exchange to the other but the same thing happens – people can start to trade.
This is a document that contains your investments in a compiled form. You can have as few as one stock and as many as possible.
This is contained in the information about the current trading price of the stocks.
This describes the stability of the price of a given stock. Highly volatile stocks experience wide price changes very rapidly. With expertise, one can make a lot from these.
This is the percentage of your investment that is returned to you as dividends. It is calculated by dividing the annual dividend you receive by the amount that was invested.
This is the total number of shares bought or sold within a given trading period. The commonly used volume is the daily trading volume. Volume can also refer to the number of shares you purchase of a single company.
Having learned a few of these terms, the next thing you probably want to know is if there are different types of stocks. Actually, there are two major types of stocks.
Types of Stocks
- Common stocks
With common stocks, the shareholder receives dividends when the company d=pays them and they have a say in shareholder’s meetings.
- Preferred stocks
With preferred stock the shareholder has priority should the company go bankrupt. However, they do not have voting rights like those with common stocks. They also receive dividends earlier than shareholders with common stocks.
Other types include;
- Large-cap, mid-cap, and small-cap stocks
Market capitalization is the total worth of shares in a stock. Based on this, they can be classified as large-cap, mid-cap, and small-cap. Those with a large volume ($10 billion or more) are called the large-cap stocks, those with, market caps from $2 billion to $10 billion are called mid-cap stocks, and those below $2 billion are called small-cap stocks. Large-cap stocks are seen as safer by a lot of investors.
- International and Domestic stocks
Stocks are classified as international or domestic-based on where the company headquarters is domiciled. If it is located in the United States, their stocks are referred to as domestic but if outside the country, international. It is possible to trade in both international and domestic stocks.
- Growth and Value stocks
Growth shares riskier as their values can fall as sharply as they rise, if not more sharply. They are the shares of companies that are experiencing a rapid rise in sales. Value stocks are relatively less expensive than their peer or their past prices. They are usually mature stocks of companies that might not need to expand much further.
- Cyclical and Noncyclical stocks
Cyclical stocks are those that are not flexible to economic cycles of recession and prosperity alike. Their demand usually surges when times are good. The noncyclical stocks do well regardless of the economic cycle.
- Dividend and Nondividend stocks
Dividend stocks are of these companies that pay dividends to their shareholders from as low as $0.01. These dividends qualify as revenue for the shareholders. The nondividend shares are useful investments because they can earn the shareholder a considerable amount of money when their prices rise. At this point, they can be sold at a higher price than they were bought.
Are Stocks the same as Bonds?
No, they are not. Bonds are debts that the company agrees to pay back with interest while shares represent a part of the company sold to raise money. Bondholders can obtain their principal with interest if they wish and they have a higher priority than the shareholders should the company go abrupt. Bonds are not as risky as stocks but they do not have the long-term return potential that stocks have. Many investors are advised to invest in both shares and bonds to be safe.
Sectors in the stock market
Stocks are usually classified according to the type of business they are connected with. These categories include consumer staples, financials, communication services, industrial, healthcare, real estate, etc.