Take a look at this recent article from Bloomberg and try to read all the way through without your head exploding:
“The dollar held near a two-month high and Treasuries slid as traders awaited minutes of the Federal Reserve’s latest policy meeting that may provide clues on the path of U.S. interest rates. The pound rallied. The greenback rose against most major currencies, while Treasury yields were close to the highest level in four months before the U.S. auctions $44 billion of securities. American stocks fluctuated on concern that corporate earnings will be slow to rebound. The pound surged after U.K. Prime Minister Theresa May accepted that Parliament should be allowed a say on her plan for taking Britain out of the European Union. Oil slipped a second day on speculation the OPEC agreement to trim crude output won’t succeed in reducing supply.”
If you read this snippet and said “what the hell does that even mean?” then don’t worry, you are not alone. For years now Wall Street has portrayed the markets as something that is highly sophisticated. They use special jargon and unique terms that almost seem like another language to make you think that learning the stock market is something beyond your skillset. They do this to make you think that experts are the only ones who can successfully handle your money. In addition, there are thousands of investment vehicles out there. Thousands of stocks that you can invest in. You think to yourself, “I am working all day, trying to start a family, trying to stay in shape, and now I have to learn about this crazy world of investments too? I don’t even know where to start.” So you give up and turn your money over to an “expert” who supposedly has all the answers and gives you the best solutions to grow your money. I am here to tell you that learning the stock market is like learning a new language BUT IT IS 100000% worth taking the time to learn! At retirement, it can make the difference of being a millionaire or fearing that you will outlive your money!
These experts make you think that they have access to information that you do not but that is 100% NOT TRUE. More than ever, the everyday person has the technology and access to information that make investing fully transparent. Remember in my last article, The Origins of Wall Street, we talked about how stock exchanges shifted from being from physical locations to electronic? Well just like that has evolved so has our access to information. The internet was a serious game changer.
The experts, aka stock brokers and brokerage firms, used to exploit investors all the time because of their lack of information. They would charge huge commissions for placing trades and made the investor feel like they were dumb. Think about it like a car salesman exploiting what little knowledge you have. He will say things to make you believe you need certain upgrades or add additional cost that ultimately increase his paycheck.
The same thing has been happening in trading for years. As the internet has evolved into a powerhouse of information these shady events have occurred less but they are still prevalent in today’s society because of the jargon that is typically used. You read an article like the one above and immediately conclude that you have no idea what you’re doing in the stock market and give up right away. Now don’t misunderstand what I am saying. There are plenty of firms out there today that are very ethical and want to do what’s right by you. I’m just saying that because the terminology is so confusing many people still get exploited today and have no idea how much they are paying in hidden fees when they give their money over to an “expert.”
The key to learning is just to take in a little at a time. In this article, we are going to go over some of the most commonly used terms that you will hear constantly once you begin to do some research into the stock market.
An index is used as a benchmark for how the overall stock market is performing. The most common indexes that you will hear about is The Dow Jones Industrial Average, The S&P 500, and the NASDAQ. The Dow Jones is composed of 30 nationally traded companies, S&P 500 having 500 companies, and the NASDAQ composed of 100 companies. Often when you hear people talk about how the overall stock market is performing they will say things like “The market took a tumble today, the DOW was down 200 points.” The index has its own value and it moves in points where individual stocks move in dollars. Many people compare the performance of a certain stock to the market to see how well it is doing. For instance, let’s say the Dow Jones is up 6% on the year but your Nike stock is only up 4% on the year. Nike would be said to underperform the market.
Bull vs. Bear
You’ll often hear people on the news say that we are in a bull market or that we are heading into a bear market. What does this exactly mean? When we are in a bull market this is referring to a period of time when stock prices are continually rising. It will not go straight up but will have an upward trend for a prolonged period of time. A bear market is just the opposite. Of course most investors would love to have a continual bull market, it does not work that way. The market, just like the economy is cyclical. We are going to have period of bull markets along with bear markets such as in 2008 with the housing market crash. People also use these terms when they talk about individual stocks or strategies going into the market. If you think Apple is going to be profitable in the long term and you buy shares in it for this reason you are said to be bullish on Apple. Just the opposite is true when you think Apple will go down in value; you are bearish on Apple. You can think of it in everyday life as well. If you think that the Broncos are going to win the Superbowl this year, you would be bullish on the Broncos. If you think that Mike is going to get dumped by his girlfriend, then you would be bearish on Mike.
Long vs. Short
The terms long and short are used quite often as well to describe when you buy or sell a stock. If you were to buy 100 shares of Apple, you would be going long in the stock. You are bullish on the position and think the value of the stock is going up. In contrast, you can also short a stock. What this means is that you think the value of the stock is going down, you are bearish. When you short a stock someone lends you shares and you make money if the price of those shares drops. You then close the position by buying those shares back. Think of the movie The Big Short. All those guys were bearish on the housing marketing. They thought prices were going down and wanted to make money off it. Because of shorting you can make money on either side of the spectrum with trading. I would advise to stick with going long first before getting into shorting. It is a more advanced trading strategy. You have to keep in mind that when you go long in a stock the most you can lose is it going down to 0; the company goes bankrupt. This is highly unlikely to happen but could happen all the same. When you go short in a position that stock has no limits to how high it can go. It could go to infinity and beyond. It’s always best to be mindful of this.
When people refer to equities they are talking about the stock that they hold in their account. Remember when a company decides it needs to raise money it can do it multiple ways. Debt financing would be if it took a loan from a bank or issued bonds. Equity financing is when they issue shares to the public. Having equity in a company is having ownership in a company.
Bid, Ask, and Spread
Remember that a stock’s price moves off of supply and demand. Whenever you see any stock listed there will be a bid price and there will be an ask price. The bid is what you could sell the stock at this very moment and the ask is what you could buy stock at this moment. Because trading happens so quickly these numbers are constantly changing throughout the trading day. The difference between the bid and ask is what’s known as the spread.
When a stock IPO’s it automatically gets what’s known as a ticker symbol. The ticker symbol is general 1 to 4 letters and often resembles the company. For example, the ticker for Nike is NKE, the ticker for Apple is AAPL, and the ticker for GoPro is GRPO. Whenever you are about to trade you will have to put in a ticker symbol for the company before you can place the order. Luckily nowadays technology is so great you can just start to type the company name and it will give you the ticker automatically. I encourage you to pay attention to what’s called the ticker tape the next time you’re watching CNBC on television. The stocks will flash across at the bottom giving you the ticker symbol, real-time price, and price change on the day.
Blue Chip Stocks
Blue chip stocks are stocks of well-established, financially sound companies that have been around for many years. The term is derived from poker, where blue chips are the most expensive chips. More often than not it is a common household name such a Procter and Gamble or Coca-Cola.
A company has an earnings announcement every quarter during the year. With these earnings they report how they company has been doing the past quarter and their expectations for the future. They release financial statements such as their balance sheet and income statement that allow investors to view the health of the company. More often than not these earnings announcements will cause a great move in the price of the stock so it’s good to keep an eye on when they will be released.
If a company would like they can choose to give back some of their earnings to their shareholders in the form of a dividend. Dividends, like earnings, are paid quarterly. The company will decide what amount of money per share they choose to give back to shareholders. As an example a company may decide that it’s going to issue a dividend of .25cents per share. If you owned 100 shares, then you would receive a dividend payment of $25 dollars. For a moment, think of a chicken as 1 share of stock in a company. Let’s say you buy 200 chickens (200 shares) of a company. Every quarter each chicken will lay two eggs as its dividend payment. You get 400 eggs in dividends from your investment. Some investors buy stocks just based on the company paying a high dividend. It is a great way to generate addition income while you hold onto a stock.
Every stock that you intend to buy is going to be a part of a certain sector. You can think of sectors as categories for stocks to be put under. Below is a list of sectors that a company can be put under.
- Consumer Discretionary
- Consumer staples
- Information technology
- Real Estate
- Telecommunication Services
Sectors are a good way to group stocks and can be helpful when certain economic events occur. For instance, if a new president gets elected and passes a new bill that restricts healthcare stocks selling their goods, then the whole Healthcare sector is going to be down.
Stock Market Hours
The stock market opens at 9:30am eastern time and closes at 4:00pm eastern time, M-F. This is when almost all trading in the market occurs. There is a pre-market and after-hours trading secessions but I would not worry about those at this time. The stock market is closed on all major holidays.
As you can see, stock market terminology is just like learning another language. You’re not going to absorb it after just reading through once but that’s ok! You are going to begin to see these terms over and over so don’t get discouraged.
“An expert is an ordinary man away from home giving advice” -Oscar Wilde
Homework: Look up 3 Blue Chip Stocks and see what Dividend payment they make on a quarterly basis