Stock Market Jargon Explained

17
December

Investing in the stock market requires some basic knowledge of what stocks are, how they are bought and sold, and how much they pay each quarter. There are also other investment instruments besides stocks and knowing how they are bought and sold and how they make money is equally as important as knowing how stocks work. The beginning investor can find all of these different terms confusing. This article will explain some common investing terminology and make it easier for the investor to find his way around the market.

The basic thing to understand about stocks is that they represent ownership in a single company. The total stock of a company is represented by how many shares of stock that company has released to the public market. An investor who owns some shares of that company’s stock owns a portion of the company equal to the number of shares. Obviously, this means something different than an investor literally owning a share of everything the company owns. Owning shares instead means that the investor is entitled to a portion of the company’s revenue.

An investor that owns ten shares in a company that only has a total share volume of ten thousand is entitled to .1% of that company’s profits. So, if the company earned $5,000,000 in revenue, the investor would receive $5,000 in earnings. Not bad for only ten shares! The amount of money that the company pays to it’s stockholders is known as dividend payments. The technical term for this payment is dividend per share, or DPS.

Other Investment Terms

Shares can be bought from other organizations, not just from businesses. For example, a popular type of investment organization is known as a mutual fund. A mutual fund is a collection of assets, such as stocks, bonds or other instruments. The fund issues shares like a business, and the investor who owns shares is entitled to a portion of the mutual fund’s profits.

Another popular investment plan is the real estate investment trust or REIT. An REIT invests in property, such as homes, malls, movie theaters and other real property interests. The trust manages the properties and issues shares. Investors who owns shares are entitled to the profits of the trust. REITs are great for gaining exposure to real estate without having to actually own any property oneself, which comes with management costs, taxes, etc.

Some companies offer dividend reinvestment plans, or DRIPs. A DRIP is a plan whereby an investor purchases shares from the company directly, without going through a broker. The dividends the investor receives from the stock are reinvested in the company’s shares, thus growing the value of their investment. The risk here is that the company will fail, in which the case the stock will be worthless.

An index fund is a type of mutual fund, constructed in such a way as to match the performance of a given stock market index, such as the S&P 500 or the Dow Jones Industrial Average. Index funds are supposed to provide low management fees, low asset turnover, which means the fund does not buy or sell assets often, and broad exposure with minimized risk. Sometimes indexed funds outperform actively managed mutual funds due to management error, which makes them attractive for conservative investors who simply want the exposure while avoiding as much risk as they can.

An exchange-traded fund or ETF is actually a type of stock itself. It is a fund that is designed to closely mimic the performance of a certain asset, index or commodity but is itself traded like a stock on an exchange. This makes ETFs very versatile in that they are hundreds of them that track indexes, assets and commodities all over the world, not just in the United States. ETFs afford the investor the ability to short the market and purchase as little as one share.

Shorting the market refers to a specific kind of trade that an investor or trader can make. Investors who own shares that they think will go down in value can attempt to short the market by selling them. Setting up a short position involves borrowing shares from a broker and selling them. Since the shares eventually have to be returned to the broker, if the shares have gone down in value, the trader has made a profit on those shares.

This post was written by

jason – who has written posts on Budget Clowns.
Father of three and married to a lovely women. Always looking for ways to save money, and invest it properly for my children's future.

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