Stock Market Terms
Stock Market Terms
Scott Leonard, CFP (President, Leonard Wealth Management, Inc.) gives expert video advice on: Why should I consider investing in the stock market? and more...
What is the "stock market"?
The stock market is a general term that describes the way in which individual securities are traded. There are stock exchanges out there that trade different securities. All of those exchanges together are called the stock market. Some examples would be the New York Stock Exchange, the NASDAQ, international exchanges, London Exchange and over-the-counter. These are all different exchanges where stocks trade hands.
What is the difference between "common" and "preferred stock"?
There's really two types of stocks. There's a common stock and a preferred stock. The preferred stock usually pays a dividend, and it's a fixed dividend. So as a result, common stocks tend to look more like bonds and trade more like bonds. Also, preferred stocks generally don't have voting rights like a common stock would. One of the last differences is, if the company default, the preferred stocks get to get paid back from the value of the company before a common stock would. Usually when someone is talking about a stock and what's being traded, they are almost always referring to a common stock. Because preferred stocks look so much like a bond in the way they trade, you're not really participating in the capital appreciation of a company. Which is really when you buy stock you're owning ownership in that company and what you're betting on is that the company is going to grow through time.
What is a "large cap" stock?
Within the stock market itself, there are additional risks or ways that we can slice up the stock market to get added returns. And one of those is through the size of a company.And that's its market capitalization which is really as simple as taking the number of shares outstanding of that company, multiplying it by its stock price. And so a large company is gonna be--the really big companies--it's a large capitalization company. Large cap companies could probably be anywhere from five to ten billion and larger, depending on who's doing the defining.
What is a "small cap" stock?
“Small cap” stocks are companies that have low capitalization. In a traditional sense, that would be companies maybe with $1 billion and below in market cap. The reason we might want to own a small cap stock is it's going to give us a higher expected return than large cap stock, because smaller companies are going to be riskier than larger companies.
What is a "value" stock?
Value companies are companies that the market perceives to be in distress of some form. What that means is that it is traditionally measured by a book to market ratio. The book value is what the accountants say a company is worth (say one billion dollars). The market is what the stock market says it's worth (say it would be 9 dollars). If you think about that, you're actually able to buy this company for less than what it was really worth and that's where the term value comes from. Why it is a value company is because the market doesn't believe it has great growth opportunities. Value companies, because of this, are riskier companies and historically have tended to give us a higher return because we're taking greater risk.
What is a "growth" stock?
A growth stock is a stock that the marketplace feels has great growth potential. Using the book-to-market example, it's a low relative book-to-market price; its book value, what the accountant says it's worth, let's say it's a billion dollars, and the market might price it at ten billion or twenty billion. What that means is the market really feels that the value of the company is going to grow into that value. Growth companies tend to be the companies with the least amount of risk in the marketplace.
What is an "emerging market" stock?
An emerging market stock can mean stocks in emerging market countries, which is the traditional sense. For example, Brazil - one of these third world countries that are coming along. An emerging market stock would just be ownership in the companies of that emerging country.
What is an "over-the-counter" stock?
An over-the-counter stock is a stock that trades on the over-the-counter-market. The over-the-counter market is one of the stock exchanges that are out there. It is usually for very small companies and new companies, unlike some of the other exchanges like the New York Stock Exchange, which is really for larger, more developed companies.
What is the "SEC"?
The SEC stands for the Securities and Exchange Commission, and it's really the government body that Congress has established to regulate the investment industry as a whole. So they're regulating brokerage firms. They're regulating registered investment advisors, mutual funds, the broad all the kind of products of the financial service industry. They're the oversight government body that regulates it.
What is the "NASD"?
If you think about NASD the name, it's the National Association of Securities Dealers. NASD is really the association of stock brokerage firms. What they have done is that the NASD is really a self-regulating body that goes out and regulates just the brokerage firms, the big wirehouse firms, and the individual brokerage firms that are trading stocks for commission. They fall under the NASD for regulations and rules and enforcement. The NASD is given that right to do that by the SEC.
What is a "publicly-traded company"?
When most people are talking about stock, they're really talking about publicly-traded companies, and that just means a company that's owned by the public. A publicly-traded company has more responsibilities as it relates to its accounting practices and its independent audits. It has to file certain annual reports to its shareholders to be considered a publicly-traded company.
What is the "NYSE"?
The New York Stock Exchange, or NYSE, is the largest exchange in the United States for trading public securities. It really trades the larger, more developed companies within the stock market as a whole, and there's certain requirements that they have, of companies that actually can get on the New York Stock Exchange.
What is the "NASDAQ"?
The NASDAQ is another stock exchange. The NASDAQ is an electronic exchange and so securities are traded on that, through computers. The New York Stock Exchange, by comparison, is really humans that are out there - literally out in a building, trading securities.
Why should I consider investing in the stock market?
If someone is considering investing in the stock market, a reason to do it is for the long term growth that stocks can provide. Stocks are volatile in the short term; there's a lot of short term risk. For a long term investor - 5 years minimum, but you're looking at 10 years, 15, 20 years - stocks are really one of the few investments that are going to give us a good, solid expectation of getting good growth long term.