Are you looking to start investing stocks but don't quite know how to get started? Here is some of the lingo and common terms used when investing in stocks to help you communicate with your broker, read financial papers and websites, and talk with other investors:
shares of stock- Shares of stock are fractional ownership rights in a company. Companies issue shares to gain money (called "capital") to buy equipment, make capital improvements, and generally grow their business. Once the shares are issued to the public, they are traded between individuals.
market cap- The number of shares of stock outstanding times the price per share. This gives the relative value of a company.
stock exchange- A stock exchange is a place where people gather to trade shares of stock. This is done by individuals who have acquired the right to do so (through the purchase of a seat on the exchange) and their employees. These "individuals" are brokerage firms, venture capital firms, and others. The brokerage firms are largely (but not always) trading shares for their clients. Most trades are now done using computers that automatically match buyers and sellers.
NYSE- The New York Stock Exchange, one of the oldest and largest exchanges. Larger stocks typically trade on the NYSE, which is also known as the "big board."
The Curb- The American Stock Exchange, a smaller exchange than the NYSE that started when a group of traders started trading outside of the NYSE on "the curb." The American Stock Exchange in the most common place where "exchange traded portfolios" trade.
NASDAQ- A newer exchange made up of a network of computers. Smaller stocks tend to trade on the NASDAQ, as do many technology companies.
specialist and market maker- These are individuals involved in actually making the stock trades happen by taking the other side of the trade (for example, buying the shares from the person who would like to sell). The specialist makes money by buying the shares at the bid price and selling them at the ask price. The difference between a specialist and a market maker is an advanced topic not needed here.
the bid price- The current price that someone is willing to pay for a stock.
the ask price- The current price for which someone is willing to sell some shares.
spread- This is the difference between the bid and the ask price. Typically the market maker or specialist pockets this difference buy buying shares from one individual at the bid price and selling them to another individual at the ask price. Not too long ago, stocks were listed in fractions, so the spread was typically no less than 1/8 or 12.5 cents per share ($12.50 for 100 shares). More recently stocks began trading in decimals such that the smallest theoretical spread is 1 penny per share or $1 for 100 shares.
going long- Taking a position in a stock (or other equity or product) such that money is made if the price of the stock goes up. For example, buying shares of stock.
going short- The opposite of going long. Taking a position such that money will be made if the price of the stock goes down.
short sale- A trade in which an individual borrows shares of stock and sells them, thus getting the proceeds from the sale. The position is closed by later buying back the shares, hopefully at a lower price. Note that the brokerage firm normally takes care of finding the shares to borrow.
stop loss- An order to sell shares of stock if the price drops below a certain price, thereby preventing further losses.
market order- An order to buy/sell shares at whatever the current ask/bid price is when there is a seller/buyer on the other side of the trade (or a market maker willing to take the opposite side of the trade).
limit order- An order in which the stock will be bought/sold when the ask/bid is at or below/above a certain price. For example, an order to "buy 100 shares of XYZ corp at a limit of $20 or better" would be filled when the ask price was $20 per share or lower, such that the buyer would never pay more than $20 per share.
dividend- Money paid by a company to share holders who own stock on a certain date (called the "ex-dividend date"). The amount paid is based on the number of shares held (for example, 2 cents per share or $2.00 for 100 shares).
capital gain- Money made on a stock by buying shares at a lower price and selling them at a higher price.
split- An event where a company issues shares in order to reduce the price per share. For example, in a 2 for 1 split a share holder who owned 100 shares worth $20 per share would end up with 200 shares worth $10 per share. There is no net difference in the value of the holding.
Hopefully this will give you a start in learning the commonly used terms.
shares of stock- Shares of stock are fractional ownership rights in a company. Companies issue shares to gain money (called "capital") to buy equipment, make capital improvements, and generally grow their business. Once the shares are issued to the public, they are traded between individuals.
market cap- The number of shares of stock outstanding times the price per share. This gives the relative value of a company.
stock exchange- A stock exchange is a place where people gather to trade shares of stock. This is done by individuals who have acquired the right to do so (through the purchase of a seat on the exchange) and their employees. These "individuals" are brokerage firms, venture capital firms, and others. The brokerage firms are largely (but not always) trading shares for their clients. Most trades are now done using computers that automatically match buyers and sellers.
NYSE- The New York Stock Exchange, one of the oldest and largest exchanges. Larger stocks typically trade on the NYSE, which is also known as the "big board."
The Curb- The American Stock Exchange, a smaller exchange than the NYSE that started when a group of traders started trading outside of the NYSE on "the curb." The American Stock Exchange in the most common place where "exchange traded portfolios" trade.
NASDAQ- A newer exchange made up of a network of computers. Smaller stocks tend to trade on the NASDAQ, as do many technology companies.
specialist and market maker- These are individuals involved in actually making the stock trades happen by taking the other side of the trade (for example, buying the shares from the person who would like to sell). The specialist makes money by buying the shares at the bid price and selling them at the ask price. The difference between a specialist and a market maker is an advanced topic not needed here.
the bid price- The current price that someone is willing to pay for a stock.
the ask price- The current price for which someone is willing to sell some shares.
spread- This is the difference between the bid and the ask price. Typically the market maker or specialist pockets this difference buy buying shares from one individual at the bid price and selling them to another individual at the ask price. Not too long ago, stocks were listed in fractions, so the spread was typically no less than 1/8 or 12.5 cents per share ($12.50 for 100 shares). More recently stocks began trading in decimals such that the smallest theoretical spread is 1 penny per share or $1 for 100 shares.
going long- Taking a position in a stock (or other equity or product) such that money is made if the price of the stock goes up. For example, buying shares of stock.
going short- The opposite of going long. Taking a position such that money will be made if the price of the stock goes down.
short sale- A trade in which an individual borrows shares of stock and sells them, thus getting the proceeds from the sale. The position is closed by later buying back the shares, hopefully at a lower price. Note that the brokerage firm normally takes care of finding the shares to borrow.
stop loss- An order to sell shares of stock if the price drops below a certain price, thereby preventing further losses.
market order- An order to buy/sell shares at whatever the current ask/bid price is when there is a seller/buyer on the other side of the trade (or a market maker willing to take the opposite side of the trade).
limit order- An order in which the stock will be bought/sold when the ask/bid is at or below/above a certain price. For example, an order to "buy 100 shares of XYZ corp at a limit of $20 or better" would be filled when the ask price was $20 per share or lower, such that the buyer would never pay more than $20 per share.
dividend- Money paid by a company to share holders who own stock on a certain date (called the "ex-dividend date"). The amount paid is based on the number of shares held (for example, 2 cents per share or $2.00 for 100 shares).
capital gain- Money made on a stock by buying shares at a lower price and selling them at a higher price.
split- An event where a company issues shares in order to reduce the price per share. For example, in a 2 for 1 split a share holder who owned 100 shares worth $20 per share would end up with 200 shares worth $10 per share. There is no net difference in the value of the holding.
Hopefully this will give you a start in learning the commonly used terms.
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