Common Stock Market Terms Explained

Stock market terminology can be confusing, especially when you are just starting out. You’ve heard terms like bull market, dividends, futures and blue chip stocks—but what do they all mean? Whether you are thinking about investing or are simply curious about how the stock market works, you need to understand the jargon before you can understand the process. Here are some of the stock market terms you are most likely to come across and their definitions.

Essentially, when you buy a stock, you are buying part ownership in a company. Stockholders have voting rights at stockholder meetings and receive notice of events that affect the company like mergers. When the company does well and the value of the stock rises above what you paid for it, you can sell your share and make money.

When you buy a bond, you are loaning the company or government that issued the bond money and the company agrees to pay you back what you loaned them with interest. The date that the company must pay you back by is the maturity date of the bond. Often, the longer the maturity date, the more interest you earn on the money. In general the bonds from more successful companies pay less interest than bonds from start-up companies because there is less of a chance the company will fail and default on their payments to you. In general, the higher the interest rate on the bond, the riskier the investment.

Futures

Futures are traded just like stocks, but the price is based on the projected cost of the commodity at a future date. Once the future matures, if the actual cost of the commodity is more than you paid for the future, you make money.

Blue Chip stocks are offered by companies with a long history of stability, increasing value and dividends. Blue Chip companies include Wal-Mart, Coca-Cola, Johnson & Johnson and Microsoft. Blue Chip stocks are considered a safe investment, but often offer a lower yield than more volatile stocks. They are a good choice for investors who want a low risk stock and plan on holding on to it for a long time.

Penny Stocks

Penny stocks are shares of small, failing or start-up companies that are valued at less than a $1 or stocks that trade outside of the main stock exchanges. Penny stocks have a limited history and no minimum standards so they are a much riskier investment. They are also susceptible to fraud and price manipulation. Penny stocks do have the potential to be a good investment if you know what to look for and have a little bit of luck.

Some stocks are grouped according to a commodity or market sector and sold as a single unit. Some examples of stock groupings are gold, technology or healthcare.

Splits

When a company wants to increase the number of their stocks or reduce the value of each stock, but not affect the total value of their stocks all together, they split them. When a company does a two-for-one split, each share is split in two. The stock holders end up owning twice as many shares, but the shares are each worth half as much.

Lot

A lot of stocks is equal to 100 shares. When you buy 10 lots, you are buying 1000 shares of a stock.

Broker

A broker is the individual who buys or sells stocks, commodities and bonds for another in exchange for a fee.

The New York City Stock Exchange, or NYSE, is the largest stock exchange in the United States. The NASDAQ, or National Association of Securities Dealers Automated Quotations, is the second largest and is also based in New York. Companies need to decide which stock exchange they want to trade their stocks on; they can’t use both.

Dow Jones Industrial Average

The Dow Jones Industrial Average is the average value of 30 of the largest and most traded stocks in the New York City Stock Exchange. This value is used to track the performance of the stock market a whole.

NASDAQ 100

The NASDAQ 100 is an index based on the 100 most valuable companies that trade stocks on the NASDAQ. This index is also used to track the stock market as a whole.

Dividends are payments made to the shareholders out of the company's profits. Dividends can be distributed as cash or as additional stock shares and are usually paid out quarterly.

Market Value

This is the current and real-time value of the stock. The market value is the amount that the stock is actually trading for and what you see when you check a stock quoting service.