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Common Terms Used in Investing in Stocks
Do you want to start investing in stocks but don’t know how to start? Here are some jargon and common terms used when investing in stocks to help you communicate with your broker, read financial documents and websites, and talk to other investors:
shares – Shares are ownership shares in a company. Companies issue shares to raise money (called “equity”) to purchase equipment, improve capital, and generally expand their business. Once shares are issued to the public, they are traded between individuals.
market capitalization- The number of shares outstanding multiplied by the price per share. This gives the relative value of the company.
stock exchange- A stock exchange is a place where people gather to trade stocks. This is done by persons who have received the right to do so (by purchasing a place on the stock exchange) and their employees. These “persons” are brokerage firms, venture capital firms, and others. Brokerage firms mostly (but not always) trade stocks for their clients. Most transactions are now done by computers that automatically match buyers and sellers.
NYSE- The New York Stock Exchange, one of the oldest and largest exchanges. Larger stocks are usually traded on the NYSE, also known as the “big board.”
Curb– The American Stock Exchange, a smaller exchange than the NYSE, which came into existence when a group of traders began trading outside the NYSE on “the curb”. The US stock exchange is the most common place where “stock portfolios” are traded.
NASDAQ– A newer exchange that consists 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 who participate in the actual execution of stock trading by taking the other side of the trade (for example, buying shares from a person who would like to sell). A specialist makes money by buying stocks at the bid price and selling them at the bid price. The difference between a specialist and a market maker is an advanced topic, not necessary here.
offer price – The current price someone is willing to pay for the stock.
asking price is The current price at which someone is willing to sell some stock.
spread- This is the difference between the bid and offer price. Usually, the market maker or specialist pockets the difference by buying shares from one person at the bid price and selling them to another person at the bid price. Not so long ago, stocks were quoted in fractions, so the spread was usually at least 1/8, or 12.5 cents per share ($12.50 per 100 shares). More recently, stocks began trading in decimals, so the smallest theoretical spread is 1 penny per share, or $1 per 100 shares.
long to go – Taking a position in a stock (or other equity or product) to make money when the stock’s value rises. For example, buying shares.
short – The opposite of going long. Taking the position that money will be made if the share price goes down.
short sale – A trade in which a person borrows shares and sells them, thus receiving proceeds from the sale. The position is closed by buying back the shares later, hopefully at a lower price. Note that a brokerage firm is usually in the business of looking for stocks to borrow.
stop loss An order to sell shares if the price falls below a certain price, thereby preventing further losses.
market order – An order to buy/sell a stock at any current bid/ask price if 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 – The order in which shares 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 with a limit of $20 or higher” will be filled if the ask price is $20 per share or lower, so the buyer will never pay more than $20 per share.
dividend- Money paid by a company to shareholders who own shares on a certain date (called the “ex-dividend date”). The amount paid depends on the number of shares owned (for example, 2 cents per share or $2.00 per 100 shares).
capital gain- Money earned on stocks by buying stocks at a lower price and selling them at a higher price.
split- An event where a company issues stock to lower the price per share. For example, in a 2-for-1 split, a stockholder who owned 100 shares at $20 per share would end up with 200 shares at $10 per share. There is no net difference in holding value.
Hopefully this will give you a head start on some commonly used terms.
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