When you start learning about investing, the language that professional investors use can be daunting and difficult to keep up with. In this short note, we will look at some of the most common phrases for beginners, also look out for the lingo for more advanced investors that will follow!
As we have now learned, investing in the stock market can be an excellent way to build wealth over time. However, getting started can be difficult, especially if you are unfamiliar with the language used by investors and traders. I’ve compiled a list of common stock market terms and definitions below to help you feel more at ease with the terminology.
You’ll be better equipped to make informed investment decisions and navigate the complex world of the stock market if you understand these terms. Let’s get this party started!
Stock – A share in the ownership of a company – for example, if you buy one share in META, you own a small piece of the company and become a small shareholder.
Dividend – A portion of a company’s profits that is paid out to shareholders – once you own the company, the idea is that you grow your wealth, this can be through the price rising, or the company paying you a dividend. Be aware that not all stocks pay dividends.
Market capitalisation – The total value of a company’s outstanding shares of stock – this is an easy calculation, you just need to multiply the share price by the number of shares outstanding, have a look at our stock pages for more on this.
Broker – A person or firm that facilitates the buying and selling of stocks on behalf of investors – brokers can help with buying individual stocks or exchange-traded funds (ETFs).
Exchange – A marketplace where stocks are bought and sold – once you are ready to start investing (after speaking to a professional), you will likely use an exchange to buy and sell.
Index – A measure of the performance of a group of stocks – many exchange-traded funds track an index, for example, the SPDR ETF tracks the S&P 500.
Bear market – A market where stock prices are falling, indicating a widespread pessimism about the economy – when we set up InvestinETFs, we made two logos, one with a bear and one with a bull (which is the next term), we preferred the bear so it’s here to stay for now!
Bull market – A market where stock prices are rising, indicating a widespread optimism about the economy – remember it is easy to make money in bull markets, this is when many people get attracted to profitable mutual funds, that often lose money in bear markets.
Portfolio – A collection of investments, such as stocks, bonds, and mutual funds, held by an individual or institution.
Diversification – The practice of spreading investments across multiple assets to reduce risk – remember that investing in ETFs is a popular way for investors to diversify at low cost.
Volatility – The degree to which the price of a stock fluctuates over time – investors often want to avoid volatile markets!
Blue chip stocks – High-quality, established companies with a long history of stable earnings and dividends – I always think of Apple, Amazon, Disney etc.
Penny stocks – Stocks that trade at a low price, usually less than $5 per share – should often be avoided, think of the Wolf of Wall Street and investors being sold shares in really small companies that appeared big, there are some good penny stocks though, but overall they should probably be avoided.
P/E ratio – A valuation ratio that compares a company’s current stock price to its earnings per share.
Yield – The return on investment, typically expressed as a percentage of the amount invested.
Short selling – The practice of borrowing and selling a stock in the hopes of buying it back later at a lower price – think of GameStop, professional investors bet on the company to fall in value, and a group of retail investors caused even large hedge funds to go bankrupt.
These are just a few of the many terms you may encounter when investing in the stock market. While it can be overwhelming at first, taking the time to familiarise yourself with the language can help you make more informed investment decisions and ultimately reach your financial goals.
Remember always speak to a financial professional before investing! Stay ahead of the game and become a successful investor by reading our previous post on how to analyse a company. It’s just a few clicks away – follow the link to access it now.