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Stock market terms: Everything you need to know

At a glance:

  • Basic stock market terms

  • Stock terms, continued

  • Stock trading terms

  • Stock value terminology

  • Summary of stock terms

Perhaps because it is one of the most volatile and potentially lucrative kinds of investment, the world of stock trading has a vocabulary all its own, with both abstruse technical terms and colorful slang. To understand what you read in the financial press or hear on television, you have to know the lingo.

Once you know this lingo, you will be prepared to begin moving more easily through the world of stock trading.

Basic stock market terms

Below are some terms commonly used with stocks.

  • Broker: An intermediary between the buyer and the seller. Brokers earn commissions for handling trades. Brokers who trade at an exchange must be registered members of that exchange.

  • Certificate: A document that serves as evidence of ownership of a company's stock. It shows the number of shares, the issuing company, the par value, and the shareholder's rights.

  • Class: Separation of equity into two kinds of shares, usually class A and class B. Classified stock is issued to give one group of shareholders – usually founders, board members, and key employees – more rights than others.

  • Diversification: A strategy of including different kinds of assets in a portfolio to reduce risk.

  • Dividend: A distribution of earnings to shareholders as decided by the firm's board of directors.

  • Equity: Equity is what you are buying when you buy stocks – a share in the ownership of a company that gives you a right to a portion of its assets and earnings.

  • Portfolio: A collection of different kinds of stocks. Investors generally put together a portfolio with particular kinds of stock to meet specific goals, such as current income or achieving high growth.

  • Principal: The funds you invest, as opposed to your earnings.

  • Public company: One that offers stock for sale to the public.

  • The Securities and Exchange Commission (SEC): Appointed by the president of the United States, this is a five-member board responsible for supervising the sale of securities and enforcing securities exchange laws.

  • Stock: A share of ownership in a company that represents a claim on the company's assets and earnings.

  • Stock market: The general term for the organized trading of stock. The stock market consists of stock exchanges and the over-the-counter market.

  • Symbol: An abbreviation used to identify a stock on the exchange on which it is traded. Stocks are often listed by their symbols in newspaper and television market reports.

  • Voting rights: Most shares of common stock permit you to vote in board of directors elections and other key decisions; preferred stock usually lacks this right.

Traders work on the floor at the New York Stock Exchange (NYSE) in New York. (Photo: REUTERS/Brendan McDermid)
Traders work on the floor at the New York Stock Exchange (NYSE) in New York. (Photo: REUTERS/Brendan McDermid)

Stock terms, continued

Here are some common terms used to describe stocks:

  • Blue chip: A term that describes the stock of well-established companies that have a track record of paying dividends and gaining steadily in value. General Motors and IBM are examples of blue chip stocks.

  • Capital stock: The stock authorized by a company's charter and listed in the capital accounts section of its balance sheet.

  • Common stock: Shares of ownership that typically entitle holders to voting rights and to receive dividends a company issues. If the company is liquidated, common stock holders are last in line to receive a share of the company's assets.

  • Hot stock: Newly issued stock that is anticipated to increase in value rapidly.

  • Large-cap, small-cap: The word cap stands for capitalization, or the amount of money invested in a company. Capital can be represented either by debt or equity (ownership). Large-cap companies are capitalized with at least $5 billion, while small-cap companies are capitalized with less than $1 billion. Generally speaking, small-cap companies have much room for potential future growth, yet are more vulnerable to market downturns.

  • Non-voting stock: Stock that does not carry voting rights. Most preferred stock is the non-voting kind.

  • Penny stock: A highly speculative stock that costs less than a dollar a share. Investors hope they will create large returns on a small investment.

  • Phantom stock: Not capital stock at all, but a share of equity a company offers employees. It’s typically not transferable.

  • Preferred stock: A kind of capital stock that pays a fixed dividend and typically lacks voting rights. If a company's assets are liquidated, preferred stockholders have a higher claim to a share of remaining assets than do common stockholders.

Stock term: An exchange is a place where stocks are traded, such as the New York Stock Exchange, the American Stock Exchange, and many other regional and specialty exchanges. (Photo: Getty Creative)
Stock term: An exchange is a place where stocks are traded, such as the New York Stock Exchange, the American Stock Exchange, and many other regional and specialty exchanges. (Photo: Getty Creative)

Stock trading terms

Below are some commonly used stock terms:

  • Exchange: A place where stocks are traded, such as the New York Stock Exchange, the American Stock Exchange, and many other regional and specialty exchanges. Each is regulated by a board of directors, and only members may trade there.

  • NASDAQ: An abbreviation for the National Association of Securities Dealers Automated Quotations. The NASDAQ is a computer network that reports transactions of over-the-counter (OTC) stocks. It provides OTC buyers and sellers with information similar to what brokers get from auctions on an exchange floor.

  • Over-the-counter (OTC) market: Unlike stocks sold by public auction at exchanges, this is the market for trades negotiated directly between buyers and sellers.

  • Options: Rights to buy or sell shares of a stock if it reaches a certain price per share.

  • Primary market: The initial offer of a company's shares to the public. Generally, the company sells its shares to an investment bank, which puts them on the secondary market.

  • Secondary market: The trading of shares between buyers and sellers, either at an exchange or over the counter.

Stock term: Short for the National Association of Securities Dealers Automated Quotations, the NASDAQ is a computer network that reports transactions of over-the-counter stocks. (Photo: Getty Creative)
Stock term: Short for the National Association of Securities Dealers Automated Quotations, the NASDAQ is a computer network that reports transactions of over-the-counter stocks. (Photo: Getty Creative)

Stock value terminology

The following are commonly used stock terms:

  • Average: An equation that combines the value of a number of stocks into an arithmetic mean in an attempt to gauge the general direction of the market. The Dow Jones Industrial Average is a famous example.

  • Growth stocks: Stocks that are thought to have the potential to grow in value more rapidly than the market as a whole.

  • Income stocks: Stocks that have a record of paying dividends regularly.

  • Index: Another means to determine market trends, but this time in relation to a base market value. The AMEX Composite Index is an example.

  • Market value: The value of a stock on the open market, based on the value of the company's assets and investor expectations of the stock's performance.

  • Par: The face value of a share of stock, as assigned by the issuing company.

  • Volatility: The tendency of a stock's value to change up or down. A stock's volatility is a prime consideration in any investment strategy.

Summary of stock terms

Understanding the terminology used in investing is the key to success. If you don't understand what's going on, how can you hope to be a successful investor?

Once you understand the key terminology used in stock investing, you will have a better understanding of the various markets and how investments are traded.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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