Stock Market Terms Worth Knowing

Consumer Staples

This is a category for companies that make essential, everyday products. People of all demographics still have to buy the same things: household products, food, drinks, and hygiene items. In all economies, these items sell. There’s less room for growth, but they usually have a nice dividend and have been winners over the years.

Dividend

A dividend is a cash payout given to shareholders. Usually, it’s done four times a year. Some do it monthly, and sometimes, if a large asset is sold, there’s a massive one-time payout. Dividends are not guaranteed and may be changed or suspended at any time.

Dividend Aristocrat

This is not an official name, but a moniker given to corporations that have consistently declared dividends over a length of time and increased them. These companies are usually low risk compared to others, but offer less price gains. Still, it’s the cornerstone of many solid portfolios.

DRIP

Dividend reinvestment plan. A DRIP takes the dividends and automatically buys more shares of the same stock. This was highly advantageous in the era of commission fees, as they were done without the fees. It’s still a solid strategy. Over the years, if left completely alone, this will grow and grow your portfolio. It’s been a get-rich-really-slowly scheme for many Americans.

Dividend Yield

This is the percentage return, figured yearly, that a stock would return a shareholder. Note that this is relation to the stock price; if the price of the stock suddenly drops, the yield will suddenly increase, making it look like a great return. If the company is in this much trouble, the dividend will usually get cancelled or suspended.

Earnings

What a company earns. There are usually earnings reports four times a year, and you can expect a movement in the stock price at this time. Usually the market will see it coming, but when the actual numbers are announced, the stock can increase or decrease a few percentage. Occasionally, big news will account for huge swings in price. This is where you make a lot of money with insider trading, and why it’s illegal.

Growth Stocks

These stocks are bought with the idea that their marketplace is still expanding. This may be due to it being a new company, or a new technology most people have not yet adopted.

Income Stocks

These stocks declare a high dividend yield. Their price is relatively stable, so the money to be made here is in the form of a dividend payout. Some senior citizens like to have a portfolio of these, as the return is often much better than other financial instruments.

Market Cap

What the company is worth, overall. Take the total number of shares and multiply by the share price.

Margin

When you trade on margin, you’re putting a small portion down, usually 10 percent, on the purchase of a stock. Say you want to buy $10000 worth of Apple, you only need to put $1000 down. If it goes up to $11000, you can sell it, repay the $9000, and you’ve doubled your money quickly. However, it works both ways, and when the market crashes, you can be left owing way more money than you have. This is what ruined people in 1929. If you’re reading this blog, margin trading is definitely not for you.

Option

This is the option to buy or sell a stock at a certain price at a certain date. You’re basically betting on the future price of a stock. It’s a way that the big kids hedge bets and positions. It’s a great way to lose or make money very quickly. If you’re reading this blog, option trading is definitely not for you.

PE Ratio

Price-to-earnings Ratio. It’s the price of the stock divided by the earnings of the stock. There are a number of theories on this that have changed over the years. Classically, it was used in a strategy called “value investing.” Since the late ‘90s, the tech industry has disrupted this strategy. But nonetheless, some stocks seem to adhere to a PE ratio. It often follows that if a company’s earnings increase, the price will increase as well to maintain a PE ratio. But some of the companies now have no earnings and some are not anchored to this number at all. It’s definitely something to pay attention to, but is not a clear indicator of performance.

Share

This is a tiny chunk of the company. Often there are millions of these per company. Only the very rich can own a full percentage point of a corporation, but even you and I can easily buy a share. We don’t even have to do that anymore! We can buy a percentage of a share.

Speculative Stock

This is a risky type of stock that can go to zero or shoot like a rocket. These companies have an idea or a technology that has potential, but is not being used. There are a lot of companies that can’t bring in revenue but have a great product. Maybe they’ll get bought by a bigger company or find a way to scale production so that it’s cost effective. Unless you know the industry very well, you should avoid this.