Common Stock Market Terms Explained
What You Need to Know
- As stocks, on average, have almost always out performed interest rates in the returns they offer, they can be a great wealth creation tool for anybody.
- Understanding stock market lingo is a must for any would be traders.
- Many stock brokers, as well as helping you trade effectively, offer free lessons in trading terminology to their clients.
- The FTSE consists on the hundred biggest UK companies on the stock exchange. These can often offer low risk investments for those new to trading.
- ’Spread betting’ is different to trading and generally more risky. It’s advisable to get a good grip on how trading works before you begin any spread betting.
Stock markets are an essential part of wealth creation for nearly everyone today. Even if you don’t actively invest in shares, you might own some indirectly through a pension scheme that invests in companies to make your retirement money grow. So it pays to know the basics of how investing in companies works.
A stock market brings together people who want to buy and sell stocks and shares, and other investments such as government bonds. In the UK, the main stock market is the London Stock Exchange. Other major exchanges are in New York, Japan, Hong Kong, Germany, Paris and China.
Lists of companies or indexes, are produced daily to give an at-a-glance guide to the performance of sections of the stock market. Each index comprises a collection of companies. In the UK the best known is the FTSE 100 index (Financial Times Stock Exchange 100). This reflects the average performance of the biggest 100 stock market-listed companies in the UK.
Each share is a tiny piece of a public limited company, or Plc. Having a share in a company entitles you to share in the growth and profits of the company. You have the right to receive the company's report and accounts. You also have a say in how the company is run - through voting rights at annual general meetings, for example.
When you buy shares you are usually issued with a share certificate as proof that you own the shares. The value printed on the certificate, usually small compared with the share price quoted on the stock exchange, is the nominal or par, value of the shares (their price at the time they were originally issued). It is unrelated to the current market value of the shares, and is required only for legal reasons. It is worth noting that these days a lot of online share dealing firms will hold your shares electronically for you to cut down on paperwork, this is also cheaper and makes it easier to buy and sell.
Most companies share their profits with shareholders in the form of dividends. You are normally paid an amount per share twice a year. If there are no profits that year, there is no dividend. The level of dividend is set by the directors of the company and approved by shareholders. You can also make money on shares due to capital growth. If the company in which you have shares does well, its value will rise, and so will the value of your shares. You only benefit from this growth when you sell the share.
When a dividend is to be issued by a company it is based upon an "on register" or "record date" so you need to hold the shares on the dividend date to get them. However, to create a level playing field (as share prices typically drop when the dividend is paid) when shares are traded on the LSE during this benefit period an "ex" date is set. Before this "ex" date if shares are sold the selling party will need to pass on the benefit or dividend to the buying party.
This is a measure of the company's worth on the stock market. It is the current share price multiplied by the total number of shares in issue. On the stock market, companies can have market valuations ranging from just a few million pounds to more than a hundred billion pounds.
When you ask a broker (someone who buy and sells shares on your behalf) what price the shares of a company are trading at in the market, he will quote two prices: the bid price is the price at which you can sell the shares, and the offer price is the price at which you can buy them. The former figure is always lower than the latter, and the difference between them is the spread.
Bull and bear markets
These terms, whose origins are unclear, related to whether stock markets are rising or falling. A prolonged rise in the index over time is called a bull market. If the market is moving downwards in a sustained way, it is a bear market.
A phrase used to describe large, well-known companies that offer stable earnings and consistent dividend record, for example Vodafone. FTSE Blue-chip companies are reputed to be solid investments.
Shares are bought and sold through brokers. A good broker for this is TD Waterhouse, More information can be found Click to visit TD Waterhouse Share Dealing Site they will also have a full glossary and offer free lessons in share trading where you will learn all the terminology.