Stock Exhange. (File photo)
It can get pretty complicated following what is a very volatile stockmarket.
Without a road map these days, it’s easy to get lost, and being lost in a world of options and margins, can sometimes result in financial chaos.
Rhode Island's Market Has Changed. Developers, Builders, Investors and Sellers Must Change With It.
By Emilio DiSpirito IV License Partner | Engel & Völkers Oceanside Leader | The DiSpirito…
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“There is no handbook on how to invest,” said Chad White, executive vice president at Barrett & Company, a Providence-based brokerage firm. “Today’s market is ever changing, it’s evolving so rapidly. What’s true today may not be true tomorrow.”
The markets have been evolving since the New York Stock Exchange first opened in 1792.
The NASDAQ Stock Market, which began operating under that name in 1971, has become the second most popular market behind the NYSE. The American Stock Exchange is the third most popular.
Where to invest?
“You need to think about risk, time horizon, investment objective, and liquidity needs,” he said. “Really what you have to do is look for funds, or a combination of funds, that best suit those needs.”
The key to any successful investment, White said, is education. “It takes time temperament and training to be a good investor,” he said.
And it starts by understanding some of the most commonly used terminology. Here’s a brief primer, with input from White, from Internet material offered by the New York Stock Exchange, from the new Columbia Knight-Bagehot Guide to Economics and & Business Journalism: “Writing About Business”; and Barron’s Dictionary of Finance and Investment Terms.
Stocks: Units of a company that represent partial ownership and are issued by public corporations trying to raise money. According to White, the stock price may not always accurately reflect the business. “It’s a common mistake,” he said. “Look back a year ago and you would see that tech stocks were booming, but it was just their stock prices. It wasn’t the companies themselves. It was the momentum from investors buying more. In the same way stock prices can lag even when the company has done good things.”
Shareholder: A person who purchases stock.
The Dow Jones Industrial Average: The oldest and most widely quoted measures of stock prices. Made up of 30 large industrial firms like General Motors, and AT & T. The average is calculated by adding together share prices of the stocks that comprise the index and dividing them by a figure that is adjusted to reflect splits.
The Standard & Poors 500: Often referred to as the S & P 500, it is a broader indicator of stock price movements than the Dow. It’s made up of 500 industrial, utility, transportation, and financial companies.
The Nasdaq Composite Index: Though it used to be viewed as an index of smaller stocks, in recent years the Nasdaq has become dominated by large technology companies that have kept their listings in this market instead of moving on to the NYSE.
The Russell 2000: An index of small stocks made up of companies with a market capitalization smaller than the 1,000 largest companies in the country.
The Wilshire 5,000: This index was created in 1974 and is considered one of the broadest measures of the entire stock market.
A bear market: An extended decline in the market.
A bull market: A prolonged rise in the prices of stocks, bonds, or commodities. Bull markets usually last at least a few months and are characterized by high trading volume.
Market capitalization: The total value of a company’s outstanding shares of stock.
Stock options: Holders of stock options have the right, but no obligation, to buy or sell a specified number of shares at a fixed price that has been determined on a certain date. Stock option contracts give a holder the right to buy and sell a stock index at a certain fixed value until a specified date. “In most cases when you are given stock options they don’t cost you anything, they are just given to you,” White said. “It’s something that may turn out to be worth it for you, especially if you think the prospects of the company are good. To get options in a company that isn’t growing, obviously isn’t worth as much.”
Index fund: A mutual fund with a portfolio that mirrors a larger broader based portfolio. “An index gives you more diversification within a particular market,” White said. “It’s often not as risky as buying individual stock.”
Growth Stock: Shares of a company known for a history of rapid earnings
growth. Most growth stocks do not pay dividends because management reinvests earnings
to feed the growth.
ICM: International Capital Markets Advisory Committee – Advises on policies
to strengthen the position of the U.S. as a world capital center and the NYSE
as an international market.
Initial Public Offering: An issue of new stock by a once private company
to transform itself into a publicly held one. IPOs are usually done to raise cash
for growing young companies that need larger sources of capital than the private
sector can provide. The new shares are sold to one or more investment banks, which
then sell them to the public.
Intermarket Trading System (ITS): An electronic communications network that links nine markets — the New York (NYSE), American (AMEX), Boston (BSE), Chicago (MSE), Cincinnati (CSE), Pacific (PSE) and Philadelphia (PHLX) stock exchanges, the Chicago Board Options Exchange (CBOE), and the NASD. The system enables market professionals to interact with their counterparts in other markets whenever the nationwide consolidated quote system (CQS) shows a better price.
Listed Stock: The stock of a company that is traded on a securities exchange, from the NYSE to local exchanges, like the Boston Stock Exchange. Each exchange has its own listing requirements.
Mutual Fund: A portfolio of stocks, bonds, or other securities administered by a team of one or more managers from an investment company who make buy and sell decisions on component securities.
National Market System: A national market system was mandated by the Securities Act Amendments of 1975, the most important federal securities legislation since the 1930s. At the heart of the national market is the ITS, which began operation in 1978. Nine markets — the American, Boston, Cincinnati, Chicago, New York, Pacific, and Philadelphia and NASD over-the-counter market — are linked electronically by ITS computers.
Price-Earnings Ratio: The P/E ratio is simply the price per share divided by the company’s earnings per share. However, P/E is not always an accurate guide to a stock’s quality. Some people tend to think that a stock is inflated and drastically overvalued if its price is many times its earnings. “The P-E earnings ratio tells you the earning in the past relative to today’s prices,” White said. “The relative P-E ratio is based on the industry. For example in the high tech industry, the P-E tends to higher, but in the Real Estate Investment Trust it could be lower.”
Quote: The highest bid to buy and the lowest offer to sell any
stock at a given time.
Arbitrage: The simultaneous purchase and sale of an assets in different
markets with a profitable price or yield differential.
Asked price: A term indicating the lowest price that a holder or a security
will take.
Blue chip stock: Common stock of a nationally known company that has a
long track record of profitability, growth and dividend payout.
Churning: Excessive trading of an account.
Common stock: Units of ownership in a public company.
Debt-to-equity ratio: Total liabilities divided by total shareholders’
equity.
Dividend: Payment designated by the board of directors of a corporation
to be distributed pro rata among the shares outstanding.
Dollar cost averaging: A system for buying securities at regular interval
s with fixed dollar amount.
Holding company: A corporation that owns the securities of another and
in most cases has voting control.
Margin: The amount a customer pays when using a broker’s credit to buy
and sell a security.
Margin call: A demand for a customer to put up money or securities with
the broker.
Penny stock: A stock that sells for less than $1 a share.
Proxy: A person with the power to act for another.
Securities and Exchange Commission: Established by congress to protect
investors the SEC monitors publicly traded interests.
Shares outstanding: The authorized shares of a corporation in the hands
of shareholders.
Split: A method of distributing shares to the public where the existing
shareholders are given additional shares based on their holdings.
