Knowledge is the only thing you need to become a successful and confident investor.
Some people think that you need vast amounts of money to succeed in the stock market. Others think that you require a master’s degree in finance, or perhaps some very good friends in very high places.
In reality, however, all you need is a small bit of money and the desire to learn.
To help you out, here are some of the fundamental terms that every investor should know. Master these and you’ll be on your way in no time:
Also called equities or shares, a stock is a piece of ownership in a company.
Buying stock makes you a company shareholder. This entitles you to a share of that company’s profits and assets, as well as having a say in how the business is run. Of course, how much of those profits you have a claim to and how much influence you have all depends on the amount of stock you own relative to the total number of shares the company has issued.
In the short term, stock prices move based on the opinion of the crowd (which is influenced by many factors). Over the long term, however, a company’s true value is reflected in its price. That’s why time, more than anything else, is the critical ingredient of successful investing.
Stock exchanges are where all of these shares are traded.
Stock exchanges operate within a specific geographical stock market. Within the U.S., the two most common exchanges are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ). Other countries, like the U.K or India, will similarly have their own exchanges.
A stock exchange essentially functions like a supermarket for shares. Think of the NYSE or the NASDAQ like Sam’s Club or Costco. They sell similar things and they have to compete for customers. The more trades or sales they process, the more money they make.
Simply put, a stock index is the calculated average of a selection of different company share prices. It is usually divided up according to a specific market, sector, or country.
Think of it as though a selection of stocks from different companies have been spread out on a table for you to see. By looking at the average performance of all of these stocks together, you’re able to get get a good idea of the health of a particular industry.
You’ve probably heard of big indices before like the Dow Jones, the Nasdaq and the S&P 500. You can read more about stock indexes here.
Annual and Quarterly Reports
By law, public companies are required to produce quarterly and yearly reports on their activities and finances to give shareholders information on their financial performance.
These disclosures are massively important for shareholders as they give us an accurate insight into the current performance and future expectations of a company.
To find out more about the things you should look for in these reports, check out our ‘Earnings Season Cheat Sheet‘.
Bid Price, Ask Price, Spread
These are terms used to describe the buying and selling of shares.
When shares are for sale, they have an “ask price”. The person looking to buy shares has to pay a “bid price,” or the actual sale prices of stocks or shares at any given time.
The difference between the two is called a spread.
When companies report their quarterly and annual earnings, you’ll often hear about dividends.
Dividends are regular payments that some (not all) companies pay out to their shareholders on a monthly, quarterly, or yearly basis. This is how some people make regular money from owning stocks in a company.
Typically, companies that pay out dividends are past their initial high-growth stage and are well established.
Though dividend stocks might seem like a very attractive investment because they pay out actual cash regularly, they might not fit into your investment strategy. Read more about dividends here and decide for yourself if these are the type of companies you would like to invest in.
Portfolio & Diversification
When you choose to invest in a number of companies, you are building your portfolio.
A good practice is to diversify—invest in multiple stocks that are different from one another in terms of size, industry, or geographical region. Diversifying decreases your risk because if one particular stock or industry suffers a slowdown, you won’t lose all your money.
A good target for diversification is 12 different companies spread across at least three industries. Making sure your eggs are in multiple baskets will help ensure you’re enjoying consistent gains with less risk.
Capital gains are the increase in the value of an asset or investment from its original purchase price. Contrarily, capital losses are the decrease in value.
You have to pay taxes on capital gains, though this varies depending on the country you reside in and the amount of capital gains you have earned. To ensure that you pay your taxes correctly, it is best to check with your government or employ the services of a financial advisor.
These are just some of the important terms you need to understand before you start investing in the stock market.
Have we missed out on any of the terms you think are important? Get in touch with us in the comments below and let us know!
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