“An investment in knowledge always pays the best interest.”
It’s common for the stock market to initially seem enigmatic. What is its purpose? How does it work? What do I need to know about it? To answer such questions, it helps to begin by learning the language that describes the stock market’s functions and behavior. Here’s what you need to know about basic stock market terms.
Basic Stock Market Terms
Modern stock exchanges date back to the 1600s, when they were first used by sailing companies during the imperialistic expansion of the British empire, Investopedia explains. The essential purpose of the stock market has remained the same since then. Companies use stock exchanges to attract investors in order to help them grow. In return, investors receive a share of a company’s profit.
Below are 15 essential stock market terms.
Annual Percentage Rate (APR)
In the context of investing, the APR is the annual rate charged for borrowing or earned through investment. Because loans and credit agreements can vary in their structures and fees, the APR provides borrowers with a bottom-line number they can easily compare to rates charged by other lenders.
A yearly record that documents the financial condition of a publicly held company. The Securities and Exchange Commission (SEC) requires that this report be distributed to all shareholders. The report includes items such as balance sheets, income statements, cash flow information and descriptions of company operations.
Anything that has value in an exchange. Stocks, for example, are considered assets.
Types of long-term debt in which buyers are considered the moneylenders. Bonds are sold to individuals by institutions, such as the U.S. government, local governments or companies, and may be subject to interest.
Money invested in a firm.
The percentage of a company’s profit that is owed to shareholders.
Initial Public Offering (IPO)
The price paid by someone for borrowing money. Interest is expressed as a percentage rate over a period of time.
Any financial obligations a company owes. Understanding a company’s liabilities gives shareholders insight into its overall financial condition and strength.
The first (and most significant) electronic exchange where traders can buy and sell stock. Nasdaq stands for the National Association of Securities Dealers Automatic Quotation System.
New York Stock Exchange (NYSE)
The largest equities-based exchange in the world, located on Wall Street in New York City. Also known as the “Big Board” or simply the “Exchange,” it is home to more than 2,000 common and preferred traded stocks.
Portfolio: Shares, Bonds, Certificates of Deposit
A “portfolio” describes a collection of investments or assets. These may include shares (a partial ownership of a company), bonds (debt owed to someone by an institution) or certificates of deposit (savings certificates designed to mature at a certain time).
Price to Earnings (P/E) Ratio
The ratio that shows a company’s current share price relative to its per share earnings. It is used to express the value of a company and can be calculated as:
Market Value per Share / Earnings per Share
Securities and Exchange Commission (SEC)
A federal agency that regulates the U.S. financial markets. The SEC also oversees the securities industry and promotes full disclosure in order to protect the investing public against malpractice.
The value delivered to shareholders that comes from owning stock in a company. This value is determined by a company’s ability to grow sales and earnings.
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