Stock Market Terms Defined
If you are a newbie in the stock market industry and question marks still appear in your head whenever the stock market is being discussed in the news or in the papers then this article for you. I give you some of the most common terms used in the stock market industry.
Stocks and the Stock Market
The most obvious question for any person just starting to get acquainted with the stock market is: what is the stock market? As the name may suggest, the stock market is the place where stocks are being sold and bought. There are two major stock markets in the United States: the NYSE or the New York Stock Exchange and the AMEX or the American Stock Exchange. Another informal stock market is the NASDAQ or the National Association of Securities Dealers Automated Quotations.
What are stocks then? Stocks are the representation of proportional ownership in a corporation. Confusing? Maybe, but it is pretty simple really. A business is usually owned by just one person and this is called a sole proprietorship business. Businesses turn into corporations when they are incorporated in the appropriate government agency. When a corporation is incorporated it attains a separate and distinct legal personality than any of its owners. Corporations even have their own social security number called Employer Identification Number (EIN). A corporation is owned by the shareholders of stock. Stocks in the stock market are from corporations that are public corporations.
Public Corporations
To become a public corporation, a corporation must first register in the Securities and Exchange Commission (SEC) and undergo an initial public offering (IPO) where the corporation’s value is determined and computed. When you buy a stock in the stock market you become an owner or shareholder of the corporation. Since a publicly traded corporation may have millions of �owners’ then they elect a board of directors (BOD) that make investment decisions and policies for the benefit of the corporation.
EPS and P/E Ratio
Since you are a stockholder and an owner of the corporation it is only logical that you get your proportionate share in the corporation’s profits. These profits are distributed as dividends or earnings per share (EPS). When you own more shares you get more profits or EPS. Stockholders can also earn profit by selling their stocks. This is called earning capital gains. They buy the stock and sell it at a time when the stock prices are higher than the amount they bought it for.
To determine how cheap or expensive a stock is you look at the P/E ratio also known as the multiple. The P/E ratio is a comparison of the price of a stock relative to its EPS. It is a representation of how much an investor is willing to pay for a stock to get the profits per stock. You can compare the P/E ratio of your company’s stock to other companies that are in the same industry to determine how expensive your stock is. The growth of a corporation is determined if it has a high P/E ratio than the market multiple. A market multiple is the P/E ratio of the top 500 largest stocks.
There are still many concepts used in the stock market today but I do hope this enlightened you in learning more about the stock market.