With over 2500 companies listed and trading 1.4 billion shares each day, there is no doubt New York Stock Exchange is the world-leading stock exchange by market capitalization.
As an investor, choosing to invest in one of the 2500 firms is easy; however, the outcome of the investment may not be as you expected. Understanding basic terms in the stock market increases your odds of making the most out of NYSE and prepares you to be the next ‘Wolf’ on Wall Street. By defining the following terms, you will understand basic concepts of the stock market.
1. Sector
A sector is a specific economic niche in which businesses offering the same services or products are grouped. For instance, farmers, food processors, and the hotel industry cumulatively fall under the food sector because they provide similar products.
As a stock investor, understanding which sector in the stock market you are channeling your money in is very crucial. Most people prefer trading in specific sectors where they understand how it works and can predict future fluctuations.
2. Growth Stocks
Growth stocks are shares in a company that are expected to grow at a significant rate above other shares or the normal market’s growth rate. In most cases, growth stocks don’t pay dividends since the main aim of an issuer is to reinvest accrued earnings from the transactions.
Growth stocks are often expensive in the short run, but they do not command a company’s valuation in the long run. Investing in high-priced stock is worth it based on the assumption that the shares will yield good returns soon. Nonetheless, growth stocks experience a dramatic decline if they do not meet customer’s expectations.
3. Insider Trades
Insider trades are a gamble between illegal and legal operations involving the stock market. These trades entail buying and selling a company’s stock while in possession of materials that are not yet released to the public. Illegalities in insider trades come to play when someone other than the company’s senior employees use material information at their possession to affect decisions made by an investor whether to buy or sell stocks in question.
When dealing with insider trades, you must be extremely cautious to avoid losing your investments and serving time in prison. According to SEC, trading on illegal insider trades calls for severe punishment, which involves spending up to 20 years of your life in a federal correction facility, paying a fine of not less than $5 million, or both.
4. Bull and Bear Market
The bull market is a condition in which people speculate that the financial, bond, real estate, or currency market prices will increase. Since prices in the stock market fluctuate periodically over a certain time frame, the bull market typically indicates a prolonged period in which a large portion of stock prices soar continuously for months or years.
On the other hand bear market is the opposite of a bull market. Here stock prices plummet for a sustained period. The bear market indicates the economy is slowing down and the prevailing unemployment rate is high, while the bull market represents a booming economy. The choice to invest in a bull or bear market depends on the state of a countries economy and future expectations. Do not make hasty decisions before listening to securities market advisors.
5. Volatility
Volatility uses statistical tools such as deviation and variance to measure the distribution of a certain type of stock’s returns. A volatile market is where stock prices rise or fall by more than 1% for a specified time. Economics argues that volatility has a direct relationship with risk; the higher the volatility, the higher the risks associated with the selling and buying of shares. Also, a share’s volatility is a key factor in determining the price of contracts. So when dealing with volatile shares, assess the risks involved before concluding the transaction.
6. Market Capitalization
Market capitalization is the total value of a company’s stock in terms of dollars. Also known as market cap, market capitalization is divided into three sections according to the firm’s number and price of shares: large cap ($10-$200 billion), middle cap ($2-$10 billion), small cap ($2 billion-$300 million), and micro caps, which are not more than $300 million. Market cap helps investors determine the current size of the company, thus influencing their decision to buy or sell shares.