Young professionals are growing by the numbers. They are the new breed of talented working class with strong purchasing power. But are they equipped to manage their personal finances and clever enough to make sound investments?
With the affluence they carry, it wouldn’t be surprising if they set their sights on a marketplace to grow their money. Stories of students hitting it big in the stock market are trending news. Whether the stories are true or a hoax, it generates interest among this bunch to venture into stock trading.
If you are new to the game, allow us to share some snippets about the U.S. stock market. By simple definition, it is the marketplace where buyers and sellers of stocks converge to make money. However, throw in some risks then it is also the place where you can lose your money.
THE U.S. STOCK EXCHANGE
The U.S. bourse is the most dominating stock market in the world. Two major exchanges comprise this giant marketplace: the New York Stock Exchange (NYSE) and NASDAQ. Today, the term Wall Street no longer refer to the NYSE in particular but has expanded to mean the financial and investment community in general.
- The New York Stock Exchange (NYSE)
Transactions are conducted physically on the trading floor. When the bell rings to signal the start of trading, stock traders engage in a frantic buying and selling of stocks. Typical in an auction, the play is about matching the highest bid price with the lowest asking price. A designated ‘specialist’ facilitates the tug-o-war until a negotiated price is agreed upon.
Unlike in the NYSE, trading of stocks does not happen on the trading floor. Transactions pass through an intricate electronic network where the listed companies are linked together. Dealers create the market for the buyers and act as brokers for the sellers.
HOW IS NYSE DIFFERENT FROM NASDAQ?
1. Both are public exchanges after NYSE changed its ownership from private to public in March 2006. Each exchange has about 3,000+ plus listed companies.
2. Stock trading in NYSE is typical of an auction market while NASDAQ is a dealer’s market. The orderly flow of trading is controlled by a dealer (market maker) on the NASDAQ side and a specialist (facilitator) in NYSE.
3. NYSE is home to the blue-chip stocks of long standing. Stocks of Bank of America, Ford Motor, Oracle and General Electric (GE) to name a few are the most active stocks month-to-date.
4. On the other hand, tech companies and internet firms or those belonging to growth industries dominate NASDAQ. Among the most active stocks at the midpoint of March 2017 are Frontier Communications, Microsoft, Apple, and Facebook.
As an investor wishing to own a piece of the pie, it doesn’t matter whether the pie is on NYSE or NASDAQ. The important thing is you now have an idea how trading is done in each exchange.
THE MARKET JARGON
From the types of operation, let us move to a different exchange, the verbal exchange. Do not let stockbrokers, traders or even investment bankers intimidate you with their sweet talk. Learning the market lingo will project a semblance of knowledge and not appear like a dummy.
Commonly Used Terminology
1. Dow Jones Industrial Average: The lead index which averages the performance of blue chip stocks
2. Standard & Poor’s 500 (S & P 500): Index Another barometer of the performance of the top 500 stocks which is an accurate representation of the stock market
3. Initial Public Offering (IPO): The listing of a company on the exchange and its first offering of its stocks to the public
4. Price per Earning Ratio (P/E Ratio): Computed by dividing the stock price by the company’s earnings per share
5. Blue Chip: or premium stocks of industry leaders and well-established companies
6. Bull Market: Characterized by rising stock prices with positive market outlook
7. Bear Market: Gloomy market outlook with steep decline of stock prices
8. Close: The end of trading day with last traded stock prices posted
9. Day Trading: Official buying and selling period before the close of the trading day
10. Dividends: Payments to shareholders (cash or stocks) from realized profits
11. Exchange: The supermarket of tradable equities mentioned earlier
12. Hedge: A trading strategy to offset or minimize losses
13. Limit Order: Specific instruction to buy or sell at a set price
14. Portfolio: The basket of held securities or stocks for trading
15. Quote: Refers to the bid, ask and the last price of a particular stock within the trading day
16. Rally: The brisk increase in the price level of the entire market or a particular stock
17. Stock Symbol: The abbreviated alphabetic symbol of a listed company on the stock exchange
18. Volatility: The unpredictability of price movements, highs, and lows
19. Volume: The total or average volume of stocks traded on the day
20. Yield: Refers to the return on investment derived from dividend payments
There are more words exclusive to the stock market. If we list them all here, it can run up to as many as 200, the same number in years since the U.S. stock trading began. Of course, you are under no obligation to memorize each and every word in the stock market vocabulary. It won’t hurt to learn some ‘keywords’ that matter.
JUST THE BEGINNING
We end this piece by reminding you the snippets we shared are just the beginning. The learning curve is steep. Hitting it big in the stock market is not like instant coffee. You need to brew, percolate and maintain the heat. You can savor the aroma only when you have mastered the craft.
The stock market is no longer for the tycoons but for the little guys in the mainstream too. Besides, if you have enough funds to invest, you are also qualified to be rich.