Before you start investing your money in anything from stocks to real estate, you should learn several terms that will help you understand the industry. These 8 terms will get you started so that you can speak knowledgeably about investment opportunities.
A period of two months or less when the stock market loses significant value. Market corrections create excellent opportunities for savvy investors to purchase stocks at low prices. Investors can then wait for the prices to rise again, at which point they can sell their stocks to earn profits.
In some cases, investors might mistake a bear market for a market correction. Bear markets are longer periods of devaluation. These longer periods of stagnation and falling prices make it difficult for even the most experienced investors to determine when stocks have hit their lowest point.
When the value of stock indexes increase rapidly over a prolonged period, investors refer to it as a bull market. Bull markets can help investors make a lot of money. As of July Standard & Poor’s stock index’s value has grown by 70 percent over the past decade. Anyone who purchased stocks while prices were low have seen huge returns.
Navigating a bull market presents its own challenges. You never know when prices will start to fall. When timed correctly, though, a bull market can generate huge returns for smart investors.
A blue-chip stock refers to stock that has a long history of growing value. If a company routinely pays strong dividends, investors often list it blue-chip. Buying these stocks is the closest thing that you can get to a sure bet in the investment world.
Some blue-chip companies include:
- International Business Machines
When you know how to buy and sell blue-chip stocks at the right times, you could find that you have more investment job opportunities. If you don’t know this and other terms, though, employers won’t give your resume a second glance.
The term “volatility” has earned a bad reputation because most people associate it with stocks that lose value rapidly. In some cases, a highly volatile stock could crash in a matter of hours.
In reality, volatility refers to stocks that have a high risk of losing or gaining value in a short amount of time. Investors can potentially make quick returns from volatile stocks when their values increase. Given the high risk, though, it takes a lot of nerve to invest in volatile stocks.
Stocks with low volatility change value slowly over time. They’re more stable, but rarely present opportunities for investors to make money quickly.
People who own stock in profitable companies might receive dividends. Dividends are cash payments that distribute the company’s profits amongst investors. In most cases, the company’s board of directors will determine how much money investors get for each share that they own. This is also called DPS, or Divided Per Share.
In other cases, the board can decide to pay a percentage of each stock’s value. This is called a “dividend yield.”
IPO, or Initial Public Offering
When a privately owned company decides to sell stocks to investors, the first round of sales is referred to as an IPO. Companies use IPO to increase capital and attract interest in their stock.
Early buyers hope to purchase stocks at low prices so they can benefit from the company’s future success. This is a somewhat risky move, though, because investors can’t base their decisions on the stock’s previous performance.
Facebook stock offers a good example of this. The company’s stock quickly fell below the IPO price, leaving many investors wondering whether they should sell before losing more money. It took Facebook nearly a year before the stock reached its IPO value.
The PEG Ratio is a more advanced version of the P/E Ratio.
P/E ratio stands for price-earnings ratio. It is the price of the stock divided by the company’s earnings. If you a company’s stock costs $40 per share and the company reports $2 per share earnings, then you divide 40 by 2 to get a 20 PE Ratio.
PEG adds growth to this equation. Many investors feel that it gives a more accurate picture of how well a stock will perform because it includes the company’s ability to grow.
How about you all? Now that you know more about investment terminology, do you think you’re ready to start investing your money? What other terms would you like defined to help you make informed investment choices?
Share your experiences by commenting below!
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