We always use terms like Blue Chip or Mid-Cap or Value Fund, but what does it mean? Here's a quick introduction to the terminology associated with the stock market.
What is a stock?
Any company with stock means that there are many many investors out there who own the company. Anyone who ownes a SHARE owns a portion of the company. Since you own the company you are liable for all the money you put into the company. If you lose it all, that was the risk you took. Stocks are actually LIMITED LIABILITY which means you cannot lose more than you put in.
As a shareholder you can vote and attend the annual meeting of shareholders. You get as many votes as shares you own. In addition to the price of the stock going up when the company does well you may also get DIVIDENDS which is your share of the company's profits.
What is a market?
A market is all the stocks together and acts as the universe of the business world. Every day individual stocks go up a little, down a little, way up, way down, whatever, but when we look at what all those stocks did in general, we call it the market. When the market goes up we say it's a BULL MARKET (think when a bull atacks it's horns swipe upward), and when the market goes down we say it's BEAR MARKET (think when a bear attacks it's claws swipe downward). If the market sounds really etherial and not very material, it's because that's exactly how it is. When it comes to measuring the market, there is no one way to do it. The most common way is to track INDICIES.
What is an index?
An index is a way of measuring the market and many exist. The two most common are the DOW JONES INDUSTRIAL AVERAGE and the STANDARD AND POOR 500. The DJIA tracks 30 industrial companies and comes up with a number that supposedly summarizes the state of the market. The S&P 500 tracks more stocks (500) and gives a broader indication of the state of the market. The RUSSELL 2000 tracks the largest 1000 to 3000 companies, and the WILSHIRE 5000 gives the broadest tracking of the usually looked at indicies.
What types of stocks are there?
- Blue-chip stocks are nationally known brands with long histories of solid dividend and growth records
- By earnings strategy
- Growth stocks exhibit above average sales and earnings growth retaining those earnings to grow the company and it's marketshare (it usually doesn't pay dividends since it uses all its earnings)
- Value or Income stocks are usually mature companies that pay high dividends and see little increase in earnings.
- By size of company
- Large Cap stocks are large in size having huge market values (tens of billions of dollars)
- Mid Cap stocks are medium in size (billions of dollars)
- Small Cap stocks are small (hundreds of millions of dollars), but usually outperform large-cap stocks (they're more risky since they tend to go out of business more)