Financial news can feel like it is written in a different language. The good news is that the same few dozen words appear again and again. Learn these and most market headlines become easy to read.
The basics of stocks and markets
- Stock (share, equity): a unit of ownership in a company. Shareholders have a claim on part of the company’s assets and profits.
- Ticker symbol: the short code used to identify a stock or fund on an exchange, such as AAPL for Apple.
- Exchange: a regulated marketplace where securities trade. The New York Stock Exchange and Nasdaq are the two largest in the US.
- Broker: a firm that executes buy and sell orders for you. Most individual investors use an online brokerage account.
- Index: a basket of stocks used to measure a part of the market. The S&P 500 tracks 500 large US companies; the Dow Jones Industrial Average tracks 30; the Nasdaq Composite includes most stocks listed on Nasdaq.
- ETF (exchange-traded fund): a fund that holds a basket of securities and trades on an exchange like a stock. Many ETFs track an index.
- Mutual fund: a pooled fund that is bought and sold at the end-of-day price rather than traded throughout the day.
Prices and trading
- Bid and ask: the bid is the highest price a buyer is currently willing to pay; the ask is the lowest price a seller will accept.
- Spread: the gap between bid and ask. It is a hidden cost of trading and tends to be wider for less actively traded stocks.
- Volume: the number of shares traded in a period. Big price moves on heavy volume are generally seen as more significant.
- Market order and limit order: a market order trades immediately at the best available price; a limit order trades only at your price or better. See market orders vs. limit orders.
- Volatility: how much and how quickly a price moves. Higher volatility means larger swings in both directions.
Company size and quality
- Market capitalization: share price multiplied by shares outstanding. It measures the total market value of a company. Companies are often grouped as large-cap, mid-cap, and small-cap.
- Blue chip: an informal term for large, established, financially sound companies.
- Sector: a group of companies in similar businesses, such as technology, health care, or energy.
Earnings and valuation
- EPS (earnings per share): net income divided by shares outstanding.
- P/E ratio: share price divided by EPS; a common valuation measure. Read our guide to the P/E ratio.
- Dividend: a cash payment a company makes to shareholders, usually quarterly in the US.
- Dividend yield: annual dividends per share divided by the share price.
- Guidance: a company’s own forecast for future results, usually given with earnings.
Market moods and moves
- Bull market: a sustained period of rising prices. Bear market: commonly defined as a decline of 20% or more from a recent high.
- Correction: by convention, a decline of at least 10% but less than 20% from a recent high.
- Rally: a period of rising prices, often after a decline.
- All-time high: the highest level a stock or index has ever closed at.
- Diversification: spreading money across many investments so that no single one can do too much damage.
Where to go next
Once these terms feel familiar, the next step is learning how the big forces behind the market work. Start with how interest rates move the stock market.
