Key Stock Market Terms Part 1
A Bull is a market investor that buys stock shares in a company based on an expectation that the value (market price) of that stock will rise over time. A Bullish trader earns money by buying a stock at a low price and then selling the stock later (at a higher price). The amount of money earned is equal to the difference between the initial purchase price and the later sale price. In terms of opinions about the economy (or about a specific single stock), a Bull trader believes that the economic fundamentals are strong and expected to perform well in the future.
For example, if a bullish trader buys stock in a company that is valued at $100, that trader will be hoping for the price of the stock to rise to $120 (or at least some figure above $100) before that position is closed. If this occurs, the trader will earn $20 for every share of stock that is owned. So, if the Bull trader owned 10 shares of stock, the total gain would be $200 (10 x $20). The method doesn’t require that prices rise to these exact levels but a Bull trader will always be looking to buy an asset at a lower price and then to close the position (which essentially means to “sell” the stock) at a higher price later.
Bulls, in essence, are happy if market prices are moving in an upward direction. Falling markets make bullish traders nervous and, in many cases, will lose money if buy positions have been opened. A Bull trader is the opposite of a Bear trader (which is someone who expects market prices to fall).
A Bear is the opposite of a Bull and is a market investor with a pessimistic view of the overall economy (or of a single specific stock). To put this view into practice, a Bear Trader will sell stock shares in a company based on an expectation that the value (market price) of that stock will fall over time. To do this, a Bear can “borrow” a stock (on credit) from a Broker and then “sell” that stock at the current market price. If the Bear trader’s expectations are correct, the price of the stock will drop and the trader can then “buy back” the stock at a cheaper price.
In this case, the Bear trader’s profits will be determined by the difference in the opening price (when the stock was first sold) and the closing price (when the stock was “bought back”). For example, if a stock is initially sold at $100 and then prices drop to $75, the Bear trader will earn $25 for every share of stock that is owned. So, if the Bear trader initially sold 5 shares of stock, the total profit would be $125 (5 x $25 = $125).
This process is also referred to as “short selling,” and it should be remembered that if the Bear trader’s expectations are wrong, and the price of the stock rises, the trader will lose money. The process for calculating losses in this case would be the same as is done when calculating gains: Find the difference between the opening and closing price of the trade, and then multiply this by the total number of shares that are owned.
The Book Value of the company is the total value of that company if all of its assets are calculated and then its liabilities are subtracted. This is not necessarily the value of the company’s stock price, however, as values in stock markets depend on many other factors, such as forecasted future performance and the value of having a well-known brand (both of which can cause stock prices to move up or down and are not directly related to the value of the company’s assets).
A broker is an entity that offers traders access to the financial markets so that stocks can be bought and sold. For this service, brokers might charge commission fees or other transaction costs.
Dividends are used by companies to reward and attract new shareholders. A dividend is a payment that is offered and is calculated as a percentage of the share price. When a company has excess cash reserves, the company will often return this money to shareholders, above the value of the actual stock price. For example, if a company offers a dividend equal to $1 per share, and a trader owns 10 shares, the trader will receive a $10 payment in addition to the gains made in the price change of the stock.