Key Stock Market Terms Part 2
A stock exchange is a venue for buying and selling stocks. The main purpose of a stock exchange is to provide fair and stable trading transactions where market information (such as an earnings report) is available to all participants. Exchanges also serve to allow companies a platform from which to sell securities for public investment. Exchanges can be seen in physical locations or on electronic platforms that can be access via the internet. Sometimes, stock exchanges are also referred to as Share Exchanges or Bourses, in different areas of the world.
Price to Earnings Ratio
A Price to Earnings Ratio (sometimes called a P/E Ratio) is a measurement of the amount paid in stock price for each Dollar of corporate earnings. For example, if a stock is trading at $50 and the company releases a report showing that the company earned profits of $2 for each outstanding share, the P/E ratio for that stock will be 25 ($50 stock price, divided by $2 in earnings for each share). In general, traders prefer to invest in stocks with low P/E Ratios, as these companies are thought to be cheaper while still being a high quality company can produce profits.
A Shareholder is a person or institution that owns part (at least a single share) of a certain company. In essence, Shareholders represent the core ownership of the company. Because of this, Shareholders are entitled to profit when company performance is strong or to lose part of their investment when the company performs poorly.
As with any type of investment, with any potential for economic gain, there is also the potential for loss and these characteristics are applied to Shareholders invested in the company. Shareholders generally are not in the position to guide company activities on a day to day basis but when Shareholders no longer believe the company is performing in an acceptable manner, they have to option to sell their stocks and choose another investment.
A stock is an asset investment that shows a person’s ownership within a certain company. Stock ownership also signifies a person’s entitlement to a portion of that company’s assets and profit earnings. Total company ownership is based on the number of shares that are owned by the investor. This number is then compared to the total number of shares that are offered by the company.
For example, if company that offers 5,000 shares of stock and an investor owns 1,000 shares of that company, that investor is said to own 20% of that company and to have a claim to 20% of its total assets. Stocks are the most common type of asset in investment portfolios and tend to perform better than most other asset classes (such as bonds or commodities investments.
Common Stock and Preferred Stock
There are essentially two common stock types: preferred stock and common stock. Common stock will often allow the stock owner to have voting rights at shareholder meetings as well as the opportunity to be paid in dividends. Preferred stock, however, differs in that its ownership usually does not provide voting rights at shareholder meeting. Because of this disadvantage, preferred stock will generally provide a larger claim on company assets and profit earnings.
This can be seen when preferred stock owners receive dividend payments earlier than owners of common stock and preferred stock holders will also be given priority if the company records a negative performance and is forced into bankruptcy. After bankruptcy, the company’s assets will be liquidated and the proceeds will be given first to preferred stock shareholders. If there is enough remaining cash, common stock holders will be paid later for their investments.
A rally is the upward movement in an asset that is larger than what is typically seen. Rallies are also referred to as Bull Markets, as prices in stocks continue to push higher and any declines are limited. When stock gains happen on a regular basis, the market activity will often be described as a rally.
For example, if a stock index rises in value by 20% in 6 months, when historically, that stock index tends to make gains of 10% each year, this activity would be described as a market rally. In this environment, buyers are outnumbering sellers, and most stock prices are moving upward.
A market crash is the downward movement in an asset that is larger than usual. Crashes are also referred to as Bear Markets, as prices in stocks continue to move lower and any rallies are limited. When stock losses happen on a regular basis, the market activity will often be described as a crash.
For example, if a stock index drops in value by 20% in 6 months, when historically, that stock index tends to make gains of 10% each year, this activity would be described as a market crash. In this environment, sellers are outnumbering buyers, and most stock prices are moving downward.