The stock market is a dynamic and complex environment where buyers and sellers exchange shares of publicly listed companies. For new traders, understanding key terminology is essential to making informed decisions.
Here’s a comprehensive guide to some of the most important terms related to stock market trading:
1. Activist investor
An investor who owns 5% or more of a company and demands changes from management.
2. American Depositary Receipt (ADR)
An instrument that trades on a U.S. exchange that represents shares (often one share) of a foreign stock.
3. Beta
A measure of volatility or risk. It is the correlation of a stock or portfolio’s change in value in response to a move by the overall market.
4. Business Development Corporation (BDC)
A publicly traded private equity firm.
5. Call option
An option that gives the buyer the right but not the obligation to buy a security at a specific price by a certain date.
6. Cash flow
The amount of cash generated by a company. Often compared with earnings.
7. Cash flow from operations
The amount of cash generated by business activities. Does not include financing activities, such as interest payments or sale of stock.
8. Closed-end fund
A mutual fund that trades like a stock, based on supply and demand. Usually trades at a discount or premium to its net asset value.
9. Compound Annual Growth Rate (CAGR)
The average year-over-year growth rate over a period of years. It’s not the simple average growth rate, but it takes into account the effect of compounding. Compounding The ability of an investment to earn additional money by adding previous distributions, earnings, and so on to the original amount, which generates a larger return than would be received from just the original amount.
10. Covered call
Selling a call, when you own the underlying stock.
11. Depreciation
An accounting method that lets a business expense the cost of equipment over its useful life.
12. Direct Stock Purchase Plan (DSPP)
A way to buy stock directly from the underlying company without going through a stockbroker.
13. Discount
A price less than the value of an asset.
14. Dividend
A cash distribution paid by a company.
15. Dividend Achiever
A stock that has raised its dividend for 10 or more consecutive years. List is maintained by Nasdaq OMX.
16. Dividend Aristocrat
A stock that is part of the Standard & Poor’s (S&P) 500 and has increased its dividend for 25 or more consecutive years. List is maintained by S&P.
17. Dividend capture
Buying a stock just before its ex-dividend date to capture the dividend and then selling the stock shortly afterward.
18. Dividend Challenger
A stock that has raised its dividend for five to nine consecutive years. List is maintained by the DRiP Resource Center.
19. Dividend Champion
A stock that has raised its dividend for 25 or more consecutive years. Unlike a Dividend Aristocrat, a Dividend Champion is not required to be part of the S&P 500. List is maintained by the DRiP Resource Center.
20. Dividend Contender
A stock that has raised its dividend for 10 or more consecutive years. List is maintained by the DRiP Resource Center.
21. Dividend Reinvestment Program (DRIP)
A program for automatically reinvesting dividends.
22. Ex-dividend date
The first day that an investor can sell the stock without losing the rights to the most recently declared dividend.
23. Master Limited Partnership (MLP)
A publicly traded partnership. Owners are not shareholders; they are partners. MLPs have different tax considerations from stocks.
24. Par value
The face value of a bond or preferred stock.
25. Payout ratio
A formula for determining the safety of the dividend. The formula is dividends paid divided by net income. You can substitute cash flow from operations or free cash flow for net income.
26. Perpetual Dividend Raiser
A stock with a track record of raising the dividend every year.
27. Preferred stock
Has properties of both stocks and bonds. Pays a fixed dividend, usually over a predetermined period. It is below a bond in rank as far as claims to the company’s assets but above common stock.
28. Premium
A price above the value of an asset.
29. Put option
An option that gives the buyer the right but not the obligation to sell a security at a certain price by a specified date.
30. Qualified dividend
Ordinary dividends that (as of 2012) are taxed at the lower 15% tax rate, rather than an investor’s ordinary income tax rate.
31. Real Estate Investment Trust (REIT)
A publicly traded partnership that invests in real estate.
32. Return on Equity (ROE)
A measure of a company’s profitability. The formula is net income divided by shareholders’ equity.
33. Sharpe ratio
A way to measure two investments’ performance relative to risk.
34. Special dividend
A one-time dividend declared by a company.
35. Standard deviation
A measure of variability. Used in securities analysis to help determine risk.
36. Yield
The ratio of the dividend per share relative to the stock price. The formula is dividend per share divided by stock price.
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