An Overview on Reading the Stock Market

A lot of people are familiar with the stock market. However, most individuals remain unfamiliar with terms like “stock”, “buying and selling of stocks”, “stock market charts, and “bulls and bears”. Even the term “stock market” itself remains a point of confusion for those who don’t have financial expertise. There are times when they would scratch their heads in bewilderment whenever they hear their neighbors complain about the low prices of stocks on the market or if a colleague suddenly gets a huge windfall from his stock market investments. What most people are aware of is that the trading on the stock market can lead to booming or bankrupt businesses if these companies have played the “stock market game” correctly. Simply put, stocks are representations of the company’s assets and profits. If the company makes a profit from the stocks, this value is divided yearly among the shareholders in the form of a dividend. As an example, if a company makes a profit of $100,000 this year, and it has 20 shareholders holding 1 stock each, the shareholders would receive a dividend of $5,000.

The Stock Market Defined

The stock market – also known as the “stock exchange” – is a financial institution wherein licensed brokers trade company stocks and other securities – including privately traded securities – that are approved for trading by the exchange. Exchanges can occur physically or virtually. Brokers buy and sell stocks based on the needs and requirements of the people and/or companies they represent.

The two types of stock markets are…

• Primary Stock Market = for trading of Initial Public Offerings (IPOs) and other brand new issues by sellers and buyers

• Secondary Stock Market = for trading of existent stocks in the market by buyers and sellers

Common Stock Market Terms

Stock market “lingo” is nothing to be confused or feel daunted about. In order to understand the trends in the stock market, you need to learn certain commonly used terms and be able to assess stock market charts. By taking the initiative to learn the basics of the stock market, you will be transformed into a knowledgeable investor and be able to make good stock decisions.

Let us take a look at some of the terms that you will most likely encounter on the stock market…

Stock price = This is the value for which stocks are bought and sold. Factors that directly impact on stock prices are the position and performance of company issuing the stocks. Another term related to the stock price is the market capitalization – or simply market cap – which is the stock price multiplied by the number of shares. Other factors that affect stock prices include current performance and expansion and future growth. Let us put it in simpler terms. If a company is doing poorly in the stock market, their stock prices decline in value. In contrast, if these companies are performing well, you will see the stock prices shoot up in value.

Reading Stock Market Charts = These charts and quotes provide the current status of the performance of the stocks. These stock changes can be reflected as “day-to-day” or “intra-day” depending on the trading on that particular day.

52 Week High and Low = This consists of stock data over a period of 52 weeks. On the date of reporting, you will be able to see the stocks with the lowest and highest prices during this 52-week period.

Type of Stock = Preferred stocks would have specific symbols written after the company name. If no such symbols are indicated, the stock is a common stock.

Ticker Symbol = Every company trading on the stock market is assigned an abbreviation or specific letters. These ticker symbols are used so that all the companies can be listed on the ticker tape. All the major stock exchanges in the U.S. – such as the New York Stock Exchange, NASDAQ, Dow Jones and American Stock Exchange – restrict ticker symbols from 1 to 4 letters only (similar to the heraldic symbols in the British exchanges). Any new companies should register their own symbols, which should be different from the symbols that are already being used by other firms. Some examples of ticker symbols include AAPL for Apple Computer Inc. and INTC for Intel. You will probably observe that some symbols would have a period followed by 1 or 2 additional letters. One good example is BRK.B. This means that the stock is being offered by Berkshire Hathway Company and it is a lower priced “Class B” stock.

Dividend Per Share and Dividend Yield = On a stock market chart, a company is said to be issuing dividends if both of the columns with these headings are filled up. You compute the Dividend Yield by dividing the annual dividends per share by the price per share. This dividend yield means that the shareholder has a return on his dividends.

Price/Earnings Ratio or P/E Ratio = This value is computed by dividing the latest stock price by the average earnings per share for the last 4 quarters.

Trading Volume = Total selling and buying transactions that have taken place during the day.

Closing = Last quoted price of the stock at closing day of the stock market

Net Change = The difference in stock prices since the last change that occurred. Net Change enables you see the direction where the stock price is headed – with a plus symbol for a positive direction while a minus symbol for a negative direction.

Bulls and bears = The term “bulls” and “bears” are economic indicators for the stock market. You have a bull market when the values of stocks go up. This is an indicator of good health in the economy. In a bull market, investors can stand to gain substantial profits from stock sales. In contrast, bear market is indicative of an economic downtrend so that investors need to sell their stocks before the prices drop much lower. During a bear market, a lot of investors and businesses tend to lose greatly if they have not been quick in buying good stocks and selling those shares before they dropped fast. The general rule of thumb to follow in the stock market is to buy when prices are low and sell when prices are high (before the prices decline.)