Stock Market 101

Between the discussions of derivatives, butterfly option spreads, buying penny stocks and dividend arbitrage play sometimes we (including myself) need to get back to the stock market basics. Remembering what investing is truly about will help even the advanced investor remember what truely drives the market. So without further ado here is

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101 stock market basics.

  1. A share is a representative of a piece of ownership in a company.
  2. Stock is the collective term for shares.
  3. If you sell a share someone HAD to buy it.
  4. If you buy a share someone HAD to sell it to you.
  5. If there is was no buyers, technically on that moment the stock is worth 0.  (IBM during Black Monday)
  6. The large markets have market makers who buy and sell to make money and keep things liquid.
  7. Liquidity is how easy you can buy or sell shares.
  8. The ask is how much a market maker will sell to you for.
  9. The bid is how much a market maker will buy from you for.
  10. The spread is the different between the ask and the bid and this is how the market maker makes money.
  11. A bull market is when stocks are climbing consistently.
  12. A bear market is when stock are declining consistently.
  13. A dividend is a return of money to the share holders.
  14. Dividends are currently taxed at a lower rate that regular gains.
  15. The dividend yield is what percentage of your money invested will be returned to you per year in dividends.
  16. Ex-dividend date is the date you must own the stock in order to receive the next dividend.
  17. Payout ratio is what percentage of cash flow (sometimes earnings) a dividend is going to use up.
  18. Authorized Stock is the number of stocks that will exist representing ownership in the corporation.
  19. Restricted Stock can’t be traded on the open market, it must be approved by the SEC.  This is usually owned by insiders.
  20. Letter Stock is another term for Restricted Stock.
  21. The float is the number of shares being traded on the open market.
  22. Outstanding shares is the number of float stock plus restricted stock.
  23. A stock split is when a company cuts the worth of a share in half by doubling the number of stocks.
  24. Stock splits are often done to increase volume of liquidity.
  25. Reverse Stock Splits are when a company increase the worth of a share of stock by reducing the number of shares to all equally.
  26. Reverse splits are often done to keep stocks out of the penny stock range.
  27. Stock buy backs occur when a company buys back stock off the open market or from restricted stock and retires it.  This reduces the outstanding shares.
  28. Stock issues occur when a company takes treasury stocks and sells it on the open market or to an insider increasing the number of outstanding shares.
  29. Stock issues is also called share dilution.
  30. NYSE is the New York Stock Exchange
  31. To be on the NYSE earnings must be more than 5 million and have more than 2 million shares to trade.
  32. NYSE stock symbols can have 1, 2, or 3 letters.
  33. NASDAQ stands for National Association of Security Dealers Automated Quote System
  34. NASDAQ stocks have 4 letter names.
  35. Option names have their expiration date and strike price coded in the name.
  36. Stock shares can be grouped.  Commonly called Class A and Class B stock, they are usually the same except for different voting rights.
  37. Preferred shares generally have no voting rights, but receive their dividend first and must be paid in full if missed before common stock recieves any.
  38. The market cap is the worth of a company if you were to buy it completely out of outstanding shares.  Share Price X Outstanding Shares
  39. Volume is how many shares are traded over a given period of time.
  40. The higher the volume the higher the liquidity.
  41. Fundamentalist believe that the worth of a stock price is correlated to the metrics of the business and economy.
  42. Technical Traders believe that everything that can be known about a stock is priced into the stock and the movement of the price tells more about the future price than the fundamentals.
  43. Many people are a hybrid of fundamentalist and technical traders.
  44. Resistance is a price point which appears to stall the climbing of a stock price.
  45. Support is a price point which appears to stop the falling of a stock price.
  46. Remember it’s not a line on a chart that creates support or resistance, it’s a price point that encourages buyers to buy or sellers to sell.
  47. Exchange Traded Funds (ETF) are buckets of stocks that are sold using a single stock.
  48. Commissions is the cost of making a stock purchase.
  49. Slippage is the percent of earnings lost due to commissions and the spread.
  50. Stop – Loss is a tool to automatically sell when a price gets too low (or too high if you’re short selling)

Ok, that’s enough stock market today.  I’ll finish the rest of the stock market 101 tomorrow.  I find as I read through the list I’m reminded of times I made a bad investment because I overlooked something as common as too high a payout ratio or excessive stock dilution.  We’ll see stock market 101 part deux tomorrow.

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Related posts:

  1. Stock Market 101 – Part 2
  2. Stock Market 101 Part 3
  3. Float – Authorized – Outstanding Shares – Oh My!
  4. Stock Market for Dummies: Stock Market 101
  5. Stock Split

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    Look forward to the rest of the pointers.

    Rendell
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