Stock Investment Vernacular
If you are a newcomer to the stock investment game, it can all seem very daunting. To make matters seem even worse, if you have ever seen on TV or film the inner-workings of stock investment, it really does have jargon to boggle the mind which can leave you completely lost. It is therefore highly recommended you learn as much ‘stock investment vernacular’ as possible, so when you hear these phrases uttered, you know exactly what it means. Without further ado, let’s get into it:
Stock Pick
Stock pick is your first port of call as a stock investor. When you ‘stock pick’ what you are doing is an in-depth analysis of a particular stock before you ultimately decide to make a purchase.
In order to stock pick, one must thoroughly analyze all of a companies details such as financial status, growth capacity, even a companies competition and far more details also. For a beginner, this can be a very complicated, lengthy and intimidating process fraught with difficulty. One way to circumvent all of this is to hire a professional stock broker or brokerage firm to do the full works for you, which will include advising you, picking stock, etc.
Primary Market Trends
- Bull Market: Also known as a bull run, is a market in which investor confidence is growing, fuelling more investment in the hope of even greater growth and gains. A bull market is characterized by having a high number of buyers, and very few sellers – most of wish to hold onto their stock anticipating even greater gains. This further causes stocks to rise as investors rigorously compete to purchase available stock themselves.
- Bear Market: This is the opposite of a bull market. A bear market has more buyers than sellers, which drives share prices down further, and as shares tumble more people cash in their money causing the value of the stock to continue tumbling.
Secondary Market Trends
This is the term used to describe a temporary – and only a temporary – change in stock price within a primary trend, and they tend to last anywhere from a week to a couple of months. There are two terms for this:
- Correction: This is when a decrease in stock value occurs during a bull market. To be defined as such, usually a minimum stock value drop of 10%, and no more than 20% (or on intraday, 25%) must occur.
- Bear Market Rally: This is when an increase in stock value occurs during a bear market. To be defined as such, usually a minimum stock value increase of 10%, and no more than 20% must occur.
Sunrise Industry
Companies which are generally new, promising and thought to become very influential and important in the future will rise fast in value and are called ‘sunrise industries.’ While such companies may not come up very often, when they do they are an investors dream come true. MP3 players such as the iPod would rightly be thought of as sunrise industry.
Sunset Industry
Sunset industry refers to technology or brands which are on the out. They are old hat, due to be replaced by something new. It is wise to sell your stocks during or before the sunset industry. If you think of MP3 players as sunrise industry, think of Walkman®/Discman as sunset industry.
Stock for Stock
Stock-for-stock is a term used in two different situations. The most common situation is when companies merge. Upon merging, the target company’s current stockholders are traded a pre-determined amount of the buying company’s stock in exchange for the stocks they hold in the target company.
Value Stock
Value stock is the term used to describe stock which is selling below its true value, and are usually, but not always, characterized by some combination of either high dividend yields, low price-to-book or low price-to-earning rations.
Value Trap
In a nutshell, a value trap is something an investor can fall into by mistakenly identifying low value shares as undervalued shares. Undervalued shares, such as those described in value stock are generally what most stock investors look for and want to invest in, as they are genuinely undervalued. A value trap occurs when an investor will purchase shares in a company misidentifying them as undervalued when in fact, there is a very real reason (or reasons) behind the shares current lower price.
A value trap may also occur when a person knowingly invests in a company which has fallen on hard times, in the hope the company will once again grow, thereby making their stocks grow also. Sure, this does happen and there is plenty of money to be made this way – but there are also many companies which don’t pull back up, and at a worst case scenario, they may continue slipping even further until they have reached total oblivion taking your money with them. As an investor, you must try to avoid the value trap at all costs. Low priced stocks aren’t always a safe bet.
Selling Short
Also known as going short, or shorting, is the term given to the practice of borrowing shares from a brokerage house and selling them to another buyer. Upon doing so, you must also at some time ‘cover’ (buy back) these shares. For instance, if you ‘go short’ on some shares at $10 a piece, should they fall, you may be able to buy them back in the future for far less, making a nice profit. Conversely, you may also have to buy them back at an increased rate, in which case you will make a loss.
These are just some of the terms which you are very likely to encounter in stock investment. More less-common terms do exist, which you would also do well to familiarize yourself with.