Stock Market Terminology Explained
The stock market is a commonly used term to describe the trading activity that takes place in formal and over-the-counter markets. The stock market is a helpful indicator of business activity as measured by stock price. Stock price reflects the supply and demand forces that originate with investors, economic conditions and expectations of returns from investing in a particular stock.
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Public Company
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A public company is a company that issues stock to the general public. Public companies spring from privately owned businesses. These businesses increase in value to the point where the owners and venture capitalists who finance the company wish to sell shares of the business, expecting to make a return on capital. A new public company first issues shares of stock through an initial public offering (IPO), which can raise large amounts of capital for the company.
Stock
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A single share of stock represents a fraction of ownership in a public company. There are two general classes of stock: preferred stock and common stock. Stockholders who own preferred stock receive dividends before any other type of shareholder. Dividends are profits the company distributes for every share of stock a stockholder owns. Owners of common stock have voting rights during annual stockholder meetings but have no priority claim over dividends.
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Stock Exchange
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A stock exchange is a formally organized market where stocks, bonds and similar investments are traded. Trading is a reference to the process of buying and selling stocks and bonds between brokers acting on the orders of investors. Some of the important stock exchanges in the U.S. include the Chicago Mercantile Exchange and the New York Stock Exchange, which is also one of the largest in the world.
Dow Jones
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The Dow Jones is a heavily quoted stock price average used to illustrate stock market performance. The Dow Jones is fully named the Down Jones Industrial Average and measures the stock prices of the 30 largest corporations in the United States. By averaging the stock prices of these 30 companies, the Dow Jones seeks to gauge the health of business activity.
Index
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An index is a collection of items used to measure the performance of a particular sector of the economy. For example, the Dow Jones is an index of the some of the most important companies in the country. Other stock indexes include the S&P 500 and the Wilshire 5000. The latter two indexes measure the stock price of a larger collection of stocks to attempt a more accurate reading of business activity throughout the economy.
Broker
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The transactions that occur in the stock market are carried out by trained individuals with access to the trading floor of a particular exchange. The trading floor is where traders sell and buy stock. Access to trading is limited by the individual exchanges to keep the process organized. Available positions vary by size of the exchange.
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