The stock market is one of the key factors in the world economies. It should be noted right away, however, that the stock market and the economy are not the same thing. While there have been very notable times in the past when the two have been closely interlinked in the United States — the Great Depression of 1929, the Great Recession of 2008 and more — that doesn’t mean the health of the stock market and the health of the economy can’t diverge. And yet stock markets are important. Over half of Americans put their money directly in the stock market, and financial institutions are reliant on them. But to the average person, trying to figure out stocks can seem entirely inscrutable. Stock market jargon is thrown around constantly, and yet parsing what anything really means is difficult.
Take, for instance, the recent stories about GameStop stock, where users online were able to temporarily raise the price of specific stocks so they could make lots of money (and, possibly, lose lots of money). While major media was covering this story, it was difficult to really understand what had happened without knowing what “shorting” is. And it’s made all the more complicated when people throw around an innocuous phrase like “the market,” which can refer to one of many things.
To help you parse through the stock market jargon, we’ve compiled simple definitions of some of the most commonly heard phrases that you might run into. This is really only the very beginning of the massive and confusing world of finance, but it can help you get your grounding next time a news story about the stock market crosses your path.
The Language Of The Stock Market
bear market — the fanciful term for when stock values are decreasing (on average) across the stock market. A bear market is declared when stock values drop roughly 20 percent.
blue chip — a blue-chip company is one that has been deemed reliable by financial institutions. If you want to play it safe when you’re investing in the stock market, you would put your money in these. It doesn’t necessarily mean that the companies are going to be safe forever, however, because the stock market is by nature unpredictable.
bull market — the fanciful term for when stock values are increasing (on average) across the stock market.
day trader — this is someone who buys and sells stocks over a relatively short period of time in the hopes of making money quickly, rather than investing in companies over a long period of time. It’s not really a specific job, because today anyone who has the financial ability can do it. It can be lucrative if someone is good at predicting which companies will do well, but it can also lead to financial ruin.
discount broker — only members of a stock exchange are able to trade on it, which means that historically it’s been very difficult to break into the stock market unless you can afford a full-service stockbroker. A discount broker allows people to invest in the stock market at a discounted rate, making it more accessible. Most popular discount brokers are apps, such as Robinhood and Ally Invest.
Dow Jones Industrial Average — Dow Jones is the name of a financial publication that covers the financial sector. But often when you hear “Dow Jones” or “the Dow,” it’s used in reference to the Dow Jones Industrial Average, which is an index used to measure the health of American companies. While there is plenty of complicated math involved here, the DJIA basically looks at the top 30 blue-chip companies to see how well they’re doing financially. It doesn’t capture all of the nuances of the stock market, but it’s a useful shorthand for how well the American stock exchanges are doing.
hedge fund — a group that takes high-income investor money and attempts to make a lot of money on the stock market. This can be done in any number of ways (including shorting), but in general, people invest in a hedge fund with the hope of multiplying their income. If a hedge fund is successful, many people get rich. But hedge funds are not always successful because the market can become volatile.
IPO — this is the Initial Public Offering, which is what a corporation offers when it first goes public, meaning people can start to buy shares of it. The value of the IPO is decided through a deliberative process, where they have to determine how much a share in their company is worth.
market cap — short for market capitalization, a company’s market cap is its worth on the market. This is calculated by taking the number of shares a company has and multiplying that by the current stock value. As the company’s stock value fluctuates, so too does the market cap.
Nasdaq — this term can refer to one of two things. Nasdaq is the name of the National Association of Securities Dealers Automated Quotations, which was the first electronic stock exchange in the world, located in New York City. It’s owned by Nasdaq, Inc., which also owns the Nasdaq Nordic Exchanges, which are various stock exchanges located in the Nordic countries. It can also refer to the Nasdaq Composite Index, which is a number used to represent the health of the stock market based on various factors (similar to the Dow Jones Industrial Average).
portfolio — the sum total of one investor’s stocks. You may “diversify your portfolio,” for example, by buying stocks from more companies.
rally — when a stock value goes up quickly, it “rallies.” If enough stocks increase in value quickly, the whole stock market can rally.
share — when you own a share of a company, you own some small percentage of it. It’s the share price that rises and falls on the stock market.
shorting — while most of the time you put money into the stock market with the hope that a company’s value will go up, shorting is the opposite. An entity such as a hedge fund borrows shares of a company and then sells them to private investors. If those shares lose value, the entity can buy them back at the lower market price and pocket the difference, returning the shares to the owner. If the shares increase in price, however, the entity still needs to buy them back, and will lose money on the transaction.
stock — the stock of a company is the collection of shares that are offered to the marketplace. Stocks and shares are similar and are sometimes used interchangeably, but aren’t exactly the same. You can own 10 shares of a company, but you wouldn’t say you own 10 stocks of a company, because stocks are more general (if you say you own 10 stocks, that probably means you own stock in 10 different companies).
stockbroker — only members of a stock exchange can trade there, so a stockbroker is someone who professionally buys and sells stock on behalf of their clients, for a fee. A full-service broker also might give you investment advice.
stock exchange — this is the infrastructure that allows people to buy and sell stocks. Historically these have been physical places, like Wall Street, but the internet has decentralized this system. There are also dozens of stock exchanges all over the world, with the two largest (the New York Stock Exchange and Nasdaq) both based in New York City. Other large stock exchanges can be found in Tokyo, London, Milan, Shanghai and other major world capitals. These stock exchanges all make up the global stock market.
stock market — this term refers to the entire network of companies and traders that span the world.
stock value — the value of a stock is somewhat ephemeral because it’s not based on any specific data. A stock value will increase when investors start buying shares of a company because they believe that the company is doing well, and vice versa. It is essentially a measure of investors’ confidence that a company will continue making money and growing.
volatility — the measure of how rapidly a stock value changes, usually going both up and down. The more volatile a stock, the more the stock value is likely to oscillate, making it a riskier investment.
Wall Street — this is the street in New York City where the New York Stock Exchange and other American financial institutions have been based for hundreds of years. Today, however, Wall Street doesn’t refer to the physical location so often as it refers to all of the institutions that make up the financial systems of the United States.