Stocks are bringin’ sexy back.
While there’s a lot more to the stock market than “buy low, sell high,” you can easily familiarize yourself with a few key concepts to understand the business section of the paper. Here’s a breakdown of what you need to know about the stock market.
What Exactly is the stock market?
It’s a marketplace where people buy and sell shares of companies, called stock. Once someone buys stock in a company, he becomes a shareholder of the company. The goal of the stock market is to buy stock in a company with the hope that the company’s profits will increase, causing both parties to receive profits. Or, in other words, your stock is worth more when the company does well. When this happens, you can sell your stock for more than you bought it for.
NASDAQ, Dow Jones, S&P 500…What’s the Difference?
You have probably seen at least one of these abbreviations mentioned with stocks. The abbreviations are short for the National Association of Securities Dealers Automated Quotations, Dow Jones Industrial Average, and Standard & Poor’s 500, respectively. Each is a different market index used to measure the value of U.S. stocks, among others.
While all three basically do the same thing, each index measures stock with a different calculation, therefore giving more weight to certain stocks on certain indexes. Each of the three deals with a different grouping of available U.S. stocks. You can think of it as sorting the stocks into three different categories.
There are approximately 3,300 companies in the NASDAQ and all are technology or biotechnology companies. It’s almost like a V.I.P. club for innovative, technology-driven companies. Think Apple, Microsoft, Amazon, etc.
The Dow Jones is much smaller; it is comprised of just 30 blue-chip companies. This means that they are almost always household names—popular and widely-accepted. Blue-chip companies offer the opportunity for stable, reliable growth because they have a knack for riding out poor economic conditions. Think Disney, Verizon, Walmart, etc.
S&P 500 is like the miscellaneous “kitchen drawer” of the US stock market. It is much broader, representing 500 companies from a variety of sectors and industries. Because the S&P encompasses a wide variety, it can give a broad overview of the market. This is why sometimes the S&P trails the other two indexes. Think everything from American Airlines to Yahoo! (Disclaimer: includes Chipotle).
How Do I Read a Stock Quote?
Stock quotes are the big, complicated-looking charts you see in the business section of the newspaper. But trust me, they are a lot less confusing than they look!
-At the top of the graph, you’ll see the name of the stock and its ticker symbol. This is how you identify the stock.
-The left column represents the prices for the stock. It shows the opening price for the stock (open), the daily high (maximum) price the stock was traded for, and the daily low (minimum) the stock was traded for.
– The last two rows in the left side column show the highest and lowest the stock has been traded for in the past 52 weeks. It typically doesn’t include the previous day’s trading.
–Volume represents the number of stocks traded during the day. The average volume calculates the stock’s daily trades over an extended period of time.
–Dividend Yield. This is the percentage return on a dividend, calculated as annual dividends per share divided by price per share.
–P/E, or Price/Earnings Ratio is the ratio of a company’s share price to its per-share earnings; it also tells us how much investors are willing to pay per dollar of earnings. Check out our in-depth explanation here.
Other Terms You Should Know
Not every chart looks the same. Here are some additional terms you should know.
“Net Change,” refers to the dollar value change in the stock price from the previous day’s closing price. Remember, stock values continue to fluctuate even after the market closes for the day. Whenever you hear that a stock is “up for the day,” that means that the stock has a positive Net Change value. Conversely, if it is “down for the day,” it has a negative Net Change value.
Percent Change tracks the difference between the current stock price and the previous day’s closing price. Stocks with a higher percent change are considered the hot stocks because they are moving quickly. These hot stocks are market advancers.
Dividend Per Share. Decided by the company’s board of directors, the dividend is a portion of the company’s earnings that is distributed to its shareholders. It can be cash, more stocks, or other property. If you’ve got a blank space, it just means that that particular company doesn’t pay out dividends right now.
Year to Date Percent Change. This tracks what the return is on the stock thus far since January 1st. A positive number here is good, because that means you have a positive return and that your stocks are doing well.
GenBiz challenges you to try reading a stock quote in today’s newspaper. What trends did you see? Tell us what stock you would invest in on Facebook.