As an investor, it is important that you know some key terms. These terms are important to you if you are investing passively with an index and especially if you are choosing stocks on your own. And since this is a teaching type of post, we are going to take a trip down memory lane.
Ready to invest? Time to get to class.
NYSE– The New York Stock Exchange
Nasdaq– The National Association of Securities Dealers Automated Quotations
AMEX– The American Stock Exchange
These are the major U.S. Stock Markets. Most stocks trade on one of these three exchanges. It is important to understand that the Dow Jones and the S&P 500 are not stock markets. They are simply a representative collection of stocks. Each of those stocks trade on an exchange.
Teacher! He cheated!!
Front Running
Remember when you were in school and that annoying kid always tried to get in front of you in line? You would put your hand out to the side to block him and say “no cutting!” Well that’s kind of what Front Running is like. When a broker places a trade on analyst advice before you get to, they just cut you in line.
Cook the Books
This is like the bully in school who passed off your homework as his own. When Enron and WorldCom lied about their financials they were cooking the books.
No one gets away with anything on my watch!
Arbitrage
This is the ‘know it all’ kid. When this kid hears, “There’s no way to beat the market.” He automatically lists all the investors that have beat the market to date. Arbitrage is exploiting the profit in mispriced securites. The mispricing is usually found by computer programs. The algorithms find the opportunity before you even get a chance to think.
Sometimes you win, sometimes you lose.
Bear Market
I used to get in trouble all the time and back in the day the teach would make me sit in the corner as punishment. A bear market is trouble. Think of sad rainy days. When investors are fearful and the market is down, the bears take over.
Bull Market
When investors are buying, we have a bull market. It’s like the teacher’s pet. They can do no wrong and all the teachers like them. Bull markets are full of positive connotations. They mostly point to an expanding economy.
You know it could come at anytime, but you still don’t prepare for it.
Black Swan
No, this is not the movie. It’s the name for the a random and unexpected event that shuts down liquidity in the markets. Kinda like picture day when you wore your best clothes to take pictures in and some kid spilled grape juice down the front of your shirt. Bummer.
More terms to come. I hope you enjoyed the trip down memory lane back to grade school.
Any other important ones you would include?
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