For most investors, the stock market is home—it’s where the bulk of their invested savings reside. Yet it can be a scary place, and not just because investing involves the risk of financial loss; it’s because it can be hard for an average investor—and even many professionals—to make sense of the stock market jargon that gets thrown around in investment commentary.
While much of the asset management industry has sought to cut through the dense verbiage and make investing simpler, Wall Street can still seem like a private club, with a velvet rope keeping out those who don’t speak stock market lingo.
Here’s a look at key stock market terms, including noteworthy facts about terms as they relate to today’s investment landscape.
Stock market—The buying, selling, and issuance of equity ownership shares in publicly traded companies across various stock exchanges.
Stock—An investment representing an ownership stake in a company, also known as an equity.
Dividend stocks—Stocks that use a portion of the underlying company’s earnings to make regular distributions—typically in the form of quarterly cash payments—to shareholders. Generally, large, established companies with consistent revenue streams are the most likely to pay dividends. NOTEWORTHY: As of June 2019, 442 companies in the S&P 500 Index (S&P 500), or nearly 84%, paid a dividend.1
Index—A group of stocks with common characteristics that represent a segment of the overall market. For example, the S&P 500 tracks the performance of 500 of the largest publicly traded companies in the United States, while the Russell 2000 Index is composed of 2,000 U.S. small-capitalization stocks.2
Benchmark—A standard—typically a market index—against which performance of a mutual fund, exchange-traded fund, or investment manager is measured. For example, many mutual funds that invest primarily in large-cap U.S. stocks designate the S&P 500 as a benchmark; many small-cap funds use the Russell 2000 Index.
Sector—A group of companies that represent a segment of the overall economy. The Global Industry Classification Standard (GICS) used to categorize individual stocks divides the market into 11 sectors, such as communications services, healthcare, and utilities. NOTEWORTHY: The biggest recent shakeup in the GICS sector regime occurred in September 2018, when the former telecommunication services sector was renamed communication services and absorbed certain stocks from the information technology and consumer discretionary sectors.
Industry—Within a sector are industries made up of companies that operate in similar lines of business. The GICS structure consists of 24 industry groups, 69 industries, and 158 subindustries.3
Market capitalization—Also known by the shorthand term market cap, it’s the value of a company as measured by the market price of the shares of stock it has issued. NOTEWORTHY: As of June 30, 2019, the three largest U.S. stocks as measured by market cap—and therefore the largest constituents of the S&P 500—were Microsoft, Apple, and Amazon.com, respectively.3
Small-, mid-, large-cap stocks—These are categorizations based on a stock’s market cap. While definitions vary and can change with market conditions, the current upper limit for small caps, as designated by S&P Dow Jones Indices, is $2.4 billion in market cap; for mid caps, it’s $8.2 billion. Large caps are $8.2 billion and up. Some index providers also extend their categorizations by breaking out micro caps and mega caps. NOTEWORTHY: Large caps are where most of the money is; the S&P 500 covers about 80% of the market cap of the entire U.S. stock market.
Growth stock—A company that seeks to generate revenue and earnings at an above-average rate—for example, think of today’s fastest-growing information technology names or biotechnology stocks with promising drug pipelines. Owing to such strong growth potential, investors are typically willing to pay a premium for these stocks, as reflected by stock prices relative to the earnings or net assets of the underlying companies.
Value stock—A company that seeks earnings that are generally steadier and slower-growing than those of growth stocks, often reflecting the relatively long history of the company’s business model and revenue sources. Value stocks are considered relatively inexpensive based on metrics such as price-to-earnings or price-to-book ratios.
Blue-chip stocks—Named after the highest-valued chips in poker, blue chips are stocks that are well established and generally considered financially sound. Blue chips typically have a large market cap, a steady dividend payment record, and a solid reputation.
Correction—A stock market price decline of 10% or more from a recent high, typically measured by the S&P 500 for U.S. stocks.
Bull market—A sustained period in which stocks generally rise. The most common technical definition is an episode in which the market rises at least 20.0% and avoids a subsequent 20.0% decline. Any decline of such magnitude would mark a transition to a bear market. NOTEWORTHY: The current bull market began in March 2009 and is the longest U.S. bull market on record.
Bear market—A sustained period when stocks generally decline. As with a bull market, a 20.0% movement is a common threshold for declaring a bear, and a subsequent 20.0% gain would signify the end of a bear market and the start of a bull. NOTEWORTHY: The closest brush that the current bull market had with an untimely demise came on December 24, 2018, when a three-month-long decline sent the S&P 500 tumbling 19.8%. Two days later, stocks began a rally, the bull stayed alive, and the bear went back into hibernation.
Closing price—The price at which a stock trades when the market closes at 4 P.M., Eastern time, each weekday.
Intraday high/low—The highest and lowest prices at which a stock trades during the trading day, not necessarily at the close.
52-week high/low—The highest and lowest prices at which a stock has traded over the last 52-week period.
Price return—A gain or loss earned over a given period as reflected by share price changes in a stock or a market index, excluding any income from dividends. It is not possible to invest directly in an index.
Total return—A gain or loss earned over a given period, including both share price changes in a stock or market index and any income from dividends. Performance of investment vehicles such as mutual funds and exchange-traded funds is expressed in total returns, after deductions are made to account for investment-related fees and expenses.
Volatility—The amount and frequency that an investment fluctuates in value.
Buyback—Also known as a share repurchase, a buyback is a company’s investment in itself through the purchase of its own outstanding shares. Companies may buy back shares for several reasons, such as increasing the value of remaining shares held by outside investors, and they may repurchase shares in the belief that their stock is undervalued by the market. NOTEWORTHY: Buybacks by companies in the S&P 500 totaled nearly $206 billion in the first quarter of 2019, down nearly 8% from the prior quarter’s $223 billion, which set a record for the fourth quarter in a row.3
IPO—An initial public offering is a company’s initial offering of equity shares to the investing public—in essence, a company converting from private to public ownership. An IPO enables a company to raise capital from public investors, often as it matures to the point that it can pursue new growth opportunities by tapping new sources of capital.
Valuation—An estimate of the value or worth of a company; the price investors assign to an individual stock.
P/E ratio—Also known as a price multiple or earnings multiple, a price-to-earnings ratio is used to evaluate a stock’s share price relative to the profits that the underlying company may generate. The higher a stock’s P/E ratio, the higher investors’ expectations are for the company’s potential future earnings growth. Most companies’ P/E ratios range between 10.0 to 30.0; companies that are generating losses rather than profits don’t have a P/E ratio. These ratios generally come in two flavors: A trailing P/E reflects a current share price divided by the company’s earnings per share (EPS) over the prior four quarters, while a forward P/E reflects projections of future EPS over the next four quarters. NOTEWORTHY: As of July 23, 2019, the trailing P/E ratio of the S&P 500 was 23.0, while its forward P/E was 18.0.4
P/B ratio—As with a P/E ratio, a price-to-book ratio is used to evaluate a stock’s price, but it measures the price relative to a company’s book value rather than EPS. Book value is an accounting metric that measures the net value of a company’s assets and liabilities.
Alpha—Alpha measures the difference between an actively managed mutual fund's return and that of its benchmark index. An alpha of 3, for example, indicates the fund’s performance was 3% better than that of its benchmark over a specified period of time.
Beta—Beta measures the volatility of an investment’s performance relative to a benchmark. The beta of the market (as represented by the benchmark) is 1.0. Accordingly, a fund with a 1.1 beta is expected to have 10% more volatility than the market.
Standard deviation—A common volatility metric that measures performance fluctuation, based on how much the performance of an investment varies over time. The higher the standard deviation, the more volatile performance has been.