A quick introduction to basic investment terms. For more in-depth analysis of certain terms, try Investopedia.
WTF is the stock market?
The stock market is the place where traders, buyers & sellers, go to exchange credit, debt, money, for stocks (equity), bonds, and other financial instruments.
There is no physical stock market, but there are physical exchanges, where people go to trade. The two most prominent stock exchanges in the United States are the New York Stock Exchange (NYSE), founded in 1792 and located on Wall Street, and the NASDAQ, founded in 1971 and also located in New York. The NYSE is the world’s largest exchange by market capitalization and the NASDAQ is 2nd. Most companies need to have their stocks listed on an exchange to be readily traded (there are Over-the-counter OTC markets where stocks aren’t listed on an exchange).
Apple, Amazon, Netflix, Google and Facebook stock are all traded on the NASDAQ (which houses many tech-related companies), and companies like Walmart, Disney, and Coca-Cola stock are listed on the NYSE.
Many banks & financial firms have trading floors, where entire sections of the office are dedicated to stock traders and stock analysts.
One important thing to note is that an IPO (initial public offering) is how a company lists their stock shares on an exchange. IPO’s are one of the functions often conducted by investment bankers.
WTF is a stock?
Company stock is essentially shares or equity of a company. When you purchase Apple stock, you now own a (very) small % of Apple. This is why one of the guiding principles for investing is that you should only invest in companies that you would personally own, because, after all, you are technically owning a tiny piece of any company that you own stock of.
There are generally two types of stocks that are discussed in the stock market: common stock and preferred stock.
Common Stock Qualities:
- Common stock is what most people are referring to when they say “stock.”
- Can receive dividends
- Often has voting rights (voting on board of directors/other issues)
- Riskier in case of bankruptcy (paid after preferential stockholders), but more potential for growth
Preferred Stock
- Can Vary greatly depending on the company
- Gets dividends preferential treatment
- Often has no voting rights
- Preferential treatment in situations of bankruptcy (paid first)
WTF is a Bond?
Bonds can get pretty complicated. In very simple terms, “bond” is just a fancier way of saying “a loan.”
Bonds are contracts that promise the holder of the contract, or “lender,” that they are to be paid a certain interest rate, a “coupon rate” over the span of a certain duration, which can be several years up to decades. At the end of the contract, the holder of the bond is paid the total principal loan + a final interest payment. Bonds thus can be traded amongst parties. Whoever holds the contract is entitled to interest payments (often annual or semi-annual) from the seller of the contract (the entity that receives the loan).
Bonds are sold in denominations of $1000. Thus, 5 bonds = ~$5000. Bond prices will fluctuate around the $1000 value depending on how competitive their interest rate is, and how creditworthy the issuer is. Corporates (Microsoft, Apple, Google), Governments, and Municipalities often issue bonds (receive loans) to conduct projects, research, and development.
Let’s recap:
- A bond (contract) = giving an entity a loan.
- The holder of a bond (creditor) = entitled to interest payments from the issuer (in debt).
- Issuer = a company, government, or entity that receives a loan by selling a bond (a contract).
What the F is a dividend
To make a company’s stock more valuable or appealing to hold and purchase, a company will sometimes offer a dividend, which is periodic cash distributions to holders of the stock. Basically, holding certain stocks means you will get “free” money.
Yes, a company is straight up giving you a passive income. Why else do you think investing is known as “making money while you sleep”?
Stated as a “Dividend Yield,” a dividend can differ greatly from company to company. Companies focused on growth often don’t offer a dividend, because they need the cash flow to push development (Amazon).
Most established companies will often offer some type of dividend (Apple offers a 1.55% quarterly dividend, Walmart has a 2.47% yield). Many energy companies often pay handsome dividends: Exxon (4%), China Petroleum Corp. (6.83%), Shell (5.29%).
Although dividends can seem nice, there are some important things to note:
- Yes, the “free cash flow” feels great, but that means the company itself won’t have that money to increase business. This is why businesses focused completely on accelerating growth, like Amazon, needs all the cash they have to push opportunities.
- Companies with crazy high dividends, 10%+, often cannot sustain consistent growth and business competitiveness. When a company loses over 10% of their cash every year, that’s a huge chunk of money.
- Companies have the right to adjust their dividend yield. This means they can increase, decrease, and sometimes even take away their dividends completely if they feel they can no longer justify losing the cash every year.
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Disclaimer:
I am not a professional financial advisor or planner as much as I’d like to be. All thoughts on the DTF Website are strictly my opinions unless otherwise stated or sourced. I understand there may be errors in my writing. My articles are not meant to be offered as professional advice, as I am currently learning a lot about finance myself. Please always do your own research and due diligence when it comes to financial decisions. Money is very important! I may own some stocks discussed in this article.
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