Stock Market Terms for Dummies

Initial public offering, abnormal return and liquidity are just a few of the terms you will come across when you invest in the stock market. To separate wise investments from inappropriate ones and develop your stock-investing smarts, you should understand these and other terms related to the trading arena.

Abnormal Return

An abnormal return is the difference between the actual rate of return an investor receives on an investment and the predicted return.

Asking Price

The asking price is the price at which a security is offered for sale on an exchange or in the over-the-counter market.

Asset

An asset is something a company acquires and owns that has a market value.

Bid Price

The bid price is the amount an investor offers to pay for a share.

Broker

A broker is an intermediary who buys and sells shares on a client’s behalf, rather than for himself. In exchange for the service, the broker earns a commission.

Earnings per Share

The earnings per share amounts to a company’s profit divided by the number of shares of common stock that are outstanding, or held by a company’s shareholders.

Dealer

A dealer joins with the client and trades as a principal to the buy or sell transaction.

Equilibrium Price

The equilibrium price is the market price at which the quantity of a security that sellers are supplying at some price is equal to the quantity of shares buyers are demanding at that price.

Excess Return

The excess return of a portfolio or security is one that is greater than the return on an index with the same risk level, such as the S & P 500, or a benchmark. The amount of the excess return is equal to the difference between the asset’s actual return and the rate that might be earned on the index.

Exchange

The New York Stock Exchange and American Stock Exchange are organized exchanges at which traders buy and sell securities.

Initial Public Offering

A company sells its stock to the public for the first time by making an initial public offering, or IPO.

Investment Banker

An investment banker advises a company about its IPO and may stabilize the stock's price during the offering by buying the security to prevent or reduce price drops. An investment banker may also reduce the risk of an IPO by buying the entire stock issue and subsequently marketing it.

Liquidity

Liquidity refers to the ability to convert an asset to cash at its fair market value.

Market Maker

A market maker is someone who is willing to buy or sell shares.

Market Movement

Market movement refers to a change in an asset’s price that's influenced by market sentiment.

Organized Exchange

An organized exchange is a physical location where a limited number of traders buy and sell shares.

Over-the-Counter Market

An over-the-counter market refers to a group of brokers and dealers who use a variety of communication methods to trade shares that are not traded on an exchange market, such as the New York Stock Exchange.

Primary Market

A primary market is a type of stock market where new issues of stock are sold.

Return

A return is a change in the value of a share or a portfolio over time.

Secondary Distribution

A secondary distribution refers to the process whereby stock is sold not by the company or the investment banker who participated in the IPO but rather by an investor.

Secondary Market

A secondary market is a type of stock market where previously issued stock is sold and bought by investors. The secondary market provides liquidity for securities originally issued in the primary market.

Securities and Exchange Commission

The SEC administers and revises regulations that govern securities transactions.

Shareholder Equity

Shareholder equity is equal to the total value of the assets a company owns minus its total liabilities, or the financial obligations it owes.

Stock

Stock certificates or shares represent ownership in a corporation’s assets and earnings.

Stock Exchange

The stock exchange is where stocks are traded and an auction market at which the price of the stock is determined by supply and demand.

Stock Market

A stock market is a “place” where offers to buy and sell shares are exchanged.