Trying to raise money and make money -- that’s the broad gist of the stock market. Companies wanting to raise money offer buyers ownership shares in their businesses. Buyers in the market for those shares invest by purchasing stock. These new part owners hope the company prospers because, if it does, the company becomes more valuable, increasing the price of stock shares, which the investor can then sell for more than what she paid. All these buying and selling activities take place in stock exchanges such as the New York Stock Exchange or Nasdaq.
Bear and Bull Markets
An active market is a bull market, where investors are optimistic about their chances of making money through buying and selling shares. And why not? During a bull market, stock market prices rise; taken as a group, stock shares increase in value. A bear market is the opposite situation, with the market going into decline and values falling at least 20 percent. CNN Money reports that, since the Second World War, the stock market has suffered several bear markets. Fortunately, bull follows bear, the market rebounds and investors make money again.
Shares can be described by several statistics. You sell your stock for a bid price, you buy stock at the ask price and the last price is the amount the share commanded when last traded. Volume refers to how many times a share has been bought or sold in a day; 90 days are typically used to calculate a share’s average volume. The 52-week highs and lows are the highest and lowest price the share traded at over the past 52 weeks. Market capitalization is the result of share price multiplied by the number of shares a company has.
Taking Stock of Stocks
All stocks fall into two major categories: common and preferred. Common stock pays dividends and gives shareholders a vote at shareholder meetings. Preferred stockholders get paid dividends before common stock owners do. Preferred stockholders, though, usually don’t get a vote. From those two categories, stocks are further subdivided into four groups: growth, income, value and blue-chip stocks. Earnings from growth stocks rise faster than the rest of the market. Income stocks generate reliable dividends. Shunned by most investors, value stocks are cheap to buy and some are gems. Blue-chip stocks are offered by large, reliable, well-established companies.
Indexes as Barometers
Since nothing is sure on the stock market, investors like to look for symptoms of the market’s health. An index follows the fortunes of a select collection of companies. The Dow Jones Industrial Average, for instance, follows 30 blue-chip stocks, each representing a sector of the economy. It accounts for about 25 percent of the market, so its health can be indicative of the larger market and economy.
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