We are all aware of how important the stock market is to our nation’s economy as a whole. At the same time we all have some notion of the markets as being those places where ‘shares’ in the big corporations that make up so much of the economy are bought and sold. Few of us however have more than vague idea of many of the various terms that get mentioned every time the stock market is discussed. Often, the many terms that economists and financial experts use seems like words from a foreign language.

So, in this post I’m going to try to explain some of those terms in simple enough language so that hopefully those of you out there who aren’t finance types can understand the ups and downs and ins and outs of the market. I think I’ll start with an example that’s easy to understand, a privately owned small business.

Consider a barbershop or beauty shop, such a small business is almost certainly owned by a single person, the head barber or beautician. Now the shop may have a few employees as well, but they get paid a flat salary. Whatever profits the business makes go to the owner alone, along with all of the losses if there are any. Now owning a small business is complicated enough, usually the owner had to take out a bank loan to start the business, and there are always things like insurance, legal permits and so on. However, a small business, owned by a single person at least doesn’t have to worry about the price of any stock in that business.

That’s a small business; a larger business or company may decide to register itself as a ‘Corporation’, which strictly speaking can be any group that is legally allowed to act as a single entity. In business terms when a group of people called ‘Investors’ come together to form a company they will incorporate that company. If the investors each contribute equally to the formation of the corporation then they will each receive an equal share of whatever profits the corporation makes.

Oftentimes however the investors do not contribute equally to the new corporation. In that case the corporation may issue ‘Stocks’ that represent a certain share of the total value of the company. For example if the corporation issues 100 shares of stock then each share of the stock is worth 1% of the total value of the company and each share will receive 1% of the profit. (Usually a corporation issues a lot more shares of stock than that, often millions of shares.) The investors now become ‘Shareholders’ with each receiving a number of shares proportional to their investment.

Now the whole purpose of forming a corporation of course is to make money, and the total sum of all of the money that a company makes is formally called its ‘Revenue’. ‘Expenses’, on the other hand are the costs that any company must pay in order to do business, expenses include but are not limited to paying employees, purchasing materials, paying for utilities like electricity and water, rent for buildings or building maintenance.

Revenue minus expenses is the ‘Profit’ that company makes, unless of course expenses are larger than revenue in which case the company has suffered a ‘Loss’. Whatever profit a company makes is then divided amongst the shareholders on an equal basis for every share, this is known as either a ‘Dividend’ or “Earnings per Share’ (EPS). Dividends can be issued by a company on an annual, semi-annual, quarterly or even monthly basis. Which depends on the company.

Obviously, the value of a share of stock depends greatly on the size of the dividend the company pays for each share of its stock, everything else being equal a stock that pays a dividend of $10 per share per year is worth ten times more than a stock that pays a dividend of $1 per share per year. Another important quantity that financial experts often use is known as the ‘Price per Earnings Ratio’ or P/E. This is simply the price of a single share of stock divided by the total dividends earned by that share over a year. What P/E works out to be then is the number of years you would have to own a share of that stock in order for its dividends to cover the cost of having bought the stock in the first place. Obviously the lower the P/E of a stock the less time it takes for the dividends to pay for the stock and therefore the more valuable the stock is.

O’k, so now let’s say that one of the stockholders in a company wants to sell their stock, or someone who is not a stockholder in a company wants to become one. We all know that the buying and selling of shares of stock has become an enormous business in itself and takes place at ‘Stock Markets’ or ‘Stock Exchanges’. The oldest stock market in the Unites States is actually the Philadelphia Stock Exchange, which first began trading in 1790 but of course the largest exchange in the entire world is the New York Stock Exchange, which first began trading in 1792 and which today lists 2,132 companies whose stock can be bought or sold there.

As in any marketplace the prices of stocks at an exchange can go up or down depending on supply and demand. I said above that the size of a stock’s dividend is the primary thing that determines a stock’s price but investors can also speculate that in the future a company is going to do better, or worse and that speculation can drive a stock’s price up or down, as can opinions about the overall health of the US economy.

Once a company’s stock is listed on an exchange is becomes possible to calculate the total value of that company, a quantity known as ‘Market Capitalization’ or Market Cap. Market Cap is simply the current price of a share or the company’s stock multiplied by the total number of shares the company has issued. For example assume a company has issued 100 million shares of stock and at the end of a trading session the price per share is $10, in that case the total value of that company is considered to be $1 billion dollars.

Now with over two thousand of our country’s biggest companies being traded every day the performance of the New York Stock Exchange, NYSE, is an important measure of just how the United States economy is doing as a whole. The problem is that measuring the daily performance of over 2,000 stocks, some of which will go up and some of which will go down is not an easy thing to calculate, especially back in the days before electronic computers. That’s why a number of different ‘Averages’ were developed, the best known of which is the ‘Dow Jones Industrial Average’ or simply the Dow. Begun in 1896 the Dow is an average of the stock value of thirty of the biggest companies in the US, known as Dow components, but spread over number of different industries. In other words the Dow is not just the 30 biggest companies, it’s the biggest financial services companies like J.P. Morgan Chase and Goldman Sacks along with the biggest retailers like Walmart and Amazon plus the biggest information services like Apple and IBM. By spreading its components over different industries the Dow became a quick peak at the entire US economy and since it only had 30 companies it could be calculated on a daily basis.

With the advent of modern computers it has become possible to calculate the Dow average almost instantaneously, and there are now other averages as well including the ‘Standard and Poor’s 500’ S&P 500 which is the 500 biggest companies in the NYSE along with the NASDAQ 100 which is the 100 biggest companies on the NASDAQ stock exchange. In fact our new ability to monitor thousands of stocks moment by moment has only increased the volatility of stock prices allowing speculators to drive prices up or down so that they can make a quick profit.

There has always been an aspect of gambling to any commodities market, including the stock market. There are always investors who think they have some inside information that allows them to pick short-term winners and losers causing market fluctuations that can hurt the long-term strength of an economy. Maybe it’s just my opinion but while investing in stocks is good for the economy, it does enable companies to secure the money they need to grow after all, turning the markets into casinos with winners and losers is not in anybody’s interest.

And I think I’ll let it go at that. If there’s anyone who thinks I made this brief outline of what the many terms associated with the stock market mean either too simple, or too complicated well I tried my best. Hopefully a few people out there learned something, and that was my intent.





































































































