With personal investment planning, as with statistics, the knowledge is in the details. Words can be just as important as numbers.
While market technology, products and services are continually evolving and changing, much of the language of finance and investment has remained constant – especially in the equity, or stock, market.
The following glossary contains some of the most familiar terms that you will encounter when buying, selling and reading about stocks.
Blue Chips: Blue- chip stocks and the well-established companies they reprsent generally have long and unbroken records of earnings, industry leadership, growth prospects, dividend payments and a solid reputation. Blue chips typically are relatively highpriced and yield low quarterly dividends.
Bulls and Bears: These terms describe people with opposing views of potential stock-market trends. Bulls believe stock prices will rise and, acting on their optimistic projections, will buy rather than sell. On the other hand, bears believe the market will decline and are more inclined to sell. Likewise, in bull or bear markets, prices are rising or falling, respectively.
Common Stock: Units of ownership of a public corporation. Owners of common stock typically are entitled to vote for corporate directors and on other important corporate matters. In addition, they are entitled to receive dividends on their stock when, if, dividends are declared. Most stocks traded in this country are common stocks.
Dividend: Payment declared by a corporation’s board of directors and usually made on a quarterly basis to the company’s stockholders in the form of cash, additional shares of stock, or other corporate assets. On common shares, the dividend varies with the assets of the company and may be omitted if business is poor or if the directors decide to retain earnings to invest in plant, equipment or other expenditures.
P/E Ratio: The price/earnings ratio represents the relationship between the price at which a stock is selling and the company’s earnings per share. When a stock sells below its historical P/E range, it’s probably undervalued if the issuing company’s prospects are favorable. In general, a high P/E ratio indicates that investors expect future earnings to exceed present earnings, and vice versa.
Preferred Stock: Securities that carry a specified dividend rate. Their holders’ claims on a corporation’s dividends and assets in the case of liquidation must be paid before common stockholders’ claims.
Yield: The dividend paid by a company, expressed as a percentage of the current stock price. For example, stock that sells for $40 and pays an annual dividend of $2 per share has a yield of five percent.
These are only a handful of the many terms used in the day-to-day buying and selling equities. More of these terms will be discussed in the next column. If you have questions about these concepts or would like more information about them, your financial advisor will be happy to assist you.
This article was written by Wells Fargo Advisors and provided courtesy of Todd Alexander, The Alexander Financial Group, in Mc- Connellsburg.
Investment products and services are offered through Wells Fargo Advisors Financial Network LLC (WFAFFN), and Member SIPC. The Alexander Financial Group is a separate entity from WFAFN.