Up to now, Girl Talk has given you a glimpse into the world of finance and also offered a range of resources for learning more. But perhaps the best way to truly understand finance, is to do finance.
This series will take you through the different phases of creating an investment recommendation so that you may pitch your own stock, either for personal investing or for an interview.
The first step? An introduction to the stock market! (Note: All key financial terms are italicized.)
What are Stocks?
Stocks (which may also be referred to as equities), essentially, are shares of the company that you may buy to become a shareholder of the company. Companies being traded in the stock market are assigned a ticker, which is a one to four letter symbol (e.g. Nike is NKE). Stocks may be classified and categorized in several ways.
First, is the distinction between common, preferred, and treasury, which are three different types of stocks.
- Common stocks, as the name suggests, are the most commonly issued publicly traded stocks by companies. Common shareholders are on the bottom of the ownership structure; in the case that a company liquidates, they have right to assets after bondholders and preferred shareholders.
- Preferred stocks are one step above common stock in that their dividends pay out before dividends for common stock are paid out.
- Treasury stocks are the shares held by the own company that were bought back or never issued to the public.
Stocks may also be divided into the three categories of growth, value, and income stocks.
- Growth stocks are companies who have great growth potential, perhaps because of its unique product or position in the market. These stocks are difficult to identify, don’t pay dividends, and generally are riskier. Many technology stocks are growth stocks.
- Value stocks are stocks that tend to trade at a price lower than its fundamentals, hence being undervalued. These stocks often have high dividend payouts and low price-to-earnings ratio.
- Income stocks are stocks that are known for regularly paying out dividends and typically have lower volatility. Many mom and pop investors looking for return over a long period of time will invest in income stocks.
Another way to classify stocks is as cyclical, defensive, or blue-chip stocks.
- Cyclical stocks are stocks whose prices follow the business cycle and overall economy. These companies often relate to discretionary goods, because consumers buy more of these goods when the economy is improving.
- Defensive stocks are also known as non-cyclical stocks. These companies’ performance are not correlated with economic conditions, so they have less losses during economic downturns. Utilities companies are one type of defensive stock, as they are a necessity for consumers regardless of the economy.
- Blue-chip stocks are typically companies that are well-established and financially sound. These stocks typically do well despite economic downturns, because they are known for selling high-quality goods and have long histories of profits. Blue chip stocks are typically considered a less volatile investment option.
What is the Stock Market?
With an understanding of stocks, we can better understand the stock market, which is the market where stocks are available publicly for selling and trading. The stock market is interconnected globally, with the global market capitalization currently at around $294 trillion! To make a distinction, the stock market consists of every stock exchange, which is where stocks are actually traded.
There are many stock exchanges, both in the US and around the world. In the US, two major stock exchanges are the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (NASDAQ). Stocks on the NYSE have one to three letter ticker symbols and stocks on NASDAQ have four letter tickers. Internationally, some major exchanges include Hang Seng in Hong Kong, Nikkei in Japan, and the London Stock Exchange. Do note that some stocks don’t trade on the stock exchange, but rather traded “over-the-counter”. These stocks are typically too small to meet requirements for being listed on an exchange.
Within the stock market, stock indices serve as grouping of stocks that measure past performance and trends; these help show market trends. There are several notable indices used for this purpose. The Dow Jones Industrial Average (DJIA) consists of thirty major companies, including Disney and General Electric, traded on either the NYSE or NASDAQ. This is a narrow representation of the overall market, but is widely quoted by in the press. The Standard and Poors (S&P 500) index chooses 500 firms selected by a committee. This index intends to reflect the risk and return characteristics of large cap companies. Two other indices are Russell 2000 and Wilshire 5000.
With this basic understanding of stocks and the stock market, you can move forward to learning about valuing stocks and investing in them, which will be covered in the next parts of this series.
Siyu Wu is from Colorado and is currently a sophomore at Princeton University, pursuing a degree in Economics and certificates in Finance and East Asian Studies. She hopes to synthesize her interest in China and East Asia with her passion for finance to eventually work in a career related to international finance and Asian capital markets.