Many of you are interested in investing in the stock market, so this blog post is perfect for you as we try to understand its vocabulary. It is similar to learning a new language or even terms and terminologies that we might hear from fellow traders and investors.
Stock Market 101 Basic Terms
Before we dive into the terminologies and words that you might hear around the stock market, let us first understand what you need to invest in the stock market.
Brokerage: You can hire a financial advisor or fund manager that will manage your investment. However, if you have done your research and choose to manage your preferred stocks, you can also sign up and register to online, self-directed brokerages (e.g. GoTrade, Wealthsimple).
Knowledge: Always do your research and due diligence when investing, and make sure that you are prepared for what is to come in the future.
Money: Investing is not only for the wealthy. Anyone can invest in the stock market, but remember to only invest money you can afford to lose in the short-term.
Difference between PSE and PSEi
PSE: This is a self-regulatory organization that provides and ensures a fair, efficient, transparent and orderly market for the buying and selling securities, shares or stocks.
PSEi: The Philippine Stock Exchange Index (PSEi) is a capitalization-weighted index composed of stocks representative of the 30 largest companies from the Industrial, Properties, Services, Holding Firms, Financial, and Mining & Oil Sectors of the PSE. The PSEi is also known as the blue-chip companies as they mimic the overall performance of the market.
In the United States, we have:
-
Dow Jones Index, which is an index composed of the top 30 largest U.S. companies.
-
S&P500: a stock market index tracking the performance of 500 large-cap companies listed on stock exchanges in the United States.
Six Sector-Based Indices of the Stock Market
-
Financial Sector: Companies that provide banking, finance and investment to people (e.g., BDO, BPI, Metrobank, Unionbank).
-
Industrials: encompasses businesses that involve heavy equipment, electricity, energy, power, water, food, beverages, tobacco, construction, infrastructure, chemicals and others (e.g., Boeing, Jollibee, Meralco, San Miguel Corporation).
-
Holding Firms: companies that control, manage partial or complete interest in another company (e.g., SM Investments Corporation, Aboitiz Equity Ventures, Ayala).
-
Services: companies involved in the telecommunication, media, IT, transportation, hotel & leisure, and education (e.g., GMA Network, ABS-CBN, Globe, PLDT).
-
Mining and Oil: these are companies engaged in mineral extraction, oil exploration and production (e.g. Petron).
-
Property: these are companies involved in land and property development (e.g., SM Prime Holdings, AyalaLand, MegaWorld).
Types of Stocks
-
Income Stocks: These are companies with a good dividend payout because of consistent and steady profits over the years (e.g. DMCI Holdings Incorporated).
-
Defensive Stocks: These are companies that provide goods and services categorized as necessities. Despite what happened to the economy, people will need these goods and services, so they are required to give investors regular dividends (e.g., PLDT, Globe, Puregold, Meralco).
-
Growth Stocks: These are companies that are expected to grow at an above-average rate relative to the market, which results in no dividend payout because they reinvest all their earnings back to the company (e.g., Google, Facebook, Amazon)
-
Speculative Stocks: These are the stocks of companies assumed to perform well, usually in the far future. Sometimes, there are not enough sales or earnings to prove that in the short to medium term, making these stocks very volatile.
-
Cyclical Stocks: These are companies that go through cycles depending on how the economy is doing. For example, if the economy is doing well, the majority of the consumers can buy luxurious goods and services (e.g., airlines, hotels, car manufacturing). However, during recessionary times, these stocks tend to underperform relative to the overall market.
Trends in the Stock Market
Trends are basically how a specific stock or market index is performing. There are two types of trends we see in the market, which are:
-
Bear Market (Pessimistic Sentiment): A bear market is a period of falling stock prices, typically by (-)20% or more. During this time, investor confidence is low, and investing can be risky because the market is down.
-
Bull Market (Optimistic Sentiment): A bull market is the condition of a financial market in which prices are rising or are expected to grow in a sustained period - usually months or years. During this time, investor confidence is high, and investing can be euphoric because the market's rate of return increases.
I hope that you understand a little bit more about the stock market because, honestly, it is a challenging topic for me to explain and simplify. However, when you're a long-term investor, the stock market should provide you wealth and financial freedom as a form of reward for your patience and grit. Again, thank you so much for reading this blog post, and I hope you will continue to learn with me about the stock market, personal finance and adulting how-to's content by subscribing to my blog!