The investment community, like most other professions, uses terminology and buzzwords that may make sense to industry insiders but are gobbledygook to the average guy on the street. Let's face it, how many ordinary citizens know what terms like arbitrage, hockey stick bidding or red chip stock mean? When you don't know the industry lingo, it is important to know and trust your broker. Any investment broker worth his salt will be a teacher at heart, and help you understand what terms like a bull or bear market mean for your financial health.
The stock market is a loose term that encompasses the entire financial marketplace. It involves not only stock investments, but bonds, government-backed securities, real estate trusts, options, commodities, money markets, derivatives and a host of other investment vehicles, most of which the average individual investor has little interest in. On a more local level, the stock market refers to a stock exchange where investments are traded. The stock market as a whole trends upwards, downwards or sideways, usually as a reflection of the general economy. When the stock market trends upward it is said to be a "bull market." When the stock market trends downward it is said to be a "bear market." A sideways trend in the stock market is said to be a "mixed market."
A bull market is loosely defined as a period when the stock market as a whole is rising in price. Certain sectors of the economy may experience a bull market while other sectors remain stagnant or are in decline. The classic way of making money in stocks during a bull market is to purchase a security, wait for the stock price to go up, then sell. The difference between the purchase price and the sale price of the stock is referred to as a capital gain.
A bear market is loosely defined as a period when the stock market as a whole is decreasing in price. Just as with a bull market, not all sectors of the economy may participate. Certain sectors of the economy may decline while others rise. Making money during a bear market can be more challenging than during a bull market, but it can be done. Investors can protect their profits or generate current income by selling call options against stock they currently own. This is referred to as writing a covered call, and it involves selling another investor the right to purchase your stock at a set price for a set period of time in exchange for a premium. If the underlying stock does not increase in value to the set price, known as the strike price, the option will likely expire unexercised. The original investor gets to keep both his stock and the premium.
All investments in the stock market, whether in a bull market or in a bear market, involve some risk. Some investments are riskier than others, and some investments are purely speculative and involve high risk. Past performance of any security is never a guarantee of future results. Investors in the stock market may lose some or all of their investment. You should never make an investment in any product that you do not understand. When in doubt, ask your broker for a full explanation prior to handing over your hard earned cash.
- stock market analysis screenshot image by .shock from Fotolia.com