The secret life of stock
I remember visiting Wall Street in my early 20s and taking a picture of the charging bull. I didn’t really get it, but I knew that was the symbol of Wall Street and so I wanted a picture. What did that bull mean, anyway? I always got it confused with the bear. One was supposed to be good, one was supposed to be bad. That’s all I knew, although really, I wouldn’t want to see either of those massive animals charging toward me for real. Maybe I could look it up later.
That pretty much summed up the extent of my interest and thoughts on the stock market for many, many years. Unfortunately, it didn’t progress much from there until just this year. I still don’t know what I’m doing with stocks, but at least I’ve moved to the experimenting stage. I’m definitely a learn-by-doing person, so that’s why I’m deliberately breaking one of the cardinal rules of investing: never invest in something that you don’t understand. I’m just not investing very much, in hopes that it will be an inexpensive and fun learning experience instead of one I might regret. I’ll consider it tuition. Or maybe gambling money.
It seems like the stock market has a life of its own, one that’s protected by a secret code that’s confusing to outsiders. I suppose that’s true of many things, but most things with confusing terms don’t include the potential to lose your life’s savings. Here are a few of the basic terms I’ve learned, along with my understanding (so far) of what they mean:
Bull market – I visualize a bull in a china shop for this one. What does the bull do? It goes crazy knocking stuff over. It charges around like it owns the place. If it had a wallet, it’d be on a shopping spree. Buy buy buy. What happens when people buy buy buy? Prices go up. So, stock prices rise during a bull market. But bulls have horns, and you want to avoid the horns. That’s a reminder to remember that what goes up usually comes down eventually. Which brings us to the…
Bear market – What do bears do in the wintertime? They hibernate. The buyers are hiding in their caves, waiting for a bargain in the future. The sellers are getting desperate, cutting their prices. So bear markets are where prices go down. (A couple of things I read mentioned prices dropping by 20% for it to be considered a bear market.) That’s a big drop, or a good sale, depending on how you look at it.
Short selling – This is where you bet against the house. You think certain stocks are going to go to hell in a hand basket, so you borrow stock that you don’t even own and sell it (with the promise that you’ll buy it back later.) The hope is that the price continues going down so that when you buy it to give back later, it’s at an even lower price and you’ve made money on the difference between the two prices. So, borrow to sell at $50, buy back at $40, make $10. This seems counter intuitive at first but I guess it makes sense. It just seems very risky, because if you borrow to sell at $50, and you’re wrong and the stock jumps UP to $110, then you owe $60 per share. In fact, you could lose more money than you have. Ouch. I’d only think about doing this if I were a day trader with a fat wallet and nothing to do but watch my stock prices.
Dividend – The amount paid to shareholders of certain stocks. Stocks that pay dividends can be nice to have, because the dividends are income, so you make money while you’re holding the stock.
Beta – This is a way of figuring how risky the stock is when compared to “the market” in general, which is assigned a beta of one. So a stock with a beta of one is probably going to behave similarly to the stock market as a whole. One with a higher beta is going to jump all over the place compared to the rest of the market. It’ll be more volatile.