Stocks have served as one of the most effective investment tools over time, but do you know how the stock market actually works? Take our quiz to see how stocks can boost your bottom line -- or cause you to lose it all.
Risk and return are typically inversely related. That means that the less risky an investment is, the lower your return will likely be. Since Treasury bills are backed by the U.S. government, which is pretty stable overall, they usually offer a much lower return than most stocks and bonds.
When the stock market is performing well and prices are going up over time, analysts refer to it as a bull market. This type of situation is good news for investors.
When a company sells stock, they are really sharing ownership stakes in the business. That means every share of stock you buy represents a tiny piece of ownership. As a partial owner, you are entitled to share in the risks and rewards of being a part of the business.
When a company earns net profits, they can either reinvest this money or pay it out to stockholders. When a company pays a quarterly or annual payment to stockholders, it's called a dividend. Stock from companies that pays lots of dividends is often called income stock.
An initial public offering, or IPO, takes place when a company first decides to sell shares of stock to the public. Many investors see IPOs as a chance to get in on the ground floor of a business with lots of future growth potential.
Your portfolio consists of all of the stocks you own. This could be one share or a million shares, and could be spread out among many companies or reflect shares in just a single corporation.
Bonds are different from stock in that they represent a loan to the company that will be repaid with interest. You do not get a share of ownership when you buy a bond -- you're simply a creditor.
A mutual fund is a nifty tool for investors. It is a managed portfolio of stocks or bonds that you can invest in, along with many other investors. By investing in a fund instead of a single bond or stock, you reduce your overall risk.
The S&P 500 is a stock market index, used as a simple measure of the market's performance. It reflects the stock market position of 500 major companies and is managed by a firm known as Standard and Poor's.
The Dow Jones Industrial Average, or Dow, reflects 30 major companies. Like the S&P 500, it serves as an index to help measure the overall performance of the stock market.
Theoretically, you can lose every single dime you invest. If you buy a share of stock in a company for $30 and that company flops completely, you could absolutely be out the entire $30.
Investing in the stock market is anything but a sure thing, but on average, investors earn around a 10 percent return each year. After inflation, the real value of the return ends up being closer to 7 percent or so.
As the housing bubble burst, the Dow Jones Industrial Average dropped 33 percent in 2008 -- the worst year for investors since the Great Depression.
While the stock market offers a return of around 10 percent annually, bonds generally offer a return closer to 5 or 6 percent.
Blue-chip stocks are solid investment options for stock market newbies. They represent some of the most stable, long-term companies on the market, and include only firms that have proven long-term growth and performance.
Over time, the market is characterized by its natural efficiency. Day traders hope to take advantage of short-term gaps in this efficiency by buying and selling stocks in a single day. Day trading offers tons of potential, but also comes with plenty of stress and a huge amount of risk.
A stock exchange is a market for trading stock. Two of the biggest exchanges in the U.S. are the New York Stock Exchange and NASDAQ. S&P, on the other hand, is a performance index, not an exchange in itself.
The Securities and Exchange Commission, or SEC, maintains strict policies over companies that sell stock. They require businesses to publish regular reports so investors have an accurate picture of each company. They also investigate fraud, such as insider trading or corruption.
The coupon rate on a bond is essentially the interest rate. If you have a bond valued at $1,000 with a coupon rate of 7 percent, you can expect to earn $70 per year in interest.
When you invest in a Treasury bond, you are loaning money to the U.S. government. These loans often offer a fairly low return, in the one to two percent range.
Bear markets are the opposite of bull markets. During a bear market, the prices of stocks are falling drastically and the market is trending negatively. This is bad news for investors with lots of money in the stock market.
Bonds pay interest, while stocks don't. You make money on stocks via dividends, or by selling the stock at a greater price than you paid for it.
Municipal bonds are issues by cities, towns and states to raise money for projects like schools and roads. These bonds are often attractive to investors, because the interest earned is not taxable in many cases.
The price to earnings, or P/E ratio, is one of the most basic tools investors use to evaluate stock. To find the P/E ratio, divide the price of the stock per share by the earnings per share.
Market capitalization is equal to the number of shares a company has sold times the price per share. If this value exceeds $10 billion, the company is considered a large-cap. Medium-cap ranges from $2 to $10 billion, while small-cap companies are valued between $300 million and $2 billion.
Small-cap stocks have the most growth potential, but also come with the biggest risk. Large-cap stocks offer the least risk of the three because they already have a proven track record.
A diverse portfolio, with a mix of stocks and bonds, is the safest option for the average long-term investor. This type of diversification helps to reduce your risk and ensure you won't lose all of your money.
At its most basic, the rule of making money in the stock market is to buy low, sell high. That means the stock that only costs $1 is the best buy, all other things being equal. Of course, price isn't the only factor to consider when planning your portfolio, but the buy low, sell high rule is always a sure winner.
With a certificate of deposit, or COD, you are lending money to the bank in exchange for interest. CODs have fixed terms that range from a few months to a few years.
Think of an annuity as an insurance policy that guarantees a certain amount of payment each year. Depending on the policy, you may have to pay for the annuity in one lump sum, or pay monthly, quarterly or annually for a certain period.