Introduction:

In this second part of three online exercises on Shares & Stock Market Terminology, we will continue to look at and explain more essential stock market and shares vocabulary. In this part, we will focus on the different types of shares/stocks, how stock/share performance is measured and look at situations which can happen to companies on the stock market and affect their share price.

Click here to go to the first part of this 'Shares & stock market vocabulary exercise'

Click here to go to the third part of this 'Shares & stock market vocabulary exercise'


Exercise: Explaining the stock market continued

In the following conversation between two work colleagues, Peter explains to Juan how the stock market works and the meaning of some different words and terms used in it.

From the context, try to guess what the meaning of the words/phrases in bold are. Then do the quiz at the end to check if you are right.

Juan:'I'm a little worried about investing in the stock market. It isn't doing well at the moment. Do you think I'll lose money if I buy shares at the moment?'

Peter:'You're right. The overall or average value of stocks and shares is falling at the moment. People who work in the stock market call this a bear market, when overall share prices are falling. When overall share prices are increasing, they call it a bull market.'

Juan:'So how would I know if the stock market is a bear market or bull market?'

Peter:'People who buy and sell stocks and shares look at share indices to see how well the stock market in general is performing. A share index, measures the average performance of the share prices of a group of different companies. A share index will tell if the average share price of all the companies in that group is increasing or decreasing. For example, one of the most famous share indices is called the Dow Jones 30 index. This share index measures the average combined performance of the share prices of the 30 largest public limited companies in America. In the last 6 months, the value of the Dow Jones 30 index has fallen from 13,160 to 12,101. But share indices only measure the average performance. So although the majority of companies' share prices are falling, there will be some companies whose share prices are actually increasing. So even in a bear market where average share prices are falling, if you buy shares in the right company, you can still make money.'

Juan:'What happens if I buy shares in a company and it files for bankruptcy? It doesn't have enough money to pay it's debts and to continuing operating?'

Peter:'Once a company has filed for bankruptcy, all trading (buying and selling) of its shares is stopped/suspended on the stock exchange. If the company has to close down, then you'll probably lose all the money you spent on the company's shares. But sometimes, another company will take it over, which means to buy the company. If that happens, then you'll receive some money for your shares.'

Juan:'Is a takeover the same thing as a merger?'

Peter:'They are similar. They are where two companies become one. But with a takeover, one company buys another company. With a merger, two companies combine. Normally, with a merger the two companies are of a similar size. With a takeover, it's normally a big company buying a smaller company.'

Juan:'So I need to do some research on companies before I decide which shares to buy. With the stock market performing so badly at the moment, it seems like a big risk to invest money in stocks and shares at the moment.'

Peter:'Not necessarily. As I said before, although most stock/share indices are showing that on average the share prices of companies are falling, it is only an average and some companies' share prices are actually increasing. But if you want to reduce the risk of losing money, you could buy preferred stocks or shares in a company.'

Juan:'What does preferred stocks mean?'

Peter:'There are two types of stocks/shares you can buy in a company. The first type is called a preferred stock/share. With this type, the owner of them is paid a fixed dividend (extra payment) by the company. So you're guaranteed a dividend unless the company has very bad financial problems. The second type is called a common stock, which is also called an ordinary share. With this type, the dividend you receive can change depending on the company's performance or how much of the profits that the management of a company wants to keep and not give in dividends. The amount of profit which a company keeps and doesn't give to its shareholders as a dividend, is called retained earnings.'

Juan:'Apart from buying preferred stock, are there any other ways to reduce the risk of losing your money?'

Peter:'Choose shares in companies which are stable and buy shares in many different companies. Your stock portfolio, which means what shares or stock you own, should be a mixture of shares from different companies in different sectors and industries. This will spread you risk, so you won't lose all your money if one of the companies you have shares in goes bankrupt. Also, after you have bought shares in a company, you should decide at what price you will sell or unload the shares if their price changes. This is called an exit point. So, if you bought shares in a company for $20, you can set an exit point at $15, which means you will sell your shares in the company if they reach that price. Exit points are used to minimise loss.'


Now do the QUIZ below to make sure you understand the meaning of this vocabulary.



Quiz: Shares & stock market vocabulary part 2

Below is a definition/description of each of the words/phrases in bold from the above text. Now fill in the blanks with one of these words/phrases in bold. Only use one word/phrase once and write it as it is in the text. Click on the "Check Answers" button at the bottom of the quiz to check your answers.

When the answer is correct, two icons will appear next to the question. The first is an Additional Information Icon "". Click on this for extra information on the word/phrase and for a translation. The second is a Pronunciation Icon "". Click on this to listen to the pronunciation of the word/phrase and to do a pronunciation speaking test.

1. The name for the 'profit' that a company makes and doesn't pay to shareholders as dividends, is    

         

Retained earnings:
(noun) When a company makes a profit, it has to decide what it wants to do with the money. Normally, companies give some of this profit to their owners (who are called shareholders). This is called a 'dividend', an extra payment. The 'dividend' is given to the shareholder through the shares they own in the company. For example, if a company pays a dividend of $1.20 on each share, if you own 1000 in the company, you will receive $1,200 in dividends. But often companies keep (or retain) some of this profit. This is called 'retained earnings'. Normally, companies use the money they keep as 'retained earnings' to reinvest in the company (e.g. to buy machinery, other companies, buildings etc...), to save for the future or to pay off debts and loans that it has. In Spanish: "ingresos retenidos".

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Retained earnings:

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2. When the stock market is performing very well and the majority of share prices are increasing, it is called a    

         

Bull market:
(noun) This is used to describe the performance of the stock market. A 'bull market' is a different way to say that the stock market is 'performing very well'. When the stock market is a 'bull market', it means the average value of shares or stocks is increasing/growing. For example 'we're in the middle of a bull market at the moment. the average value of shares has grown by 25% during this year'. When the stock market is performing very badly (i.e. the average value/price of shares is falling/decreasing), the stock market is called a 'bear market'. In Spanish: "mercado alcista".

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Bull market:

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3. When two similarly sized companies combined to become one company, is called a    

         

Merger:
(noun) In theory, a 'merger' is like a marriage, where two companies of a similar/equal size combine to become one. Both companies want to 'merge' because there are mutual benefits for both (e.g. new markets, reductions in costs and expenses etc...) by being one company. An example, is the merger between the car manufacturers Daimler and Chrysler. A 'merger' is different to a 'takeover'/'acquisition'. With a 'takeover'/'acquisition', one company buys another company (which is normally smaller or experiencing financial problems) and they become one company. But what is similar in both 'mergers' and 'takeovers' is what happens to the share price. In both 'mergers' and 'acquisitions', one of the companies tries to buy the other company's stock/shares (by making an 'offering price', the price they will pay for the shares or what value/number of shares the shareholders in the company being bought will receive in the new or in the buying company). Normally before the merger or takeover has been completed, the share price of the company who is trying to buy, goes down, while the share price of the other company goes up. After the 'merger' or 'takeover' has been completed and both companies are now one, the stock market (investors in the market) will decide what the appropriate share price of the one company should be. In Spanish: "fusión/consolidación".

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Merger:

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4. A type of stock/share where the owner is guaranteed to receive a fixed dividend, are called    

         

Preferred stocks:
(noun) On the stock market, you can buy two main types of stocks and shares in companies; 'common stock' and 'preferred stock'. With 'common stocks' (which are the most common/normal type of share), the dividend (extra payment) is based on the company's profit performance (so if the company makes a large profit, you'll receive a large dividend. But if the company makes no profit, you'll receive no dividend). Also, with 'common stock', you can vote in shareholders meetings. 'preferred stock' is different. With 'preferred stock' you are guaranteed to receive a fixed 'dividend' for a period of time which isn't based on the company's profits. Also, if the company goes bankrupt, people who own 'preferred stock' will be the first to receive the money from the selling of the company's assets (buildings, machinery etc...). But, people who own 'preferred stock/shares' can't vote at shareholders meetings. So with owning 'preferred stock' you normally earn a constant return and there is less of a risk of losing your money than with owning 'common stock'. But although 'common stock' is riskier, if everything goes well with the company, you can earn a lot higher 'return' (a bigger dividend) on the money you have invested in this type of shares than in shares that are 'preferred stock'. In Spanish: "acciones preferidas/preferenciales".

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Preferred stocks:

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5. A method which measures the average share price performance of a group of companies, is a    

         

Share index:
(noun) A 'share index' or 'stock market index' (as it is known in America) is used to show the average combined share price performance of the shares or market value of a group of different companies. Its main purpose is to show investors and people who in work in the industry what the general situation or trend is in the stock market. There are 100s of different 'share indices/indexes' which are used to measure share price/market value performance of companies in different countries (e.g. the 'Dow Jones Industrial Average', which measures the average share price performance of 30 of the largest American companies), industries/sectors (e.g. the 'Amex Oil Index' which measures the average share price performance of the world's largest oil companies). There are also global, regional and stock exchange 'share indices'. In Spanish: "índice de acciones".

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Share index:

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6. The price of a company share at which a shareholder has previously decided that they will sell their shares at, is an    

         

Exit point:
(noun) The 'exit point' means the price at which a shareholder will sell their shares in a company if they reach that price. Normally, an 'exit point' is used by a shareholder as a strategy to minimise losses from an investment. So, if a shareholder buys 100 shares at a price of $10, they could decide to set an 'exit point' of $7, which means that they will sell their 100 shares if the price reaches $7. By doing this, they will have lost $300, but at least they won't have lost all of their money. An 'exit point' can also be set a price to sell shares if the price rises (e.g. sell shares if they increase and reach a price of $14.50). 'exit points' are also used with many other types of 'financial securities' (e.g. bonds). In Spanish: "precio/punto de salida".

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Exit point:

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7. When one company buys another company, is a    

         

Take it over:
(phrasal verb) The infinitive is 'to take something over'. 'to take over' is sometimes called 'to acquire'. It is where one company buys another company (which is normally smaller or experiencing financial problems) and they become one company. An example, is when the bank lloyds bought another bank called HBOS (who had financial problems). The noun of this phrasal verb is 'takeover' (which is also called an 'acquisition'). A 'takeover' is different to a 'merger'. With a 'merger', two companies of a similar/equal size combine to become one. But what is similar in both is what happens to the share price. In both 'mergers' and 'acquisitions', one of the companies tries to buy the other company's stock/shares (by making an 'offering price', the price they will pay for the shares or what value/number of shares the shareholders in the company being bought will receive in the new or in the buying company). Normally before the merger or takeover has been completed, the share price of the company who is trying buy, goes down, while the share price of the other company goes up. After the 'merger' or 'takeover' has been completed and both companies are now one, the stock market (investors in the market) will decide what the appropriate share price of the one company should be. The phrasal verb 'to take over' always needs to have an object (e.g. 'it' or 'the company') and the two parts can be separated. For example, 'take it over', 'take the company over' or 'take over the company'. In Spanish: "adquirir".

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Take it over:

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8. A type of stock/share where the dividend changes depending on profit performance, is called a    

         

Common stock:
(noun) 'common stocks' are also known as 'ordinary shares' (they are called this outside of America) or just simply 'shares'. On the stock market, you can buy two main types of stocks and shares in companies; 'common stock' and 'preferred stock'. With 'common stocks' (which are the most common/normal type of share), the dividend (extra payment) is based on the company's profit performance (so if the company makes a large profit, you'll normally receive a large dividend. But if the company makes no profit, you'll receive no dividend). With 'common stock', it's the company decision how much to give its shareholders (for many years Apple made large profits but didn't pay out dividends on 'common stock'). Also, with 'common stock', you can vote in shareholders meetings. 'preferred stock' is different. With 'preferred stock' you are guaranteed to receive a fixed 'dividend' for a period of time which isn't based on the company's profits. Also, if the company goes bankrupt, people who own 'preferred stock' will be the first to receive the money from the selling of the company's assets (buildings, machinery etc...). But, people who own 'preferred stock/shares' can't vote at shareholders meetings. So with owning 'preferred stock' you normally earn a constant return and there is less of a risk of losing your money than with owning 'common stock'. But although 'common stock' is riskier, if everything goes well with the company, you can earn a lot higher 'return' on the money you have invested in this type of shares than in shares that are 'preferred stock'. In Spanish: "acción ordinaria/común".

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Common stock:

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9. When the stock market is performing very badly and the majority of share prices are decreasing, it is called a    

         

Bear market:
(noun) This is used to describe the performance of the stock market. A 'bear market' is a different way to say that the stock market is 'performing very badly'. When the stock market is a 'bear market', it means the average value of shares or stocks is decreasing/falling. For example 'we're in the middle of a bear market at the moment. the average value of shares has decreased by 25% during this year'. When the stock market is performing very well (i.e. the average value/price of shares is increasing/growing), the stock market is called a 'bull market'. In Spanish: "mercado bajista".

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Bear market:

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10. All the stocks and shares that an investor owns in different companies, is called their    

         

Stock portfolio:
(noun) A 'stock portfolio' (which is also called a 'share portfolio') is basically all the stocks and shares that a person/investor owns. Normally, investors would only say that they have a 'stock portfolio' if they own stocks and shares in two or more companies and want to sound professional. Investors often decide to mix what stocks and shares they own in their 'stock portfolio' to minimise risk/loss. Sometimes, investors pay stockbrokers to manage their 'stock portfolios' (the stockbroker decides which shares to buy and sell). In Spanish: "cartera de acciones".

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Stock portfolio:

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11. When a company is unable to pay its debts/the money it owes, it    

         

Files for bankruptcy:
(phrase) 'bankruptcy' is basically when a company is unable to pay the debts/money it owes to people/organisations (e.g. bank loans, wages, supplier invoices etc...). When a company is 'filed for bankruptcy' (where a company publicly admits it can't pay its debts, or is forced to by one of its creditors (somebody it owes money to)) it means that it either has to reorganise itself and its debts (how to save money and come to an agreement on how it can pay back its debts) or be liquidated (be closed and have all of its assets sold). If a company is forced to close down, the shareholders will probably lose all their money in the shares they own. If the company survives, but is reorganised, the existing shareholders will normally have their current shares replaced with new ones, whose value is a lot less than what they paid for their original shares. In Spanish: "radicar una declaración de quiebra".

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Files for bankruptcy:

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