Four market terms you need to know
One of my big goals with the Rich Life Roadmap is helping you become a more knowledgeable investor.
So today I’d like to tell you about four stock market terms that are often cited, but rarely explained properly, even by investment experts and the financial press…
Misunderstood Term #1: “Market Breadth”
Market breadth is a measure of how many companies in a particular index have gone up vs. how many have gone down.
Take the S&P 500, which contains 500 different constituents. If 300 of those stocks closed in negative territory on a given day, the stock market had negative breadth.
Conversely, if 400 of the stocks went up, market breadth would be considered very positive.
Since market breadth provides a quick way of knowing how widespread buying or selling was, it’s considered a good gauge of investor sentiment.
Misunderstood Term #2: “Limit Order”
There are many different ways to place a stock order, and the suggested approach depends on the particular security you’re going to purchase along with what the market is doing.
Perhaps the most popular way of placing an order is “at the market,” which is the same thing as telling your broker “buy me this investment no matter what the cost and do it as soon as possible.”
Market orders have the distinct advantage of getting your order filled quickly. They also tend to be the cheapest type of order you can place since your broker is not being asked to do very much on your behalf.
The downside of market orders is that you have no way of knowing exactly what price you’re going to pay.
This is generally not a problem when a stock trades millions of shares a day and when its price is expected to remain relatively stable. However, it can be a dangerous method when a stock is thinly traded or moving very rapidly.
Limit orders, on the other hand, give your broker very clear instructions — to buy the specified number of shares at a predetermined price… or better.
The “better” means that the broker can buy the stock at a price that is lower than your specified price or sell it at a price that is higher. Limit orders can be a great way to keep everyone involved in the process honest.
One other thing I’d like to note on placing limit orders with your broker…
You will usually have the option to specify a “day order” or a “good till cancelled” (GTC) order.
As the name implies, a day order will expire at the end of that trading day if it is not filled. A GTC order will remain open until either it is filled or you inform your broker that you no longer wish to place that trade.
Misunderstood Term #3: “Same-Store Sales”
We often hear retailers citing same-store sales. And the entire stock market can move when a bellwether like Wal-Mart releases this monthly number.
Here’s the important thing to understand about same-store sales: they measure results from stores that have been open for a year or more.
The idea here is that you want to know how much more product a company is selling from its existing locations, not from new stores that it might have recently added.
Reason being, sales growth from new stores is good, but rising sales at the same location generally show increasing demand for a company’s goods or services…
And that indicates the kind of larger, deeper trend that investors really care about.
Misunderstood Term #4: Fiscal Year
If only every company would just use a regular old calendar, comparing numbers would be so much easier!
Unfortunately, many companies opt to use their own business calendars — or fiscal years — to report their results. In fact, roughly one quarter of U.S. companies choose to end their years on a month other than December.
Some have good reason to do so.
For example, retailers often end their calendars in January. That allows them to record all their holiday sales into their current fiscal year. While it technically doesn’t matter what year they record the sales, I suppose they like to go out with a bang.
A lot of technology companies also have whacky fiscal years. In many cases, this is simply related to the date of their initial public offering or because their competitors also use the same fiscal year.
So why worry about fiscal calendars at all?
Because they determine when various quarterly earnings reports, dividend payment announcements, and other important developments will be hitting the news wires.
To a richer life,
Editor, The Rich Life Roadmap