Top 10 terms used in US Stock Market

Not everyone understands what Bulls & Bears are, what S&P 500 means or what going long means in the context of the US Stock market. While some terms are common in the Indian and US markets, it is still essential to review the fundamentals. 

Before you start shortlisting the best long-term US stocks, you should add these terms to your trading vocabulary:

1. ADR - American Depository Receipt

American Depositary Receipts, or ADRs, are financial instruments that bridge the gap between US investors and foreign companies. Imagine a certificate issued by a US bank, representing ownership of shares in a company overseas. That's an ADR in a nutshell.

Here's how it works:

• A US bank acts as a custodian, buying shares in a foreign company.
• These shares are then bundled and represented by ADRs, which trade on US stock exchanges like the NYSE or Nasdaq, just like regular US stocks.
• ADRs are priced and pay dividends in US dollars, simplifying the investment process for American buyers.

Benefits for Investors

• Diversification: Invest in foreign companies with growth potential, spreading your portfolio risk.
• Convenience: Trade on familiar US exchanges in your preferred currency.expand_more
• Transparency: Sponsored ADRs often require foreign companies to provide financial information in English, making research easier.

2. Blue Chip Stocks in US Market

In the US stock market, blue chips are like the reliable all-stars. These are shares of large, well-established companies with a history of success. Think household names like Microsoft or Coca-Cola. Blue chips are known for their:

• Stability: They tend to weather economic storms better than smaller companies.
• Dividends: Many blue chips have a long track record of paying out a portion of their profits to shareholders.
• Market Leadership: They're often dominant players in their industries.

While blue chips offer lower risk, their growth potential may also be lower. They're a solid foundation for a portfolio, but diversification with other investments is still important.

3. DJIA - Dow Jones Industrial Average

The Dow Jones Industrial Average (DJIA), nicknamed "The Dow," is a stock market index that tracks the performance of 30 large, blue-chip companies listed on US exchanges. It's considered a bellwether for the overall US stock market.

The DJIA reflects the combined price-weighted average of these 30 stocks. So, a rise in the share price of a high-priced company like Apple can significantly impact the index more than a lower-priced company.

The Dow is a widely watched indicator of investor confidence and economic health. While not a perfect measure, it offers a quick snapshot of how the US stock market is performing.

4. Fractional Share Ownership

Fractional shares allow you to own a slice of a pricey stock, instead of needing the full purchase amount. Imagine co-owning a company with other investors. It opens the door to the stock market for those with limited capital. This is not allowed in the Indian stock exchange. It has following Benefits:

• Invest in expensive stocks: Access companies like Amazon or Tesla, even if they cost thousands per share.
• Diversification: Build a more varied portfolio by owning slivers of multiple stocks.
• Lower barrier to entry: Start investing with smaller amounts and gradually build your holdings.

5. Going short or Going long

In the US stock market, you can bet on a stock's rise ("going long") or fall ("going short").

• Going Long: You buy a stock hoping it increases in price. You profit by selling it later for more than you paid. This is the traditional investing approach.
• Going Short (Advanced): You borrow shares from a broker, sell them, then repurchase them later (hopefully at a lower price) to return them. You profit if the price falls between selling and repurchasing. Shorting is riskier, as losses are potentially unlimited, and requires a margin account with borrowing privileges.

6. LRS - Liberalised Remittance Scheme

The LRS, or Liberalised Remittance Scheme, isn't directly related to buying US stocks, but it's a hurdle Indian investors face. It's a regulation setting a limit on how much money (USD 250,000 annually) a resident Indian can send abroad for various purposes, including investing in US stocks.

The LRS helps manage capital outflow from India and protects the foreign exchange reserve. It restricts excessive investment in foreign stocks but allows some participation in the US market.

7. DCA - Dollar Cost Averaging

Dollar-Cost Averaging (DCA) is an investment strategy for stress-free, long-term investing. Instead of a lump sum investment, you invest a fixed amount of money at regular intervals, regardless of the stock price.

Benefits of DCA:

• Lowers risk: Reduces the impact of market volatility by averaging out your cost per share over time.
• Disciplined investing: Encourages consistent saving and investing habits.
• Emotions in check: Avoids the urge to time the market, which is notoriously difficult.

Think of it like this: You buy more shares when prices are low and fewer when they're high, potentially lowering your overall investment cost. It's a great approach for beginners and long-term investors seeking a steady investment strategy.

Here's a nice video by Charles Schwab on comparing DCA and Lump Sum investing

8. Moving Averages in US Stock Market

Moving averages (MAs) are a popular tool in the US stock market to gauge trends and potential support/resistance levels. They smooth out price fluctuations by averaging a stock's price over a chosen period (e.g., 50 days, 200 days).

1. Upward Sloping MA: Suggests an uptrend, as the average price keeps rising.
2. Downward Sloping MA: Indicates a downtrend, with the average price falling.
3. Price Above MA: May signal support, with the MA acting as a floor that the price bounces off of.
4. Price Below MA: May indicate resistance, with the MA acting as a ceiling that the price struggles to break through.

Remember: MAs are lagging indicators, reflecting past price movements. They don't predict future trends, but can help identify established trends and potential turning points.

9. Pink Sheets & OTC Market

The terms "Pink Sheets" and "OTC Markets" are intertwined in the US stock market. Here's a quick breakdown:

• OTC Markets: An electronic network for trading stocks that don't qualify or choose not to list on major exchanges like NYSE or Nasdaq. Think of it as a less formal marketplace.
• Pink Sheets (Outdated Term): Originally, quotations for OTC stocks were printed on pink paper, hence the nickname. Today, OTC Markets operates a digital platform.

Key features of OTC Markets (including Pink):

• Less stringent listing requirements compared to major exchanges.
• Lower trading volume and wider bid-ask spreads (difference between buy and sell prices).
• Higher investment risk due to potentially less regulated companies.

So, Pink Sheets or OTC Markets are for:

• Speculative investors seeking high-risk, high-reward opportunities.
• Companies unable to meet listing requirements of major exchanges.

10. Yield in US Stock Market

In the US stock market, "yield" has a different meaning compared to bonds. Here's the breakdown:

• For Bonds: Yield refers to the annual interest payment as a percentage of the bond's face value. Higher yield means higher guaranteed return.
• For Stocks: Yield refers to the dividend yield, which is the annual dividend per share divided by the stock's current price, expressed as a percentage.

Key points about Stock Yield:

• Shows the income return you're getting on your stock investment.
• Not all stocks pay dividends, so some may have a 0% yield.
• A higher yield can be attractive, but it's not the only factor to consider.

Think of it like this: A stock with a 5% yield pays out $5 annually for every $100 invested (assuming a constant price and dividend). It's one way to generate income from your stock holdings.

Bonus Questions

Here are some terms that you might have heard but didn't understand them.

Q. What are the basic stock categories in US stock market?

• Growth stocks
• Speculative stocks
• Penny stocks
• Defensive stocks
• Value stocks
• Cyclical stocks
• Income stocks

Q. What is S&P 500?

The S&P 500 is a widely followed stock market index in the US, not a single stock. It tracks the performance of the 500 largest publicly traded companies. Imagine a basket containing these leading companies. By following the S&P 500, you get a sense of how the overall US stock market is performing. It's a good benchmark for investors.

Q. What are the most popular exchanges in US Stock Market?

The three primary stock markets in the United States are the

1. New York Stock Exchange (NYSE)
2. NASDAQ and the
3. Chicago Mercantile Exchange (CME)

That's it folks. I hope this article has helped you get started on the US Stock terms. Keep learning, be curious, and Happy Investing! 😃