Confusing Stock Market Terms And Events, Explained

Definition: Insider trading happens when someone with materials, reports, or other information about a company's stocks buys or sells to make a profit. 

How It Works: Company employees, people who know individuals at companies, or anyone with access to financial information about a public company can take part in insider trading. 

This is one potential scenario: A CEO of a company gains access to a financial report about negative earnings. Before that information goes public, the CEO sells his shares to take advantage of stock prices before they likely fall. Once the report is released, the stock prices go down and shareholders lose money, but the CEO is unaffected.

Another scenario involves buying in anticipation of an impending merger. With stock prices likely to go up after the news is released, that same CEO can buy more stock, making money in the process. 

In a situation where a CEO tells the people to do the same thing, the CEO and anyone who takes advantage of the information are guilty of insider trading. 

One of the most notable examples of insider trading involved Martha Stewart. She was accused of insider trading after she sold stock in ImClone right before the company's stock fell. She was not convicted of these charges, however. She was convicted of lying to investigators and obstruction of justice and lying to investigators. She spent five months in prison as a result. 

Definition: Securities is the general word for investments like stocks and bonds. Buying stock in a company means you buy part of the company, but a bond is a loan to the company contingent upon repayment with interest. 

How It Works: Stocks don't guarantee an investor will make money, but if a company is profitable, it pays dividends to stockholders. Bonds, however, result in interest payments that are either fixed or variable, depending on the terms.  

Definition: A bull market is a strong market with rising stock prices and general optimism for the future. According to the SEC, “a bull market occurs when there is a rise of 20% or more in a broad market index over at least a two-month period.”

In contrast, a bear market is characterized by declining stock prices. Again, per the SEC, a bear market generally falls 20% or higher over two months or more. 

How It Works: In a bull market, investors are more likely to take risks, put larger amounts of money into the market, and, though stock prices are higher, feel more secure in their chances of selling them for a profit in the future.

Bear markets, again, are the opposite. A decline in the market causes investors to sell their holdings, which ultimately leads to lower stock prices. With time, confidence in the market continues to fall.

Definition: A 401(k) is a profit-sharing plan between an employee and their employer for retirement. Companies may or may not match individual contributions into the plan by the employee. 

How It Works: Money that goes into a 401(k) comes out of the employee's paycheck (often before it's taxed) and is invested in mutual funds. Mutual funds are pools of money used to purchase an array of stocks, bonds, and other securities. When stocks, bonds, and the like fluctuate, so does the mutual fund and, as a result, the 401(k) does, too. 

What It Is: Short selling takes place when a trader borrows shares from a broker (someone who sells and buys on behalf of clients) in anticipation of the price going down. The trader sells the stocks, waits for them to decline in price, buys them back at the lower cost, and returns them to the broker. The trader keeps the difference as a profit. 

How It Works: Short selling is couched in the belief that a stock is going to fall. For example, a trader believes stock in a company will decline soon based on trends and other market indicators. The trader then borrows stocks in that company from a broker and sells them on the open market. 

Presuming the stocks fall, the trader buys them at the lower price and then sells them back to the broker with interest. Any difference left between the high and low stock prices goes to the trader as a profit. 

Short selling a stock that does not fall but goes up instead may mean the trader has to take a loss. 

Definition: The New York Stock Exchange, NYSE for short, is an auction market with an actual floor of trade. An auction market indicates that market participants interact with each other to buy and sell stocks.  

The NASDAQ (National Association of Securities Dealers Automated Quotations) is also a stock exchange, but activities are carried out electronically. It's a dealer market, meaning market participants make transactions through dealers instead of with on another.

How It Works: At the NYSE, individuals trade on the trading floor and electronically. Designated market makers (DMMs) represent the over 2,300 companies listed on the NYSE, while floor brokers work for NYSE member firms and “act as agents, buying and selling stock for the public.” Core trading at the NYSE is between 9:30 am and 4 pm ET.

NASDAQ, often associated with the technology sector, is considered more modern and faster-paced than the NYSE, but maintains the same core trading schedule. NASDAQ dealers make connections between buyers and sellers electronically. 

The S&P 500, or the Standard and Poor's 500, is an index that tracks the stocks from the leading 500 companies on the stock exchanges. Named for the company that maintains it, the S&P 500 weighs information by the size of the company and incorporates companies on both the NYSE and NASDAQ.