New investor, welcome to the language of Wall Street and the stock market.
"The bulls on Wall Street charge and the bears take cover as the Dow rallies to all-time highs...
sending its P-E ratio through the ceiling and its dividend yield south, as analysts anticipate a correction.
" If you think this headline is about four-legged animals loose in the city, you need to read this real basic investor guide to stock market language.
Translation: Stock prices are up to the highest levels ever.
Some experts expect prices to fall soon because stocks are expensive and dividends are low.
Now let's look at the terms to get a handle on things.
Wall Street in New York is the home of the New York Stock Exchange and the hub of the financial world, even today.
When the big financial firms headquartered there speak, investors listen.
When they act they can move markets, including the stock market.
BULLS are investors who bet that stock prices will go up.
They do this by buying stocks.
BEARS bet that prices will fall.
They do this by selling stocks.
Sometimes bears sell stocks they don't even own, and this is called selling short.
They borrow shares through their broker, sell them, and hope to later buy them back at a lower price and make a profit.
When selling short you must someday COVER your position by buying equivalent shares in the market to return to your broker.
The DOW is the Dow Jones Industrial Average, the oldest and still most popular measure of stock market performance.
When it RALLIES it goes up, meaning that stocks in general went up.
The P-E ratio for the Dow tells investors how expensive or cheap the price of the stocks (30 of them) included in that average are relative to corporate earnings.
The DIVIDEND YIELD for the 30 Dow stocks tells you what rate of dividend income investors might expect at the current level of stock prices.
A CORRECTION is simply a drop in stock prices.
When the stock market advances too far too fast, it's ripe for a fall.
In our scenario, P-E ratios for stocks are high and dividend yields are low by historical standards.
That's why some analysts think that stock prices are expensive and will fall.
Pretty simple, isn't it? In reality, stock prices relative to corporate earnings and dividends might not be expensive.
If stocks continue to go up and this is not accompanied by higher corporate earnings and dividends, there could be a big correction (fall) in stock prices.
On the other hand, if earnings reports beat expectations and companies raise their dividends the market could continue to make new highs.
So, it's never really simple in the stock market game.
For example, here's another possible twist to the story.
Remember bears and selling short? There's a thing called a BEAR TRAP, and it can fuel a market rally.
When a bunch of bears make a bad call and the market moves up against them they can find themselves scrambling to cover their positions.
In the process they buy stocks, bid prices up, and lose money.
Welcome to Wall Street, new investor.
Once you learn the language, the game has just begun.
I've played for 35 years, and I'm still learning.
There's one more thing.
If the concept of selling short confuses you, don't worry because it confuses most people.
But now you know that in the stock market you can bet that a stock will fall in price.