Bulls and bears: 20 stock market terms to understand the downturn
Bulls, bears and dead cats. The stock market has a language all its own, and with much of Australia focused on the economy - and particularly the markets - here is a quick glossary to help you understand.
1. All Ords
Australia's most cited market index. It's made up of the 500 largest Aussie stocks.
200 largest Aussie companies by market size.
3. AUD and the exchange rate
The value of the Australian dollar's (AUD) health is measured against other currencies, primarily the US dollar. For foreign exchange investors it is often used as hedge but in times of global uncertainty, investors often sell the AUD. The value of the dollar is tied, like the economy, to commodity prices, the economies of its trading partners, particularly China. If the dollar falls - it makes our commodities and other goods cheaper to overseas purchases and may then attract more business. If it is higher, we are able to buy more overseas.
4. Bear market
A bear market is one where the bear claws down equity prices - and signifies a falling market. Typically it refers to a fall of 20% from a market high.
5. Bull market
A bull market is where the bull thrusts its horns and tosses up equity prices - and signifies a rising market. It usually refers to a market which has moved up and records higher highs and higher lows.
6. Circuit breakers or market halts (NYSE)
On rare occasions, where the market falls dramatically in a single day there are systems in place for the market to halt trading to stop a total market crash. Typically these halts will last around 15 minutes to give people time to absorb information, analyse it and make more rational decisions. Here's how they function: if the S&P 500 falls 7% from the prior day's close, it triggers a 15-minute trading halt. If the S&P 500 falls 13% before 3.25pm, trading halts again for 15 minutes. If the S&P 500 falls 20%, all trading remains halted for the rest of the day. These systems have a long history.
A market correction is where equity prices fall to take into account new circumstances and the market moves to establish a new equilibrium price. Typically the term is used when a security or index falls more than 10%.
8. Dead cat bounce
This is a partial recovery of the stock market after a significant fall. It is not a sign of recovery but just a temporary boost.
9. Defensive assets
Defensive assets work in the opposite way to equities. They generate lower returns, and risk, and balance a portfolio during down times in the market. Defensive assets include cash, fixed interest, bonds and gold.
Bonds are often seen as a safe place to store wealth, and act as a key economic indicator. The movement of yields up and down is in large part a reflection of market optimism. If market optimism sinks, people flock to bonds because they're deemed a safer place to store wealth than equities. If investors think the market will head upwards, then they're more likely to leave safe assets like bonds and instead invest in stocks.
Investors buy bonds from issuers in exchange for regular coupon payments (which you can think of as the interest or yield of the bond). They're then held for a set period of time, after which the investor returns the face value of the bond to the issuer. When financial commentators talk about bond yields rising or falling, this refers to the sale and purchase of bonds in the secondary market.
Gold is seen as a defensive asset in a portfolio, and a hedge during volatility in equity markets. It has a history of outperformance in low interest rate environments, its price increases at times when equities and bonds fall. Gold prices may be volatile in the short- term but it holds value in the long term. Investors typically purchase gold in bullion or coin form, gold certificates, gold mining stocks and ETFs.
The price of oil can have a severe impact on the economy; for consumers, fuel can be one of the largest purchases of the week. The price at the pump is determined by supply and demand in the global market. Typically, the oil producing nations will manipulate the price by limiting supply to increase the price of oil or flood the market to bring prices down.
Lower oil prices represent good news for Aussie motorists. The ready-reckoner is that every US$1 a barrel fall in the oil price leads to a one cent fall at the Australian petrol pump. An added benefit is more money which could in turn help support consumer spending during the next few turbulent months.
13. Crystallise losses
In times of market volatility when share prices fall, people talk about retaining the shares so that you don't crystallise losses. This means that while the price of your shares has gone down, until you sell those shares you still own the same number of shares that you owned before the price went down, and if the share rebounds the fall will not be felt by your holdings in any way. Once you sell the shares you are taking the loss and you are unable to benefit from any particular rebound.
14. The Futures index
The futures exchange allows for trading of futures contracts, which are contracts to buy specific amounts of shares at a particular price at a particular time. (These are also known as derivatives, as they are derived from the primary exchange of stock on the regular stock markets). The futures index represents the replication of the index at a later time. If the index is trending lower than its current position it suggests that there is little confidence in the market and it is likely the market will open at a lower price. Conversely, if it is high it suggests investors are feeling positive towards the market's direction.
15. Fiscal stimulus
Fiscal stimulus refers to any action by governments to increase spending in the economy. It might be through increased government investment on infrastructure, money to boost different sectors, income injections to people to increase spending.
16. Global Financial Crisis (GFC)
The global financial crisis (GFC) refers to the period of extreme stress in global financial markets and banking systems between mid-2007 to early 2009. It was caused by the housing market crisis that occurred in the US and was attributed to the sale of risky loans through sub-prime loans. Home buyers were given loans they were unable to pay back, and the loans were sold through complex products called mortgage-based securities to unsuspecting investors.
17. Monetary stimulus
This is where the central bank lowers interest rates to increase borrowing and spending into the economy. It also includes quantitative easing, an extreme monetary policy where the central banks purchase government bonds or other securities to release more money into the economy. By increasing the money supply it is hoped to increase spending and stimulate the economy back into action. In extreme cases it can lead to inflation. It is used in situations where other stimulus policies are no longer working; where interest rates are at or approaching zero.
This refers to a sustained upward movement in the stock prices. Rallies can occur in either bear or bull markets.
Technically, economists will call a recession if the Australian stock market has two successive quarters where Australia's GDP has fallen. When the economy stops growing, businesses are forced to cut costs - one of the largest being labour costs. Unemployment will reduce consumer spending and this tends to exacerbate the economic contraction. This is where governments may try to artificially boost spending to stimulate the economy. This may be done by a stimulus payment to households or certain businesses or people, or it may occur through the printing of more money, or it has often been done through reducing interest rates to encourage people to borrow, particularly businesses. A global recession occurs if there is a worldwide decline for six months.
Recession will technically become a depression if recession lasts for 18 months.
A sell-off occurs when a large number of shareholders sell a particular stock. The number of sellers usually outstrips buyers which causes the price of the stock to decline. It may happen when there is news about the company, or rumours or lower than expected earnings.
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