The stock market is volatile. Perhaps you heard. Or maybe this is actually new to you.
If you’ve only been in the market the last several years, you may be new to terms like “correction” or “dead cat bounce.”
But these are some of the things that arise when the market that was always going up, eventually comes down.
No judgments. Here are five stock terms you hear a lot, that you may be too embarrassed to ask about.
The Dow Jones Industrial Average
The Dow, as it’s called, is the most highly regarded measure of the stock market’s performance over time. And it’s got a track record: Charles Dow created it in 1896. When people say, “The market is down,” they are often talking about the Dow.
The Dow takes the average of 30 large American companies — including big names like Coca-Cola, Nike, Caterpillar, Apple, McDonalds, Exxon Mobil — and converts them into a point-system. Each company is weighted by price. That means moves of the higher priced stocks have a bigger impact on the average than lower priced stocks.
The current value of the Dow is around 25,000. It’s risen about 18,600 points since bottoming out in 2009, after the last market crash.
A correction is a downward swing in the market of 10%. You wouldn’t know it from the recent run of the market, but corrections are common. And they can be a good thing.
These price declines punctuate a steady rise in the market and can offer buying opportunities to investors. Corrections are not as long as “bear markets” or “recessions” and not as deep as a “crash.” Rather, these setbacks allow for investors to sell, take advantage of gains or buy into another company at a lower price.
Commonly regarded as an opportunity to reassess holdings for investors, corrections are a chance to get a feel for your risk tolerance and reallocate your portfolio.
Bonds are a type of security in which investors essentially lend money to bond issuers (like governments or companies) who pay interest regularly and pay the money back after a set amount of time. The interest that investors earn is called the yield.
People talk about bonds and bond yields when the stock market falters because it’s considered a safer place to keep money. Yields tend to rise as the Federal Reserve raises interest rates and when there is inflation. Some investors currently see those as possibilities on the horizon.
When interest rates go up, the price of fixed-rate bonds fall. And when bond prices fall, bond yields go up. When yields go up, investors go in.
Dead Cat Bounce
Even a dead cat will bounce. So the thinking goes. The metaphor is dark, but stay with me: even a downward market or stock will go up a little, before heading back down.
These brief upticks in the market or a stock follow downward movement as investors scoot out of short positions or slide in at a lower price that they may think is the bottom. But the price or index doesn’t continue to rise, it falls more.
Just like an automatic shut-off breaker in your home prevents a fire, these trip-wires stop markets that move too far up or down too quickly. By halting trading in a market or security at pre-set points, the stock market and its regulators can keep panic-selling and wild swings at bay.
Currently there are several levels for market-wide circuit breakers. For the S&P 500 Index, Level 1 is a 7% drop from its previous close, Level 2 is a 13% drop, Level 3 is a 20% drop. Markets that hit a Level 1 or 2 are paused for 15 minutes on all exchanges, given the time of day; a Level 3 will stop trading for the day.
There are circuit breakers for big moves up or down for single stocks, which include Exchange-Traded Funds.