Understanding Financial Terminology
Watch Your Step
A child who doesn't understand the risks might be willing to be too aggressive with his investments; he could lose it all on a speculative stock. A child should be encouraged to become a conservative investor who goes for long-term growth.
Penny stocks don't necessarily sell for a penny a share—today they're usually priced at as much as $5 a share. These stocks got their name because such highly speculative, low-priced stock used to go for just a few pennies a share.
To become a knowledgeable investor, your child must learn the terminology that's unique to the street—Wall Street, that is. As with learning any vocabulary list, it becomes easy only when the words are used over and over again. This section presents some things your child should know before he puts his money into the market.
Your child can learn the lingo in many ways. Hearing you speak it is certainly the easiest way to go, but there are other ways to consider. For example, there's a self-study course called Investing for Life designed for kids under 18 by the National Association of Investors Corp. NAIC, an educational organization, also offers a youth membership that includes a newsletter and other benefits.
What Kind of Investor Will Your Child Be?
People are sometimes classified by their personality as Type A or Type B. The same goes for stock market investing. There are aggressive investors who are willing to take on a lot of risk and who hope to hit a home run and reap big profits. At the other extreme are conservative investors who don't want much risk and who are willing to settle for hitting singles on a consistent basis. Most people fall somewhere in between.
There's another category of investor: the speculator. He's more than just aggressive. He might, for example, invest in very risky investments, such as penny stocks.
Playing the Averages
Piggybank on It
The Wired Index, started in 1998 by Wired magazine, claims to represent the blue-chip stocks of the next millennium. It includes 40 companies, more than half of which are in computer-related technology, although it also includes some low-tech companies such as Walt Disney, Wal-Mart, and Marriott.
We all hear it every day: The market is up. The market is down. What does this mean? The movements in the stock market are really only movements in certain indexes designed to present aspects of the market. These include the following:
- Dow Jones Industrial Average (DJIA). Started in 1896, the Dow is the oldest index and indexes 30 blue-chip (industry leader) stocks representing the industrial age. The Dow is quoted as the benchmark of market activity. If the Dow is up, then people say the market is up. The stocks in the Dow (with the exception of General Electric) have changed over the years as industry evolved or companies have merged. The first day, the Dow closed at 40.94; today it's over 9,000.
- Standard & Poor's 500 (S&P 500). As the name implies, this index represents 500 companies, mostly those listed on the New York Stock Exchange. These 500 are broken down as follows: 400 industrial companies, 40 utilities, 40 financial companies, and 20 transportation companies. Some investment advisers suggest
- that this index is more representative of the market as a whole because of the greater number of companies included in the index.
- NASDAQ Composite Index (NASDAQ) includes all companies traded on the NASDAQ Stock Market, a computerized market for many smaller companies. Today, it's over 5,000 strong and includes such giants as Intel and Microsoft.
- Russell 2000 is an index that tracks 2,000 small capitalization stocks, those whose market value is below $500 million.
- Wilshire 5000 is an index that tracks 5,000 stocks of all kinds.
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Excerpted from The Complete Idiot's Guide to Money-Smart Kids © 1999 by Barbara Weltman. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.
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