What are the public markets?
In the public markets, companies sell shares (representing stakes of ownership) to investors that include large institutions and the general population alike. Companies often make their debut in the public markets through an initial public offering (IPO), direct listing or through a reverse merger with a special purpose acquisition company (SPAC). Public market investors are connected by exchanges that enable them to find an opposite party for their trade. When one party buys a share, another party is selling that share and vice versa.
In the US, top stock exchanges include the the New York Stock Exchange (NYSE) and Nasdaq. Around the globe, some of the largest stock exchanges also include:
- Japan Exchange Group
- Shanghai Stock Exchange
- Hong Kong Exchanges
- Shenzhen Stock Exchange
- London Stock Exchange
- Saudi Stock Exchange
- TMX Group
Stocks and bonds are examples of traditional asset classes and are considered mainstream investments. When someone invests in the stock market, whether individually or through a program like a 401(k), they own a small portion—a share—of the public companies they’ve invested in.
What are the key characteristics of the public markets?
- Public companies operating within public markets are heavily regulated
- Public companies are also required to report out on their performance
- Details about these public companies must be easy to find
- Individuals can invest in them
Public market terminology
52-week highThe highest price for a given stock in the past 52 weeks (one year). Investors can use this measurement to get a sense of the upper limit of a stock’s price range in recent history.
52-week lowThe lowest price for a given stock in the past 52 weeks (one year). This can be helpful for getting a general sense of the lower end of the range of a stock’s price in recent history. It can also potentially help highlight the amount of growth or decline a given stock has seen in the last year.
AlphaAlpha is a measure of an investment’s performance in the context of the broader market or a benchmark index, like the S&P 500. In other words, it represents how much better or worse an investment does compared to typical market or benchmark performance. Alphas are usually represented in whole numbers or as a percent. E.g., +1 or -1.
Used colloquially, creating or generating alpha means that an investment, firm or manager is able to provide a result that is greater than typical market performance.
AskAn ask is the amount a seller is willing to sell something (e.g. a share) for.
Bear marketA bear market is a market in decline, usually down by 20% or more from recent highs. In a bear market, the economy recedes and the price of shares decreases. Additionally, bear markets—including the 2008 global financial crisis—are associated with layoffs and a rise in unemployment. In 2020, COVID-19 also created conditions for a bear market.
BetaBeta is a measurement that conveys the likelihood of a stock’s price to fluctuate, also known as volatility. A beta lower than one indicates a stock is less volatile than the market, while a beta higher than one indicates a stock is more volatile than the market. Overall, volatility can represent risk, but it also highlights the potential for greater reward through higher returns.
Here’s an example of a few public companies and their stock’s corresponding betas.
Select low-beta stocks*
- Kroger (NYS: KR): 0.18
- Walmart (NYS: WMT): 0.33
- Dollar General (NYS: DG): 0.36
- Campbell Soup Company (NYS: CPB): 0.60
Select high-beta stocks*
- Tesla (NYS: TSLA): 2.03
- Aphria (NYS: APHA): 2.36
- Advanced Micro Devices (NYS: AMD): 1.78
- MGM Resorts International (NYS: MGM): 2.64
*Data as of 4/1/2021 according to PitchBook
BidA bid is the amount a buyer is willing to pay for a share. This can be assessed to determine the appetite for demand of a share at a certain price.
Bid-ask spreadBid-ask spread represents the difference between the buying (bid) and selling (ask) prices for a share. This shows the discrepancy between the highest price a buyer is willing to pay and the lowest price a seller will accept.
A wide bid-ask spread could indicate that there is some lack of agreement between how buyers value a stock compared to sellers. This can be especially helpful to pay attention to when dealing with stocks that are relatively less liquid, as prices are likely to be more volatile. The spread also acts as compensation for a market maker in case it is unable to connect buyers and sellers before a stock's price changes considerably.
Also known as “bid/ask spread” or simply “spread.”
Black swanA black swan is an unpredictable event with potentially catastrophic consequences. Black swans, like the 2008 global financial crisis and 2001 dot com bubble, are characterized by their tremendous rarity and severe and wide-ranging impact. Damage to an economy during a black swan event can negatively impact both markets and investments.
Bull marketA bull market is a market on the rise, where economic conditions are favorable overall. A sustained increase in the value of stocks is typical during a bull market, and investors reinforce the trend by asserting that it is likely to continue over the longer-term. Additionally, bull markets are usually characterized by a strong economy and low unemployment.
BuyTo buy shares or take a position in a company.
Consensus estimateInvestors can get a sense of a company’s projected future performance through consensus estimates, which aggregate analyst expectations for a company’s forward-looking prospects. These estimates typically refer to a company’s earnings per share (EPS) or its expected revenue.
DividendA payment that is offered to shareholders by a public company, usually paid in the form of cash, though sometimes through additional stock. Dividends can be used as a reward to shareholders for their investment in a company or as an incentive to encourage longer-term holding.
Economic moatEconomic moat refers to the overall competitive position that a company has and how much of an advantage it has compared to others that operate in a similar market. For example, a company with a wide economic moat may own unique intellectual property or have access to resources or partnerships that others are unable to attain.
On the other hand, a company with a narrow moat may have little to differentiate it from competitors, making it more vulnerable to competitor pressure or other market forces.
EPSEPS means earnings per share. It is a key metric used to track a public company’s ability to deliver earnings back to shareholders on a relative basis. In other words, it’s the ratio of net income (earnings) to outstanding shares.
Also known as “earnings per share” or “earnings/share.”
Fair value estimateThe fair value estimate is a proprietary Morningstar data point that can help investors understand the long-term intrinsic value of a stock. It represents an analyst’s assessment of a stock’s value based on a number of factors including a company’s future ability to generate cash and the predictability or uncertainty of the company or its market.
Market capitalizationMarket capitalization refers to how much of the market a given stock occupies in terms of dollar value. In other words, market cap is the product of stock price multiplied by total number of shares (representing the total current value of a company's stock).
Also known as “market cap”.
Price/earnings ratioThe price/earnings (P/E) ratio is the price of a stock divided by its earnings per share. This is a critical valuation metric for public market investors that helps them understand how much a stock costs compared to its current earning power. Essentially, this represents how much an investor will pay for every dollar of earnings.
A high P/E means that the cost of a stock is high compared to the earnings it has brought in, as measured by earnings per share on a trailing twelve-month basis. A low P/E means the cost of a given stock is more in line with its current earnings.
Another way to look at P/E is as investor willingness to pay more or less for a stock, with high P/E indicating high investor appetite. As many investors make decisions based on long time horizons, a high P/E ratio alone may not be enough to dissuade a potential investor from making an investment if they expect that the company will improve its earnings significantly, carve out a new market or disrupt existing markets in the future.
For instance, tech companies with a lot of future potential may trade at higher P/E levels, while stocks for companies in more mature industries (such as energy or finance) may generally trade at lower values.
P/Es for popular tech companies
P/Es for popular public commercial banks
- Citigroup (NYS: C): 15.38
- KeyBank (NYS: KEY): 15.85
- Bank of America (NYS: BAC): 20.70
- J.P. Morgan (NYS: JPM): 17.15
- Wells Fargo (NYS: WFC): 95.24
*Data as of 4/1/2021 according to PitchBook
Also known as “price-to-earnings ratio,” “price-earnings ratio,” “P/E ratio,” or “PER.”
SellTo sell shares or close a position.
ShareA share is an individual unit of stock ownership.
Target priceTarget price represents the price an analyst expects a given stock to meet in the future. Changes in analyst target price can potentially instigate shifts to a stock’s market price, as some investors may feel encouraged or discouraged to buy or sell based on analyst assessment.
VolumeVolume is the number of shares exchanged for a given period of time, often daily. This helps investors understand how frequently a given stock is traded. Stocks with higher volume will typically be easier to buy or sell (often with less volatility in price) as there are more available shares being exchanged.
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