What does 'bull market' actually mean?
A bull market is a period when stock prices are rising and investor sentiment is optimistic. The SEC's Investor.gov defines it as 'a time when stock prices are rising and market sentiment is optimistic.' There's no single universal threshold for declaring a bull market, but a common benchmark is a 20% rise from a recent low in a broad index like the S&P 500. Bull markets can last for years; the 2009–2020 bull run was one of the longest on record. ClearValue Lending is not a Registered Investment Advisor; this is education, not investment advice.
How is P/E ratio calculated?
P/E ratio = current share price ÷ earnings per share (EPS). If a stock is trading at $50 and its annual EPS is $5, the P/E is 10. Forward P/E uses projected earnings instead of reported earnings. A high P/E means investors are paying a premium for expected future growth — it doesn't necessarily mean the stock is 'expensive' in an absolute sense. P/E ratios are most useful when compared against the same company's historical P/E or against other companies in the same industry, not across sectors.
Is a higher market cap always safer?
Not always — but generally, large-cap companies have greater financial resources, more analyst coverage, and more stable earnings than small-cap companies, which tends to reduce short-term volatility. The SEC notes that large company stocks have historically lost money on average about one out of every three years, but over long periods, diversified stock portfolios have delivered positive returns. Small-cap stocks can outperform large-cap stocks over certain periods — particularly in early economic recovery cycles — but they also carry higher risk. Diversification across size categories is the more practical approach for most beginners than picking one tier.
What's the difference between an index and an index fund?
An index is a benchmark — a predefined list of securities measuring the performance of a market segment. The S&P 500 is an index; you can't 'buy' the S&P 500 directly. An index fund is an investment product (either a mutual fund or an ETF) that holds the securities in its target index to replicate its performance. When you buy a total-market index fund, you're buying a fund that holds essentially all publicly traded U.S. companies, weighted by market cap. The index describes what exists; the index fund is what you actually own.
Why is diversification important?
Diversification reduces concentration risk — the risk that one bad outcome derails your entire portfolio. The SEC describes it as 'spreading your money among various investments in the hope that if one investment performs poorly, others may perform well.' A broad-market index fund automatically provides diversification across hundreds or thousands of companies. If one company collapses, its weight in the fund is small enough that the impact is minimal. Diversification doesn't prevent losses in a broad market decline, but it eliminates the scenario where a single company failure takes a major portion of your portfolio to zero. Source: SEC Investor.gov Glossary.
What is a dividend and how is it taxed?
A dividend is a payment made by a corporation to its shareholders from company profits or reserves. Companies are not required to pay dividends — growth stocks often reinvest earnings instead. For tax purposes, dividends fall into two categories: (1) Qualified dividends, which meet IRS holding-period and issuer requirements, are taxed at the favorable long-term capital gains rates (0%, 15%, or 20% depending on your income). (2) Ordinary (non-qualified) dividends are taxed as ordinary income at your marginal rate. Dividends are reported on Form 1099-DIV. Most dividends paid by U.S. corporations held for more than 60 days qualify for the lower rate. Source: IRS Publication 550 — Investment Income and Expenses (irs.gov/publications/p550).
What is short selling and why is it considered risky?
Short selling is a trading strategy where an investor borrows shares from a broker and sells them immediately, hoping the price will fall so they can buy the shares back cheaper, return them to the lender, and pocket the difference. The risk is theoretically unlimited: if the stock price rises instead of falls, the short seller must still buy back at the higher price — and there is no cap on how high a stock can go. Brokers also charge interest on borrowed shares and may force you to close the position ('margin call') if your account falls below minimum equity thresholds. Short selling is regulated by the SEC and FINRA under Regulation SHO. Source: SEC Investor Bulletin — Short Sales (sec.gov/investor/alerts/shortsales).
What does it mean when a stock goes ex-dividend?
The ex-dividend date is the cutoff date set by the stock exchange after which new buyers of the stock are NOT entitled to the upcoming dividend payment. If you purchase shares on or after the ex-dividend date, the seller (not you) receives the dividend. If you purchase before the ex-dividend date, you receive it. Under standard T+1 settlement rules, you need to own shares the business day before the ex-dividend date to qualify. The stock price typically drops by approximately the dividend amount on the ex-dividend date, reflecting the payout. Dividend dates (declaration, ex-dividend, record, payment) are publicly disclosed by the company. Source: FINRA — Understanding Dividends (finra.org).
What is a stock split and does it change the value of your investment?
A stock split increases the number of shares outstanding while proportionally reducing the price per share — the total market value of your holdings does not change. In a 2-for-1 split, for example, each share becomes two shares at half the price. Companies split their stock to make shares more accessible to smaller investors or to bring the price into a more liquid trading range. A reverse stock split works the opposite way: consolidating shares and raising the per-share price. The SEC requires companies to file an 8-K disclosing stock splits. Splits do not dilute shareholder ownership percentage — your stake in the company remains the same. Source: SEC — Stock Splits (investor.gov).
What is the difference between a stock and a bond?
A stock (equity) represents ownership in a company. Stockholders may receive dividends and benefit from price appreciation, but have no guaranteed return — if the company fails, stockholders are last in line to recover assets. A bond (debt) is a loan to a company or government that pays a fixed interest rate (coupon) and returns the principal at maturity. Bondholders are creditors — they rank ahead of stockholders in bankruptcy. Stocks generally carry higher risk and higher long-run return potential; bonds provide more predictable income with lower default risk (especially for investment-grade issuers). Most financial advisors recommend holding both to balance growth and stability — the proportion depends on your time horizon and risk tolerance. Sources: SEC Investor.gov — Stocks (investor.gov/introduction-investing/investing-basics/investment-products/stocks), Bonds (investor.gov/bonds).
