Entering the stock market for the first time is a little confusing. You’ll encounter a number of new terms and phrases that sound weird but once you know what they mean, everything makes sense. To get you started investing, here’s a guide to some basic terms everyone who is starting out should know.

• Share or Stock
  When you purchase a share, you are essentially buying a fraction of a company. In simpler terms it means, you become one of the owners, though it may be infinitesimally small. The term “stock” is used to describe ownership in a company or companies whereas a “share” is a unit of ownership in any given company.
• Market Capitalisation
  Market capitalisation or market cap is the total market value of shares in a company. It is determined by multiplying the outstanding shares with the prevailing share price. Depending on this figure, companies are large cap, mid cap or small cap. This helps investors in measuring the size of the company and its risk profile.
• Bid and Ask
  Bid is the highest price that can be paid by a buyer for a stock and ask is the lowest price at which a seller can sell. The difference between the two is referred to as the spread. A narrow spread often reflects a highly traded stock while a large spread indicates lower trade volumes.
• Liquidity
  Liquidity indicates the rate at which and with which one can buy or sell a stock without bringing about significant change in its price. Highly liquid stocks are traded easily but less liquid stocks will take time to sell.
• Volatility
  Volatility is used to indicate the degree to which the price of a stock varies over time. A very volatile stock has dramatic price changes, both potentially more reward and more risk. Low-volatility stocks move smoothly and in a relatively predictable fashion.
• Bull Market and Bear Market
  Bull market is a situation where prices are going up and investors are optimistic. A bear market is when prices are declining and investors become conservative. These are normal phases of market behavior and tend to have an impact on how individuals invest.
• Dividend
  A dividend is that share of a company’s profit which it distributes among its shareholders. Not every company pays dividends but the companies which do give investors fixed income along with any increase in the value of the stock.
• Price to Earnings Ratio
  Price to earnings ratio is utilized by investors to calculate how much they are paying per unit of profit of a company. It is calculated by dividing the existing share price with earnings per share. A high ratio can suggest that investors expect high growth in the future while a low one may suggest a conservative estimate or an undervalued stock.
• Initial Public Offering (IPO)
  An IPO is when a company that is private issues its shares for the first time to the public and actually lists itself on the stock market. IPOs are usually heard and seen with publicity and excitement because they present new opportunities to investors but can be risky because the company is venturing out into public trading for the first time.
• Market Order
  A market order is a request to purchase or sell a stock instantly at the best price available. It guarantees the trade to occur in a timely fashion but the precise price might change slightly based on the market conditions.
• Limit Order
  Limit order is an order to buy or sell a stock at a predetermined price or higher. The trade will only be executed if the market touches the established price, allowing you greater control over what you pay or get.
• Stop Loss Order
  Stop loss is an instruction given to a broker to sell a stock automatically once its value dips to a predetermined level. It assists investors in capping their losses by avoiding further depreciation in value.
• Portfolio
  A portfolio is an aggregation of investments belonging to an individual or an organization. It may comprise stocks, bonds, mutual funds and other products that cumulatively indicate the financial objectives and risk tolerance of the investor.
• Blue Chip Stocks
  Blue chips are the stocks of well-established large corporations with a background of stability, sound performance and regular returns. Blue chip companies prefer to pay dividends regularly and are a safer bet among long-term investors.
• Stock Split
  Stock split occurs when a firm raises the number of its stocks but lowers the price per stock proportionally. The total worth of your investment does not change but with the reduced price per stock, it may be more appealing and affordable to investors.

Strengthen Your Financial Future

Learning these fundamental words is a first step towards success as an investor. The better you know the vocabulary of the stock market, the simpler it will be to understand market trends and make good financial decisions.

The stock market is more than just buying and selling stocks. It is an arena to learn, observe and gain financial self-discipline. With knowledge, patience and carefully planned strategy, even a novice investor can lay a solid basis for long-term financial success.

For more market insights and financial guidance, contact Aetram today.

Frequently Asked Questions

1. What is a portfolio?
A portfolio is a group of investments like stocks, bonds or mutual funds. It indicates your risk tolerance and financial goals. A diversified portfolio balances rewards and risks among different assets. Your goal should be to manage your portfolio intelligently in order to achieve long-term financial stability and growth.

2. What is an IPO?
An Initial Public Offering (IPO) is when a private firm issues its shares to the general public for the first time. It is the company’s introduction to the stock market. IPOs tend to make headlines because they provide fresh investment opportunities. Nevertheless, investors must investigate thoroughly before investing, as new listings can be volatile.

3. What does liquidity mean in the stock market?
Liquidity indicates the ease with which a stock can be sold or bought without significantly changing its price. Stocks that are highly liquid are traded often and selling or buying is as easy as entering or closing a position. Low liquidity results in less trading and harder selling in a rush. Flexibility and reducing potential losses require liquidity.

4. What is the difference between a share and a stock?
Shares are individual pieces of ownership in a particular company whereas stocks are ownership in one, some or all companies together. Although the terms are sometimes used interchangeably in everyday speech, a share is actually the property of a specific corporation while stocks are a more general phrase for ownership interests.

5. What is a stop-loss order?
A stop-loss order sells your stock automatically when it falls to a specific price. It’s a means of capping losses and insulating your investment from falling further. Stop-loss orders benefit especially new investors who wish to control risk without having to keep an eye on the market constantly.