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Understanding Stock Terminology: A Beginner’s Guide to the Language of the Stock Market

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The stock market is a world in itself with its own language and terminology that might be quite confusing, especially for a starter. If ever you had to feel lost and did not know which way was out, like when hearing words such as “bull market,” “P/E ratio,” or “dividends,” do not worry. Understanding what those terms mean is a crucial step toward becoming a savvy investor. In this post, we’ll break down some of the most commonly used stock terms and explain their meaning in simple terms.

1. Stock (or Share)

Let us start with the basics. A stock or share, referring to ownership in a company, represents ownership in it. When you buy a stock, you buy ownership shares in the company. In other words, if you buy 100 shares of Tata Consultancy Services, or TCS, you essentially own a fragment of the company. Companies issue stocks to raise capital, and investors buy them in anticipation that the company will run well and enlarge their share values.

Key Point:

Stock = Share in a firm.

2. Stock Exchange

The stock exchange is an entity where stocks are traded. In India, the two major stock exchanges are Bombay Stock Exchange and National Stock Exchange. These two exchanges make sure that there is a fair and systematic medium through which the trading of stocks takes place.

Key Point:

Stock Exchange = Platform through which stocks are traded.

3. Bull Market vs. Bear Market

Stock market terminology includes the bull market and the bear market. These are the general trends of the market.
A bull market is one where the stocks are moving upward or believed to do so.
This represents optimism and confidence among investors.
A bear market is the opposite. This occurs when the stock prices are going down or are anticipated to fall, portraying pessimism and a lack of confidence.
The names come from the manner in which these animals attack their prey: bulls charge upward with their horns, while bears swipe downward with their paws.

Key Point:

Bull Market = Increasing stock prices.

Bear Market = Decreasing stock prices.

4. Market Capitalization (Market Cap)

Market capitalization or market cap is the total of all outstanding shares of a company’s stock. It is calculated as the current price of one share times the number of shares outstanding. Market cap is generally used to categorize the company in the following categories:

Large-cap : The market cap is greater than ₹20,000 crores; such companies are stable with an established root.

Mid-cap: Companies with a market capitalization between ₹5,000 crores and ₹20,000 crores. They are in the growth stage.

Small-cap: Companies with a market capitalization of less than ₹5,000 crores. These are usually new or smaller companies that carry a lot of risk but also can be expected to have more growth.

Key Point:

Market Cap = Total value of a company’s stock in the market

5. Stock Price

The price of the stock at which one share of any given company is sold at any given time. Stock prices vary for supply and demand factors, market sentiment, company performance, and other macro factors. The investor sells his stocks when he thinks that the prices are rising and buys his stocks when he thinks that the prices are going to fall.

Important Point:

Stock Price = The value of a firm per share.

6. Dividends

This is a dividend payment made by a corporation to its shareholders usually from its profit not all firms pay dividends but those that do usually pay it regularly, either quarterly, semi-annually or annually. The firms paying dividends tend to be more established and provide a flow of cash income for investors.

For instance: Assume that you hold 100 shares of a company that distributes a dividend of ₹5 per share. Then, you get a dividend payout amounting to ₹500.

Key Point:

Dividend = A portion of profits distributed by the firm to its shareholders.

7. P/E Ratio (Price-to-Earnings Ratio)

Price-to-Earnings or P/E ratio is the measure of the valuation ratio that reflects how much one has to pay for every unit of earnings of the company’s equity. It is calculated by dividing the market value per share by the company’s earnings per share. With help of the P/E ratio, analysts can determine if the stock is overvalued or undervalued against its capacity to earn.

A high P/E ratio means that the stock price is too expensive when compared with its earnings, and the market believes that the growth is going to be very high.

A low P/E ratio may indicate that the stock price is undervalued or the company’s prospects of growth are low.

Key Point:

P/E Ratio = A multiple used to gauge a company’s valuation relative to its earnings.

8. EPS (Earnings Per Share)

Earnings Per Share, EPS is one of the most crucial financial metric. EPS is measured to show the profitability of the company on the basis of a per share basis. The net profit of the company is divided by the number of outstanding shares. Higher the EPS value, the better will be the profitability and it is an indicator that the company is financially healthy.

EPS = Profit of the company devoted to each outstanding share

9. Liquidity

It is the facility of buying or selling an asset, say, a stock without affecting its price. Highly liquid stocks, therefore, are those which can be bought or sold quickly at fair prices. Stocks of most large companies, listed in the NSE or BSE, are highly liquid. The smaller companies’ stocks, especially the small-cap stocks, have relatively low liquidity, and it takes more time to buy and sell.

Liquidity = How easily and quickly an asset can be sold.

10. Volume

Volume refers to the number of shares traded within a given time, which is usually measured daily. High volume means that many investors are interested in a particular stock, while low volume can be a sign of the lack of interest in such stock. Increasing volume often indicates a change in the price of the stock and causes upsurges in volatility of such a stock.

Key Point:

Volume : The number of shares traded during a specific time period.

11. Short Selling

Short selling-often referred to as shorting-is an advanced trading strategy in which an investor borrows shares of a stock that he or she doesn’t own, sells them, and hopes to buy them back later at a lower price. Depending on when he sells and buys it back, he pockets the difference and returns the shares to the lender. The potential for short selling losses is theoretically limitless.

Key Point:

Short Selling = Buying and selling stocks to profit from a decline in price.

12. Bullish vs. Bearish

Bullish is the feeling that the market or an equity will rise in price.

Bearish is the feeling that the market or an equity will decline in price.
If you are bullish on a stock, you expect it to go up. If you are bearish, you expect it to fall.

Key Point:

Bullish = The price is likely to increase.

Bearish = The price is expected to go down.

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