Introduction
Stock market information has wide exposure in today’s world. From newspapers to news channels, from your friends’ social media posts to social media influencers, everybody is talking about stock market and stock market related topics.
Stock market is a dynamic environment. It has something to offer to everyone interested. Before entering and investing in stock market and involving in stock market operations, it is essential to have a solid understanding of key terminologies related to stock market. Also, such terminologies help in understanding and comprehending the investment strategies, financial analysis and making an informed decision. Some of such key terminologies related to stock market and stock market investment are:
Stock/Share
A stock or share represents ownership of a publicly traded company. Holding of a share or stock of a company means you are a partial partner in the company sharing the company’s profit, assets and voting right. Companies issue shares to raise capital for their operations and investments. Share represents a means for raising funds.
Stock Exchange
A stock exchange is a place where buyers and sellers of stocks/shares participate. It is a platform where companies list their stocks for raising funds and for trading. Well-regulated platforms govern stock exchanges.
New York Stock Exchange (NYSE), National Stock Exchange (NSE), London Stock Exchange (LSE) are some of the stock exchanges from different parts of the world.
Portfolio
Portfolio means pools of investment. As a stock market investor, investments are made in multiple assets i.e. multiple companies. Investors purchase different types of securities that may be either stocks from different companies or different assets like stocks, mutual funds, golds, options etc. The basket of all such different stocks and assets is called a portfolio.
Ticker Symbol
All the publicly traded stock/shares have a unique identification symbol. This symbol is called the ticker symbol. Traders and investors use this ticker symbol to identify the stocks. Traders use these symbols for executing trades, analyzing the market, tracking indexes, communicating, and representing various aspects of the stock market. Ticker symbols have ensured effective and efficient communication and smooth functioning.
Ticker Symbol
| Amazon (AMZN) | Facebook (FB) |
| Google (GOOGL) | Honda (HMC) |
| Reliance Group (RELIANCE) | JP Morgan (JPM) |
Dividend
Dividend is simply a reward for equity investment (share purchase) in the company. Companies often distribute the dividend from the profit earned during the fiscal year. Companies choose to pay dividends as regular cash payments to shareholders, even though they are not obligated to do so.
Initial Public Offering
Initial Public Offering is a process where a private company offers its share to the public for the first time. After an IPO, a private company becomes a public company and the investors and traders purchase the IPO share via stock exchange listing.
Market Order
Market order is a type of order used in stock market operation. It means the order given to the broker or intermediary party to buy or sell the specified stock at the best available price. This means, market orders instruct brokers to buy or sell a specified security immediately at the current market price.
Example :
Investor A shows keen interest in purchasing shares of Company X, which currently trades at $40 per share. The investor placed a market order at $ 40 per share. The broker will execute the order once s/he gets a selling request at $ 40 or below. Once a selling request emerges at $39.9, the market order will execute and fill at the prevailing best price of $39.90.
Limit Order
Traders utilize limit orders as another type of order in stock market operations, executing the order when the stock price reaches their desired ideal price. In Limit order we can set a specific price for buying and selling a security.
Example:
Investor A expresses interest in purchasing shares of Company X, which currently trades at $40 per share. The investor believes that the stock is overvalued and the ideal purchase price for this is when the price drops to $35. For this, the investor uses a limit order at $ 35 per share, which is the price the investor is willing to buy the shares.
This means that the investor’s order will only be executed if the stock price reaches or falls below $35 per share. Once the market price of the stock reaches $35 or lower, the limit order will trigger, and the broker will execute the trade on behalf of the investor.
Bid and Ask Price
Bid price represents the highest price at which a buyer is willing to purchase a stock or share. It is the maximum price at which buyers are willing to pay for a particular price. A bid price for the same stock may be different for different investors. Bid price is the demand side of the market. Buyer is always willing the keep the bid price as low as buyer wishes,
For instance, A share of company X is trading for $ 50 per share. Two investors are willing to invest in the stock of the company. Investor A bid $ 49.5 per share and Investor B bid $ 49.9 per share. A bid request, when stock price is desirable, may get executed if the buyer is okay with the deal. If he finds the share value will increase/decrease can again change the bid price.
Ask price represents the lowest price at which a seller is willing to sell a stock or share. It is the minimum price at which the seller is willing to sell the security . It is the supply side of the market. A seller is always trying to keep the ask price higher.
For instance, the last traded price of a stock of Company A is $ 50. The seller will ask the price of the share of Company A, which the investor is holding, at $ 50.20 per share. Multiple shareholders of company A, who are willing to sell their stock, will have different ask prices.
Bull Market and Bear Market
We hear it all the time that the market is either bearish or bullish. Bear market and bull market are two market situations in a stock market operation. A bear market occurs when stock prices fall, and investors adopt a pessimistic outlook, characterizing the market condition. In this market situation, investors believe that the market will continue to decline and investors have low or no confidence in the market situation. Some of the characteristics of bear market are:
- Decreasing stock prices
- Pessimistic approach of investors
- Defensive investment strategies
- Selling pressure among investors
A bull market is the opposite of a bear market. A bull market is that market condition where stock prices are rising and investors are positive towards investment. The investors are optimistics and believe that the market will continue to rise. Some of the basic characteristics of stock market are:
- Increasing stock prices
- Optimistic investment outlook
- Long term investment strategies
- Buying pressure among investors
Diversification
Diversification means purchasing stock from different asset classes, sectors, and companies. It is an important strategy for investors to diversify their investment and help to mitigate risk.
Illustration: If an investor has $ 1000 for investment. S/he has two options for investment. Either s/he will invest all $ 1000 in the one stock “A” or s/he will invest all $ 1000 in stocks of different companies from different sectors, say Stock ‘A’, Stock ‘B’, Stock ‘C’. The latter one is diversification.
Under unfavorable conditions, when the performance of Stock A plummets, the investor investing all its investment in stock A bears complete loss. While investors investing in multiple stocks mitigate the risk of complete loss. Only the stock A from his/her portfolio gets affected. This is the ideal example of how diversification mitigates risk.
Holding different stocks helps investors during tough times. Multiple stocks from multiple impacts will have shared risk hence, investors suffer less than investing in only one stock or only one sector.
Market Capitalization
Market capitalization is a very common word in stock market and stock market analysis. It is the total value of a company’s outstanding shares. It is calculated by multiplying the current stock price by the outstanding shares.
Outstanding shares are the total number of shares of a company that are with shareholders. Outstanding shares show the distribution of ownership of the company. Market capitalization classifies companies as large-cap, mid-cap, or small -cap.
Volatility
Volatility is the degree of variation in the price of a stock or overall market. Higher volatility means higher price fluctuation and vice versa. Volatility is key in understanding the behavior of a stock. Volatility measures how quickly and significantly the price of stock changes. This helps investors assess the potential risk and return associated with the stock and overall market.
Example:
- The closing price of stock A on Monday $ 20.
- Positive news broke out about the stock, the stock price rose to $ 50 on Tuesday.
- On Wednesday, the stock was hot pot so the price rose to $ 80.
- On Thursday, there was a negative article in the newspaper about the company, there was a sharp dip in stock price. The market closed at $ 38 per share.
- On Friday, the price lowered to $ 17 per share.
The stock A is highly volatile, within a week, the stock price fluctuated from highest $ 80 to lowest $ 17.
Blue Chip , Growth and Value Stocks
While learning about the stock market, we get to hear about different categories of stocks. The most common categories are; blue chip stocks, growth stocks and value stocks. Blue chip stocks are stocks of large, well established and financially stable companies. Blue chip companies have strong hold in respective industries and are considered less risky investments compared to other stocks.
Growth stocks are those stocks which have the growth potential. In other words, growth companies have above-average growth rates in revenue, earnings, and market value. Growth companies use their profits back into their business.
Value stocks are those stocks that are perceived to be undervalued by the market. Such companies have strong fundamentals and market operations but are overlooked by investors and are not in target of traders or investors.