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The Stock Market might be too intimidating for beginners. It is where investors buy and sell shares of companies, mutual funds, bonds, and other securities. Companies mainly issue shares on the stock market to collect money from investors and grow their businesses. But it doesn’t end here; thousands of terms are associated with it, which an investor should know before making an investment decision.
What are Stocks?
Stocks are a type of investment that gives you part ownership of a listed company. Stocks can be classified in various ways based on different criteria. Some common ones are Common Stocks, Preferred Stocks, Blue-chip Stocks, Beta Stocks, Growth Stocks, and many more.
What is the Share Market?
The Share Market is where public-listed companies’ shares are bought and sold. It is regulated by the Securities and Exchange Board of India (SEBI), which supervises the functioning of stock exchanges and ensures that listed companies adhere to the regulations and disclosure requirements.
For instance, if a company has issued 100 shares, and you own 10 shares, you own a 10% stake. A share market allows only the trading of shares.
How to Understand the Stock Market?
To learn the stock market concept, you must first understand the basics, such as what stocks represent, insider trading, stock split, and how trading works. It is essential to familiarise yourself with stock market indices like Nifty and Sensex, as well as learn about different types of stocks and share markets. Learning fundamental and technical analysis to elevate stocks and trading platforms and tools. You can also practice with a virtual portfolio, invest a small amount, and continuously learn from books, news, and online communities.
Basic Terminology of Stock Market
Here is a list of commonly used terms when talking about the stock market. Mastering this stock market terminology will empower you to make informed investment decisions and position yourself for long-term financial growth:
- SEBI
The Securities and Exchange Board of India protects the interests of investors in securities. It promotes the development and regulation of the securities market and for connected or incidental matters. It looks after any fraudulent transactions and activities made by any parties: companies, investors, traders, brokers and the like.
- Liquidity
Liquidity refers to quickly converting an asset into cash without affecting its market value, which is how comfortably an asset can be bought or sold. It helps investors and traders convert assets into cash quickly without impacting the market value.
- Initial Public Offering (IPO)
When a private company first offers its shares to the general public, it is called an Initial Public Offering, it is the company’s debut in the stock market, transitioning from private to public ownership. Companies may do this for various reasons, such as to gain visibility or raise additional funds to expand business.
- Dividend
Dividends are the allocating of a portion of a company’s earnings to its stockholders, typically in cash payments or stocks. The dividend yield is a stock’s yearly dividend payment to stockholders as a percentage of its current price. The dividend payout ratio is used to calculate the dividend among the stocks.
- Bear Market
A bear market takes place when stock prices fall from a recent high amid widespread pessimism and negative investor sentiment. This results in a weak economy, low GDP, and lower employment rates.
- Bull Market
A bull market takes place when stock prices rise, and investors are optimistic. This results in a growing economy, GDP, and employment rate, and companies generate more revenue during this period.
Also Read: Bull vs Bear Market: Factors, Differences and FAQs
- Portfolio
A portfolio is a collection of shares, bonds, derivatives, and mutual funds owned by an investor or institution. It is designed to diversify risk, maximise returns, and align with their financial objectives and risk tolerance.
- P/E Ratio
P/E Ratio, also known as the Price-to-earnings ratio, is a valuation metric that evaluates a company’s current stock price by its earnings per share (EPS). It determines the relative value of a company’s share. A high P/E ratio may indicate an overvalued stock, while a lower P/E ratio indicates an undervalued one.
- Exchange-traded fund (ETF)
An exchange-traded fund (ETF) is a unique investment fund with multiple underlying assets instead of one. This allows investors to buy many bonds and stocks in specific market segments at once.
- Market Capitalisation
Market capitalisation is the overall value of a listed company. It is evaluated by multiplying the current market price of a company’s shares by the total number of outstanding shares.
How Does the Stock Market Work?
The companies file a draft offer document comprising company information with the SEBI. Once approved, the company offers its shares to investors through an IPO on the primary market. Companies offer their shares to raise capital in an Initial Public Offering (IPO). Companies can gain the capital they need to operate and expand their businesses without taking on debt by listing shares on the stock exchanges for sale.
As companies invest that money in growing and expanding their businesses, investors profit as their shares of stock become more beneficial over time, leading to capital gains. So, investors benefit by exchanging their money for shares on the stock market. Additionally, as a company’s profits increase, it pays dividends to its shareholders. Individual stock performances vary widely over time.
Conclusion
Understanding these stock market terms can help you make more informed decisions, manage risks, and confidently navigate the stock market’s complexities. Whether you are a beginner or an expert, use these terms frequently to explain trading strategies, indices, stock market patterns and other components of the stock market. You must know these terms well to make money in the stock market. Moreover, investing in the stock market can be rewarding with the proper knowledge and correct approach.
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