Investing in the stock market can be a daunting task for beginners, but understanding the stock market terminology is a great place to start.
In this post, we will explore 25 key stock market terms and meanings that every investor should know.
Whether you are a seasoned investor or just starting out, understanding the stock market terms and definitions for beginners is essential. From basic concepts to investing terms for beginners, this post is a comprehensive guide with 25 key stock market terms explained!
By the end of this post, you will have a better understanding of the stock market terminology, allowing you to make informed investment decisions and navigate the world of finance with confidence.
Stock Market Terms Definitions
Bull market is a stock market term that describes a time where prices have been rising consistently for a long time. In a bull market, investors have confidence in the market and are optimistic about the future performance of stocks, often resulting in an increase in buying and a rise in stock prices.
A bull market is usually considered to have started when the market rises by 20% or more from its previous low and ends when prices start to fall significantly. Bull markets are characterized by strong investor sentiment and a general feeling of confidence in the economy and financial markets.
Bear market is a stock market term that describes a time where prices have been declining consistently and for a long time.
Bear markets are typically characterized by a drop of 20% or more from recent highs, and often leads to widespread investor pessimism and fear.
During a bear market, investors tend to sell stocks and buy safer assets such as bonds. Bear markets can last several months or even years and are often caused by factors such as economic recession, high interest rates, or geopolitical uncertainty.
Blue chip stocks are stocks from large, well established, and reputable companies that are usually household names. These companies have proven their worth by surviving through good times and bad.
Some examples of Blue Chip stocks include Apple, Coca-Cola, Disney, Amazon, Walmart, Citigroup, and Boeing.
Buyback / Stock Buyback
A stock buyback, or share repurchase, is when a company buys shares of its own stock back from its shareholders.
This decreases the number of outstanding shares of the company but increases the shareholder value, as each remaining shareholder now holds a larger proportion of the outstanding shares.
Stock buyback is usually viewed as a positive sign by the market, causing the stock price to shoot up as soon as the buyback is announced.
Market Capitalization / Market Cap
Market capitalization (also known as Market Cap) is a measure of a company’s value. It is calculated by multiplying its outstanding shares by its current stock price.
Market capitalization is an important factor in the stock market because it helps investors understand the size of a company and its situation. For example, companies with a large market capitalization are generally considered more stable and have a larger market presence than companies with a smaller market capitalization.
Market cap is also used to categorize companies into small-cap, mid-cap, and large-cap based on their market capitalization.
Capital gains refer to the increase in an investment’s value over time. A capital gain typically occurs in the stock market when an investor sells a stock for more than they bought it for. The difference between the original purchase price and the selling price is considered a capital gain.
Capital gains can be short-term (less than one year) or long-term (more than one year). Capital gains are often taxed, and the tax rate usually depends on whether it is short-term or long term, and the investor’s tax bracket.
Common Stock / Stock
Common stocks are a way for investors to have partial ownership in a publicly traded company. It gives shareholders the right to vote on corporate decisions and receive dividends.
Common stock can be bought and sold through the stock market and gives investors a high potential to earn (or lose) money, depending on the company’s performance. If a company does well, the stock price will go up and the stock can be sold for a profit.
Companies also usually pay out dividends periodically to stockholders.
Preferred stocks, also known as preferred shares, are hybrid securities that combine features of both stocks and bonds.
Like a regular stock, a preferred stock represents ownership rights. But like a bond, preferred stock provides fixed income in the form of dividends.
They are called preferred stocks due to the preferential treatment given to their holders compared to common stockholders when it comes to paying dividends, as well as in the event of bankruptcy.
Preferred stocks are more prevalent in the financial sector, and are commonly issued by banks, insurance companies, real estate investment trusts or REITs, etc.
Day trading is when people buy and sell the same securities during a single trading day with the intent of making a profit.
This can happen in any type of financial market, but is most common in the stock market.
An example of day trading would be if I bought Amazon stock at 10:00 AM, then sold it at 12:30 PM on the same trading day, because the stock price went up.
Day traders try to time the market and take advantage of price fluctuations through different strategies to make a profit.
A dividend is a distribution of a portion of a company’s earnings to its shareholders. It is usually declared as a certain dollar amount per stock.
Dividends are generally paid out on a regular basis, such as quarterly or yearly, and are a way for shareholders to share the company’s profits. Alongside capital gains, dividend is another way to profit from your investment in stocks.
Dividend yield is the dividend of a stock expressed as a percentage of the stock price.
It is calculated by dividing the annual dividend per share by the stock’s market price.
DCA (Dollar Cost Averaging)
Dollar Cost Averaging is an investment strategy where you invest a fixed dollar amount in a stock, mutual fund or ETF periodically – usually every month – irrespective of the stock price, and without worrying about market tops and bottoms.
The only way to consistently get high returns from the stock market is Dollar Cost Averaging.
Earnings Per Share (EPS)
Earnings Per Share (EPS) is a common metric that represents a company’s profit for each outstanding stock. It is calculated by dividing the company’s net income by its outstanding shares of common stock and is a good indicator of the company’s profits.
The higher the EPS, the more profitable a company is considered to be, and the greater its potential for future growth. Earnings per share is a common factor used to make investment decisions.
A stock exchange is a centralized marketplace where stocks, bonds, and other securities are traded. The exchange’s role is to facilitate purchases and sales of different securities.
A stock index is measurement of the stock market by looking at a group of stocks instead of individual stocks.
Its value is calculated from the prices of stocks that make up the index, also called the index’s constituents.
An index fund is a fund that aims to track the performance of a specific market index, like the S&P 500.
Index funds are passively managed and invest in stocks in the same proportion as the index they track. The fund’s portfolio is rebalanced periodically to reflect changes in the underlying index.
Index funds offer diversification at a low cost, and broad-based index funds are an excellent long-term investment.
Short selling is a type of investing that allows an investor to make money when they believe a stock will go down in price.
The investor borrows shares of the stock, sells the shares immediately, and then buys them back later. If the price decreases between the sale and purchase, the investor makes a profit. If it increases, they make a loss.
Short selling is much riskier than traditional investing and is not a good choice for individual investors.
IPO / Initial Public Offering
An IPO, or Initial Public Offering happens when a private company sells its stock to the general public for the first time.
After an IPO, the stock gets listed on a stock exchange so that it can be bought and sold like any other stock.
Price to Earnings ratio (P/E ratio) is a common financial metric. P/E Ratio is calculated by dividing a company’s current stock price by its earnings per share (EPS).
A higher P/E ratio indicates that investors are paying more compared to earnings and that the stock may be overvalued, while a lower P/E ratio suggests that investors are paying less compared to earnings and that the stock may be undervalued.
P/E ratios are an important metric to use while assessing a company’s growth prospects and overall financial health.
A sector classifies companies based on the industry they operate in.
Some of the most common sectors are consumer goods, financials, healthcare, technology, and energy.
Volatility describes how quickly and by how much a security or an index can fluctuate in price. An investment that is very volatile can have large price changes over a short period of time. But an investment that is not volatile will not change in price quickly.
Volatility is expressed as a percentage, and represents price movements across different durations like daily, weekly, monthly, etc.
There are two main types of volatility: historical volatility is based on past performance, while implied volatility makes predictions about a security’s price movement in the future.
Growth stocks are companies that are expected to grow their sales and profits at a much faster rate than the market average. This high rate of growth in turn results in an increased stock price.
Some examples of growth stocks are Amazon, Facebook, Netflix, and Alphabet.
Value stocks are stocks that appear to be underpriced compared to how well the company is doing in terms of sales and earnings. They could be trading at a discount compared to other companies in their industry, likely due to some recent events or market perception.
Berkshire Hathaway, Johnson and Johnson, and Proctor and Gamble are commonly considered to be value stocks.
Technical Analysis is a methodology used to predict the future price of securities based on past price movement and trading volume of that security. This is used to identify new investment opportunities, as well as to evaluate current investments.
The underlying belief behind technical analysis is that price moves in trends, and history repeats itself.
Fundamental analysis is a type of analysis you could use to identify the companies or stocks you want to invest in.
Fundamental analysis takes into account multiple factors and how they may influence the company’s future growth prospects, to see if the company is overvalued or undervalued.
There is no way to accurately predict how a stock would perform, but fundamental analysis is a good tool for investors to choose companies to invest in.
Bonus Term: Insider Trading
Insider trading is the act of making investment decisions in the stock market using confidential information obtained through someone’s employment or other relationship with a company.
Insider trading is illegal because it gives the investor an unfair advantage over others. Insider trading is closely monitored by regulatory authorities such as the Securities and Exchange Commission (SEC).
Stock Market Terms Explained: Conclusion
Understanding the stock market terminology is essential for anyone looking to invest in the stock market. By learning the stock market terms and meanings, investors can make informed decisions and navigate the complex world of finance with confidence.
Remember that investing in the stock market comes with a certain degree of risk, but with risk comes the potential for reward. By diversifying your investments and understanding your risk tolerance, you can make smart investment decisions and achieve your financial goals.
So, take the time to learn stock market terms with the help of this post and start investing in your future today!