Stock Market Terms you need to learn Right Now!
Lack of knowledge about the stock market can leave you in a loss. Whether you are trading large cap stocks or microcap stocks, the basics of stock trading remain the same. Hence, learning about the basic terminology of the stock market helps you in making better trades. Let’s learn about stock market terms. Most of these terms are common and you will come across them while trading. Some terms can be uncommon and mostly found in analysts’ research posts only. We will be discussing these terms as well.
Let us first understand what a stock is. A stock is the share or equity of a company that provides you part ownership with relevant risks attached. You do not ‘own’ the corporation per say but own a part of their earnings and assets. The more shares you own, the more right you will possess in the company’s earnings. Equities are paid after bonds.
Over the Counter
When a security is not listed on an exchange, it is traded over the counter. The orders for buying and selling these securities are placed on the internet or on the phone. Over the Counter Bulletin Boards are also places where you will find many microcap stocks, also known as penny stocks. New investors are advised to work on regulated stocks with a broker as OTC can be confusing for them.
Ask Price
The ask price is the lowest price at which a stock owner is ready to sell his shares. The price is always higher than the bid price. However, there could be chances that the ask and bid price are either the same or have miniscule differences. This shortens the ask-bid spreads.
Bid Price
This is the highest price that a buyer is ready to pay to purchase shares of a company. It is always lower than ask price and becomes the starting point for negotiation between buyer and seller.
Portfolio
A portfolio signifies the total securities- equities, bonds, and other financial instruments that an individual or a corporate entity holds overall.
Penny Stocks
All stocks that trade for less than $5 are known as penny stocks. They are mostly traded on AMEX, OTC boards and pink sheets, but can also be found on NASDAQ and NYSE.
Bull Market
If the stock prices continue to rise in the market, it is known as a bull market.
Bear Market
If the stock prices continue to fall in the market, it is known as bear market.
Liquidity
The liquidity of the security refers to the ease with which it can be bought and sold in the market. A security that is traded in higher volumes and remains active through the day is more liquid than other stocks.
Short Selling
This is the sale of stock that the investor does not own. He borrows this stock from his lender and promises to pay them back at a specific time, anticipating the prices of the stock to fall. He then profits from the difference in the stock’s current price and anticipated lower price. One of the most confused stock market terms, short selling is not for naïve investors. Often, this could lead to massive losses. Remember, the losses in short selling could be limitless as you could end up paying more than what you intended to invest.
Thin market
A thin market is where the securities are not traded in very high volumes. It could be used for the entire market or used to refer to a single security. Thinly traded securities do not provide high liquidity. You could be stuck with such securities. Many shares being traded on pink sheets qualify as thin markets/trades. Avoid them and invest your money elsewhere for profits.
Limit Order
A limit order is placed when the investor decides that he will sell or buy a stock at a pre-defined price. Limit orders are usually placed to save the investment from erosion or for capitalizing on up ticking trends in a stock. This is one of the stock market terms that can provide hedging benefits to investors when they are trading in volatile stocks.
Yield
The yield of the stock is essentially its return on investment, shown in percentage terms. The yield of a stock must be good enough to match or outpace inflation. Often, the yield of a bond is lesser, barely reaching the rates of inflation. Equities provide higher yield but you must balance both in your portfolio.
Market Capitalization
The market capitalization of a firm the total value of a company’s stock presented in dollar terms. The dollar price is arrived upon by multiplying the current share price and the total number of shares. For example, if a company has 1, 00,000 shares and the value of each share is $2, the market capitalization of the firm is $2, 00,000. The market capitalization of a firm is subject to change and drastic changes in stock prices are first reflected in this figure.
Earnings Per Share (EPS)
The EPS of a company refers to dollar value assigned to each share. It is one of the most common stock market terms. The EPS of a company changes on a quarterly and annual basis. The number is derived by divided the total profit of the company by the total number of outstanding common shares. For example, if a company earns a profit of $1 million and has about 50,000 outstanding common shares in the market, the EPS on each share would be $2. This number can also be negative. The profitability of the company is often calculated based on the EPS.
Upon learning these commonly used stock market terms, you will be able to make better trades. In fact, learning these terms will give you a clear idea of how the stock market functions. If you are trading in penny stocks, being familiar with this terminology will be greatly beneficial to you. You will be safeguarded against frauds. Additionally, you will read stock charts more carefully before making an investment.
