Many investors are attracted to the stock market for the great amount of returns it has to offer. However, making money through stock market investments is not an easy task. Stock market trading requires patience, discipline, and a great deal of research along with a sound understanding of the stock market.
In simple words, the stock market is an arrangement where the equity shares of companies listed on the stock exchanges are bought and sold. The participants of the stock market can be classified as investors or traders. An investor invests in the stock market for the long-term with the objective of capital appreciation. However, a trader looks forwards to earning quick profits by tapping into the small price changes in equity shares. These price changes might last from a few minutes to the whole trading day.
Now that you know what a share market is, it is essential for you to learn some of the basic stock market jargon, making trading in equities easier. A lot of traders are hesitant to step into the stock market as they are not confident about their understanding of some common stock market terms.
Some certain financial jargon or metrics will help to ascertain the true worth of a given stock while providing adequate information to take a judgmental call regarding whether to buy a particular stock or not.
Financial Jargons in Stock Market
- Stock price: Stock price refers to the amount of money that a trader is required to pay to purchase a single unit of stock. If the stock price goes up after being purchased, it means that you have gained from the stock. While on the other hand, if the stock price declines after you purchased it, you are making a loss. Though a stock’s price is tracked continuously by the traders, it communicates very little about the stock in itself. Hence, the stock is always studied in conjunction with some other metric, such as the company’s earnings.
- Stock-price chart: A stock price chart, as the name suggests, shows the daily movement of the stock prices plotted in a chart. The stock-price charts are used by traders to observe the trend. These charts project a progression in the stock price over a time period. Usually, the 52-week trend of a stock price is tracked, which tells the highest and the lowest points touched by the stock price during a particular year. The prices plotted on the chart during the 52-week can be correlated to various economic and social factors and how they affected the stock prices.
- Market Capitalization: Market capitalization, also referred to as a market cap, indicates how big a company is. Market capitalization is calculated by multiplying the stock market price with the number of outstanding shares. If we talk about it roughly, then a company with a market capitalization of up to Rs.5,000 crore is referred to as a small-cap company. A company with a market cap of Rs.25,000 crore is referred to as a mid-cap company. Simultaneously, a company with a market capitalization beyond Rs.25,000 crore is referred to as large-cap companies. With the help of market capitalization, traders can relate the size of one company with another.
- Volume: Volume is the average number of shares of a stock that are traded during a particular period. It indicates the number of people buying and selling a particular stock. Traders should always invest in stocks with high volumes as it is easier to buy and sell such stocks.
- Long Position: Long position or going long as it is sometimes referred to, reflects the direction of a trader’s trade. For instance, if the trader has bought Tata Motors shares, then he/she is said to be long on Tata Motors or is planning to go long on Tata Motors.
- Short Position: The market allows traders to sell first and buy later. This is known as shorting. For instance, if the trader sells a share for Rs.500 and later buys it back at Rs.450. Doing so earns the trader a profit of Rs.50. If seen in the other way, the trader is buying the share at Rs.450 and selling it at Rs.500 except for the fact that the order of transaction is reversed.
- Bullish or Bull Market: Bull Market or Bullish is a representation of a positive trend in the market. When the traders expect the prices of the stocks to go up, it is referred to as a bullish or bull market. If we explain it in a broader perspective, a bullish market is when the stock market indices are going up during a particular time period.
- Bearish or Bear Market: Opposite to Bull Market, a Bear Market or Bearish is a projection of a downward trend in the stock market indices. This means that if the prices of the stocks are declining during a particular time period, it is referred to as a bear market or bearish.
- Earnings Per Share (EPS): Earning Per Share or EPS defines the share of the company’s profit, which is distributed to each share of stocks. A higher EPS means that the share of stock will be worth more money as investors are willing to pay for the share to earn higher profits. In order to calculate EPS, the total profit of a company is divided by a total number of shares.
- Price to Book Ratio (P/B): Price to Book ratio represents the relationship between the total value of an organization’s outstanding shares and the book value of its equity. Hence, it is used to compare the market value of a stock to the book value of the company. The price to book value is arrived at by dividing the stock price of a share by a book value. P/B ratio is also sometimes referred to as a Price-Equity Ratio. A P/B Ratio below one indicates that the stock under consideration is undervalued. However, it can also indicate that something is wrong with the fundamentals of the company.
- Dividend Yield: Dividends are the profits that are shared by the company with its shareholders. The dividend yield is calculated by dividing the dividend per share by its stock price. A higher dividend yield indicates that the trader will receive more money as a dividend from the company. A low dividend yield percentage indicates that the company retains a large portion of its earnings towards developing the firm hence giving a hint of future growth prospects.
An understanding of this financial jargon will help you in making informed decisions regarding your stock market trades. However, there is no sure shot formula of success when talking about stock market trading. There are certain basic rules which the traders should follow to avoid a huge amount of losses from their investments or trade-related decisions. Taking informed decisions with proper in-depth research of the stock market before investing in stocks is of prime importance. Having realistic expectations is yet another requirement when talking about the success of stock market trading.