Investing in the stock market can be a great way to grow your wealth, but it can also be a bit intimidating for beginners. With so many terms and concepts to wrap your head around, it's easy to feel lost. But don't worry! In this part of our Stock Marker 101 series, we'll be covering the basics of stock market terminology. From understanding stock market and market trends to different types of stocks and return measures, you'll have all the basic information you need to start your investing journey with confidence.
Let me tell you story of Litti who was once facing the similar beginners dilemma. She had always been fascinated by the stock market, but she had never really understood it.
As an aspiring investor, Litti was excited to learn everything she could about the stock market. She had always been excited by the idea of making money by buying and selling stocks, but she quickly realized that she had underestimated the complexity of the task. Everywhere she looked, she saw unfamiliar terms like alpha, beta, and market capitalization. She felt like she was trying to read a foreign language. So she turned to her mentor, Viraj, who is a stock market veteran, with years of experience and expertise in the field of investing.
Viraj, noticed her confusion and decided to take her under his wing.
Litti, I know it can be overwhelming at first, but don't worry, he said. The stock market is like any other profession - you need to learn the language in order to be successful.
Viraj went on to explain that the stock market is a complex system, and without understanding the basic terms and concepts, it would be difficult to make informed decisions. Think of it like a game, he said. If you don't know the rules, you can't play. And if you can't play, you can't win.
Litti knew that Viraj was right. She needed to learn the language of the stock market if she wanted to succeed. She decided to take note of all the terms she didn't understand and make a list of questions for Viraj. And so, with a newfound determination, she began her journey to master the stock market.
As Litti sat down with Viraj to review her list of questions, she couldn't help but feel a little intimidated. She knew that the stock market was a complex system, and she wasn't sure she was ready for the challenge.
Viraj saw the look of concern on her face and reassured her. Don't worry Litti, he said. We'll take it one step at a time. Remember, you don't need to know everything right away. Just focus on understanding the basics.
With that, Viraj began to explain some of the key terms and concepts that Litti needed to know. He started with the most basic concepts and worked his way up.
As we are discussing Stock Market, let's first talk about what Stock or Share means at its core, Viraj said.
Stocks are like little pieces of a big puzzle. When you buy a stock, you are buying a tiny piece of ownership in a company. The more pieces (shares) you own, the more of the company you own. And the more of the company you own, the more money you get when the company makes a profit. This money is called a dividend. Think of it like a reward for owning a piece of the company. And the way you own a piece of a company is by owning a stock.
Companies are launched in the stock market through an Initial Public Offering (IPO). An IPO is when a company offers its shares to the public for the first time. The company sets a price for the shares, and then investors can buy them in the open market. The company will use the money raised from the IPO to fund its operations and expand its business. The IPO also provides the company with exposure and liquidity, as it will now be traded on the stock exchange.
What is a Stock Exchange or Stock Market? Litti asked.
A stock exchange is a marketplace where stocks, or shares of ownership in publicly traded companies, are bought and sold. This platform allows for easy buying and selling of stocks, enabling investors to purchase or sell shares quickly and easily from any location. Viraj explained. For example, BSE and NSE are the two main exchanges in Indian stock market. Through them, you can buy or sell almost all stocks of publicly traded companies in India.
Can I buy or sell stocks through Exchanges directly? Litti asked.
No. For that you need to go through a broker who will facilitate buying and selling on your behalf, Viraj explained. You need to have a Demat account with the broker. This Demat account acts as the repository of your stocks.
What is benchmark or Index? Litti asked.
A benchmark is a standard that is used to measure the performance of an investment, Viraj explained. For example, Nifty and Sensex are index of stock market in India. Nifty represents top 50 companies listed on National Stock Exchange (NSE), while Sensex represents top 30 companies listed on Bombay Stock Exchange (BSE). They are often used as a benchmark for the overall performance of the Indian stock market. Nifty and Sensex are also known as Market Index as they act as statistical measure of the state of a stock market, designed to track the performance of a particular group of stocks.
What are large cap, mid cap, small cap stocks? Litti asked.
This is a nomenclature followed to classify stocks based on their Market capitalization, or market cap, Viraj answered. Market capitalization is the total value of a company's outstanding shares which is equal to the current stock price multiplied by the total number of shares outstanding. This number is one measure of the company's size.
Large cap stocks are stocks of companies with a high market capitalization, typically over Rs. 25,000 crore. Mid cap stocks are stocks of companies with a medium market capitalization, typically between Rs. 5,000 crore and Rs. 25,000 crore. Small cap stocks are stocks of companies with a small market capitalization, typically under Rs. 5,000 crore.
We have a special sub category of large caps too called Blue Chips. These are well-established companies that have a history of stable earnings and steady growth. They are favorites of everyone in the stock market.
But that's not all, Viraj continued. There is an another category called Penny Stocks. This term is mostly used in a derogatory fashion, since many penny stocks are virtually worthless and considered extremely risky investments involving frauds at times.
What is risk? Litti asked.
Risk is the potential for loss on an investment, Viraj explained. By spreading your investments across different types of assets, you can reduce the risk of losing all of your money if one type of investment performs poorly. This strategy to mitigate risk of total loss by spreading investments across different asset classes is known as diversification. Take the case of ETF's. Exchange Traded Funds (ETFs) are financial instruments that allow you to purchase a basket of stocks that track an entire market, sector, or industry. ETFs are traded on exchanges, just like stocks, and can be bought and sold at any time during the trading day. ETFs are inherently a cost-effective way to diversify your portfolio and gain exposure to a broad range of assets without putting in too much research effort.
Next, Viraj explained the concept of asset allocation. Asset allocation is the process of dividing an investment portfolio among different asset categories such as stocks, bonds, and cash, he said. The idea is to spread your investments across different types of assets to reduce risk.
Litti began to understand the importance of these terms, and with each concept that Viraj explained, she felt a little more confident in her ability to understand the stock market.
As Viraj continued to explain the key terms and concepts of the stock market, Litti listened attentively, taking notes as he spoke.
Next, let me tell you about Market Trends, Viraj said.
When it comes to the stock market, there are different trends that can happen over time. These trends can be classified as primary trends (long-term), secondary trends (short-term), and secular trends (long-term).
A bull market is a period of time where the prices of stocks are generally rising. This means that the market is doing well, and investors are feeling optimistic. On the other hand, a bear market is a period of time where prices are generally falling. This means that the market is not doing well, and investors are feeling pessimistic.
Investors can also be described as having bullish or bearish views. A bullish investor is someone who believes that the market will rise, while a bearish investor believes that the market will fall. When the bulls (people who believe the market will rise) outnumber the bears (people who believe the market will fall) in the market, it is said to be a bull market. Conversely, when the bears outnumber the bulls, it is said to be a bear market.
It's important to note that bull or bear market refers to the market trend and sentiment as a whole, but it can also refer to specific stocks or sectors. For example, someone may be bullish on a particular company like TCS or bullish on IT stocks in general.
What is Fundamental and Technical Analysis? Litti asked.
To which Viraj replied, fundamental analysis is the process of evaluating a company's financial and economic fundamentals, such as its revenue, earnings, and assets, to determine its intrinsic value. Technical analysis, on the other hand, is the study of historical market data, such as price and volume, to identify patterns and make trading decisions. Both are methods used to evaluate investments and make decisions about buying or selling securities.
Viraj continued to elaborate on fundamental analysis and introduced Litti to EPS and PE ratio. PE (Price-to-Earnings) ratio is a measure of the stock price relative to the company's earnings. It is calculated by dividing the current share price by the company's earnings per share (EPS). EPS is the total earnings of a company divided by the number of outstanding shares, and it is used to measure how profitable a company is. A high EPS suggests that the company is profitable and may be a good investment.
In the context of fundamental analysis, a low PE ratio indicates that a stock is undervalued, while a high PE ratio suggests that the stock is overvalued.
Litti was pretty amazed with the way Viraj was explaining things. She got more curious about Technical Analysis and asked Viraj to explain support and resistance.
Support and resistance are two key concepts in technical analysis. Support is a price level at which demand is thought to be strong enough to prevent the price from falling further. Resistance is a price level at which supply is thought to be strong enough to prevent the price from rising further. Support and resistance levels are usually identified using trend lines, chart patterns, and other technical indicators. When the price breaks through a support or resistance level, it can indicate a potential reversal or trend continuation. A breakout with above average volume i.e. number of shares traded in the market during a certain period of time, offers further confirmation on the continuation of the price trend. Viraj said.
What is Return on Investment (ROI), Alpha and Beta? I have heard a lot about them. Litti asked.
Return on Investment (ROI) is a measure of the profit or loss on an investment, expressed as a percentage of the original investment, Viraj said.
Alpha is a measure of the risk-adjusted performance of a portfolio, relative to its benchmark. In other words, it tells you how well a portfolio is performing compared to a benchmark, such as the Nifty or Sensex.
And Beta is a measure of a stock's movement in relation to the market. It is calculated by comparing the stock's returns to a benchmark index, such as the Nifty. A stock with a Beta of 1.5 is expected to move 50% more than the Nifty in either direction. If Nifty goes up by 1 %, the stocks with 1.5 Beta might go up by 1.5% and vice versa.
As Viraj finished explaining the last of the key terms and concepts, Litti felt a sense of accomplishment. She had come a long way since her first day as an intern, and she knew that she still had a lot to learn.
Litti, you've made great progress, but don't forget that the stock market is always changing, Viraj said. It's important to stay up to date on the latest trends and news, and to continue to learn and improve your skills.
Litti knew that Viraj was right. She knew that she had a lot to learn, and she was excited to continue her journey. She made a plan to read more about the stock market and to practice with a virtual trading platform.
Viraj, thanks for your help and guidance, Litti said, shaking his hand. I'm ready to take on the stock market.
I know you will, Viraj said with a smile. Just remember, stay focused, stay disciplined, and always be willing to learn. That's the key to success in the stock market.
Here are the notes Litti made while she was discussing stock market with Viraj.
|Alpha||A measure of the risk-adjusted performance of a portfolio, relative to its benchmark.|
|Asset Allocation||The process of dividing an investment portfolio among different asset categories such as stocks, bonds, and cash.|
|Beta||A measure of a stock's volatility in relation to the overall market.|
|Blue Chip Stocks||Large, well-established companies that have a history of stable earnings and steady growth.|
|Bond||A debt security that pays fixed interest to investors until the bond matures.|
|Bull Market||A market that is on the rise, characterized by optimism and increasing prices.|
|Bullish||Optimistic outlook on the stock market or a particular stock.|
|Bear Market||A market that is on the decline, characterized by pessimism and decreasing prices.|
|Bearish||Pessimistic outlook on the stock market or a particular stock.|
|Capital||Money or wealth that an individual or business has available to invest in the market.|
|Diversification||Spreading investments across different asset classes to reduce risk.|
|Earnings per Share (EPS)||A measure of a company's profitability, calculated as the company's net income divided by the number of outstanding shares of stock.|
|ETFs||Investment funds that trade on stock exchanges like stocks.|
|Fundamental Analysis||Examination of a company's financial and economic fundamentals, such as revenue and earnings, to determine the value of its stock.|
|IPOs||Initial Public Offerings, which is the first time a company offers shares to the public in the stock market.|
|Market Capitalization||The total value of a company's outstanding shares of stock, calculated by multiplying the number of shares by the current market price of one share.|
|Market Index||A statistical measure of the state of a stock market, designed to track the performance of a particular group of stocks.|
|Margin||The amount of money that a trader must deposit to cover potential losses on a leveraged trade.|
|P/E Ratio||Price-to-Earnings Ratio, which is a valuation ratio that compares a company's stock price to its earnings per share.|
|Penny Stocks||Low-priced stocks that trade for less than Rs. 10 per share.|
|Resistance||A term used to describe a price level at which a stock or market has difficulty rising above.|
|Return on Investment (ROI)||A measure of the profit or loss on an investment, expressed as a percentage of the original investment.|
|Sector||A group of companies that operate within a specific industry or market.|
|Short Selling||A trading strategy that involves selling shares of stock that the trader does not own, with the expectation that the price will decline, allowing the trader to buy the shares back at a lower price.|
|Stock||A share in the ownership of a company and constitutes a claim on part of the company’s assets and earnings.|
|Support||A term used to describe a price level at which a stock or market has difficulty falling below.|
|Technical Analysis||The study of past market data, primarily price and volume, to identify patterns and make trading decisions.|
|Volume||The number of shares traded in a market during a certain period of time.|
To sum up, this story aimed to provide you with a comprehensive list of basic stock market terminologies for beginners. From Alpha to Sector, we've covered the most important terms that you need to know to get started in the stock market. It is essential to continue your education and stay informed about the latest trends and developments in the market. By familiarizing yourself with the lingo, you'll be better equipped to navigate the stock market and make informed investment decisions. We will be covering these terminologies in greater details in the coming parts to further deepen your understanding.