Getting into the stock market is an exciting and often rewarding way to grow your money. While it may take some time to identify your favorite stocks and decide on a budget that you want to go ahead with, it is equally important to understand how the market works.
Understanding the stock market vocabulary for beginners is crucial to ensuring you are able to make informed decisions, especially during crunch time when you are required to act swiftly to avoid losses and gain advantage. Here are some terms that you need to know when stepping into the stock market.
13 Stock Market Terms To Know To Make Better Decisions
Annual report: Just as our report cards carry information about our performance, weaknesses, and strengths at school, similarly, companies share an annual report that informs their shareholders about vital information, including finances, performance, forecasts, and future plans. It gives an insight into how the organization performed throughout the year and if their shares are worth holding for long periods of time.
Arbitrage: The buying and selling of the same security on different exchanges that can be at a different price point. For instance, if you bought a stock at $12 in the first exchange and went on to sell the same for $12.50 in another market. The price difference is what you get to pocket.
Asset Allocation: A smart way to divide your investments among different asset classes to ensure your portfolio is vast and profit-generating. Asset allocation allows you to invest in stocks, bonds, and real estate. Diversification of your portfolio will ensure you are able to cover losses and are able to generate profits continuously.
Bear Market: A market set-up wherein the major index or the stock falls 20% (sometimes more) from its recent market high. In a signature bear market, investors experience a prolonged drop in investment prices. You can consider buying the stock of companies you plan on holding for a long time.
Blue Chip Stocks: A blue chip company has a large market cap backed by a ravishing and promising reputation & has a track record of financial progress. The stocks issued by such companies are known as blue chip stocks.
Bull Market: It is quite the opposite of a bear market. In a bull market, the stock prices increase by 20% (sometimes more) after a recent low.
Broker: Usually a person or a firm that deals with buy and sell orders on your behalf. A broker is a must for people who are looking for an additional hand in trading.
Day Trading: The process of buying and selling stocks on the same trading day with the intention of making profits as a result of small price fluctuations during the trading day.
Earnings per Share (EPS): A financial metric that actively represents the portion of a company’s allocated profit to every outstanding share of the common stock. It is a litmus test that many investors conduct while they are considering investing in a company’s stocks. The EPS usually gets reported in new articles. A rise or decline in EPS can significantly impact the stock’s price.
Exchange: The place where investors and traders engage in the practice of buying or selling of stocks. New York Stock Exchange (NYSE) and Nasdaq are stock exchanges where this exchange takes place.
Exchange-Traded Funds (ETFs): These are financial product assets. These include indices, real estate, commodities, and bonds.
Growth Stock: These are the stocks that have a future growth potential in the coming years. As these stocks are aimed to accelerate growth in the short term, these stocks don’t usually offer dividends.
Index: A reference marker, also deemed as a benchmark, for traders and investors.
Investing in the stock market is a massive financial decision that anyone can make with adequate awareness and knowledge. Understanding the fundamentals and making yourself familiar with terminologies will ensure you are able to make informed decisions and are making the best investment decisions. Notably, it may seem overwhelming initially to find your way around the market while you are new to stock market trading. In such cases, always refer to these definitions and then proceed to make a decision that suits you the best.