Understanding the stock market can be an intimidating experience for some people. With so many terms, it can be difficult to wade through the speculation and understand the basics. But with the right resources, you can unlock the stock market, giving you the confidence to invest with more clarity and peace of mind.
In this guide, we will be covering the basics of stock market terms. We’ll define the terms, explain how understanding them can help you, and discuss their different types and uses. By the end you should have the necessary understanding to start trading and investing with tenacity and expertise.
I. Introduction
A. Definition of Stock Market Terms
Stock market terms relate to the buying and selling of stocks, which are units of ownership in a publicly traded company. When investors buy stocks, they’re essentially investing in the company and hoping its value will increase, in turn resulting in a higher return on their investments. Terms such as market capitalization, price-to-earnings ratio, and dividend yield all help investors to understand the financial standing of a company, which can impact the value of their stocks.
B. How Unlocking the Market Can Help
Unlocking the stock market doesn’t necessarily mean predicting its future or having a deep understanding of complex financial strategies. All it requires is a basic understanding of key concepts and terms that can help you make informed investment decisions. Being able to interpret stock market terms can help you become more confident in your abilities to invest and trade in the stock market, while also avoiding risks that could be harmful to your portfolio.
II. Types of Stock Market Terms
Stock market terms can be divided into three main categories: fundamental terms, technical terms, and other related terms.
A. Fundamental Terms
Fundamental terms are the most important when it comes to understanding the stock market and making investment decisions. These terms give an overall financial picture of a company, and allow investors to assess its value.
Market Capitalization: This refers to the total market value of a company’s outstanding shares. It’s calculated by multiplying the number of shares by the current price per share.
Price-to-Earnings Ratio: This is a measure of a company’s current share price compared to its earnings per share. It’s calculated by dividing the current stock price by the earnings per share.
Earnings Per Share: This is the amount of a company’s net profit allocated to each outstanding share of common stock. It’s calculated by dividing the net income by the total number of outstanding shares.
Dividend Yield: This is a measure of how much a company pays out in dividends to its shareholders each year, relative to its stock price. It’s calculated by dividing the annual dividend by the current stock price.
Beta: This is a measure of a stock’s volatility compared to the overall market. It’s calculated by comparing the volatility of a stock to an index of the entire market.
B. Technical Terms
Technical terms are more specific to the buying and selling of stocks. They include metrics used to analyze the performance of a stock over time and help investors identify trends.
Moving Averages: This is a technical indicator that helps investors evaluate the average price of a stock over a set period of time. It’s calculated by taking the average price of a stock over a specific number of days.
Relative Strength Index: This is a technical indicator used to measure the strength of a stock relative to the market. It’s calculated by comparing the average gain to the average loss of a stock over a set period of time.
Bollinger Bands: This is a technical indicator used to measure the volatility of a stock. It’s calculated by plotting three lines on a chart – a simple moving average and two other lines that are two standard deviations away from the simple moving average.
C. Other Related Terms
In addition to fundamental and technical terms, there are some other related terms that are important to know when it comes to investing in the stock market.
Volatility: This is a measure of the degree to which a stock’s price is prone to large fluctuations. It’s calculated by comparing the stock’s daily price movements to the average stock price.
Liquidity: This is a measure of how easily an asset can be converted into cash. It’s calculated by comparing the number of buyers and sellers for a given asset.
Bull/Bear Markets: These are terms used to describe the direction of the stock market. A bull market is a prolonged period of rising prices, while a bear market is a prolonged period of falling prices.
III. Fundamental Terms
Fundamental terms are the most important terms when it comes to understanding the stock market and making informed investment decisions. These terms help investors assess the financial standing of a company and determine its value.
A. Market Capitalization
Market capitalization is the total market value of a company’s outstanding shares. It’s calculated by multiplying the number of shares a company has by the current price per share. This number gives investors an idea of the size of the company and its potential for future growth. It’s usually expressed in terms of millions or billions of dollars.
The market capitalization of a company can also be used to classify it into different size categories. Companies with a market capitalization of less than $2 billion are usually considered small-cap stocks, those between $2 billion and $10 billion are considered mid-cap stocks, and those with a market capitalization of more than $10 billion are considered large-cap stocks.
B. Price-to-Earnings Ratio
The price-to-earnings ratio is a measure of a company’s current share price compared to its earnings per share. It’s calculated by dividing the current stock price by the earnings per share. This ratio gives investors an idea of how much they’re paying for each dollar of the company’s earnings. A higher ratio indicates that investors are paying more for each dollar of the company’s earnings, while a lower ratio indicates that investors are paying less for each dollar of the company’s earnings.
C. Earnings Per Share
Earnings per share is the amount of a company’s net profit allocated to each outstanding share of common stock. It’s calculated by dividing the net income by the total number of outstanding shares. This number gives investors an idea of how much money a company is making for each share of stock. It’s usually expressed in terms of cents or dollars per share.
D. Dividend Yield
The dividend yield is a measure of how much a company pays out in dividends to its shareholders each year, relative to its stock price. It’s calculated by dividing the annual dividend by the current stock price. This number gives investors an idea of how much money they can expect to receive from the company each year, relative to the price they paid for the stock. It’s usually expressed in terms of a percentage.
E. Beta
Beta is a measure of a stock’s volatility compared to the overall market. It’s calculated by comparing the volatility of a stock to an index of the entire market. A stock with a beta of 1 has the same volatility as the market, while a stock with a beta of less than 1 is less volatile than the market, and a stock with a beta of more than 1 is more volatile than the market. This number helps investors assess how much risk they’re taking on when investing in a particular stock.
IV. Technical Terms
Technical terms are more specific to the buying and selling of stocks. These terms help investors analyze the performance of a stock over time and identify trends.
A. Moving Averages
Moving averages are a technical indicator that helps investors evaluate the average price of a stock over a set period of time. It’s calculated by taking the average price of a stock over a specific number of days. This number helps investors identify short-term and long-term trends in the stock’s price.
B. Relative Strength Index
The relative strength index is a technical indicator used to measure the strength of a stock relative to the market. It’s calculated by comparing the average gain to the average loss of a stock over a set period of time. This number helps investors assess the performance of a stock compared to the overall market.
C. Bollinger Bands
Bollinger bands are a technical indicator used to measure the volatility of a stock. It’s calculated by plotting three lines on a chart – a simple moving average and two other lines that are two standard deviations away from the simple moving average. This indicator helps investors assess how much volatility a stock is exposed to.
V. Other Related Terms
In addition to fundamental and technical terms, there are some other related terms that are important to know when it comes to investing in the stock market.
A. Volatility
Volatility is a measure of the degree to which a stock’s price is prone to large fluctuations. It’s calculated by comparing the stock’s daily price movements to the average stock price. This number helps investors assess the risk they’re taking on when investing in a particular stock.
