In this post, we go into what we call “share market jargon” every beginner should know.
Let us give a finishing touch to that part of our brain where the knowledge from the previous posts is sitting. Next in this series, we are gonna deal with the fundamental analysis of a stock where you can learn how to pick a potential stock.
Let us begin.
1. Bull Market
If you believe that the stock prices are likely to go up then you are said to be bullish on the stock price. From a broader perspective, a Bull Market is a period of optimism where an entire financial market trends upwards and there are more buyers than sellers. The reason behind the name is officially unclear, however, one of the most frequently used explanations is the way a bull attacks its victim in an upward style.
2. Bear Market
If you believe that the stock prices are likely to go down then you are said to be bearish on the stock price. From a broader perspective, a bear market is a period of pessimism and declining stock market prices, where selling outweighs buying. As the name bull market, the name bear market indicates the way a bear attacks its victim with a downward swipe.
3. Market Capitalization
Lately, you might have heard that Apple became the first US company to touch $2 trillion market capitalization. But what is it?
Market capitalization is the total value of a company. It’s measured by the stock price times the number of shares issued. For example, a company that has 10,00,000 shares that are selling for Rs.100 each would have a market capitalization of Rs.10 Crore. This means you could buy that company for Rs.10 Crore if you had the money and all the current stockholders are willing to sell you their shares.
4. Blue Chip Stocks
Blue-chip stocks are generally classified as well established companies with several years of strong financial performance and large market capitalizations relative to the market. Generally, the company will pay consistent and reliable dividends and be a household name. Blue-chip stocks are often referred to as ‘safe investments’, however, it must be noted that investing in blue-chip stocks does not guarantee returns.
A dividend is a distribution of a portion of a company’s earnings to its shareholders. The amount to be paid is decided by the company’s board of directors. Investors can choose to reinvest the dividend or simply take the cash. There is no obligation for a company to pay dividends, however, many companies use it as a tool to reward existing and attract new shareholders.
6. Common shares and Preference shares
Common shares are ordinary stocks issued to the public. It means the shares that you and I buy. It pays you a share of the company’s profits through dividends. Common stockholders are usually given voting rights, with the number of votes directly related to the number of shares owned.
Preferred stock is generally considered less volatile than common stock but typically has less potential for profit. The Preferred stockholders generally do not have voting rights, as common stockholders do. Preferred stock shareholders receive their dividends before common stockholders receive theirs, and these payments tend to be higher.
You can buy preferred shares of any publicly-traded company in the same way you buy common shares i.e., through your broker.
A collection of investments owned by an investor makes up his or her portfolio. In simple terms, the portfolio is the number of stocks you own in your DEMAT account. You can have as few as one stock in a portfolio, but you can also own an infinite amount of stocks or other securities.
8. Annual Report
An annual report is a financial summary of a company’s activities during the year along with management’s analysis of the company’s current financial position and future plans. In simple terms, it is a book explaining what the company has done during the year and what it is going to do in the year ahead.
9. Quarterly Earnings Report
A quarterly earnings report is a quarterly filing (every 3 months) made by companies to report their performance. Earnings reports include items such as how much profit/loss the company has made, investments made by the company. By analyzing quarterly earnings reports, investors can begin to gauge the financial health of the company and determine whether it is worth to include in a portfolio
10. Averaging Down
Averaging down is nothing but reducing the buying price of shares. Let us say you bought 100 shares of Reliance at Rs.1000 ( i.e., Investment = Rs.10,000). Now the buying price is Rs.1000 per share. However, the price comes down to Rs.950 after you bought the shares. So you are at a loss of Rs.50 per share. But what if you have decided to buy more shares at this price?
Let us say you bought 100 additional shares at Rs.950 (i.e., Investment = Rs.9500). What will be the new buying price now?
That is calculated by dividing the total investment by the total number of shares you own. That is Rs.975 per share in this case. Now the loss is just Rs.25 per share compared to the earlier loss. This is the power of averaging down.
It refers to the fluctuations in the price of a share. Highly volatile stocks witness severe ups and downs during trading sessions. These are highly risky bets which can bring a large amount of profits for the skilled intra-day trader.
12. Face Value:
Face value (FV) or par value of a stock indicates the fixed denomination of a share. The face value is important with regard to a corporate action. Usually, when dividends or stock split are announced they are issued keeping the face value in perspective. For example, the FV of Infosys is 5, and if they announce an annual dividend of Rs 63 then it means the dividend paid is 1260% (63 divided by 5).
13. Fundamental Analysis:
Fundamental analysis is a form of stock analysis that assesses the value of a company based on various elements and factors. It uses quantitative and qualitative methods to form an assessment and analyze the relationship between a company’s share price and influential elements.
We shall see more about it later in these series of posts.
14. Technical Analysis
Technical analysis is a means of examining and predicting price movements in the financial markets, by using historical price charts and market statistics. It is based on the idea that if a trader can identify previous market patterns, they can form a fairly accurate prediction of future price trajectories.
Hedging is a common strategy used in the stock market which enables investors to manage risk. It is often compared to an insurance policy as it is used to offset the risk of potential losses of one’s investment. In order to hedge, an investor will invest in a stock or an asset with lower volatility in order to reduce the risk of the overall portfolio.
16. Long Position
Long position or going long is simply a reference to the direction of your trade. For example, if you have bought Biocon shares then it is said that you have gone long on Biocon. In other words, if you are long on a stock, you are said to be bullish.
17. Intraday Trading
Day trading usually refers to the practice of purchasing and selling a stock within a single trading day. It means if you buy a share on a particular day you must sell it by the end of the day.
18. Insider Trading
It is referred to as buying or selling security based on the information that is not available to the public. Participants in insider trading are often leveraging information that should be or will soon be public.These participants are usually the employees or higher-level management within the company. As a result, insider trading is regarded as an illegal activity.
19. Pre Opening Session
It is provided to stabilize heavy volatility due to some major event or announcement that comes overnight before the market actually opens for trading.
The duration of the pre-open market session is from 9:00 AM to 9:15 AM, i.e 15 minutes before the trading session starts and is conducted on both the major Indian stock exchanges: NSE and BSE.
20. Trading Session
The trading session is a period of time between which actual trade happens. The normal trading time for equity market (share market) is between 9:15 am to 03:30 pm, Monday to Friday
21. Business Day
The Business day is referred to as that day where the share market is opened. This is usually between Monday to Friday across the world.
Yield is the income returned on an investment, such as the interest received from holding the security. The yield is usually expressed as an annual percentage rate based on the investment’s cost, current market value, or face value.
These are some of the important terms every share market enthusiastic must know. Now we are good at the working of the share market. Let us now dive into fundamental analysis starting from the next post.
Thanks for reading. Stay safe.