Investing in the stock market is not rocket science. Even though there are professionals to help along the way, it pays however, for one to understand the following basic concepts associated with stock investing.
Here are some of the technical words you might come across:
Stocks: This refers to an investor’s overall ownership in a company. In order words, it is the accumulation of one’s shares in a company. Often times, “Shares” and “Stocks” are used interchangeably; however both terms mean different things.
While a share refers to the smallest unit into which a company’s capital can be divided, a stock is a collection of fully paid up shares.
Liquidity: The ease of buying and selling security, asset or instrument is what is meant by liquidity. In investing, the closer an asset is to cash, the more liquid it is said to be.
Liquidity is a very important consideration before buying into any stock because investors holding illiquid instrument may be forced to sell at a discount to incentivize buyers.
Bulls: Bulls, Bullish, Bull-run are some of the more likely words you would come across as an investor in equities.
A Bull refers to an investor who believes a share’s price would rise and as such is willing to bet on an upward trend on such stock. Similarly a bull market occurs when prices of equities rise or are expected to rise.
The word “Bull” is usually associated with optimism and willingness to bet on improving market conditions.
Bears: The concept of bear in a stock market originates from the way in which a bear attacks its prey – swiping its paw downwards. The term ‘bear market’ is used when prices of stocks are falling or expected to decline.
All Share Index (ASI): The ASI is an indicator that measures the average price movement of all stocks listed on an exchange. It is used to evaluate the general trend of a stock market, and is computed in weighted points.
Year-to-date (YTD): This refers to the percentage return of a stock from the first trading day of the day to a particular trading day. It could be positive or negative depending on general sentiment toward the stock.
Dividend: This is the sum of money companies paid to shareholders out of its profit or reserves as a compensation or reward for risk. Dividends are recommended by a company’s board of directors, subject to the approval of shareholders
Right Issue: This is a group of rights a company offers its current shareholders to purchase new shares at a rate below the current market price. It implies that the company is giving shareholders a chance to increase their exposure to the stock at a discount price. Companies typically decide to offer right issues when they are cash-strapped and require additional funds either to settle debt or invest in new equipment.
Bonus shares: These are free additional shares given to existing shareholders. A company may decide to distribute further shares as an alternative to increasing dividend that will be paid to shareholders. Bonus shares are issued out of a company’s reserves. When bonus shares are issued, the number of shares a shareholder holds increase. Shareholders pay nothing for these shares.
Blue-chip stocks: This term is used for shares of large and well-recognized companies with track record of sound financial performance. These stocks are known to have capabilities to weather tough market conditions and deliver high returns in good market conditions. Blue-chip stocks are often market leaders in their respective sector.
Bid and Ask: The two terms describe the best potential price that buyers and sellers in the market place are willing to transact at. The bid price is the highest price an investor is willing to pay for the stock. On the other hand, ask price is the lowest price that an investor is willing sell. The difference between the bid and ask price gives the bid-ask spread.
Volatility: This refers to the amount of uncertainty or risk related to the sizes of changes in a stock’s value. A stock with higher volatility means that its value can potentially be spread out over a large range of values. This implies that the stock price can change dramatically over a short time period in either direction. A lower volatile means a stock’s value is steadier and does not fluctuate dramatically.
Basis points (bps): Bips are a unit of measure use to describe the percentage change in the value of a financial instrument. One basis point is equivalent to 0.01 percent. That is, 1 percent is 100 basis points.
Dividend yield: This is a financial metric that shows how much a company pays out in dividends each year in relation to its share price. It is expressed in percentage and calculated by dividing annual dividend by the stock price. For instance, if a company’s declared a dividend per share of N2 and the stock is trading at N4, the dividend yield is 2%.Rally: A rally is a period of sustained increases in prices of stocks or upward swings in the market. Short-term rallies occur due to several reasons. Short-term rallies are caused by news or events such as a new CEO appointment that affect demand-supply equilibrium. Rallies can also be long-term, which result from changes in macroeconomic conditions such as implementation of favourable fiscal policies, etc.
Profit-taking: This describes a situation in which investors sell shares after prices have risen to make profit. Profit taking often causes stock price to fall.
Institutional/Retail Investors: Institutional investors are organizations that pool money from individuals and group of individuals to buy securities. Examples of institutional investors are investment banks, insurance companies, pension fund administrators, etc. On the other hand, retail investors are individuals who purchases securities for their own personal account rather than for an organization.
Arbitrage: This is simply the simultaneous purchase of a security in one market and sales in another, to take advantage of difference in price.
Beta: This is a measure of a stock’s volatility; that is how its share price moves in relation the general market price movement. A beta value greater than one shows the stock’s price swings more than the market, while a value less than one connotes the converse.
Beta is a useful gauge of riskiness for investors in the equity market.
For example if a Stock’s beta value is 1.5, the stock is 50 percent more volatile than the market. If the market gains 10 percent, the stock should therefore gain 15 percent.
On the other hand, if the market dips by 10 percent, the value of the stock is expected to also fall by 15 percent.
Broker: A broker is an individual or firm which buys and sells securities on behalf of the transacting parties. The broker acts an intermediary to execute deals between owners and buyers of a security in exchange for a commission.
Initial Public Offering: An IPO is the process of selling shares of a private company wishing to turn public and raise capital on the stock exchange. The IPO is used only where there is a first time issuance of shares to the general investing public-although institutional investors typically participate in more in an IPO.
52-week high/low: The 52-week high and 52-week low refers to the highest and lowest price at which a stock has traded over the course of the previous year.
An investor might see a stock trading close to its 52-week high as a signal to sell the stock. This is because they tend to believe the stock price would fall and therefore see opportunity in exiting when the price is still high, so they buy back when price falls.
By the same token, a 52-week low is often seen as a guide pointing to a good entry point into a stock.
Bargain hunting: A Bargain hunter is someone looking for stocks that are cheaper than usual and therefore would offer opportunity to exploit capital gains.
Value investors look for stocks with good fundamentals which are undervalued would guarantee gain when the stock becomes rightly priced.
Penny Stock: A stock less than N1 per share is a penny stock. This kind of stocks is also commonly referred to as micro-cap stocks, and small-cap stocks.
Penny stocks are usually highly speculative and prone to be illiquid and as such may sometimes be risky investments.
Fundamental Analysis: This is a method of evaluating a stock’s true worth by factoring economic and financial factors that are important to the company’s performance.
In Fundamental analysis, Macroeconomic, Industry analysis and trends, corporate caption and news relating to companies are crucial to estimating what price the stocks would trade at in the near term.
