Speaking with a few novice investors and learning about their difficulties, revealed several share market pitfalls for novice investors. First, they encounter a ton of intimidating “investing lingo” in their tremendous attempt to comprehend the market, which only overwhelms and confounds them as they learn more about it. That inspired this essay: Revelations of Some Fundamental Terms That an Investor Must Come Across.
Before starting an investment, you need to know a few things. Every stock market investing adventure starts here since it makes the investment procedure more approachable and will aid you in reaching your financial objectives.
If you haven’t completely engaged with the stock market because you can’t understand some of the “jargon,” you’re giving up for the wrong reasons. You must finish reading this article; you cannot afford to miss any of it. Before we get into the stock trading terminologies you will undoubtedly encounter when investing, let’s first grasp the basics of the stock market.
What Exactly is a Stock Market?
When you read books or articles on stock investing or listen to the daily stock news, the phrase “stock market” is staring you in the face. But, if the foundation isn’t comprehended, how will you be able to understand simple terminologies?
Shares of businesses can be bought and sold on the stock market. For instance, you would need to go to the market where bags sell if you wanted to buy one. The stock market operates similarly, except shares, usually referred to as stocks, are, this time, what sells.
It is only a venue where investors can trade securities directly amongst themselves or through an exchange.
By selling shares to investors as a thank-you for their investment, firms looking to obtain capital to expand their operations will do so through this exchange. By swapping their funds for shares on the stock market, investors gain. In addition, investors profit from corporations using that money to invest in developing and expanding their operations as the value of their stock increases over time, resulting in capital gains.
Now that you know what the stock market is all about, it’s time to comprehend the stock market technology you will encounter along the way.
- Inflation
Inflation is the term used to describe this gradual rise in prices. There are several causes of price inflation. First, because investors’ confidence wanes during inflation, the cost of stocks falls.
The stock market performs noticeably poorly overall during times of rising inflation. Inflation impacts many firms negatively because decreased consumer spending and increased operating and production expenses result in lower revenues. In addition, share prices drop due to investors’ propensity to sell off these stocks, further motivating investors to do so. As a result, the stock market, as a whole, often tends to drop as inflation rises.
Three forms of inflation exist:
Demand-Pull Inflation
Demand-Pull inflation occurs when there is an increase in the amount of money in circulation, stimulating consumer spending and raising prices. It causes a disparity between supply and demand, meaning more demand than supply.
Cost-Push Inflation
This price increase results from rising labor costs and manufacturing costs for products and services.
Build in Inflation
This build-in inflation occurs when employees demand more pay owing to an annual inflation increase in the cost of living. The cost of production impacts a rise in wages or salaries, which raises the price of goods and services.
- Asset Allocation
A novice investor must understand that there is no outstanding stock or bond. This term implies that there aren’t any securities that provide a high current return, liquidity yield, tax advantages, or chances for capital gains. But you may create a portfolio by acquiring a range of assets that complement each other to meet your risk appetite and financial objectives. Asset allocation refers to the distribution of your portfolio’s asset types.
The crucial element in reaching your financial objectives is creating your asset allocation and selecting your portfolio policy. By allocating a portfolio’s assets to a person’s objectives, risk tolerance, and investment horizon, asset allocation is a type of investing strategy that seeks to strike a balance between risk and return.
- Market Capitalization
This term is a company’s market worth based on the aggregate market value of all of its outstanding publicly traded shares. To determine market capitalization, you’ll multiply the total number of outstanding shares by the share price. The most popular way to gauge the size of a publicly listed firm is to use its market capitalization (or market value), which is determined by dividing its current stock price by the total number of outstanding shares. For example, at the moment, Fidelity National Financial’s market capitalization is 10.77 billion NGN.
Market capitalization is used to classify small-cap, mid-cap, large-cap, and mega-cap corporations.
Small-Cap Companies
Companies having a market value of $300 million to NGN 2 billion are in this category.
Medium-Cap companies
In medium-cap companies, the market value of between 2 billion NGN and 10 billion NGN falls in this category.
Large-Cap Businesses
Companies with a market value of at least 10 billion NGN fall in this category.
Mega-Cap Businesses
Companies with a market value of at least 100 billion NGN fall in this category.
- Portfolio
A collection of different assets, such as cash, bonds, stocks, and other financial assets, make up an investment portfolio. You may diversify your portfolio across several markets, supports, and sectors to profit from a range of assets. A portfolio of assets is the foundation of all investments. Investments are s[lit into growth investments, speculative trading, and cash flow investments.
Depending on their level of investment market knowledge, people can either manage their portfolios alone or enlist the help of qualified financial advisors. Diversification is a crucial idea in portfolio management, according to specialists in finance.
Price to Earnings Ratio
The P/E ratio is another name for this. A P/E ratio is a tool used by investigators to analyze the performance of similar businesses. For example, consider that there are just two businesses in the cement sector. Company A charges 80 NGN for each share it sells, whereas Company B charges 10 NGN. An undervalued stock can sometimes have a low share price. Only when the share price is down about the company’s earnings is it deemed cheap. We utilize the P/E ratio statistic, calculated by dividing the stock price by the company’s earnings or profit, to compare the two businesses and choose the one with a superior value.
Let’s imagine the firm makes 100,000 NGN in profit each year, but company B only makes 10,000 NGN. To compute the value of each share and determine the firm’s overall earnings, we need to know how many shares the company has issued. The term EPS, or earnings per share, refers to this computation.
With 50,000 shares in circulation and 100,000 NGN in earnings, Company A has an EPS of 2 NGN per share. 100,000/50,000=2 NGN. So let’s figure out the first company’s P/E ratio now that we know the EPS.
80 NGN EPS(2 NGN) = 40; P/E Ratio. For firm A, the P/E ratio is 40. the stock is currently selling for 40 times its earnings per share.
On the other hand, Company B has 10,000 shares in circulation and 10,000 NGN in earnings. Therefore, 10,000/10,000 Equals 1 NGN in EPS.
Since the stock is trading at 10 NGN per share (101=10), business B has a P/E ratio of 10 or 10 times its profits per share.
- Risk Tolerance
Risk appetite is another name for risk tolerance. It reflects the level of risk an investor is ready to accept and their resilience in the face of setbacks. Investors might be either high or low-risk takers depending on their risk appetite.
In contrast to a lower-risk investor, who is conservative and unable to withstand losses, a higher-risk-tolerance investor is aggressive in his risk-taking and can take more significant losses.
Provide answers to the following questions to determine your level of risk tolerance:
- How much money do I need to put up?
- What kind of financial commitment am I ready to accept?
- How much money am I prepared to let go?
- How worried would I be if share prices dropped precipitously?
- What steps will I take in the event of a price drop?
- IPO (Initial Public Offering)
Companies launch initial public offerings (IPOs) to list their shares on an exchange (IPO). The company switches from being privately owned to being publicly traded by doing this. Companies may use it to raise money or sell their stake in the company through an IPO. Additionally, once a company list on an exchange, the general public can list it. Market mood impacts price movements, but more precisely, so do the company’s operations and earnings, for which Eva; auto uses various indicators, such as the price-to-earnings ratio. So let’s keep looking at how and why the share price fluctuates.
- Volatility
Volatility is a metric used to gauge how asset prices have changed over time. Generally, the more volatile a market or the individual item is, there is more significant price movement—up and down. Since there is a higher probability that the asset price may decline, volatile investments are typically considered riskier.
To Sum Up
You’ll constantly come across many more stock market jargon as an investor. However, the phrases used in this article’s explanation of the stock market will put you on the proper path for your financial adventure.
