Understanding the stock market begins with mastering its basic terms. Many rush into investing, only to be overwhelmed by confusion that eventually leads to losses. In truth, the market rests on a foundation of simple concepts, and once you grasp them, the entire journey becomes far less intimidating.
If you wish to invest wisely, make confident decisions, and navigate the market without fear, start by strengthening your understanding of these fundamentals. Below, you will find ten essential stock market terms explained in clear, accessible language to help you build a solid foundation and a more secure financial future.
Equity: Equity refers to your ownership stake in a company. When you purchase shares, you own a small portion of the business, and your gains or losses depend on the company’s performance.
Market Capitalisation: Market capitalisation represents the total market value of a company. It is calculated by multiplying the share price by the total number of outstanding shares. Companies are categorised as large-cap, mid-cap, or small-cap based on this value.
IPO: When a company offers its shares to the public for the first time, it is known as an IPO. This enables the company to raise capital and allows investors to purchase its initial shares.
Bull Market: A bull market refers to a period when the market rises consistently and investor confidence remains high. Most shares tend to perform well during such times.
Bear Market: A bear market is when the market declines steadily and fear dominates investor sentiment. During this period, investors generally avoid taking high risks.
Dividend: A dividend is the portion of a company’s profits distributed to its shareholders. It serves as an additional income for those who hold its shares.
P/E Ratio: The P/E ratio indicates whether a share’s price is high or low in comparison with its earnings. Investors use this to determine whether a stock is overvalued or undervalued.
Trading Volume: Trading volume refers to the number of shares bought and sold within a particular day or period. It shows how actively a stock is being traded.
Liquidity: Liquidity indicates how easily a share can be bought or sold. High liquidity ensures smooth and hassle-free transactions.
Portfolio: A portfolio is the complete collection of investments an individual holds. Experienced investors always diversify their portfolios to reduce risk.