Are you also planning to invest some of your funds in the stock market? But there are times when, out of ignorance, you hold yourself back from going any further. It’s true that having little or no knowledge of the stock market can be dangerous. Investing in the stock market without effective knowledge can lead to financial decisions that result in large losses.
On the other hand, if you know the stock market and the terminology used in the market very well, you should have a pretty good foundation for making it big in the stock market. The idea of multiplying your hard-earned money is certainly appealing. We all want our money to grow because when it comes to the financial market, the more the merrier. However, the stock market is a great place where your money can grow much faster than your savings account.
The fact is if you don’t have a basic understanding of how the stock market works, how will you know which stocks to invest in? If you feel ambivalent about your knowledge of the stock market, you will be in doubt. You want to invest and make big money, but you are afraid of the risks. The mathematics here is simple, the more knowledge, the less fear.
In the end, all you need is a good, easy resource for beginners to help you understand key stock market terminology. Getting the basics right is the perfect basis for becoming a stock market pro. Becoming a professional means that you can actually play stocks and grow your wealth exponentially. Who doesn’t want that thought?
This blog is exactly the resource you were looking for. It explains in an engaging way what an exchange is, why it’s needed, and the basic terminology you need to know. So without further ado, let’s get started.
What is a stock exchange?
In simple terms, an exchange is defined as a platform where investors and sellers interact to trade listed shares. These shares can come from private companies or from public companies listed on a country’s stock exchange. Furthermore, this trade is facilitated both by telephone and through online media.
In the US there is the New York Stock Exchange and the Nasdaq. They are regulated by the US Securities and Exchange Commission (SEC). The SEC also formulates guidelines for exchange boards, providing them with a framework for operating exchanges. In return, exchange supervisory boards must adhere to the structure and guidelines that have been formulated for their activities. Gallup reveals that 58% of the entire American population is invested in the stock market.
Each country has its own exchange and regulator that oversees trading. However, the stock market is highly systematic and there are strict regulatory requirements for both sellers and buyers. However, the bottom line is that as complex as it may seem, a thorough stock market investment pays off. Why should you miss the opportunity to increase your funds? The next section takes a closer look at how the stock market works.
How does it work? Now let’s turn your focus to exchange operations. Shares are operated through a network of different exchanges. If a company wishes to list its shares, it must first contact the stock exchange authority, which will list its shares. This process is known as an Initial Public Offering (IPO). In this way, the main market for company stock is formed.
Once the shares are listed, investors have the option to buy them. This sale and purchase of shares occurs in the secondary market. Investors in a company are also known as shareholders. In this way, the company can raise funds in the market for future expansion and growth. Also, there is a certain period of time when the exchange operates. Usually starts from 09.30 to 16.00.
For individual investors, you will need to open an account with a brokerage firm. The company will act as an intermediary between investors and the exchange. They will buy company shares for you and then sell them at your request. This is the traditional practice by which trade is carried out.
With the advancement in technology, this process is now much easier and less time-consuming. Many applications have been developed that eliminate the need to contact brokerage firms. Many people use this app to buy and sell their preferred stocks as they, please.
When the company profits from this accumulation of funds, a part of it is distributed among the shareholders, which is known as dividends. To give you further clarity on the terminology you will encounter in the stock market, the most important terms are listed in the following sections. The formulation of terms that become indicators of the company’s financial performance is also included if necessary.
7 financial terms you should know:
There are different types of stocks that people invest in. One type is stock. A person who owns company shares has the right to participate in the day-to-day management of the company. Simply put, shareholders have the right to vote on the internal affairs of the company.
If the company makes a profit, all shareholders can claim a portion of the profits in the form of dividends. However, it should be noted that it is entirely up to the management whether to use the revenue generated to grow the company or to distribute it to its shareholders.
Another type of stock is called preferred stock. Preferred stockholders have two main advantages. Preferred stockholders are entitled to receive dividends when the company reports income and at a fixed interest rate. Even if the company is liquidated, these shareholders can recover all the invested capital.
However, they are limited in their ability to express their opinions on internal company matters. So it’s understandable that they don’t have a say in company decisions
It is described as the ratio of the number of shares rising to the number of shares falling. It is a form of technical analysis that determines the marketing director of a stock. In simple terms, he was very good at predicting whether the stock market would go up or down.
The formula for calculating market reach is given below:
Market Breadth = total number of shares that went up/total number of shares that went down
If the calculated ratio is greater than 1, it means a positive movement or it can also be said that the market is bullish. Conversely, if the ratio is less than 1, it means that the movement is negative or the market is called bearish.
Support and Resistance
We all agree that the stock market is very dynamic. Sometimes it is quite difficult for investors to predict the movement. Therefore, terms like support and resistance help them predict whether the stock price will go down or up.
This concept is defined in such a way that once a stock reaches a certain value, it will go no further. On the contrary, it tends to move in the opposite direction. The upper limit that the stock price reaches is called resistance. The lower limit is called support.
For example, you buy 100 shares of stock in a company. The price at which you bought the stock was $65. As expected, the stock price will continue to rise, but the opposite is true. The stock price stopped at $74 and showed no movement after reaching that level. Therefore, one could say that this is a resistance level for this stock
Conversely, when the stock price does not show a downward trend, it can be said that the stock price has reached the support level.
However, there is a high probability that the stock price will break above the resistance level, indicating an uptrend. It will continue to increase until it reaches a new resistance level. It can provide you with much needed assistance in creating a long-term stock trading strategy.
There are stocks of various companies that have done very well in the past. Moreover, their future performance is expected to be favorable for investors. Such stocks are called blue chip stocks.
These stocks tend to outperform other stocks when it comes to unexpected stock market trends. This stock launch prevented the market from falling sharply. Investors also benefit from the high returns of this stock in the long term. They can also regain momentum very quickly in adverse market conditions.
According to the Nasdaq, some of America’s blue chip stocks are Goldman Sachs (GS), PepsiCo (PEP), Home Depot (HD), Disney (DIS) and Nike (NKE). you can also look for the list of these amazing dividends to supercharge your portfolio.
Debt to equity ratio
The debt level describes how much external financing the company uses compared to its own funds. Creditors, shareholders, and even company owners have been involved in financing this debt. This ratio determines how well the company performs in meeting its financial obligations to support its operations.
If the rates are much higher than expected, it can cause a serious financial crisis for the company. The lower the ratio, the better for the company’s financial health.
This ratio is calculated by dividing the company’s liabilities by shareholder equity. This is one of the most important financial ratios that describe a company’s financial performance.
Leverage = Total Debt/Equity
This is one of the most important performance indicators of the company. In general, a good leverage ratio is between 2 and 2.5.
It refers to the total value of the company’s shares in the market. It is calculated by multiplying the current share price by the total number of shares issued. For example, if a company has 1 million shares issued and the current share price is $10, the company’s market capitalization is $10 million.
It is considered an important metric that helps investors better understand a company’s position in the stock market. For example, Apple Inc.’s market capitalization. is $2.53 trillion according to the Nasdaq, while Tesla’s market cap is $868.4 billion. Investors will always be tempted to invest in companies with the largest market capitalization. However, as a beginner, you should ideally invest in small companies or low-priced stocks given the risk.
In short, these are the 7 most talked-about financial terms you should know before going public. As mentioned, a better understanding of these terms will give you a much better idea of whether or not you should invest in a company. As you continue to benefit from this knowledge, you will explore the ins and outs of the stock market. Equally important is understanding the risks associated with the stock market. The more you know about the market, the more chances your money will multiply. This basically means your money will work even if you are sound asleep.