Have you ever heard your family or friends discussing stocks and the stock market and wondered what the term 'stock' actually means and how the stock market works? If yes,
then don't worry in this post I'll explain about Stocks and the most used stock market terms so that next time you hear people discuss them around you, you will not misunderstand the term “Black Swan” for the bird.
No? Just me? Well, here's a picture of one below anyways;-}
Stocks:
Alternative names for stocks are "equity" and “shares”. When a person owns stock in a company, it represents that they have legal ownership which means they are a part owner of the company.
Such a person is known as the “stockholder” or the “shareholder” of the company. For example, if you buy 10 shares from a company that has a total of 100 shares then you become the owner of 10% of the company.
Common Stocks V/S Preferred Stocks:
Stocks are of the following two main types:
COMMON STOCKS-
It is the most common type of stock in which people invest and the majority of stock is issued in this form only, hence the name. Here, the shareholders can exercise control over corporate policy and management issues compared to “preferred shareholders” which I’ll explain in a bit.
It has the potential for long-term gains.
Its value goes up and down with the company's values.
Common shares can't be converted into “Preferred shares” but the other way round is possible.
PREFERRED STOCKS-
In this type of stock, the investor has no voting rights and so preferred shareholders have no voice in the company's future decisions.
Per values of Preferred shares are inversely affected by interest rates. This means when the value of the preferred stock increases the interest rate decreases and vice versa. Which is different from common shares where values of stocks depend on supply and demand in the market.
The market for preferred shares often anticipates callbacks and prices may be bid up accordingly.
Preferred stock also gets priority over common stock, so if a company misses a dividend payment, it must first pay any arrears to preferred shareholders before paying out common shareholders.
Now that we know what stocks are, let's understand what the stock market is and how it functions.
What is Stock Market?
According to Wikipedia, “A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses”.
In simple terms, it refers to public markets where buyers and sellers i.e. investors meet to buy and sell their stocks in companies.
Stock market exchanges act as both primary and secondary markets for a company's stock. They allow companies to directly sell shares via initial public offerings (IPO) to expand their businesses.
Why do we need the Stock Market?
The market allows negotiation between buyers and sellers which provides a fair opportunity for both to get the lowest possible buying price and highest possible selling price at the same time.
A stock’s demand and supply determine its price in the market and this process is known as price discovery.
The performance of a group of stocks, which either represents the market as a whole or a specific sector of the market like technology or retail companies is tracked with the help of a market index. When one of the major market indexes goes up or down, people usually refer to it as the stock market going up or down.
You can also invest in an entire index through an index fund or exchange-traded fund (ETF), which usually tracks a specific index or sector of the market.
Factors affecting Stock Market:
Some of the most important factors that have a direct effect on the stock market are given below:
SUPPLY AND DEMAND:
When there’s an imbalance between the supply and demand of stocks their prices will go up and down accordingly. For example, when a company’s not doing great and has a lot of shares that no one wants to buy then the stock price will go very low. In the same way,
the price of the stock increases when people want to buy stocks from the same company which creates a shortage of stocks, and hence their price increases.
INTEREST RATES:
Interest rates are inversely related to stock price. With lower interest rates companies will have to pay a low price for loans thus having more profit. Similarly, with higher interest rates they’ll achieve fewer profits.
CURRENT EVENTS:
Events that can impact the stock market include geopolitical conflicts, riots, or terrorist attacks. These events can negatively impact the stock market. The ongoing conflict between Russia and Ukraine has affected the crude oil supplies in India and this has caused its price to increase tremendously,
which in turn is gonna affect our common goods such as vegetables, fruits, etc. which need transportation and your investments might have to bear the brunt of falling markets and rising daily expenses.
NATURAL CALAMITIES:
Stock prices are bound to fall because the destruction of properties and other assets due to disasters incur heavy losses on the companies which in turn leads to the fall in stock prices.
EXCHANGE RATES:
The position of the Indian Rupee to the dollar and other foreign currencies can affect the stock market. When the value of the rupee increases, prices of Indian commodities abroad go up which leads to lesser demand, and this makes the exporters suffer by making their stock prices go down. While the stock prices of importers go up.
When the rupee weakens, exactly the opposite happens, that is the stock prices of exporters go up, while those of importers go down.
Stock Market terms you should know:
Following are a few terms that you should know in the stock market:
LIMIT ORDER : Limit order tells you a specific price at or below which you can buy a stock. Similarly, it also tells a specific price at or above which you can sell a stock or security.
MARKET ORDER : If an investor wishes to buy or sell a security at the current market price, he or she can make a request and this request is called market order. This can be expensive if there’s not enough volume.
GOOD TILL CANCELLED ORDER : It means that the market order remains open until you cancel the order or trade it.
VOLATILITY : The up or down movement of stock prices is called volatility. Volatile stocks move up and down wildly.
LIQUIDITY : The measure of ease of buying and selling a stock is known as its liquidity. Less liquid stocks are harder to buy and sell because of limited activity.
GOING LONG : In this when you buy stocks you hope to profit from an increase in the stock price.
GOING SHORT : When you try to profit from a stock's falling price.
PUBLIC FLOAT : It means the company’s freely traded shares. Low public floats have more volatile prices hence people mostly look to buy them.
BLUE-CHIP STOCK : These are the stocks of giant industry-leading companies. For example, Apple, Microsoft, etc.
MUTUAL FUND : It is a corporation that makes investments on behalf of its owners. With limited capital, if you want to diversify your portfolio, then you should look into this type of investment, given you have a trusted fund manager.
DIVIDEND : The portion paid from a company’s earnings to its stockholders is called the dividend.
BEAR MARKET : When a major index falls 20% or more from its recent highs is called the bear market.
BULL MARKET : A long period of increasing stock prices by at least 2% or above is known as the bull market. It is the complete opposite of the bear market.
INDEX : It is a measure of the performance of a major group of stocks.
LEVERAGE : When you borrow money to invest in stocks more than you can afford then it’s called leverage.
BLACK SWAN : It means a market crash that exceeds six standard deviations. Usually, it is considered a very unlikely event to occur.
COMPOUND ANNUAL GROWTH RATE (CAGR) : It means the annual growth rate of an investment over a while longer than one year.
DAY TRADING : When you buy and sell stocks within the same day, it is called day trading.
INITIAL PUBLIC OFFERING : When a company goes to sell shares for the first time.
MARKET CAPITALIZATION : The total value of all of the company’s shares.
EXCHANGE-TRADED FUND : These are capital pools used for investment purposes.
BUY AND HOLD : When you start trading ventures it is usually recommended to follow this tactic where you purchase stocks and hold them for a period ignoring short-term price fluctuations.