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Home » Trading Talk: Stock Market Key Terms for Beginners

Trading Talk: Stock Market Key Terms for Beginners

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Money is a touchy topic for us humans. We ask tons of questions and get the opinions of people we follow just to understand which bank has a high-interest rate or how to invest the money. Even though we have taken finance management classes in school. Likewise, Stock Market can be pretty confusing for beginners who have no idea what the short forms mean when they try to read the company’s information. In this article, we will focus on those terms and terminologies which beginners often ignore. These terms are very easy to understand and it is important to have a clear mindset to analyze a company’s performance before investing in them.

  1. Stock Symbol: The stock symbol is a unique arrangement of letters representing the stock market company. Stock symbols are assigned to a security exchange which makes it easier for traders to identify their company. For instance, the stock symbol for NIC Asia is NICA.
  • Last transaction price (LTP): The last transaction price indicates the price at which the most recent trading was done. If the buyer and seller agree to trade stocks at a certain price. Then the price indicates LTP until the next trading is done.
  • Open price: The price at which the first trade of a day of stocks between buyer and seller is called the open price. The first trade execution when the market opens at a specific price is the available price. For example, If the first price agreement between the buyer and seller of NICA is 675, then the open price of NICA is 675.
  • High price: The highest price at which trade is executed in a day, then the price represents a high price. For example, if the traded price of a stock is 675, 678, 679, 685, 682, and 678, then the high price is 685.
  • Low price: The lowest price at which trade is executed in a day, then the price represents a low price.  For example, if the traded price of a stock is 675, 678, 679, 685, 682, and 678, then the low price is 675.
  • Earnings per share (EPS): Earnings per share is a financial indicator showing the company’s earning power each for a share. The higher the company’s EPS, the higher the profitability and value of a stock. EPS is calculated by dividing a company’s net earnings by the outstanding shares.

The formula for calculating EPS is: EPS = (Net Earnings – Preferred Dividends) / Average Outstanding Shares.

  • P/E ratio: The P/E ratio, or Price-to-Earnings ratio, is a financial metric that measures whether the price of a stock is high or cheap. It is calculated by dividing the market price per share of a company’s stock by its earnings per share (EPS). The P/E ratio indicates how much investors are ready to invest for every dollar of the company’s profit.

The formula for calculating the P/E ratio is: P/E Ratio = Market Price per Share / Earnings per Share (EPS)

A high P/E ratio indicates that investors are willing to pay more for the company’s earnings, and a low P/E ratio indicates that investors are willing to pay less for the company’s earnings. For instance, if the market value of company A and company B is 200 and 240, respectively. While also both the companies have 20 earnings per share. The P/E ratio of Company A is 10, whereas the P/E ratio of Company B is 12, which concludes that investors are paying more for Company B than Company A.

  • Book value:

Book value, also known as net asset value (NAV), is a financial metric representing a company’s net worth. It is calculated by subtracting a company’s total liabilities from its assets. Book value measures the amount that can be distributed to the shareholders if all the assets are liquidated, and all the liabilities are paid.

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The formula for calculating the book value is:

Book Value = Total Assets – Total Liabilities

  • Dividend:

Dividends are the distribution of profits to shareholders regularly. It can be distributed monthly, quarterly, semi-annually, or annually. Dividends can be distributed by cash payments, distributing bonuses, and other forms. The Board of Directors decides the number of dividends at the suggestion of the chief financial officer.

  1. Right share:

Right share is an offer to existing shareholders to purchase additional shares at a discount to the market price. When the company decides to raise capital, it invites existing shareholders to invest through the right share. Right share gives the opportunity to maintain a stake in the company and prevent dilution.

  1. Market capitalization:

Market capitalization refers to the total value of the company, which is determined by the last transaction price of the company’s stock. Market capitalization is calculated by multiplying the last transaction price (LTP) by the total number of shares outstanding.

The formula to calculate market capitalization is:

Market capitalization = current market share price per share * number of shares outstanding

These are the terms and terminologies I feel are important to understand when entering the share market. However, the share market is a huge ocean with great depth; once you enter the market, you will learn accordingly. All these terms are a way to learn and understand how the share market works and what we can do to minimize losses in the market.

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