Buy Stocks
Important Terms To Understand When You Buy Stocks
If you are looking to buy stocks but are new to the stock market, you may feel overwhelmed, especially because of all the complicated terms used by brokers and analysts. It is important that you familiarize yourself with some of the common terms used in the market so that you can make well-informed investment decisions.
Stock Market Index
A stock market index, such as the Dow Jones Industrial Average or the S&P 500, is an aggregate of price data of the stocks included in that index. Changes in the index level can be seen as a reflection of the mood of investors and the state of the market.
Shares and Shareholding
A share is a unit of ownership of a company. A person who is the owner of a share in the company is known as a shareholder. A shareholder has different rights depending on the kind of share and the laws of the country.
Dividend
Dividend is that part of profits of the company which is distributed among the shareholders. It is up to the company’s management to decide whether it wants to declare a dividend or not. The management will also decide how much dividend it wants to distribute.
Bull & Bear Market
In a bull market, the prices of stocks rise for a prolonged period at a rate that is faster than the historical average. The confidence among investors is high and they buy more stocks. Bull markets are usually accompanied by a period of economic boom.
A bear market is exactly the opposite of a bull market, and it sees a sustained decrease in prices. A common reason for a bear market is economic recession or lack of growth. In both, a bull market and a bear market, the prices can sometimes move in a direction opposite to the general trend. This is known as a correction.
Bid and Offer Price
The bid price is the price a buyer is willing to pay for a single share of the company. The offer price is the price that a seller is asking for when selling shares in the company. The difference between the two at any point of time is called the spread.
Buy and Hold
If you buy stocks and hold them for a long period of time irrespective of the market conditions then it is called a buy and hold strategy. It is a long-term investment strategy through which you want to avoid short term market fluctuations.
PE Ratio
PE ratio, or the Price-Earnings ratio, is a common method of assessing whether a stock is overvalued or undervalued. It is the ratio of the price of the stock and the earnings per share (last reported or projected) of the company.
As you keep trading in stocks, your familiarity with these and other technical terms will increase. If you do not understand a term used by your broker, always seek a clarification so that you can buy stocks with confidence.