ASX Investment Education. Find below some of the most common share market terminologies explained for beginners. Click here to read part 2 of the Wise-owl Share Market Terminology series.
A bear market is a period of pessimism and declining stock market prices, where selling outweighs buying. There is no specific criteria for a market to be classified as a bear market, however a decline of around 20% in value is often considered to be a common feature of a bear market. The reason behind the name is not entirely clear, however a frequently used explanation is the way a bear attacks its victim with a downward swipe.
Blue-chip stocks are generally classified as well established companies with several years of strong financial performance and large market capitalisations relative to the market. Generally the company will pay consistent and reliable dividends and be a household name. Blue-chip stocks are often referred to as ‘safe investments’, however it must be noted that investing in blue-chip stocks does not guarantee returns.
A Bull Market is a period of optimism where an entire financial market or an individual financial instrument trends upwards and there are more buyers than sellers. There is no specific criteria for a market to be classified as a bull market, however if a financial market or instrument increases about 20% in value, the cycle is generally considered to be a bull market. The reason behind the name is officially unclear, however one of the most frequently used explanations is the way a bull attacks its victim in an upward style.
A dividend is a distribution of a portion of a company’s earnings to its shareholders. The amount to be paid is decided by the company’s board of directors. Investors can choose to reinvest the dividend or simply take the cash. Dividends may be quoted in dollar terms or as a percentage of the market price, which is referred to as the dividend yield. Generally a consistent or growing dividend yield is a sign of a strong company, however there are some exceptions. To qualify for a company’s dividend distribution, an investor must purchase the stock before the Ex-Dividend date and be on the registry of the company on or before the Record Date. Usually the Ex-Dividend date and the record date are 2 days apart, as it takes 2 days for the purchase to be processed and the investor to be registered as the owner. There is no obligation for a company to pay dividends, however many companies use it as a tool to reward existing and attract new shareholders.
The earnings per share (EPS) is a portion of a company’s net income to each outstanding share of common stock. The calculation for earnings per share is “Net Income – Dividends on Preferred Stock / Weighted Average Shares Outstanding”. In simpler terms, it’s the company’s net income divided by the number of shares outstanding. EPS is an important variable in determining the performance of a company. Investors often look for a company with growing EPS. EPS is often used to assess the current valuation of a stock by dividing the company’s current stock price per share by its EPS. The so called Price-to-Earnings multiple of P/E can then be compared to the market or sector average or with other competitors.
An ETF is a financial security that tracks the performance of an index (or any other basket of assets) and is traded like a common stock on a stock exchange. The price of an ETF fluctuates with the price of its underlying asset. An investment in ETFs provides exposure to diverse markets without the need to invest in each stock separately.
Ex-div date generally occurs two days before the Record date and is the date that determines if an investor is eligible to receive a dividend. The investor has to buy the stock at least one day before the ex-dividend date in order to receive the distribution. The date is usually determined by the local stock exchange.
Fundamental analysis is a form of stock analysis which assesses the value of a company based on various elements and factors. It uses quantitative and qualitative methods to form an assessment and analyse the relationship between a company’s share price and influential elements. In order to perform quantitative or qualitative analysis, an investor must look at a company’s revenue generating capabilities, balance sheet, cash flow, operational activities, management track record, industry analysis, brand value or competition.
Hedging is a common strategy used in stock portfolios and derivatives which enables investors to manage risk. Hedging is often compared to an insurance policy as it is used to offset the risk of potential losses of one’s investment. In order to hedge, an investor will invest in a stock or an asset with lower volatility in order reduce the risk of the overall portfolio.
An Initial Public Offering (IPO), also known as a ‘float’ or ‘going public’, is the initial sale of a private company’s stock to the public before it lists on the stock exchange. For more information on IPO’s refer to our article What is an IPO or Initial Public Offering?
A limit-order is a buy or sell order placed with a broker to buy or sell a certain amount of shares at a certain price or better. Because the order is not at market price, there is a chance the order will not be executed or will only be partially executed. The order also has a time period attached, stating how long the order can be outstanding before it is canceled. For example, an investor places a limit order to purchase 200 shares at a price of $1.20 with an expiration date 2 days from now. Currently, the stock is trading at $1.22. If the broker is not able to purchase the stock for $1.20 within 2 days, the order will simply expire. However, if the stock does reach $1.20 the order will automatically be executed.
Liquidity is the availability of liquid assets of a stock, security or market. It is the ease with which an asset can be bought or sold without affecting its current price. It is connected to the volumes of a stock traded, as higher volume facilitates greater liquidity.