A Beginner’s Guide to Understanding Commonly Used Terms in the Stock Market

You’ve finally decided that it was time to invest in the stock market. But after doing some research, you came across all these terms that are used in the stock market that left you confused. This made you start thinking that the stock market is too complicated and should be left to financial experts.

For a long time, I thought that way too. But as I took the time to understand the basics, I realised it’s not as complicated as I thought. In this article, I want to help you understand some of the common terms used in the stock market.

Commonly used terms in the stock market

The Stock Market/ Exchange

A Stock exchange or market is a place where stocks are traded. They allow investors to buy and sell shares of a company among each other. In Kenya, this marketplace is the Nairobi Securities Exchange (NSE).

StockBroker/ Brokerage firm

A stockbroker is a registered person or firm that acts on your behalf in buying and selling shares. For their services, they charge a commission. Before you choose a stockbroker, make sure that they are registered and approved by the regulatory authority in your country. In Kenya that would be the Capital Markets Authority.

An Order

When you are ready to buy some shares, the first thing you do is to go to a broker and make an order. This will include the name of the company, the number of shares you want to buy and with a lot of brokers, the type of order.

In the stock market, there are many types of orders. But as a beginner, you need to understand these two types of orders:

• Limit Order This is an order to buy or sell a share at a pre-defined price. Here is how it works. If a share is currently trading at KSh 5 but you want to buy it at KSh 4 then you set a limit order. Once the share price falls to KSh 4, the order is then executed and the share is bought.
• Market order This order tells your broker to buy or sell a share immediately at the best available price in the current market.

Bids and Asks

A Bid is the highest price a buyer is willing to pay for a stock while an Ask is the lowest price an owner is willing to sell the stock.

The Bull and the Bear

One of the most commonly used terms in the stock market is the Bull and the Bear. It is used a lot by financial experts when talking about the performance of the stock market. Here is what they mean:

• A Bull market is where we see the prices of shares rise consistently over a long period of time. Investors usually rush to the stock market to invest and make profits during a bull market.
• A Bear market is where we see the prices of shares fall consistently over a long period of time. Short-term investors usually cash out of the stock market during a bear market. An example of a bear market was during the 2007-2009 stock market crash.

Types of Investors

There are two types of investors in the stock market:

• Retail investors. These are individual investors like you or me.
• Institutional investors are the big players. These include pension funds, hedge funds, banks, investment companies etc

Index

Indexes measure the performance of certain stocks. This can tell us the overall performance of the stocks that the index tracks.

The most popular ones are the Dow Jones Industrial Average (Dow Jones) and the Standard and Poor’s 500 (S&P 500). The Dow Jones tracks the stock performance of the 30 largest companies listed on the stock exchange in the US. The S&P 500 tracks the performance of the 500 largest companies listed in the US stock exchange.

Other countries have their own indexes. In Kenya, we have FTSE NSE Kenya 15 index that measures the performance of the largest 15 stocks trading on the NSE. We also have FTSE NSE Kenya 20 index, FTSE NSE Kenya 25 index.

Buy Hold Sell

Buy for you would mean to buy shares. To an analyst, it would mean they are recommending that you should buy the share.

Hold means that you neither buy nor sell the stock. If you already have the stock in your portfolio, then it is best that you continue to hold on to the stock. And if you don’t have the stock, it is best to wait until the recommendation to buy is issued.

Sell for you will mean sell your shares but for an analyst, it would mean a recommendation to sell.

Dividend

Dividend is the amount of money a company pays to its shareholders out of the profits it earned. It is usually declared as a percentage of the current share price and decided by the board of directors of the company.

Initial Public Offering

Initial public offering or IPO is the process through which a privately held company becomes public. IPOs are issued by smaller, younger companies seeking funds for expansion and growth, but large companies do this to become publicly traded companies.

Market Capitalization

This is the total value of all a company’s shares or stock. It is calculated by multiplying all the outstanding shares with the current market price of one share. It determines the company’s size in terms of its wealth.

It is one of the most important things that investors look at when trying to decide if it’s worth buying shares of a company.

Portfolio

This is the collection of financial investments of an individual or institution. A portfolio may include stocks of different companies operating in different sectors. For example, if you have shares in Safaricom, KCB and Kakuzi, then this collection of stocks will be your portfolio.

Bonus shares

Bonus shares are extra or additional shares that a company gives to its shareholders at no additional cost. The number of bonus shares you get depends on the number of shares you originally own.

Let’s say you own 1000 shares of KCB and they decide a 2:1 bonus. It means you will get two free shares for every share you own. So you will end with 2000 extra shares for a total of 3000 shares

Final note

Knowing these terms will go a long way in helping you understand how the stock market work and greatly aid in your research.

If you still need to wrap your head around the whole concept of the stock market, here is an article I wrote that better explains the stock market