A novice investor has a lot of learning and knowledge ahead of him, which he needs to acquire in order to achieve good investment results. Already at the beginning he is inundated with various concepts and terms, the meaning of which he may not understand. We have tried to collect for you all the most important stock market terms and concepts and compile them in the form of a single dictionary. We hope that they will be useful to you. Especially if you are a beginner in the world of investment, but also if you are already an advanced investor and are looking for definitions of more difficult concepts and terms.
Shares represent partial ownership in a public company. Investors who buy shares become co-owners of the company, are entitled to share in its profits and can vote on company matters at general meetings.
A stock market index is a tool for tracking the performance of the stock market. It consists of a group of selected stocks listed on the stock exchange and is used to measure overall trends and changes in the market. Indexes, such as the S&P 500 or the Dow Jones Industrial Average, reflect changes in the value of the stocks of these companies.
Market capitalization is the market value of a company, which is calculated by multiplying the price of one share by the number of shares available on the market. It is an indicator that helps investors assess the size of a company and its importance in the market.
The P/E ratio, or price/earnings ratio, compares a stock’s price to a company’s earnings. It is used to assess a company’s valuation and growth prospects. A high P/E ratio may indicate high investor expectations for future growth, while a low P/E ratio may suggest an undervalued stock.
A dividend is a portion of a company’s earnings that is paid to shareholders. It is a reward for holding shares and is a form of passive income for investors. Dividends can be paid in the form of cash or additional shares and are announced by the company’s board of directors.
Options are financial instruments that give investors the right, but not the obligation, to buy or sell shares at a certain price in the future. Options can be used to hedge a portfolio, speculate on changes in stock prices or generate additional income.
Short selling is an investment strategy in which an investor sells shares that he does not own, hoping that their value will fall. The investor can later buy back these shares at a lower price, generating a profit on the price difference. Short selling is a more sophisticated investment strategy that involves risk. The investor must be adequately hedged against rising stock prices, as he may suffer losses if the strategy is wrong. Short selling is popular in declining market conditions, when investors expect the stock price to fall.
A stop-loss order is a type of stock market order that specifies the price level at which an investor wants to sell a stock. It is a protective tool that helps investors limit potential losses in the event of a sudden price drop. When the price of a stock falls to a set level, a stop-loss order automatically triggers a sale of the stock, protecting the investor from greater losses.
An IPO is the process by which a company decides to sell its shares to the public for the first time, allowing public investors to purchase them. A company conducts an IPO to raise capital to grow and expand its business. Investors can buy the company’s shares on the primary market during an IPO.
A bull market is a period of rising prices in the financial market, characterized by optimism, increased demand and increased transactions. In a bull market, investors tend to buy assets in anticipation of further price increases. Economic growth, good corporate performance, technological advances or optimistic events can be factors in a bull market. A bull market is often associated with confidence and positive market sentiment.
Called a bear market is a period of falling prices in the financial market, characterized by pessimism, falling demand and limited trading. During a bull market, investors tend to sell assets, fearing further price declines. Economic recession, poor corporate performance, political unrest or negative events can all be factors contributing to a bull market. A slump is often associated with uncertainty and pessimistic market sentiment.
Fundamental analysis is a method of evaluating investments that examines the fundamental factors that affect a company’s value, such as financial performance, management, market outlook, competition and macroeconomic external factors. The purpose of fundamental analysis is to determine the intrinsic value of a company and assess whether a stock is undervalued or overvalued.
Technical analysis is a method of studying financial markets that focuses mainly on analyzing price charts, volume and technical indicators. Technical analysis aims to identify price patterns and trends in order to predict future price movements and make investment decisions.
We wrote more about the comparison of technical and fundamental analysis in a separate article.
An ETF is an exchange-traded fund that is listed on an exchange and reflects an index, sector or other group of assets. ETFs allow investors to gain exposure to broad markets or specific industries by purchasing a single instrument, much like stocks.
The spread is the difference between the bid and ask price for a financial instrument. It is a transaction cost for investors and also a source of income for brokers. A narrow spread means a smaller difference between bid and ask prices, which is beneficial for investors.
Blue chip is a term that refers to a reputable, stable and well-established company with a recognized market value. These companies often have a long history of success, stable earnings and are considered safe investments. Blue chips are often leaders in their industries.
Speculation is an investment strategy in which investors take risks in order to make quick profits from short-term price fluctuations. Speculators often make investment decisions based on predictions of future market movements, technical analysis or news events. Speculation involves a high level of risk, as the opportunity to earn quick profits simultaneously carries the risk of incurring losses. Speculators often use leverage and take a large number of trades in a short period of time.
A broker is a financial intermediary that allows investors to transact in financial markets. Brokers can operate in a variety of markets, such as the stock market, foreign exchange, commodities, etc. They provide services such as access to markets, execution of orders, investment advice and other services related to trading and investment.
Leverage is the ratio of foreign capital to equity in financing a company. Companies can use leverage by borrowing or issuing bonds to increase potential returns to their shareholders. However, increasing leverage also increases risk for the company and its shareholders.
The rate of return (ROI) is a measure of investment performance that determines the percentage gain or loss relative to the initial investment. The rate of return (ROI) is a measure of investment efficiency, which is calculated as a percentage ratio of profit to the initial investment amount. It is an indicator that helps investors assess the profitability of a given investment. For example, if an investor bought shares at GBP 100 and sold them at GBP 120 after a year, the ROI would be 20%, since the profit is GBP 20 against the initial investment of GBP 100.
An order limit is an instruction from an investor specifying the price at which he wants to buy or sell shares. The investor specifies a certain price, and the order is executed only when the market price reaches or exceeds this value. An order limit gives the investor more control over the price, but does not guarantee immediate execution.
A stop order is a stock market order that is activated when the market price of a stock reaches a certain level, called the stop price. In the case of a sell order, when the market price falls to or below the stop price, the order is activated and the stock is automatically sold. In the case of a buy order, when the market price rises to or above the stop price, the order is activated and the shares are automatically bought.
Investment portfolio: an investment portfolio is a collection of investment assets, such as shares, bonds, commodities or real estate, which are held by an investor. An investment portfolio is diversified to minimise risk and maximise potential return. The investor manages his or her portfolio by making asset allocation and rebalancing decisions to achieve specific investment objectives.
Profitability is an indicator that measures the profitability of a company’s investments or operations. It can be expressed as a percentage ratio of profit to cost or investment. Profitability ratios, such as net profitability, operating profitability or return on equity, help investors assess the effectiveness of a company’s investments and management.
Diversification is the strategy of spreading risk by investing in different asset classes, industries, geographical regions or financial instruments. The aim of diversification is to reduce investment risk by avoiding the concentration of investments in one place.
Risk analysis is the process of assessing and managing the risks associated with investments. It involves identifying, measuring and evaluating investment risks and taking appropriate action to minimise potential losses.
Long-term investment is a strategy of investing for a longer period of time, usually several years or more. The aim is to achieve growth in the value of the investment or to generate dividend income. Short-term investing, on the other hand, is a strategy of buying and selling shares over a short period of time, usually within a few days, weeks or months, in order to make quick profits from short-term price movements.
Venture capital is a form of funding for startups and other small, innovative companies. Venture capitalists provide financial support in exchange for shares in the company. Venture capital is usually provided during the development phase of a company, when capital is needed for expansion and growth.
Ratio analysis is a method of assessing the financial health of a company by analysing various financial ratios, such as liquidity, profitability, debt or efficiency. It helps investors and analysts understand a company’s financial performance, its ability to generate profits and manage risk.
PPA is the process of allocating the value of an acquired company to individual assets and liabilities. In the case of a company acquisition, the PPA is used to determine the value of intangible assets, such as brand, patents or customer relationships, that may affect the value of the acquired company.
The secondary market is a market where investors can buy and sell existing financial instruments such as shares, bonds or options. Stock exchanges are an example of a secondary market where investors can trade in shares of public companies.
Day trading is a form of speculation in which a trader opens and closes trading positions within one day. Day traders seek to make money from short-term fluctuations in share prices, using technical analysis, trading tools and quick reactions to market changes.
A bond is a financial instrument issued by companies, governments or other entities to raise capital. An investor who purchases a bond becomes a creditor of the issuer and receives interest over a specified period and then repayment of the principal after a fixed period.
A stock market index is an indicator that reflects the price movements of shares of selected listed companies. A stock market index is used to monitor the general direction of the market, to compare investment performance and to create investment vehicles such as index funds.
Passive investing is the strategy of holding an investment portfolio for the long term minimising trading and reacting to short-term market changes. Passive investors often choose the strategy of investing in stock indices through index funds or ETFs to achieve an average market return with minimal costs and high diversification. Passive investing is based on the assumption that, in the long term, financial markets are rising and effective portfolio management means minimal action.
Preference shares are a class of shares that gives its holders certain privileged rights over ordinary shares. Holders of preference shares often have preferential rights to dividends, voting rights at general meetings and priority for capital distributions in the event of liquidation of the company. However, holders of preference shares do not usually share as much in the profits and appreciation of the company as holders of ordinary shares.
Value investing is an investment strategy in which investors seek to find undervalued shares or other assets whose intrinsic value exceeds their current market price. Value investors look for companies that have solid fundamentals, growth prospects and a low valuation relative to their intrinsic value, which offers the potential for returns over the long term.
A requote is when a broker refuses to execute a trade order at the price quoted by the trader and proposes a new, revised price. A requote can result from a lack of available shares at a given time or market volatility. It can affect the precision and speed of execution of a trader’s orders.
ESG (Environmental, Social, Governance) compliant investing is an investment strategy that incorporates environmental, social and governance factors into the investment process. ESG-compliant investors look for companies that operate with respect for the environment, care about social aspects such as labour rights and safety, and have appropriate governance and transparency. The goal of ESG-compliant investments is to combine achieving financial returns with creating a positive impact on the world and society.
Systemic risk refers to the risk arising from the instability or failure of the financial or economic system as a whole. It is a risk that can affect all investments in the market. For example, a financial crisis or economic recession can lead to a fall in the value of shares, an increase in the cost of funding and difficulties in selling assets.
The spread is the difference between the bid and ask price of a financial instrument, such as shares or currencies. The spread is expressed in pips or points and represents the cost of the transaction to the investor. A high spread means a wider difference between the bid and ask price, which can affect the profitability of a trade.
Alternative investments are investments in a variety of assets that are different from traditional financial instruments such as stocks and bonds. Examples of alternative investments include real estate, commodities, hedge funds, private equity, art and cryptocurrencies. Alternative investments often have higher risk and complexity, but can offer the potential for high returns. Investors looking to diversify their portfolio may consider alternative investments to increase potential returns and reduce risk.
Arbitrage is an investment strategy that involves taking advantage of differences in asset prices in different markets to make profits. The arbitrageur buys assets in one market where they are cheaper and then sells them in another market where they are more expensive. Arbitrage takes advantage of small price differences that arise from market inefficiencies or delays in the flow of information.
A capital reserve is a portion of net profit that is retained by a company as a form of savings for future needs. The capital reserve can be used to strengthen the company’s equity, invest in growth, pay dividends or cover potential losses. The capital reserve provides an additional source of financial stability for the company.
A derivative is a contract whose value depends on the value of another underlying asset, such as shares, bonds, stock indices, commodities, currencies, etc. Derivatives include options, futures contracts, swaps and contracts for difference (CFDs). Derivatives are often used to hedge risk, speculate or manage an investment portfolio.
Portfolio rebalancing is the process of adjusting the structure of an investment portfolio to restore a desired level of asset allocation. Rebalancing may be necessary when certain asset classes gain or lose value as a result of market changes, which may lead to a deviation from the desired allocation strategy. Through rebalancing, the investor sells some of the assets that have gained in value and buys those that have lost value to rebalance the portfolio.
Risk management is the process of identifying, measuring and controlling the risks associated with investments. The objective of risk management is to minimise losses and protect the value of the investment portfolio. Risk management involves analysing and assessing risks, setting risk management strategies, implementing appropriate tools and monitoring performance.
