Stock Market Terms Beginners should know

Understanding the stock market terms is necessary for an Investor working in this. Some confusing terms and concepts will frustrate you if you don’t have the knowledge of the terms. Being familiar with these terms will surely help you.

These stock market terms will improve your stock market vocabulary and help you become a better and more successful investor.

So let us understand these 25 essential stock market terms that every investor should know:

What is the stock market?

The stock market is a collection of markets where people buy and sell shares of publicly traded companies. When someone invests in a stock, their investment is represented by a share, or partial ownership, of that company. 

The stock market operates by potential buyers naming the highest price they’ll pay for an asset (the “bid”) and potential sellers naming the lowest price they’re willing to sell for (the “ask”). Trades are typically executed by stockbrokers on behalf of individual investors.

Good Fundamentals of Company

• Market Cap > Rs 500 cr
• Sales and Profit growth >10%
• The earnings Per Share(EPS) growth rate has been increasing for the past 5 years
• Debt to Equity Ratio <1
• Return on Equity(RoE) >20%
• Price to Book value(P/B) <= 1.5 or lower compared to peer companies within the same industry
• Price to Earnings(P/E) < 25 or lower compared to peer companies within the same industry
• Current Ratio > 1

What is a good PE ratio?

Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio.

What does ROE mean?

Return on equity (ROE) is a financial ratio that tells you how much net income a company generates per dollar of invested capital. It helps investors understand how efficiently a firm uses its money to generate profit.

ROE = Net Income / Shareholders’ Equity

What is a good ROE?

What is a good return on equity? While average ratios, as well as those considered “good” and “bad”, can vary substantially from sector to sector, a return on equity ratio of 15% to 20% is usually considered good. At 5%, the ratio would be considered low.

What is a good ROCE for stocks?

The general rule about ROCE is the higher the ratio, the better. That’s because it is a measure of profitability. A ROCE of at least 20% is usually a good sign that the company is in a good financial position. But keep in mind that you shouldn’t compare the ROCE ratios of companies in different industries.

Which is better Roe or ROA?

A higher ROE does not impart impressive performance about the company. ROA is a better measure to determine the financial performance of a company. Higher ROE along with higher ROA and manageable debt is producing decent profits. Higher ROE can be misleading with lower ROA and huge debt carried by the company.

What does a ROA tell you?

Return on assets (ROA) measures how efficient a company’s management is in generating profit from the total assets on its balance sheet. ROA is shown as a percentage, and the higher the number, the more efficient a company’s management is at managing its balance sheet to generate profits.

What is the quick ratio?

The quick ratio measures a company’s ability to convert liquid assets into cash to pay for short-term expenses and weather emergencies like these. Key Takeaways. The quick ratio measures a company’s ability to quickly convert liquid assets into cash to pay for its short-term financial obligations.

Quick Ratio=Quick Assets/Current Liabilities

Quick Assets=Cash+CE+MS+NAR

where:

• CE=Cash equivalents
• MS=Marketable securities
• NAR=Net accounts receivable​​​

Quick Assets=TCA−Inventory−PE

where:

• TCA=Total current assets
• PE=Prepaid expenses​

What is standalone in the stock market?

A standalone statement represents a company’s financial performance as a single entity, while a consolidated statement reports a company’s financial performance on the whole. It includes information about its associate companies, subsidiary companies, and joint ventures.

Should I use standalone or consolidated?

So, if a company has multiple businesses, then a standalone statement of the company will offer details of the financial performance of that particular company. If you want to know how all the businesses of the company have impacted its performance, then you can look at its consolidated statements.

What is cash flow in simple terms?

Cash flow is a measure of how much cash a business brought in or spent in total over a period of time. Cash flow is typically broken down into cash flow from operating activities, investing activities, and financing activities on the statement of cash flows, a common financial statement.

What is a good cash flow?

If a business’s cash acquired exceeds its cash spent, it has a positive cash flow. In other words, positive cash flow means more cash is coming in than going out, which is essential for a business to sustain long-term growth.

What is a Balance Sheet?

It is a written statement showing the amount of money and property that a company has, and how much has been received and paid out. It summarizes a company’s assets, liabilities and shareholders’ equity at a specific point in time

What is a good EV to Ebitda?

It’s ideal for analysts and investors looking to compare companies within the same industry. The enterprise-value-to-EBITDA ratio is calculated by dividing EV by EBITDA or earnings before interest, taxes, depreciation, and amortization. Typically, EV/EBITDA values below 10 are seen as healthy.

What is a good dividend yield?

What Is a Good Dividend Yield? Yields from 2% to 6% are generally considered to be a good dividend yield, but there are plenty of factors to consider when deciding if a stock’s yield makes it a good investment. Your own investment goals should also play a big role in deciding what a good dividend yield is for you