Stock Market Terms for Beginner

There are many stock market terms that are used frequently in the share market. Those terms are very crucial for investors. Here are basic things that every investor needs to know about any particular company before investing their money in that particular company.  There are many websites from which you can get information about a particular company listed in NEPSE.

About Company:

Either apply for IPO or buy stock from the secondary market, an investor should know about the company. Knowing company means, paid-up-capital of the company, investment sector and investment amount, mission and vision of the company, production capacity, property of the company, and corporate social responsibility of the company.

When investors choose the company for the investment they must look after the management team because top-level executives are the ones who have must impact on the company’s mission and vision.

Outstanding Shares:

Outstanding shares mean the listed shares in NEPSE. It means the company’s share which is held by its shareholders, mutual funds, and other institutional investors, and the company’s insiders and outsiders. Through bonus share, right share, stock split company can increase their outstanding shares. Normally, a high outstanding share means more supply of share in the market and vice-versa.

Earning Per Share (EPS):  

EPS indicates that how much money a company can make for each share of its. Earnings per Share is the company’s total profit divided by the company’s outstanding shares. EPS= Net Income – Preferred Dividend/Outstanding Common shares

So, EPS is the portion of a company’s profit that is allocated to every individual shareholder of the company. This term is so important for investor and the trader who invest money in the stock market. The higher EPS refers to the higher profitability. The company that has the EPS, can give a good return to their shareholders. Although EPS is crucial for investors to invest in, there are other tools as well investors should look at.

P/E Ratio:

P/E ratio stands for the price to earnings ratio. It is one of the major tools to do analysis about the company. P/E ratio means valuing a company that measures the current stock price relative to its earnings per share (EPS).

                                    P/E Ratio. = Current Market price of share / EPS

So, P/E is the ratio we get after dividing the current market price by earning per share. High P/E suggests that the company is expecting higher-earning growth in the future as compared to a lower P/E ratio.

Likewise, lower P/E indicates that either the company is undervalued in the market or the company is doing so well as compared to its past trends. When a company has no earning or in a loss at that time the P/E signed as a ‘N/A’. Less P/E is taken as a good symbol to investors because it indicates the undervalued stock.

Return On equity (ROE):

It provides information to investors that how effectively and efficiently companies are using the money that collects from shareholders. So, ROE measures the efficiency and profitability of the company in relation to shareholder’s equity.

ROE. =      Net Income / Shareholders Equity

The higher ROE indicates that the company is an effective and efficient management team. So, when investors compare ROE between different companies it will be more effective if they compare with the same type of industry.

Announcement Date:

It is a day where the company announces the most important details and decisions related to the company. That kind of decision should highly impact business and the company’s shareholders. So, it is the first day the public receives information about the company. The day when the company announces bonus share, cash dividend, right share, stock split, and other important announce is the example of the announcement date.

Book Closure Date:

It is also known as a record date. This is the date the shareholder must retain or hold their stock to get a certain benefit. The benefit might be cash dividend, right share, bonus share, stock split. So, the record date is the date that is on the company’s records as on the date are eligible for all the benefits that they announced.

Book closure date will determine that who is going to get the benefit from the company. So, this date is really important for investors. The day after book closure, the company will adjust its market price according to the cash dividend and bonus share that they announced earlier.

Right Share:

If a company wants money from their existing shareholders at face value to expand their business or to meet the paid-up-capital requirement, they can issue the right share. So, the right share is those shares that are issued to its existing shareholders. Control on existing shareholders, no cost to issue share for the general public, help to increase the goodwill of the company, and capital formation are the major benefit of issuing the right share.

Distributable Profit:

The profit which is legally available for distribution as a dividend is distributable profit. So, distributable profit is deducting all realize losses from all the realizes profit. So, when investors choose the company they have to see the distributable profit to get a good return.

Dividend History:

The history of dividend distribution helps investors to understand the company. The company provides the return either in cash or in bonus. So, investors should look after the dividend distribution history of the company and can compare with the same kind of industry and invest the money. The long term should follow the dividend history of the company.

Bullish and Bearish market:

The bull market is a market condition where investors and traders are expecting the stock’s price to rise continuously. This is the market where short-term investors also make a good profit. However, the market where investors expect to fall the stock’s price is a bearish market. Currently Nepalese stock market is in a bullish trend.

Circuit Rules in Nepal:

Nepal Stock Exchange recently change the circuit in Nepal from 2nd April 2019. The new circuit rules are as follows:

S.N.Trigger TimeTrigger limitMarket halt for
111.00 AM to 12.00 PM4%15 minutes
212.00 PM to 1.00 PM5%30 minute
3After 1.00 PM to market closing time6 %Halt for the day

So, the trigger limit refers to the NEPSE index. For example; if the NEPSE index is up and down by 4 % during the first hour of market ( from 11.00 AM to 12.00 PM) the will stop for 15 minutes and from 12.15 PM it will continue.

Therefore, the above terms are really essential for all the investors and traders of the stock market. Except for that term, investors should know about the NEPSE index, market depth, market floor sheet, candlestick chart. All those terms are good for short-term and long-term investors.

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