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One way of achieving financial freedom is to save and invest your money. While there is a wide variety of financial instruments, stocks tend to be one of the most common one that people tend to invest in today. However, before we jump into the realm of stock investing, it is good for us to understand some basic terminologies that are relevant to the stock market.
Possessing a stock means that you own a share of the company, having a claim on their earnings and assets.
Blue chip stocks
Blue chip stocks are stocks from well established and reputable companies. These companies tend to have stronger financials that are likely to help them tide over tough economic conditions.
Penny stocks are stocks that are traded at low prices. These stocks are often associated with being more speculative and risky in nature given that these companies would typically have small number of shareholders, lower liquidity and larger bid/ask spread.
Market capitalisation refers to the total dollar value of the the firm’s outstanding stocks.
A bull market refers to a market condition where stock prices are rising or are forecasted to rise. Investors are often motivated to buy stocks during a bull market. On the other hand, a bear market occurs when market condition are poor, leading to falling stock prices. Investors will then be likely to sell stocks during a bear market.
Bid/Ask price and spread
The bid price in the stock market refers to the maximum price that buyers in the market are willing to pay for the stock. Ask price would then be the maximum that sellers in the market are willing to sell the stock at. Naturally, the ask price will be higher than the bid price and the difference between the two prices will equate to be the spread of the stock. However, do take note that the bid/ask price is often just a quotation which only reflects the potential prices that you can enter or exit the market. If there are no seller in the market willing to fulfill the bid price of the buyers, your order will not be executed.
While ask/bid price will only provide the potential price in which you can enter the market, the last price of the stock reflects the actual price in which the stocks are last transacted.
Market order occurs when stock orders are executed at the current market price. Typically, market orders are filled immediately.
A limit order is used when we want to buy/sell the stock at a predetermined price or better. Such order type is used when you have a specific price in which you want to enter the market. A buy limit will be triggered at the predetermined price or lower. On the other hand, a sell limit will be triggered at the predetermined price or higher.
Fundamental Analysis is a mean in which people can participate in the stock market. Participants will often look at company’s relevant data and information to derive an intrinsic value to the stock. Possible data may include the company’s earnings, growth and profit margins which can often be found in the firm’s annual report.
Participants who uses technical analysis focus more on the price movement of the stock itself which can be derived from the stock’s price chart. Through technical analysis, they are often able to project future trends and attempt to forecast where the prices will move in the future.
After knowing the basic terminologies used in the stock market today, it is still paramount for one to further research the stock market. With a good grasp of how the stock market work, you may be able to earn lucrative returns that would certainly go a long way in providing financial security in your life.