A lot of investors dive into equity markets expecting to make some quick bucks. But this is not the case. Investment in Equity Markets requires a lot of research, patience and extremely good market knowledge. You need to make yourself familiar with the jargons and metrics of the equity market so that you can trade effectively and take the right call whether to buy a stock or not.
Here we share some jargons and metrics which you should be familiar with before you start equity trading.
1. Market Capitalization
Market capitalization is the aggregated value of a company. This value is based on the current price of the share and the total number of stocks which are outstanding. You can calculate the ‘market cap’ or ‘mcap’ of the company by multiplying the current price of the stock by its outstanding number of stocks. Different companies have a different market cap. A small cap is up to Rs 5,000 crore; mid-cap is up to Rs 25,000 crore. Above Rs 25,000 crores is the large cap. This is a very useful metric to dwell on when you are analyzing the trends.
2. Stock Price
A Stock Price is the price of the single unit of the stock on the exchange. This is the amount of money you pay when you plan to buy the stock. For e.g., if you have bought a stock of an ABC company for Rs. 100 and the price increases to Rs. 200, then you have made a profit of Rs. 100. If the price of the stock falls to Rs. 50 then you make a loss of Rs. 50.
Your gains and losses are dependent on the price of the stock. Yet, when you decide to buy a stock, you also need to look at other factors such as company earnings, market position etc. This will help you put into perspective your buy or sell decision.
3. Stock-Price Chart
When traders want to do a technical analysis of a share, they use a stock price chart. A stock price chart includes the daily movement of the stocks. It also shows the trend of the stock over a period of time. You can set the time frame to a minute, hour, day, weeks or months. Traders usually analyze a 52-week range. This range helps them understand the high and low points of stocks in a year. This way they can also relate the economic and social events which might have affected the stock price.
4. Earnings per share (EPS)
As self-explanatory as it can be, earnings per share is the profit per outstanding share that a company makes. If the EPS is high, then your stocks are worth more as the investors will be willing to pay more so as to earn higher profits. You can calculate EPS by dividing the total profit earned by the company by its total number of shares.
5. Price-to-earnings (P/E) ratio
More than the price, the valuation of stock tells you how expensive it is. The Price-to-earnings a valuation tool which should be used by every trader to determine the actual market value of the stocks as compared to the company’s earnings.
Volume is the term which is used to indicate the number of trades which are executed in stock for a particular period of time. The volumes show the number of people engaged in buying or selling the stocks. The higher the volume the easier it gets for you to buy or sell the stock. If the stocks have thin volume, then it gets difficult to sell the stocks.
To calculate the Price-to-earnings ratio you need to know the total amount of the earnings for the last twelve months or four quarters. This time frame is known as a trailing twelve months or TTM. Once you know the amount of TTM you can divide it by the stock price.
7. Dividend Yield
The profits shared by the companies amongst its shareholders are known as dividends. When you divide the dividend per share by its stock price you get the dividend yield. If the yield is high, then you get more dividends.
8. Price-to-book (P/B) ratio
This ratio is used to compare the market value of a company to its book value. The book value of a share is the share’s worth in the books of the company. You divide the stocks of the company by the book value. If the ratio is below one, then the share is undervalued. You should be wary of stocks with a low P/B ration.
9. Price-to-earnings-growth (PEG) ratio
The Price-to-earnings-growth ratio is calculated by dividing the P/E by its rate of earnings growth over a specific period. Cheap stocks have a PEG of less than one whereas a PEG or more than one is an expensive stock.
If you want to increase your chances of earning good returns from trading in equity markets, there here are a few golden rules which you should follow.
- Never take a decision to invest in a particular stock based on your relatives, acquaintances or friends’ investment habits. Invest in a stock which you seem fit.
- Always research before investing. Invest only in the businesses you understand.
- Refrain from timing the market.
- Have a disciplined and patient approach. Keep a long term goal.
- Never take a decision based solely on emotions.
- Have a diverse portfolio depending on your risk taking capacity.
- Set realistic goals and expectations.
- Invest only if you have surplus funds.
- Global events affect the stock market hence you should keep monitoring events worldwide constantly.
Investing in equity markets is something which you should do with thorough understanding and knowledge of how the Indian stock market works and how much volatile it is. Do not get into a trade if you are not 100% sure about it.