Finance Terminologies
A pool of money collected from many investors to invest in a diversified portfolio of stocks, bonds, or other securities.
Imagine a group of friends who each contribute money to buy a variety of snacks. They all share the snacks based on their contribution, and the group benefits from the variety.
A stock (or share) represents ownership in a company. When you buy a stock, you own a small part of that company.
If you buy a share of a pizza company, you own a small portion of that company. If the company does well, your share becomes more valuable.
An ETF is a type of investment fund and exchange-traded product, with shares that are tradeable on a stock exchange.
Think of an ETF as a basket containing various types of fruit. Investors can buy and sell shares (or pieces) of this basket on the market, just like stocks.
Mutual Fund: Typically bought or sold through the fund company at the end of the trading day at the net asset value (NAV). ETF: Traded on stock exchanges throughout the day at market prices, similar to individual stocks.
Diversification is a risk management strategy that involves investing in a variety of assets to reduce the risk of a single investment affecting the entire portfolio.
Instead of putting all your money into one type of fruit, like apples, you spread it across different fruits. If apples have a bad season, you still have other fruits.
Risk and return are fundamental concepts in investing. Generally, the higher the potential return, the higher the risk, and vice versa.
Investing in a high-risk, high-return stock is like buying a lottery ticket – you might win big, but there's a chance you could lose.
A bond is a debt investment where an investor loans money to an entity (usually a government or corporation) for a defined period at a fixed interest rate.
Buying a bond is like lending money to a friend who promises to pay you back with interest after a certain period.
Financial Indicators
A company with increasing earnings and revenue over time may be considered good. It indicates business growth and profitability.
Declining or inconsistent earnings and revenue could be a red flag, suggesting potential financial challenges.
Strong profit margins and return on equity are positive signs of a company's ability to generate profits for shareholders.
Low or negative profit margins may indicate inefficiency or financial difficulties.
A consistent and attractive dividend yield can be appealing to income-seeking investors, indicating a financially stable company.
A company cutting or eliminating dividends might signal financial trouble or a shift in priorities.
Low debt levels and a healthy balance sheet suggest financial stability and the ability to weather economic downturns.
High levels of debt, especially if increasing, may pose risks and limit a company's financial flexibility.
A company with a strong market position and a competitive edge may have sustainable growth prospects.
Losing market share or facing intense competition without a clear advantage could be concerning.
Competent and shareholder-friendly management can positively influence a company's performance.
Poor management decisions or governance issues may negatively impact a company's outlook.
Investing in sectors with favorable long-term trends can contribute to a stock's attractiveness.
Industries facing decline or economic headwinds might not be ideal for investment.
A stock trading at a reasonable valuation relative to its earnings, growth, and industry peers may be considered attractive.
Overly high valuations without corresponding fundamentals might suggest an overvalued stock.
Companies that innovate and adapt to changing market conditions are often viewed positively.
Failure to adapt to technological advancements or changing consumer preferences could be a negative signal.
Companies operating in a stable regulatory environment may face fewer uncertainties.
Frequent regulatory challenges or changes may introduce risks and impact a company's performance.
Market Concepts
| Supply | Demand |
|---|---|
| This represents the willingness of buyers to purchase a stock at different prices. Factors influencing demand include investors' expectations, economic conditions, and company performance. | This represents the willingness of sellers to sell a stock at different prices. Shareholders may decide to sell for various reasons, such as profit-taking or changing investment goals. |
| Bidding | Asking Prices |
|---|---|
| The highest price a buyer is willing to pay for a stock. | The lowest price a seller is willing to accept for a stock. |
When a buyer's bid matches a seller's ask, a transaction occurs, and the stock is traded at the agreed-upon price.
Prices are export constantly adjusting based on new information, market sentiment, and changes in supply and demand. Stock prices can change rapidly during market hours.
A request to buy or sell a stock at the current market price. It is executed immediately. While an order to buy or sell a stock at a specified price or better. It will be executed only if the market reaches the specified price.
News, economic reports, and company announcements can influence investor sentiment and impact supply and demand, leading to price changes.
Stocks are traded on stock exchanges (e.g., NYSE, NASDAQ), where buyers and sellers come together. The exchange acts as a marketplace, providing a platform for trading.
Some traders use technical analysis to predict future price movements based on historical price patterns, trends, and trading volumes.