Shares, Market Capital, IPOs – These are the terms that we often come across when we try to understand the stock market, but what do they exactly mean?
Being aware of them can help us in making smart investments, so let us walk through these terminologies that are building blocks of the market.
The stock market has always been a key investment avenue, but many investors overlook a critical segment: the unlisted market. This market offers unique investment opportunities with substantial growth potential. Here’s a quick guide to understanding the unlisted market, key terminologies, and its risks and rewards.
Key Terminologies Every Investor Should Know
Stock:
When you buy stocks, you’re buying ownership in a company. Think of stocks as tiny pieces of capital of the company. So, the more shares you own, the more of the company you own. It’s like getting a slice of the pie.
Portfolio:
It’s a collection of all the investments you own, like stocks, bonds, mutual funds, real estate, and more. A well-diversified portfolio helps spread out risk, so if one investment goes down, the others might still do well. The aim is to achieve a balance of risk and return.
Dividend:
When you invest in a company, you might get paid dividends. A dividend is a portion of the company’s profits shared with you, the investor. Some companies pay regular dividends as a reward for holding their shares.
Bid and Ask Price:
When you want to buy or sell a stock, you’ll see two prices:
Bid Price: The highest price someone is willing to buy the stock for.
Ask Price: The lowest price someone is willing to sell the stock for.
Example: If you’re looking to buy a stock, the ask price might be $100, but if you’re selling it, you could get the bid price of $98. The difference between these two is called the spread.
Market Capitalization (Market Cap):
Market Cap: is the total value of a company’s outstanding shares. It’s calculated by multiplying the current share price by the number of shares available.
Formula: Market Cap = Stock Price × Total Shares Outstanding
Example: If a company has 1 million shares and its stock price is $50, the market cap is $50 million.
Blue Chip Stocks:
Blue-chip stocks are shares in well-established, financially stable companies that have a long history of reliable performance and often pay dividends. These companies are usually leaders in their industry.
Examples: Apple, Microsoft
IPO (Initial Public Offering)
An IPO occurs when a private company offers its shares to the public for the first time. This is the process of transitioning from an unlisted to a listed company. Going public allows the company to raise capital from a broader pool of investors.
Example: When Facebook went public in 2012, it held an IPO, allowing anyone to buy shares of Facebook for the first time.
Secondary Market:
In the unlisted market, the secondary market refers to the buying and selling of shares between investors, typically outside of a formal exchange. While these transactions don’t occur on a stock exchange, they still allow liquidity for investors who wish to exit their positions in unlisted stocks.
Private Placement:
In private placement, a company sells its shares to a select group of investors (usually big institutions or wealthy individuals) before they go public.
Example: If a company is growing fast, they might raise funds through private placements to expand before their IPO.
OTC (Over-the-Counter)
OTC stocks are not listed on major exchanges like NSE or BSE. They trade directly between buyers and sellers, and often belong to smaller or newer companies.
Some OTC stocks are high-risk but can offer big rewards. Would you gamble on them, or stick to more established companies?
Lock-In Period
A lock-in period happens when investors can’t sell their shares for a set amount of time after an IPO. This helps keep the stock stable as it first starts trading.
Example: If you bought shares in a company’s IPO, you may have to wait six months before you can sell them. That’s the lock-in period!
Valuation
Valuation is the process of determining the worth of a company or asset. Investors use different methods to figure out if a stock is fairly priced, undervalued, or overvalued.
Pre-IPO
Pre-IPO refers to shares of a company being sold before they go public. Investors in this stage usually get in early, and they’re looking for the next big opportunity.
Example: You might have been one of the lucky few who bought shares of Google or Facebook before they went public!
Share Buyback
A share buyback happens when a company buys back its own shares from the market, often because they believe their stock is undervalued.
Example: Apple often buys back its shares to increase stock prices and return value to investors.
Stock Split
A stock split is when a company divides its shares into more pieces to lower the price and make it easier for people to buy. If you had 100 shares of a company, and they did a 2-for-1 stock split, you’d have 200 shares, but each would be worth half as much.
Reverse Stock Split
A company consolidates its shares, making the price per share higher but reducing the total number of shares outstanding. This doesn’t change the overall value of your investment; it just changes the number of shares you own and their price.
Example: Before a reverse stock split, you own 100 shares of a company priced at rs 1 each. After a 1-for-5 reverse stock split, you’ll own 20 shares priced at rs 5 each. But the total value of your shares will stay the same: 100 shares × rs 1 = rs 100 = 20 shares × rs 5 = rs 100.
Liquidity Risk
Liquidity risk refers to the difficulty of buying or selling unlisted shares. Since these shares aren’t traded on public exchanges, it can be harder to find buyers or sellers, making it challenging to liquidate investments quickly.
You’ve just learned some essential stock market terms.Which term did you find most interesting, and how would you use that knowledge in your own investments? Feel free to drop your thoughts below—let’s chat more about it!
