Basic Stock Market Terms Explained
A beginner-friendly explanation of common stock market terms such as P/E ratio, bull markets, and bear markets.
Basic Stock Market Terms Explained
A beginner-friendly explanation of common stock market terms such as P/E ratio, bull markets, and bear markets.
Price-to-Earnings Ratio (P/E)
The Price-to-Earnings ratio (P/E) measures the relationship between a company’s stock price and its earnings per share (EPS).
The formula is:
P/E = Stock Price / Earnings Per Share (annual)The P/E ratio is commonly used to evaluate whether a stock is overvalued or undervalued.
- A high P/E usually indicates that the stock price is high relative to earnings, suggesting higher growth expectations or overvaluation.
- A low P/E often suggests that the stock may be undervalued and potentially more attractive to investors.
In simple terms, the lower the P/E ratio, the higher the potential investment value—assuming other fundamentals are sound.
Bull Market vs Bear Market
Bull Market
A bull market refers to a prolonged period during which stock prices are rising.
Key characteristics:
- Long-term upward trend
- Frequent gains with occasional small pullbacks
- Investor optimism and strong market confidence
Investors who believe prices will rise are often referred to as bulls.
Bear Market
A bear market refers to a prolonged period of declining stock prices.
Key characteristics:
- Long-term downward trend
- Frequent declines with occasional short-lived rebounds
- Investor pessimism and reduced confidence
Investors who expect prices to fall may take short positions, aiming to profit from price declines. This strategy is commonly referred to as short selling.
Long vs Short Positions
- Long position: Buying a stock with the expectation that its price will increase, allowing the investor to sell later at a profit.
- Short position: Selling borrowed shares with the expectation that the price will decline, then buying them back at a lower price to profit from the difference.
Summary
Understanding basic stock market terminology is essential before making investment decisions.
Key concepts to remember:
- P/E ratio helps assess valuation
- Bull markets trend upward
- Bear markets trend downward
- Long and short positions reflect different market expectations
This document will be expanded with more financial terms in the future.