Basic Stock Market Terms: Beginners Beginner Guide for Investors

If you never followed the stock market before words like Book Value, Face value, Authorised capital, Preferred stocks, Common stocks, and Equity Capital, and the Stock split will not make much sense to you.

There are many different terms in the stock market that Beginner investors don’t know.

If you are just want to start investing in stocks, most of those words just confuse you instead of helping you.

So that’s why Here few of those Basic

Book Value

The Books value refers to the value of the business as per its accounts and financial statements.

In more simple terms, we can understand it as what the would investor receive on each share if the company sold all its assets and distribute the money amongst investors.

It would not happen in real life off course. Even the company which is on the brink of collapse will not sell its assets to only pay to investors.

However, The book value is one of the most important things to consider when you are analyzing the true value of any given stock.

We can get the total book value of any company by this formula:

Book value = Total Assets – (Intangible Assets + Total Liabilities)

If we want to get book value per share we divide the result with Average shares outstanding.

The investors don’t have to calculate the book value of each share on their own since most of the stock analysis websites already provided it along with other important ratios.

Market Value

Market value refers to the current price of shares in the market.

In an overall sense, it refers to the market capitalization of the public traded company.

You can calculate this formula:

Total Market Value = Outstanding shares x Current price of each share

In a general sense, Market value is just the current price of each share.

It is the most important value since it’s literally the price you pay to own any particular share.

Face Value

Face Value as compared to Market and book value is not a very important value that investors have to consider.

You can understand Face value as the original value of each share that is mentioned on the share certificate when they are first issued.

When a company issue an IPO they decide the price of each share, that price is called the Face Value.

Book value and Market value of share change over time but the Face value stays constant almost all the time.

The only time when an investor needs to consider Face value after IPO is Stocks split or dividend.

Paid Up Capital

Paid-Up capital is the sum of money that the company receives from shareholders in exchange for shares.

In terms of the stock market, the primary market is the only place from where the company receives paid-up capital.

Companies raise paid-up capital usually by IPO’s.

In IPO, Company takes money from an investor and issue shares to them.

But after all, shares are bought in the primary market it moves to the secondary market – On stock exchanges.

Once company shares are listed on the stock exchange they are both bought from and sold to investors from other shareholders, not the company.

Authorized Capital

Authorized capital is described as the total capital for which shares can issue by the company.

The amount Authorised share is mentioned in the Memorandum of association of the company when its first issue an IPO.

Sometimes the company does not issue whole shares in the market since it may need them to raise capital in near future.

Following the necessary steps company can increase the Authorised capital when needed.

Issued Share Capital

The Issued Share Capital refers to the total funds that a company raised by the sale of equity.

It is raised by selling preferred shares and common stocks to investors.

The shares which are circulating in the stock exchanges are called common stocks.

But the share capital can also be raised even before the company decides to be listed on the stock market.

Here company grants ownership of the company in exchange for monetary investors.

This type of stock is called preferred shares.

Market Capitalization

Market Cap which is also called Market capitalization is the current total value of all shares of a company.

Market Cap = Current Share Price x Total Outstanding Shares

So if we take all of the outstanding shares and multiply them with the current market price of each share, we will get the Market Capitalization of the company.

You can also call it the total worth of the company by the stock market.

Depend on Market capitalization companies can be divided into three different sections-

  • Large-Cap: These are also called Blue-chip are the companies. This kind of Companies market caps of Rs 20,000 crore or more.
  • Mid-Cap: Mid-Cap companies are companies whose market capitalization is more than Rs 5,000 crore but less than Rs 20,000 crore.
  • Small-Cap: If the company has fewer than Rs 5,000 crore of market capitalization, it is considered a small-cap company.

IPO

IPO stands for Initial public offering. This term refers to the process of offering shares to the public when a private company enters in share market.

The IPO’s are issued to raise money from general investors via the share market.

Unlike the stock market, in the IPO investors needs to bid to get the share in any particular IPO.

The Shares in IPO are allowed in the lot size.

The lot size is the minimum number of shares that you would have to apply in the process.

Dividend

Occasionally companies distribute extra profits to their shareholders in form of Dividends.

It usually happens when the company earns a surplus.

The money distributes as dividends will be transferred to the account of shareholders directly.

How much dividend would be distributed is decided by the company.

The company is not obliged to pay a dividend, and in most cases, it depends on the nature of business and other factors and the company wants to pay a dividend or not.

There are many high dividends paying stocks available which can provide stable income along with the return given on the stocks.

Bonus Shares

Bonus shares are the shares that are given to the current shareholders for free to Shareholders.

It is generally issued in the ratio of the number of shares that shareholders have.

For example, you have 10 shares of XYZ company and they announced a 1:5 bonus share.

It simply means that on every five shares a current shareholder receives 1 share.

So if you have like 10 stocks of XYZ company in your Demat account, you will have 12 shares after the bonus share is issued.

Stock Split

The stock split is what happens when a company divides its existing shares into multiple shares.

The stock split doesn’t add any value nor does it creates any loss for investors usually.

For example, if a company divides each stock into two shares the price of the original one share will decrease to half.

The price of the stock would not increase immediately, but usually, it is considered a good sign.

Generally, the company decides to split the share if the price of each share is too high for a retail investor.

It’s just a way to decrease the price of shares without diluting the ownership of shareholders

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