5 Stock Market Terms To Get You Started | Ultimate Beginner Guide

This year, I made around 4000 euros investing in the stock market. I was a total beginner, I didn’t do any deep research or spend considerable time on it. I just bought a few equities that I thought would bring considerable profits in the long term. Then I started to think about why I didn’t invest earlier, and the simple answer was that I didn’t know where to start. I always thought that investing was reserved for investment gurus or the "wolves of Wall Street."

I believed this world was too complicated and stayed away from it. I couldn’t have been more wrong. If I can do this, then you can probably do this too. You just need to know five key terms. That’s it, five key terms that tell you what to buy and when to buy.

Stocks

If you’ve watched my YouTube channel videos, you might already know about the history of stocks and the stock market. Stocks, also called shares, form the basics of everything we do in the stock market. Stocks represent stakes in a company. When you own stock in a company, you’re technically owning a piece of the company. As the company grows, so does the value of your stock. When you sell them at a higher price than what you paid, you make a profit.

But not all stocks are the same. The benefits you get and the profits you make depend on the type of stocks you buy. Ideally, stocks can be classified into two categories, market capitalization and the type of returns. Market capitalization, or market cap, is the value of a company in stock market terms.

Calculating market cap is simple, multiply all the company’s shares by the value of one share. For example, if a company has 1 million shares and each share is valued at $10, then the market cap is $10 million. You’ve probably heard recently that Tesla became a trillion-dollar company. This means Tesla’s market cap reached $1 trillion.

Based on market cap, companies can be classified into three categories, small-cap, mid-cap, and large-cap companies. Small-cap companies have a market cap between $300 million and $2 billion, and their stocks are often highly volatile. Mid-cap companies have a market cap between $2 billion and $10 billion, while large-cap companies have a market cap of more than $10 billion. Stocks in this category are often referred to as blue-chip stocks.

Large-cap stocks are generally considered safer than small-cap stocks, but small-cap stocks have a much higher growth potential. You can ideally compare them to trees in a storm, a giant redwood tree holds up well, but a small oak tree struggles. However, the redwood may not have much growth left, whereas the small oak tree has plenty of growth ahead.

Although market cap is important, it’s just one measure of value. Another way to classify stocks is by how they provide returns—either as dividend stocks or growth stocks. Publicly traded companies often reinvest profits into the company to grow faster, such as buying new machinery or hiring more people. These companies’ stocks are called growth stocks.

Examples include Meta (formerly Facebook), Amazon, and Netflix. Other companies distribute a share of their profits to shareholders as dividends. These stocks are called dividend stocks, with Coca-Cola being a great example. It has paid dividends consistently for the past 59 years. Some companies, like Apple, offer both growth and dividend benefits.

Funds

For beginners, investing in individual stocks requires knowledge and an understanding of the company and its future prospects, which can take time. A less time-consuming option could be funds. A fund is a collective investment where money from many people is pooled and invested together in the stock market. Managed by fund managers, funds are a convenient way to invest without needing to analyze every detail yourself.

They’re also accessible for smaller investors because you can start with small amounts. For example, buying a single Berkshire Hathaway Class A share costs around $400,000, but you could invest in a fund that includes Berkshire Hathaway shares instead.

Funds offer automatic diversification, spreading investments across sectors and countries. This diversification helps balance risks. For example, during a pandemic, travel sector losses might be offset by gains in pharmaceutical companies.

Exchange-traded funds (ETFs) are a popular option today. ETFs are similar to funds but automatically follow stock indexes, such as the S&P 500 ETF, which tracks the 500 largest U.S. companies. ETFs don’t need active management, making them a cheaper option than regular funds.

Bonds

Both stocks and funds carry risks, and there’s no guarantee of profits. For risk-averse investors, bonds are a more secure investment option. With bonds, you lend money to a company or state and earn fixed interest in return. While bond investments are generally safer, the returns are also lower compared to stocks.

Knowing the right investments is one thing, but understanding market performance and timing your trades is another. This brings us to three key terms, market index, bull market, and bear market.

Market Index

If I asked you to give me a real-time update on traffic in your city, how would you do it? You’re unlikely to visit every junction and road to check the traffic flow. Instead, you’d focus on a few major roads and highways to make an assumption. Similarly, when understanding market performance, you don’t need to assess the individual performance of every company. Instead, monitoring a few major companies across key industries is often sufficient. If the values of these companies rise, we say the market is going up, and if they fall, the market is going down.

But how do we decide which companies to monitor? Specialized organizations create clusters of companies, monitor them continuously, and assign a value based on their combined stock performance. This value is known as the market index. A well-known example is the S&P 500, which tracks 500 leading publicly traded companies in the U.S. The S&P 500 is maintained by the global credit rating agency Standard & Poor’s, hence the name.

When people say the market is going up or down, they usually refer to one of the major market indexes.

Bull & Bear

An easier and more relatable way to express market movements is through two animals, the bull and the bear. You might have heard statements like, "The market is bullish today," or "We’re in a bear market." The bull represents market growth, while the bear signifies a downward trend. These terms come from how the animals attack their opponents, a bull thrusts its horns upward, symbolizing rising prices, and a bear swipes downward, indicating falling prices.

A bull market means assets are increasing in value, and investors are optimistic and confident. Conversely, a bear market signifies falling prices, with investors feeling pessimistic and pulling back. According to Dow Theory, a bear market occurs when prices drop by at least 20%, and a bull market begins when prices rise by 20%.

The good news? Historically, bull markets far outlast bear markets, which is why investing for the long term is often profitable.

The formula for success in the stock market is simple, buy low, sell high. However, controlling emotions during a downturn is easier said than done. When everything seems to be tumbling, maintaining a strong resolve is critical. For long-term investors, bear markets are an excellent opportunity to buy stocks at lower prices.

Now that you understand market dynamics, it’s time to put your money to work. If you’re wondering how to get started, check out this video which is a step-by-step guide on how to start trading with a broker. Remember, being in the game is more important than mastering it. Start small, stay consistent, and keep learning.

Disclaimer: The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. It is important to do your own analysis before making any investment.