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The term "stocks" in stock investment involves various terms that investors or traders need to be aware of. These terms are numerous and very important, especially for beginners, which we will discuss some of them in the text below. However, before that, download the GICTrade app from the App Store or Play Store to start trading with GIC.
Stock Terms: ABA
Auto Reject is the maximum and minimum limits for stock price increases and decreases so that stock trading remains in fair conditions. There are two conditions that occur when certain stocks experience autorejection. First, stocks with significant price increases will be subject to autorejection so that there is no more bidding activity on the stock. Also known as Lower Auto Rejection. The term ABA is related to a stock decrease that exceeds its limit. The decrease is carried out so that the stock price does not continue to fall.Stock Terms: Acquisition
A stock acquisition—falling under the broader category of business combinations—occurs when a buyer acquires the target company by purchasing its shares. This can be done through peaceful negotiations with management or through a hostile takeover. Both entities retain their legal existence, but the buyer now owns the other as a subsidiary.
After purchasing the target company's shares, the buyer gains control over the target's assets and liabilities; however, since only ownership changes, the net assets are not physically transferred to the buyer, they remain with the target company. For financial accounting purposes, all assets and liabilities are adjusted to their fair value as explained above for mergers under the law, as both are considered business combinations.
Thus, a costly and complex process to assess all identifiable assets and liabilities of the target is required for both methods. However, for tax purposes, a stock acquisition does not result in an increase in the tax basis; the net assets remain at the same basis because the target remains a separate legal entity. Certain tax elections are available to treat the stock acquisition as an asset acquisition, but this will be discussed later in the article.
The advantage of a stock acquisition is the relative speed and simplicity of the transaction, and the fact that hard-to-purchase assets easily fall under the buyer’s control. One disadvantage is that the tax basis in the acquired assets and liabilities remains unchanged, which means the buyer may lose out on some tax benefits associated with higher depreciation and amortization deductions for revalued assets. Another drawback is that goodwill created in a stock acquisition is not tax-deductible. For these tax reasons, stock acquisitions are generally considered more seller-friendly, while asset acquisitions are more buyer-friendly due to their tax advantages.
Stock Terms: Blue Chip
Blue chip stocks are stocks of very large, well-recognized companies with a long history of healthy financial performance. These stocks are known to withstand tough market conditions and provide high returns in good market conditions. Blue chip stocks are generally expensive, because they have a good reputation and are often market leaders in their respective industries.
Blue-chip stocks and companies are those that are well-established, have a long and consistent track record of growth and earnings, and have a high market capitalization (i.e., are worth a lot of money according to the market). In simpler terms, blue-chips are large, respected, well-known, and successful companies that have been around for a long time. These companies are large, financially healthy, and have a solid earnings history. Many blue-chip companies also pay dividends to their investors.
When you think of "classic" or "big" American companies, many of them that come to mind are likely blue chips. JP Morgan Chase, Coca-Cola, Walt Disney, Pfizer, and General Motors are just a few examples. The Dow Jones Industrial Average (DJIA), a popular stock index, consists of 30 major blue-chip stocks but does not include every stock in that category. Before continuing with the next stock term, take a preliminary test to discover your trading talent.
Stock Term: Middle Cap
Mid-cap stocks are stocks of companies with medium market capitalization or valuation. They are named as such because they fall between small-cap and large-cap stocks.
A stock is classified as mid-cap when the total value of all outstanding shares of the company falls between $2 billion and $10 billion. Here is how stocks are generally classified based on market capitalization:
| Category | Market capitalization |
|---|---|
| Micro cap company | Less than $300 million |
| Small-cap companies | $300 million to $2 billion |
| Mid-cap companies | $2 billion to $10 billion |
| Large-cap companies | $10 billion to $200 billion |
| Mega-cap companies | Over $200 billion |
Mid-cap stocks include young, fast-growing companies that have outgrown their small-cap origins, as well as mature companies operating in stable and profitable market niches. The COVID-19 pandemic has made technology more important than ever and has turned previously small businesses into much larger ones. The launch of vaccines also helped reopen economic areas, leading some stocks to rise to mid-cap status.
While small-cap stocks often grow quickly but are volatile, and large-cap stocks tend to grow relatively slowly but steadily, the best mid-cap stocks often fall in between. Mid-cap companies are less stable than rapidly growing small companies and have greater growth potential than large-cap companies.
Metropolis Healthcare, Castrol India and LIC Housing Finance are some examples of mid-cap companies listed on Indian stock exchanges.
Stock Term: Small Cap
Small-cap stocks are calculated based on market capitalization or the valuation of the company. Market capitalization is found by multiplying the stock price by the number of shares outstanding in the market. The definition of small-cap stocks varies from broker to broker but typically refers to companies valued between $300 million and $2 billion. Small-cap stocks are often associated with relatively young companies. For companies that continue to grow and succeed, the benefits of buying stocks early are clear. However, with these benefits come significant risks: There is no guarantee that a young company will survive, and even good early performance may not be sustained in the long term.PRO TIPS
Small-cap stocks can be a very beneficial part of your investment portfolio. However, before diving in, do your research and consider purchasing a small-cap index fund.While larger companies may have less room for significant growth, they come with a track record that tends to show more lasting value. For investors, a mix of small-cap, mid-cap, and large-cap stocks offers a way to benefit from what each has to offer—while minimizing the risks that come with a portfolio lacking diversification. After learning about Small Cap stock terms, consult your trading with GIC through GIC’s trader assessment!
Stock Terms: Equity
The equity market is a market for traders where they buy or sell stocks. Investors can invest in public or private stocks. Public stocks are traded on an exchange, unlike private stocks which are traded privately. Initially, when an organization is founded, it is private and then it launches its IPO. Launching an IPO makes the private company available to public investors.While private shares of a company are available to limited investors such as employees or certain other traders. Companies are listed on the stock exchange with the motive of raising capital from public investors and using it for their growth or expansion. As opposed to equity financing, debt financing involves loans and other borrowing methods to raise capital.
IPO (Initial Public Offering)
When a private company first sells its shares to the public, the process is known as an initial public offering (IPO). Essentially, an IPO means that the ownership of the company is transferred from private ownership to public ownership. Therefore, the IPO process is sometimes referred to as “going public.” Startups or companies that have been in business for decades may decide to go public through an IPO.
Companies typically issue an IPO to raise capital to pay off debt, fund growth initiatives, enhance their public profile, or allow insiders to diversify their ownership or create liquidity by selling all or part of their private shares as part of the IPO. In an IPO, after a company decides to "go public," it selects a lead underwriter to assist with the securities registration process and the distribution of shares to the public. The lead underwriter then assembles a group of investment banks and brokerage dealers (a group known as a syndicate) responsible for selling the IPO shares to institutional and individual investors.
Stock Terms: Portfolio
A stock portfolio is a collection of stocks that you invest in with the hope of making a profit. By building a diversified portfolio that spans different sectors, you can become a more resilient investor. That’s because if one sector takes a hit, the investments you hold in other sectors won’t necessarily be affected. A portfolio is a person or institution’s entire collection of investments or financial assets, including stocks, bonds, real estate, mutual funds, and other securities. “Portfolio” refers to all of your investments — which may not necessarily be held in a single account.
Outside of the financial world, a portfolio can refer to a collection of other items — for example, an artist might have a portfolio that showcases their artwork, or a student might have a portfolio that highlights their academic achievements.
Stock Terms: Bid and Ask
The bid and ask prices are essentially the best prices that traders want to buy and sell at. The bid price is the highest price a buyer is willing to pay for a financial instrument, while the ask price is the lowest price a seller is willing to accept for that instrument. The difference between the bid and ask prices is often referred to as the bid-ask spread. Bid and ask are crucial concepts that many retail investors overlook when making transactions.It is important to note that the current stock price is the last traded price – a historical price. On the other hand, the bid and ask represent the prices at which buyers and sellers are willing to trade. Essentially, the bid represents demand, while the ask represents the supply of the security. For example, if the stock quote shows a bid of $13 and an ask of $13.20, an investor who wants to buy the stock will pay $13.20. An investor who wants to sell their stock will sell it for $13.
Stock Terms: Cut Loss
A cut-loss can be defined as an advance order to sell an asset when it reaches a certain price point. It is used to limit losses or secure profits in trading. This concept can be applied to both short-term and long-term trades. It is an automatic order placed by an investor with a broker/agent by paying a certain amount to the broker. A cut-loss is also known as a 'stop order' or 'stop-market order.' By placing a cut-loss order, the investor instructs the broker/agent to sell the security when it reaches the pre-determined price limit.Stock Terms: Capital Gain
Capital gain is the increase in the value of an asset or investment that results from the appreciation of the asset's or investment's price. In other words, a gain occurs when the current price or sale price of an asset or investment exceeds its purchase price. This results in a capital gain when the sale price of an asset is higher than its purchase price. It is the difference between the sale price (higher) and the cost price (lower) of the asset. A capital loss occurs when the cost price is higher than the sale price. Capital gains are attributed to all types of capital assets, including, but not limited to, stocks, bonds, goodwill, and real estate.Stock Terms: Growth Stock
Growth stocks are those whose earnings (or net profits) are expected to grow at a faster rate than the market. Therefore, their stocks have the potential to rise faster than the market. Growth stocks typically have high price-to-earnings (PE) ratios, indicating that they are valued higher than their earnings. This occurs because investors factor in the high growth rate expected from the company.
Investors in these stocks believe that rapid earnings growth will make the stock more attractive in the future and drive its price higher. These stocks often come from relatively new companies in emerging industries. These companies usually do not pay dividends. Since they are in an expansion phase, they prefer to reinvest their earnings to grow the business.
Stock Terms: Deviden
A dividend refers to a reward, either cash or other forms, given by a company to its shareholders. Dividends can be issued in various forms, such as cash payments, stocks, or other forms. The company's board of directors decides on the dividends and requires shareholder approval. However, it is not mandatory for a company to pay dividends. Dividends are usually a portion of the profits that the company shares with its shareholders.Market Capitalization
Market Capitalization (Market Cap) is the latest market value of a company's outstanding shares. Market Capitalization is equal to the current stock price multiplied by the number of outstanding shares. The investment community often uses market capitalization to determine a company's ranking and compare its relative size within a specific industry or sector. To determine a company's market capitalization, simply take the current stock price and multiply it by the total number of outstanding shares.Stock Terms: LQ45
The LQ45 Index, compiled by the research and development division of the Indonesia Stock Exchange (IDX), consists of 45 stocks that meet certain criteria. One of the main criteria is that these stocks are among the most liquid traded on the IDX. The composition of the LQ45 Index is adjusted twice a year (in February and August).Stock Terms: Halting
Halting Stock, also called trading halt, refers to a scenario when a security or stock is temporarily suspended from trading in the respective market it is traded in due to factors such as the imposition of regulatory action, anticipated important news, or to correct a phase where there is excessive buying or selling of a particular security, and even during times of mergers and acquisitions, trading may be temporarily halted until the merger or acquisition is completed.Ex-Date, Recording Date & Cum Date
Recording Date: The record date is when a company checks its records to identify shareholders who are eligible for corporate actions. Shareholders holding shares in their demat accounts on the record date are entitled to corporate actions such as rights issues, bonus shares, stock splits, dividends, etc.Ex-Date: The date on which shares begin to trade without the benefit of the corporate action, known as ex-benefit, is referred to as the ex-date.
To qualify for a corporate action, clients need to purchase shares at least two days before the record date so that the shares can be credited to their demat account on the record date. Therefore, the ex-date, or the date when shares trade without the corporate action, is one day before the record date. A stock will trade with the benefit of the corporate action or cum-benefit (such as cum-rights, cum-dividend, etc.) until the ex-date. Cum Date: Refers to a dividend; it describes stocks where the buyer is entitled to receive the declared dividend. Stocks are typically "cum-dividend" for trades done on or before the third trading day prior to the record date, when the list of eligible shareholders is closed for the dividend period. This is the opposite of ex-dividend.
Private Equity
Known as an alternative asset, private equity allows accredited investors and institutional investment firms to diversify their portfolios and take on more risk in exchange for the potential to achieve higher returns than they might with investments in public companies.
At a basic level, private equity involves three parties:
- Investors who provide capital.
- Private equity firms manage and invest the money through private equity funds.
- Companies in which private equity firms invest.
Fee Trading
Trading fees can arise when you buy and sell stocks, mutual funds, or other investments. This is true whether you trade in an online brokerage account or through a traditional full-service broker. Each broker differs in the fees they charge for trading and how much you'll pay. Being aware of trading fees is important for managing returns in your portfolio, as excessive fees can significantly cut into your returns. Here's what you need to know about trading fees and how they work.Stock Split
A stock split is the multiplication or division of a company's outstanding shares that does not change its overall market value or capitalization. For example, if a company doubles its number of shares by giving investors one additional share for each share they own, each shareholder will have twice as many shares. However, the total value of all outstanding shares will remain unchanged because no additional capital will be deposited into the company.Suspend
Trading suspension, as the name suggests, means that the exchange has temporarily halted the trading of a specific stock or other securities. A suspension can be a sign of bad news, but it can also be an announcement that is beneficial for shareholders. This means that during the suspension, the stock cannot be traded.
Buyback
Stock buyback is when a company buys or "repurchases" its shares from its shareholders. This is sometimes referred to as a share repurchase. The company buys its own stock at market prices, thereby reducing the number of outstanding shares. Since the company's value remains the same, the result of a buyback is typically an increase in the stock price. After learning about some stock terms, you can continue your learning through articles or trivia found in the GIC journal. Additionally, by registering your friends to join the GIC Affiliate program or becoming an IB, you can earn income based on the level you currently hold.
