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5 Stock Market Terms You Must Know

April 2016

By WM in the Classroom

April 14, 2016 | 9:45 | Dubai

So you’ve finally decided to take the plunge. You’ve seen the DFM General Index return 35% since its low in January and begun to wonder why you didn’t jump in earlier. Here are 5 key terms you should be in the know off to brand yourself a stock investor:

Initial Public Offering (IPO): A company can raise money by issuing either Debt or Equity. If the company has never issued equity to the public, it’s known as an IPO. In effect, it is a company’s first sale of stock by a company to the public.

Middle East Healthcare Co. (Kingdom of Saudi Arabia), recently came out with an IPO involving a total of 27.61 mn shares, or 30% of its capital.

[Read More:]

Bull & Bear Market: A market in which the stock prices are constantly on the rise is referred to as a Bull market and the person expecting a stock or market to rise going ahead is said to be Bullish on the same. On the contrary, a market in which stock prices are constantly falling is a bear market with the person holding such a view referred to as being Bearish.

[Read our section: Bulls & Bears, to get an understanding on the same with specific asset discussions]

Earnings Per Share (EPS): EPS represents the portion of a company’s earnings (profits) that is allocated to each share of common stock. The figure is calculated by dividing net profit by the total number of shares outstanding. Say a company reported a net income of AED 10 million over the year 2015. During this period, the company had a total of 2 million shares outstanding. Thus, the EPS is calculated as AED 5. Why is this important? Read the next term.

Price Earnings (P/E) Ratio: If there’s one ratio which would dominate articles around stocks you would be investing in, it is the P/E Ratio. It puts forth a value which helps bring stocks on a common platform allowing comparison irrespective of the stock price. In its most simplest form, it represents the valuation of companies, calculated as the ratio of the share price to the latest reported 12 months Earnings Per Share. For example, continuing with the earlier example, if the last traded share price of that company is AED 40 and having determined the EPS in 2015 as AED 5, the P/E ratio in this case is 8 (AED 40 / AED 5). Compare that to the closest competitor or industry and you would get a perspective on the share being expensive or cheap.

Market Capitalisation: This is the total value of a company’s outstanding shares. It is calculated by multiplying all the outstanding shares with the current market price of a share. It helps determine the size of a company, enabling ranking and establishing leadership or categorization as large cap, mid-cap or small-cap.

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