Stock Market Terms Beginners Should Understand Before Investing

Investing in the stock market can feel like entering a world that speaks its own language. Charts, tickers, acronyms, and numbers can seem overwhelming, especially if it’s your first time exploring stocks. But the truth is, understanding the basics doesn’t have to be complicated. With the right knowledge, you can approach investing with clarity and confidence.

Raenest has made this even easier by integrating U.S. stocks and ETFs directly into the platform. This means you can now access global investment opportunities from a single account, track your portfolio seamlessly, and manage your investments without switching between multiple apps. Whether you’re aiming to grow your savings, explore long-term wealth strategies, or start experimenting with small investments, Raenest has you covered.

To help you get started, we’ve put together a breakdown of essential stock market terms that every beginner should know. We’ll cover everything from the basics of shares and dividends to critical metrics like market capitalisation, P/E ratios, and trading orders. Understanding these terms will not only make your investment journey smoother but also help you to make decisions based on knowledge rather than guesswork.

Also read: How Stocks work on Raenest.

What is stock, and how does it work?

If you’re new to investing, the first question is usually: What is a stock? A stock is a unit of ownership in a company. When you buy a stock, you become a shareholder, meaning you own a small piece of that business. This ownership gives you the right to a portion of the company’s profits and, in some cases, voting rights in important company decisions. Over time, if the company grows and performs well, your investment can appreciate. 

There are two main types of stocks:

• Common stocks: These are the most common type of shares people buy. When you own common stock, you own a small part of the company and can benefit if the company grows and its share price increases. Some companies also pay dividends, which are cash payments made to shareholders from the company’s profits. Common shareholders usually have voting rights, allowing them to take part in important company decisions.
• Preferred stocks: Preferred stocks are a type of share that usually pay a fixed dividend, meaning you receive a set amount of income regularly. Preferred shareholders are paid before common shareholders when dividends are distributed. However, they typically do not have voting rights. These stocks are often chosen by investors who want steady income rather than strong price growth.

Knowing the differences between these types of stocks helps you make investment decisions that align with your financial goals, whether you’re focused on long-term growth or generating regular income.

Shares vs. Stake

Since owning a stock means owning part of a company, it’s helpful to understand how that ownership is measured. That’s where the concepts of shares and stake come in. While they’re related, they mean slightly different things:

• A share is a single unit of ownership in a company. For example, if a company issues 1,000 shares and you own 10 shares, you hold 1% of the company.
  
• Your stake refers to your overall percentage of ownership in the company. It shows how much influence or exposure you have as an investor.

What is the Stock Exchange?

Now that you understand what a stock is and how ownership works through shares and stakes, the next question is: where do these stocks actually trade? And the answer is the Stock Exchange.

Stocks are bought and sold on stock exchanges, which are regulated marketplaces connecting buyers and sellers. Popular examples include the New York Stock Exchange (NYSE) and NASDAQ. Stock exchanges provide security, transparency, and liquidity, making it easier for investors to trade with confidence. For beginners, it’s helpful to understand how stock exchanges actually operate:

1. How Stock orders work: Exchanges match buyers and sellers using different types of orders. A market order buys or sells a stock immediately at the best available price. A limit order only executes if the stock reaches a price you specify. Stop orders automatically sell a stock if it falls to a certain level, helping manage risk.
   
2. Stock trading hours: Most exchanges have official trading hours. For example, the NYSE and NASDAQ operate from 9:30 a.m. to 4:00 p.m. ET on weekdays. Knowing trading hours can help you plan when to buy or sell.
   
3. Liquidity and Trading volume: Exchanges provide liquidity, meaning you can buy or sell shares quickly without significantly affecting the stock price. Trading volume measures how many shares are being traded, which can indicate demand and investor interest.
   
4. Primary and Secondary markets: Exchanges host both primary markets, where companies issue new stocks (like IPOs), and secondary markets, where investors trade existing shares. 
5. Price discovery on Stock Exchanges: One of the most important functions of a stock exchange is price discovery. Stock prices are determined by supply and demand, ensuring transparent pricing that reflects what buyers are willing to pay and sellers are willing to accept.

Top Stock Market Terms for Beginner Investors

A. Core Stock Concepts

These terms explain how ownership works and basic investment fundamentals.

• Dividend: A dividend is a portion of a company’s profits paid to shareholders. Companies usually pay dividends in cash or additional shares. For example, if you own 100 shares of a company that pays a $1 dividend per share, you’d receive $100. Dividends are a key way investors earn income from stocks without selling them.
• Market Capitalisation (Market Cap): Market cap is the total value of a company’s outstanding shares. It’s calculated by multiplying the stock price by the number of shares. For instance, a company with 1 million shares priced at $50 each has a market cap of $50 million. Market cap helps investors gauge a company’s size and stability, which can affect investment decisions.
• Portfolio: A portfolio is the collection of all your investments, including stocks, ETFs, and other assets. Building a diversified portfolio helps reduce risk by spreading investments across different sectors or asset types. For beginners, understanding portfolio construction is key to balancing potential returns with risk.
• Blue-Chip Stocks: Blue-chip stocks are shares of established companies with a history of strong performance and financial stability. They often provide regular dividends and are considered lower-risk investments. Examples include companies such as Apple and Coca-Cola. For beginners, blue-chip stocks are a good starting point for building a stable portfolio.

B. Market Movements & Trends

These terms help beginners understand how stock prices move and how markets behave.

• Bull Market: A bull market occurs when stock prices are rising over time, reflecting investor confidence and economic growth. For example, if major indices like the S&P 500 steadily increase over months, the market is in a bull phase. Bull markets often encourage investors to buy stocks in anticipation of gains.
• Bear Market: A bear market is characterised by falling stock prices and negative investor sentiment. For example, a 20% drop in major market indices over several months indicates a bear market. Understanding bear markets helps beginners prepare for periods of potential loss or volatility.
• Volatility: Volatility measures how much a stock’s price fluctuates over time. High volatility means prices can rise or fall sharply in a short period, while low volatility indicates more stability. For beginners, knowing a stock’s volatility is crucial for risk management.
• Index: A stock index tracks the performance of a group of stocks to represent the overall market or a sector. Examples include the S&P 500 or the Dow Jones Industrial Average. Indices help investors monitor market trends without having to follow individual stocks.
• Market Trends: The general direction of stock prices over time. Recognising trends helps beginners make informed decisions, such as whether to invest, hold, or sell.
• P/E ratio: A P/E ratio, which means price-to-earnings ratio, tells you how expensive a company’s stock is compared to how much money the company makes. You calculate it by dividing the stock’s price by the company’s earnings per share. For example, if a company’s stock costs $50 and it earns $5 per share each year, its P/E ratio is 10. This means investors are willing to pay $10 for every $1 the company earns. A high P/E ratio can suggest that investors expect strong future growth, while a low P/E ratio may mean the stock is cheaper or that growth expectations are lower.
• Liquidity: The ease with which a stock can be bought or sold without affecting its price. Highly liquid stocks are easier to trade quickly, while low-liquidity stocks may have wider spreads and slower transactions.

C. Investment Strategies & Instruments

These terms cover ways to invest, diversify, and manage risk.

• ETF (Exchange-Traded Fund): An ETF is a collection of stocks or other assets that trades on an exchange like a single stock. ETFs allow investors to diversify without buying individual stocks. For example, an S&P 500 ETF lets you own a small piece of 500 companies at once.
• Mutual Fund: A mutual fund pools money from multiple investors to buy a range of stocks or bonds. Professional managers handle the investments, making it easier for beginners to diversify. Mutual funds differ from ETFs in that they usually trade at the end of the day, not continuously.
• Index Fund: An index fund is a type of mutual fund or ETF designed to track a stock market index. Simply put, it's a type of investment that lets you invest in many companies at once by following a specific part of the market. So instead of trying to pick individual stocks and guess which companies will perform best, an index fund simply tracks an index, and you can invest in it. An index is just a list of companies, grouped together to represent how a market or sector is doing. For example, an S&P 500 index fund mirrors the performance of the 500 largest U.S. companies. Index funds are popular with beginners for low-cost, long-term investing.
• Growth Stock: Growth stocks are expected to grow faster than the overall market. They often reinvest profits rather than paying dividends. Tech companies like Tesla or Amazon are common examples. Growth stocks can be more volatile but offer higher potential returns.
• Value Stock: Value stocks are considered undervalued relative to their fundamentals, such as earnings or assets. They may offer dividends and are generally less volatile. Investing in value stocks can be a strategy for long-term growth.
• Dividend Reinvestment (DRIP): DRIP programs automatically use dividends to purchase more shares. This helps compound your returns over time without adding new cash. DRIPs are an easy way for beginners to steadily grow their investments.
• Diversification: Diversification is spreading investments across different stocks, sectors, or asset types. This reduces risk because gains in another may offset losses in one area. Beginners should aim for a diversified portfolio to manage risk effectively.
• Risk Tolerance: Risk tolerance is how much risk an investor is willing to take. Beginners need to understand their comfort level to choose stocks or strategies that match their financial goals and avoid panic selling during market swings.
• Capital Gains: Capital gains are the profits from selling an investment at a price higher than the purchase price. For example, buying a stock at $20 and selling it at $30 results in a $10 per-share capital gain. Understanding capital gains helps beginners track returns and tax implications.

D. Trading Mechanics & Platforms

These terms explain how stocks are traded and priced.

• Primary Market: The primary market is where companies issue new stocks, such as during an IPO. Investors in the primary market are buying shares directly from the company.
• Secondary Market: The secondary market is where investors buy and sell existing shares from other investors. This is where most stock trading occurs.

• Market order: Executes immediately at the best available price.
  
• Limit order: Executes only at a specific price.
  
• Stop order: Automatically sells a stock if it reaches a certain price to limit losses.
  
• Bid and Ask Price: The bid price is what a buyer is willing to pay; the ask price is what a seller is willing to accept. The difference, called the spread, affects trading costs.
• Price Discovery: Price discovery is how a stock’s price is determined by supply and demand on exchanges. It ensures transparent pricing for buyers and sellers.
• IPO (Initial Public Offering): An IPO is when a private company offers shares to the public for the first time. IPOs allow companies to raise capital and give investors early access to new opportunities.
• Stock Split: A stock split divides existing shares into multiple new shares to make them more affordable. A 2-for-1 split doubles the number of shares while halving the price per share, keeping total value the same.
• Margin Trading: Margin trading is borrowing money from a broker to buy more stock than you can afford with your own cash. While it can amplify gains, it also increases risk and potential losses.
• Short Selling: Short selling involves borrowing and selling a stock you don’t own, hoping to buy it back later at a lower price. Short selling is high-risk and usually for advanced strategies, but it’s good for beginners to know the term.

Now that you’re familiar with the key stock market terms, you’re better equipped to start investing with clarity and confidence. The next step is to begin. And Raenest lets you get started easily. Own shares in Apple, Tesla, Google, Nvidia, Amazon, and more on Raenest with as low as $2, and enjoy one commission-free stock purchase every month.

Disclaimer: Raenest is not a broker-dealer, investment adviser or member of FINRA. Securities offered by Alpaca Securities LLC ("Alpaca Securities"). Alpaca Securities is a member of FINRA and the Securities Investor Protection Corporation. Raenest does not recommend any specific securities or investment strategies. Investing involves risk & investments may lose value, including the loss of principal. Past performance does not guarantee future results. Investors should consider their investment objectives and risks carefully before investing. U.S. stock investments are held with Alpaca Securities LLC, a U.S.-licensed broker-dealer regulated by the SEC and FINRA. Your assets are custodied under strict regulatory and security standards, and you retain full visibility into your holdings and performance at all times. Investment feature is offered in partnership with City Investment Capital Limited, a firm licensed by the Securities and Exchange Commission of Nigeria.