If you decided to invest money in Pakistan Stock Market then you first thing you need to learn is about the most important terms of Stock Market. There are few basic things which everyone who is investing in the stock market must need to understand.
Example to understand the Stock Market and its Important Terms
Ali is a brilliant and innovative person with lots of ideas but no money. He innovate a perfect product and want to start its production in factory but he has only 1 million rupees. The total cost of building factory and starting the business is around 50 million rupees. To raise the required capital (Money), Ali made a company with name Ali Corporation Limited. He registered his company and floats its shares (each share cost 10 rupee) in the Pakistan Stock Market. Many people like his business idea and purchase the shares of company and in this way Ali got 50 million rupees. Now Ali Corporation Limited has the required amount to build factory and start business. Within first year after the start of business factory earns huge profits. Ali Corporation Limited’s share price rise to 100 rupee per share and he also pays part of profit (dividend) to the shareholders.
Followings are these important terms;
What is Company?
When different individuals set together to engage and operate a business and form a legal entity, it is known as Company. In our example, Ali formed a company with name Ali Corporation Limited (ALC). The company is also known as listed company or publically-held company.
What is Stock Market?
In simple words, the stock market is like any other market where seller and buyers meet for trade of a specific product. Like fruit market offers fruits, fish market offer fish similarly stock market offers stocks or shares of different companies. It is also known as equity market or share market. In our example, Ali Corporation Limited must be listed in Pakistan Stock Exchange in order to sell its shares among the public.
What is Share?
In very simple words, Share is unit of ownership in a company. It is single unit with specific price which one can buy or sale in the stock market. In our example, Ali Corporation Limited, started business and initially sold its shares at rate of 10 rupee per share. But with success of company, its share price rose to 100 rupee per share within year.
What is EPS or Earning per Share?
This is one of the most important terms used in Stock Market. Earning-per-share (EPS) shows you how much money a company makes for each share of its stock. It is calculated by dividing the total profits earned by company in one year with total number of outstanding shares of company in market. In our example of Ali Corporation Limited (ACL), if ACL earns 10 million rupee of profit in one year and it has 1 million shares in the market then its EPS is 10 rupee per share. It is one of the basic factors to determine the strength and future of any company listed in Pakistan Stock Market.
Total number of shares?
It represents the total number of shares of any particular company. In our above mentioned example, say Ali Corporation Limited has total number of 100 million shares. It is important to note that all shares of company are not available for trade in the stock market. Let say, Ali and his close associates held 40 million shares with themselves and rest of the shares are available in stock market.
Free Float Shares in Market?
Free float shares are those shares which are available in the stock market for trade. In our example, say Ali Corporation Limited has 60 million free float shares which are about 60 percent of its total number of shares. These 60 million shares are owned by individual and companies, who can trade them on the stock market. It is important to note that the higher the percentage of free float shares of company, the better its reputation because it is difficult to manipulate the price of shares when they are owned by public at large. Large companies have high percentage of free float shares in PSX.
Market Capitalization or Market Cap.?
Simply speaking the Market Capitalization or Market Cap is total rupee market value of company’s outstanding shares of stocks. It can be calculated by multiplying the total outstanding shares of company with current price of share. In our example, if Ali Corporation Limited has total 60 million outstanding shares and today its share price in 100 rupee per share, then total market cap of Ali Corporation Limited is 6000 million rupees. Huge market cap means a large company with solid reputation in the market.
What is Book Value & Book Value per Share?
Simply stating, the book value of any company is the difference between total assets and total liabilities of the company. So book value is like a total worth of any company. Book Value per Share (BVS) indicates the total rupee value remaining after all assets are liquidated and all debts are paid of any specific company. If value of company’s book value per share is high than its market value then it means its stock is undervalued and worth buying.
Price to Book Value?
P/B ratio shows the market value of company relative to its book value. If price to book value ratio is under 1, it means you can invest in the company as its share is undervalued. In our example, if ACL has book value per share of 50 rupee and its share price is 100 rupee, it means it has P/B Ratio of 0.50.
What is Dividend Yield?
It is an important term which indicates how much company pays to its shareholder from profits it earns. Dividend yield can be measured by dividing the annual divided with share price of company. In our example, if Ali Corporation Limited pays annual dividend of rupee 10 per share and its share price is 100 rupee, then dividend yield is 10 percent. Mature and big companies always have higher dividend yields, as compared to new companies. We have separate and detailed post about highest dividing paying companies in Pakistan Stock Market.
It is the amount paid to the shareholders by the company from its profits. In our example, if Ali Corporation Limited earns 10 million in profits and pays 8 million to its shareholders in dividends then its payout ratio is 80 percent. Generally, companies with high payout ratios are considered good by the investors.
These above are some simple and necessary terms related with stock market. If you have any questions you can ask in comment sections.