Stock Market 101: Key Terms Every Investor Should Know

I want to buy shares, but I don’t understand anything about the stock market or investing in stocks. The language is all jargon to me.

If this is where you are right now, this guide is for you. One of the most common reasons people stay out of the stock market is a lack of confidence and understanding of how the market works, and it makes sense. Terms like P/E ratio, market capitalization, and stop-loss orders get thrown around as if everyone already knows what they mean.

This guide is built to fix that. Think of it as your personal stock market glossary, where we’ve broken down every essential term related to the market into plain terms that are easy to understand. Whether you’re looking to buy shares for the first time or want to understand what investing in stock market really entails, this is your starting point.

Let’s get into it.

Getting started: The basics of the stock market

A stock, share, or equity all refer to the same thing: a small unit of ownership in a company. When a company wants to raise money to grow its business, it can divide itself into millions of tiny pieces and sell those pieces to the public. Each piece is a share. When you buy one, you become a part-owner of that company, no matter how small your stake is. That ownership entitles you to a portion of the company’s profits and, in many cases, a vote on major company decisions. Think of it as becoming a silent business partner.

The words “stock,” “share,” and “equity” are often used interchangeably, though technically “stock” is the broader term, and “share” refers to a specific unit within that stock.

Stock Market / Stock Exchange

The stock market is not a physical marketplace in the traditional sense. It is a system or a network of buyers and sellers who trade shares of publicly listed companies. The actual venue where this trading happens is called a stock exchange.

In Nigeria, that exchange is the Nigerian Exchange Group (NGX), formerly known as the Nigerian Stock Exchange. Globally, the most well-known ones are the New York Stock Exchange (NYSE) and NASDAQ. When people say, “the market is up” or “the market crashed,” they are usually referring to the general direction of prices on these exchanges. The exchange ensures transparency, fair pricing, and regulated trading — so you’re not doing deals in a back alley.

Bull Market vs Bear Market

These two terms describe the overall mood of the market.

A bull market is a period when stock prices are rising consistently, generally by 20% or more from recent lows. Investor confidence is high, the economy is usually doing well, and more people are buying than selling. The bull is used as the symbol because bulls thrust upward with their horns.

A bear market is the opposite. It is a period when prices are falling, typically by 20% or more from recent highs. Fear takes over, sales increase, and the economy often slows. The bear represents this because it swipes downward with its paws.

Knowing which type of market you are in does not tell you exactly what to do, but it gives you important context for the decisions you make.

Ticker Symbol

Every publicly traded company has a short code that identifies its stock. For example, Zenith Bank trades as “ZENITHBANK,” Dangote Cement as “DANGCEM.” It’s like a nickname that makes placing orders fast and easy.

Index

An index is a measure of the overall performance of a group of stocks. Instead of tracking every company on the exchange individually, an index selects a representative basket of companies and uses their combined performance as a snapshot of the market.

In Nigeria, the primary index is the NGX All-Share Index (ASI), which tracks the performance of all listed equities on the exchange. Globally, the S&P 500 tracks the 500 largest companies in the US, and the Dow Jones Industrial Average tracks 30 major American companies.

When an index rises, it means that, on average, the companies within it are gaining value. When it falls, the reverse is true.

You can’t invest directly in an index, but you can buy index funds that mirror its performance, which is a popular strategy for passive investing in shares.

Market Capitalization (Market Cap)

Market capitalization is the total value the stock market places on a company. It is calculated by multiplying the current share price by the total number of shares issued by the company.

If a company has 10 million shares and each share is trading at ₦50, its market cap becomes ₦500 million.

Market cap is a also a useful way to compare the size of companies. Large-cap companies are usually the biggest, most stable, and most established (typically over ₦500 billion or $10 billion globally). Mid-cap companies are mid-sized and often growing. Small-cap companies are smaller and can carry more risk, but sometimes more growth potential too.

Types of stocks

Common Stock vs Preferred Stock

Common stock is what most people buy when they invest in stocks. It gives you part-ownership of a company, the right to vote on major company decisions, the potential for capital gains and access to a share of the profits (called dividends) when the company chooses to pay them. However, if a company goes bankrupt, common stockholders are paid last after everyone else.

Preferred stock sits between common stock and bonds. Preferred shareholders receive fixed dividends before common stockholders, and they have a higher claim on assets in the event of a company collapse. However, they usually do not get voting rights but are a more stable form of ownership.

Growth Stocks

Growth stocks are shares in companies expected to grow faster than the market average. These companies typically reinvest their profits in the business rather than paying dividends, because their goal is expansion.

Tech startups are a classic example. The trade-off with growth stocks is that they tend to be priced higher relative to current earnings, so if growth slows or fails to meet expectations, the price can drop sharply.

Value Stocks

Value stocks are shares in companies that appear to be trading for less than what they are actually worth. Value investors believe the market has temporarily underestimated these companies and that the price will eventually reflect their true worth. Value investing requires patience and a willingness to hold a position before the market comes around.

Dividend Stocks

Dividend stocks belong to companies that regularly share a portion of their profits with shareholders. If you own these shares, you receive periodic cash payments called dividends just for holding the stock. This makes them attractive to investors who want consistent income rather than only relying on price appreciation. When you reinvest those dividends, compound growth works in your favour. Banks and large established companies tend to be strong dividend payers.

Blue-Chip Stocks

Blue-chip stocks are shares in large, well-established, financially stable companies with a long track record of reliable performance. These are the companies that have survived recessions, market crashes, and industry disruptions and are still standing.

On the NGX, examples include companies like Dangote Cement, Zenith Bank, and Guaranty Trust Bank. Globally, names like Apple, Microsoft, and Johnson & Johnson fall into this category. Blue-chip stocks are generally considered lower risk, though no stock is completely without risk.

Penny Stocks

Penny stocks are shares that trade at very low prices (typically under $5 or ₦5), often because the companies behind them are small, new, or financially unstable. They can deliver massive returns, but they’re also prone to manipulation, low liquidity, and sudden collapses. The low price can look attractive to new investors, but penny stocks are typically high risk, thinly traded, and more vulnerable to price manipulation. They require a level of due diligence that most beginner investors are not yet equipped for. So steer clear until you truly understand the risk.

How stocks are bought and sold

Initial Public Offering (IPO)

An IPO is the first time a private company offers its shares to the general public. Before the IPO, only private investors and the company’s founders own shares. After the IPO, anyone can buy shares on the stock exchange.

Companies go public to raise capital for growth. For investors, an IPO can be an opportunity to buy into a company early, but it also comes with uncertainty, since there is limited historical data to assess.

Broker / Stockbroker

You cannot walk into a stock exchange and start buying shares directly. You need a licensed intermediary known as a broker or stockbroker. This is usually an individual or firm that executes buy and sell orders on your behalf, either on a traditional exchange or through a digital investment platform. For us at Zedcrest Wealth, our sponsoring stockbroker is Zedcrest Securities.

In Nigeria, all stockbrokers must be licensed by the Securities and Exchange Commission (SEC). When you invest in shares through a platform like Zedcrest Wealth, the brokerage function is built into the process.

Bid Price vs. Ask Price

Every stock has two prices at any given moment: the bid and the ask.

The bid price is the highest price a buyer is willing to pay for a share. The ask price (also called the offer price) is the lowest price a seller is willing to accept. A trade happens when these two prices meet.

Spread

The spread is the difference between the bid price and the ask price. A narrow spread usually signals high liquidity and active trading. A wide spread often indicates that a stock is less actively traded, which can make it harder to buy or sell at a fair price quickly.

Order Types: Market Order, Limit Order, Stop-Loss Order

When you place a trade, you have options for how that trade is executed.

A market order tells the broker to buy or sell immediately at the best available current price. It is fast but gives you less control over the exact price you pay or receive.

A limit order lets you set the exact price at which you want to buy or sell. Your order will only execute if the stock reaches that price. This gives you more control but means you might wait a while, or the trade might not happen at all.

A stop-loss order automatically sells your shares if the price drops to a level you set in advance. It is a risk management tool designed to protect you from larger losses than you are willing to absorb. Smart investors use both depending on the situation.

Liquidity

Liquidity refers to how easily and quickly you can buy or sell a stock without significantly affecting its price. A highly liquid stock has many buyers and sellers actively trading it, so you can enter or exit a position without much friction. A low-liquidity stock can be harder to sell, especially during market downturns. When you buy shares, always consider how quickly you could exit if needed.

Trading Volume

Trading volume is the total number of shares bought and sold for a particular stock within a given time period, usually a day. High volume signals strong interest in that stock. Unusual spikes in volume can be an early signal that something significant is happening with the company.

Reading Stock Performance

Stock Price

The stock price is simply the current price at which one share of a company is trading on the exchange. It is not the same as the company’s value—that is determined by market cap. A high share price does not automatically mean a company is doing well, and a low share price does not mean it is a bargain.

52-Week High / Low

This tells you the highest and lowest prices at which a stock has traded over the past year It gives you a sense of how much the stock has moved and where it currently sits relative to its recent range. A stock trading near its 52-week low might look cheap; one near its 52-week high might look expensive — but neither reading is conclusive on its own.

EPS is the portion of a company’s profit allocated to each outstanding share. It is calculated by dividing the company’s net profit by its total number of shares.

If a company earns ₦1 billion in profit and has 500 million shares, the EPS is ₦2. A rising EPS generally signals that a company is becoming more profitable, which tends to attract investors and push the share price higher.

Price-to-Earnings Ratio (P/E Ratio)

The P/E ratio compares a company’s share price to its earnings per share. It tells you how much investors are willing to pay for every naira (or dollar) of earnings the company generates.

A high P/E ratio might mean investors expect strong future growth or the stock is overpriced. A low P/E ratio might mean the stock is undervalued or that growth expectations are low. Context matters here: you compare the P/E ratio against the company’s own history and against its industry peers, not in isolation.

Dividend Yield

The dividend yield expresses the annual dividend a company pays as a percentage of its current share price. If a company pays a ₦10 annual dividend and the share price is ₦200, the dividend yield is 5%.

It is a useful metric for income-focused investors who want to know how much return they are getting purely from dividends, separate from any price appreciation.

Return on Equity (ROE)

ROE measures how effectively a company uses the money its shareholders have invested to generate profit. It is expressed as a percentage. A consistently high ROE is usually a sign that management is doing a good job of turning investor capital into earnings.

Book Value

Book value is the net worth of a company based on its financial statements, essentially what would be left if the company sold all its assets and paid off all its debts. When compared to market cap, book value helps investors assess whether a stock is trading above or below what the company is actually worth on paper.

Portfolio Concepts

Portfolio

Your portfolio is your entire collection of investments. It can include stocks, bonds, mutual funds, money market instruments, and other assets. The goal of portfolio construction is not just to pick good individual investments; it is to combine them in a way that aligns with your goals and risk appetite.

Diversification

Diversification is the practice of spreading your investments across different companies, sectors, and asset classes so that the poor performance of one does not devastate your entire portfolio. The core logic: do not put all your eggs in one basket.

If you invest only in one company and that company struggles, you lose significantly. If you spread across 10 different companies in different industries, one company’s bad news has a far smaller impact on your total wealth.

Asset Allocation

Asset allocation is how you divide your portfolio among different asset categories, such as stocks, bonds, cash, real asset

Your allocation should reflect your goals, your investment timeline, and how much risk you are comfortable with. A younger investor with decades ahead might hold more stocks. An investor closer to retirement might lean more toward bonds and stable income instruments.

Rebalancing

Over time, the performance of different assets shifts your portfolio away from your intended allocation. Rebalancing is the process of bringing it back in line or selling assets that have grown beyond their target weight and adding to those that have fallen below it.

It is a discipline that prevents your portfolio from drifting into a risk profile you never intended.

Risk Tolerance

Risk tolerance is your capacity and willingness to absorb potential losses in pursuit of investment returns. It is shaped by your financial situation, your investment goals, and your emotional ability to handle market downturns without making panicked decisions.

Understanding your real risk tolerance is one of the most important things you can do before you start investing in shares.

Correlation

Correlation measures how two assets move in relation to each other. Assets with high positive correlation tend to move in the same direction. Assets with low or negative correlation move independently or even in opposite directions.

Building a diversified portfolio means including assets that do not all move together. If everything in your portfolio goes up and down at the same time, diversification is not doing its job.

Market behavior and indicators

Volatility

Volatility describes how dramatically and quickly a stock’s price moves over a period of time. A highly volatile stock can swing significantly in price within days or even hours. A low-volatility stock tends to move more steadily.

High volatility is not inherently bad as it creates opportunities. But it also amplifies risk, which is why understanding volatility is critical for anyone investing in shares.

Market Sentiment

Market sentiment is the overall attitude of investors toward the market or a particular stock at any given time. It is driven by news, economic data, earnings reports, global events, and sometimes just collective emotion.

When sentiment is positive (bullish), prices tend to rise even if the underlying fundamentals have not changed much. When sentiment is negative (bearish), prices can fall despite strong fundamentals. Sentiment is powerful and often irrational, which is why experienced investors pay attention to it without being completely ruled by it.

Correction

A market correction is a short-term decline in prices, typically a drop of 10% or more from a recent peak, that does not escalate into a full bear market. Corrections are a normal, healthy part of market cycles. For long-term investors, corrections are often buying opportunities rather than reasons to exit.

Rally

A rally is a sustained increase in stock prices after a period of decline or stagnation. Rallies can be driven by positive earnings, strong economic data, policy changes, or a shift in investor sentiment. A strong rally can signal the beginning of a bull market, or it can be a temporary recovery within a broader bear market.

Day Trading vs Swing Trading vs Long-Term Investing

Day traders buy and sell within hours, trying to profit from tiny price movements. Swing traders hold for days or weeks, riding momentum. Long-term investors buy shares and hold for years or decades, letting compound growth do the heavy lifting. For most people building wealth, long-term investing wins. you get less stress, lower fees, better tax treatment, and historically superior returns.

Short Selling

Short selling is a strategy where an investor borrows shares, sells them at the current price, and hopes to buy them back later at a lower price, pocketing the difference. It is essentially betting that a stock’s price will fall.

Short selling is a more advanced strategy with significant risk: if the stock price rises instead of falls, the short seller loses money, potentially more than they started with.

Margin Trading

Margin trading means borrowing money from a broker to buy more shares than your current capital would allow. It amplifies both gains and losses. If the trade goes well, your returns are larger. If it goes poorly, your losses are also larger and you still owe the broker. Margin trading is a high-risk strategy best left to experienced investors who fully understand the downside.

Hedge

To hedge is to take a position in one investment that is designed to reduce the risk of another. Think of it as taking out insurance on your portfolio. For example, an investor might hedge a stock position by buying options that profit if the stock falls.

Hedging reduces potential losses but also limits potential gains. It is a risk management technique, not a profit-maximization strategy.

Corporate actions that affect your stocks

Capital Gains

This is the profit you make when you sell a stock for more than you paid. If you buy shares at ₦100 and sell at ₦150, your capital gain is ₦50 per share. In many jurisdictions, capital gains are taxed differently than regular income , sometimes at lower rates.

Dividend

A dividend is a payment a company makes to its shareholders from its profits. It can be paid in cash or in the form of additional shares. Not all companies pay dividends; some reinvest profits into growth instead. Companies that consistently pay and grow their dividends are often seen as financially healthy and shareholder friendly.

Stock Split

A stock split is when a company divides its existing shares into multiple new shares. For example, in a 2-for-1 split, every shareholder receives two shares for every one they held, but the price of each share is halved. The total value of your investment stays the same. Companies split their shares to make them more accessible to a wider pool of investors and improve liquidity.

Buyback

When a company repurchases its own shares from the market. This reduces the number of shares outstanding, which can boost earnings per share and signal that management believes the stock is undervalued. It’s often an alternative to paying dividends.

Bonus Issue

A bonus issue (also called a scrip dividend) is when a company issues additional shares to existing shareholders at no cost, proportional to the number of shares they already hold. It is similar to a stock split in effect but is funded from the company’s retained earnings rather than a division of existing shares.

Rights Issue

A rights issue gives existing shareholders the opportunity to buy additional shares in the company (usually at a discounted price) before the company offers those shares to new investors. It is a way for companies to raise fresh capital while giving current shareholders the first right of participation.

If you do not take up your rights, your ownership percentage in the company is diluted as new shares are issued.

Prospectus

A legal document companies must file before selling securities to the public. It details the business model, financials, risks, and how the raised money will be used. Before investing in shares through an IPO, read the prospectus.

Mergers and Acquisitions (M&A)

A merger is when two companies combine to form a new entity. An acquisition is when one company buys another. Both events significantly affect stock prices of the acquiring company, the acquired company, and sometimes entire sectors.

M&A activity is one of the more dramatic events that can affect your portfolio, so it is worth understanding how each type of deal typically plays out for shareholders.

Risks involved in investing in stocks

Systematic Risk vs Unsystematic Risk

Systematic risk is the risk that affects the entire market or a large part of it, like recessions, interest rate changes, political instability, or global pandemics. You cannot diversify your way out of systematic risk because it hits everything at once.

Unsystematic risk is specific to a particular company or industry — a bad earnings report, a management scandal, or a regulatory challenge affecting one sector. This type of risk can be reduced through diversification. Spreading your investments across different companies and industries means that one company’s problems do not sink your entire portfolio.

Related: Types of Risk in Investing

Inflation Risk

Inflation risk is the danger that your investment returns will not keep pace with inflation, leaving you with less purchasing power than when you started. This is one of the key reasons why equities, despite their volatility , have historically been one of the best long-term tools for preserving and growing wealth.

Liquidity Risk

Liquidity risk is the risk that you will not be able to sell an investment quickly enough or at a fair price when you need to. This is a more significant concern with smaller, less actively traded stocks. In a market downturn, even relatively liquid stocks can become hard to exit without taking a significant price cut.

Concentration Risk

Concentration risk happens when too much of your portfolio is tied to a single stock, sector, or market. If that one position moves against you sharply, the damage to your overall portfolio is severe. Diversification directly addresses this, but it requires conscious effort and discipline.

Conclusion

Learning the language of the market is not the same as mastering investing, but it is the foundation everything else is built on. Now, all that’s left is application, understanding how these terms connect, and understanding how they should shape the decisions you make with your money. Once you understand these terms, then you can start making informed investment decisions.

Before you get there, it helps to have a strong financial foundation, and the Zedcrest Wealth Academy is a good place to build one. It is free, and it features bite-sized lessons that covers everything from budgeting to investments and more, and is structured across Beginner, Intermediate, and Advanced levels so you can learn at your own pace.

When you are ready to put your knowledge to work, you can start investing on the Zedcrest Wealth app and build a portfolio that works for your goals.

To access the Academy, download the Zedcrest Wealth app on the App Store and Google Play Store today.