Hello readers, we are happy to announce that our team of MoneyWiseMind.com launched a new section “Investing Insights: Weekly Q&A for Stock Market Newbies”, to spread the basic stock market knowledge to the beginners.
This is your go-to resource for demystifying the stock market from the scratch. Each day, we will present 10 carefully curated questions with answers that will cover essential concepts, strategies, and terminologies. Whether you have just entered into the market, or trying to starting your stock market journey, or looking to strengthen your foundation, our weekly post will guide you through the basics and beyond, making investing accessible and understandable for everyone. Happy reading.
Day 56: Basic Stock Market Concept
What Is a Mortgage?
Think of
a mortgage as a long-term loan you take when buying a property—like your first
home or a piece of land—and the property itself serves as collateral. You
borrow money from a lender and then pay it back over time, usually in monthly instalments
that include both principal and interest.
There are two typical flavours:
Fixed-rate
mortgages, where
your monthly payments stay the same. Great for planning your budget.
Adjustable-rate
mortgages, where
the rate can shift based on market indicators—sometimes rising, sometimes
easing.
What Does “Burn Rate” Mean?
Burn rate
tells you how fast a company—often a startup—is spending its cash reserves.
It’s typically measured monthly. If someone says, “Our burn rate is ₹1 crore a
month,” it means that’s how much cash they’re burning through, whether they’re
making revenue or not.
Gross
burn =
total monthly expenses.
Net burn = expenses minus any
revenue.
This
metric helps figure out how many months a company can keep going before running
out of cash—what’s often referred to as its "runway." A high burn
rate with little revenue could mean trouble ahead unless new investment or
income shows up. It's a vital signal for founders and investors alike.
What Is Stagflation?
Stagflation
is when the economy faces a tough mix: high inflation, sluggish
or no growth, and often rising unemployment—all at once. It’s
rare but troublesome because tackling one problem often worsens another—for
example, inflation-fighting hot money policies can slow down the economy even
further.
It’s
called “stagflation” because it combines stagnation and inflation,
a blend that baffled economists when oil prices spiked in the 1970s.
In simple
terms: your wallet shrinks because prices are up, your job might be at risk
because the economy isn’t growing, and fixing one thing usually makes something
else worse. Definitely a scenario nobody wants to play referee in.
What Is a Safe Haven Asset?
Imagine
when markets are shaky and many people rush to hold something stable—that
something is called a safe haven. These are assets like gold,
high-grade government bonds, or even cash, which tend to hold or grow in value
when everything else is sinking. They become a sanctuary in stormy financial
times.
Safety
doesn’t mean huge growth; it's more about preserving what you have when the
market gets rocky. Buy these when your nerves need a break.
What Are Reverse Stock Splits?
In
a reverse stock split, a company merges multiple existing shares
into a smaller number of shares. For instance, a 1-for-10 reverse split means
ten shares at ₹5 become one share worth ₹50. The total value stays the
same—just fewer shares outstanding.
Companies
typically do this to stay above minimum price thresholds or make their shares
more appealing to certain investors. So, your share count changes, but your
total value doesn’t unless investor sentiment shifts.
What Is Paid-Up Capital?
Paid-up
capital is
the money shareholders actually hand over to the company in exchange for its
shares. Think of it like the real cash the company has “in the bank” from
selling shares. This is different from authorized capital, which is
the maximum amount a company is allowed to raise—by law—but may not necessarily
have done so yet.
In short:
paid-up capital = the actual investment received; authorized capital = the
potential limit.
What Is Book Building (in IPOs)?
Book
building is
a pricing method used during an IPO where investment bankers ask institutional
investors how many shares they’d like and what price they’d pay within a price
range. Based on how demand stacks up, they then pick the final offering price
that balances investor interest and company goals, ensuring enough demand
without undervaluing the stock.
Think of it as auction-style pricing—but just for big investors. It helps find a fair market value before going public.
What Is Insolvency?
Insolvency is simply when someone—individual or business—can’t pay debts as they come due or their liabilities outweighing their assets. It comes in two flavors:
Cash-flow insolvency: can’t pay bills even though
total assets might exist.
Balance-sheet insolvency: liabilities exceed assets.
This isn’t necessarily bankruptcy—it’s more like the financial “warning light.” It signals potential trouble and may prompt restructuring or debt negotiation.
What are Private Equity Firms?
Think of private equity (PE) firms as specialized investment groups that buy businesses—often private or underperforming—improve their performance, and then sell them later for profit. They often use a mix of bought-in funds and borrowed money, aiming to boost value through better operations, leadership, or strategy.
It’s like buying a fixer-upper home, renovating it, and then selling it for more—on a much bigger scale.
What Is the Interest Coverage Ratio?
Why should investors care about the interest coverage ratio?
The Interest
Coverage Ratio lets you see how comfortably a company can
pay its interest expenses out of operating profits. You calculate it by
dividing earnings before interest and taxes (EBIT) by the interest owed. So, if
a company earns ₹10 and pays ₹2 in interest, its ratio is 5—pretty solid.
A higher number (ideally above 3) means the company isn’t likely
to stumble if revenues dip. A low number signals that interest costs are eating
up its earnings—an early red flag worth watching.
If you have any other questions in your mind relating to stock market basics or need any clarification, please put your query into the comment box, We will try our best to clarify the same
Disclaimer: The information provided on MoneyWiseMind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
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