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 61: Basic Stock Market Concept
What is Private
Equity?
Private equity refers to when investors (often
institutions or high net-worth individuals) put money into companies that
are not listed on a stock exchange.
These investments could be for start-ups (venture
capital), buyouts of existing businesses, or growth capital. Because the
companies are private, there is less liquidity (you can’t easily sell your
shares) and longer timelines (often 5-10 years). The potential returns are
high, but also risks (company failure, illiquid exit) are higher.
What is Pump and
Dump?
A pump and dump is a market
manipulation fraud. The scheme works in two stages:
Pump: fraudsters spread
false or misleading information (through social media, newsletters, etc.) to
create hype and drive up the stock price.
Dump: once price goes
up (often on low volume and interest), they sell (“dump”) their holdings at the
inflated price. After that, price falls sharply, leaving later buyers with
losses.
What does Risk
Premium mean?
Risk premium is the extra return an investor
expects (or demands) from an investment, above what they'd get from a risk-free
asset (like a government bond).
Because riskier assets (stocks, private
equity etc.) can go down, the investor wants compensation in case things go
wrong. The larger the perceived risk, the higher the risk premium.
What is a Hedge
Fund?
A hedge fund is an investment fund that pools money
from investors and uses more flexible or aggressive strategies (like short
selling, leverage, derivatives) to try to generate returns.
Hedge funds are less regulated than mutual funds
and typically only open to accredited investors. The aim is often to get good
returns even when the market is falling, or to outperform through complex
strategies. But they also come with higher fees and risk.
What is Index
Rebalancing?
Index rebalancing is the process by which stock
indices (like S&P, Nifty etc.) adjust their composition or weights of
constituent stocks. This may happen periodically (quarterly, semi-annually) to
account for changes like companies dropping out, new ones added, or changing
market caps.
For example, if a company’s stock raises a lot, it
might become a larger part of the index; rebalancing ensures the index stays
representative. Rebalancing can cause buying/selling pressure around
rebalancing dates.
What is a Rights
Issue?
A rights issue is when a company offers its
existing shareholders the “right” to buy additional shares, usually at a
discount to the market price, for a limited period. This helps the company
raise new capital (for expansion, paying debt, etc.).
Shareholders can accept (subscribe) to buy the new
shares, or decline; if they don’t, their ownership gets diluted (because there
are more shares in total).
What does “Gap Up”
mean in Stock Trading?
Gap Up refers to
when a stock opens at a significantly higher price than its previous day’s
closing price—there is a “gap” on the price chart.
This can be due to good news overnight, earnings
beats, positive macro-news etc. Traders look at gap ups to see strength;
sometimes the gap fills later (price falls) or continues upward.
What is “Gap Down”?
The opposite of gap up: a gap down occurs
when a stock opens significantly below its previous closing price, forming a
gap downward on the chart. Usually caused by bad news, negative earnings, or
macro headwinds.
It signals weakness; traders may watch to see
if the gap gets “filled” (price moves up to close the gap) or continues
downward.
What do
“Underweight” & “Overweight” mean in Analyst Ratings or Portfolios?
Overweight: If an analyst or portfolio manager says a stock is “overweight,” they
believe that stock will outperform its benchmark (e.g. a sector or index). They
may recommend holding a higher proportion of that stock in a
portfolio than its proportion in the benchmark.
Underweight: Conversely, being “underweight” means the belief the stock will
underperform relative to the benchmark, so holding less of it (or avoiding it)
compared to the benchmark.
These are not absolute “buy/sell” but relative to
expectations vs market or sector.
What is the Repo
Rate and why does it Matter?
Repo rate has two related meanings, depending on context:
In central banking / monetary policy: it is the interest rate at which
central bank lends short-term funds to commercial banks against securities
(repos). Lowering repo rate makes borrowing cheaper, encouraging banks to lend
more; raising it does the opposite.
In financial markets: a repurchase agreement (repo) is
a short-term, secured loan where one party sells a security to another with an
agreement to repurchase later at a slightly higher price. The interest implied
by that difference is the repo rate.
Repo rate influences liquidity in the system,
affects borrowing costs, influences inflation, and is a key tool for central
banks.
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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