Today we are going to explain all the basic terminologies used in the Stock Market. Age doesn’t matter to be a successful trader. All you should know about the marketing tactics. But before going into more depth directly, you should know the common terms used in the stock market that will let you make your trade-plan comfortably.
Many young individuals who are keenly interested and have enthusiasm for stock trading lack the basic domain knowledge of the market. Even though trading does not require plenty of time as well as money, it is crucial to have a basic understanding of the terms used and the necessary training to make the right decisions. We have listed almost all the key elements that will assist you in understanding the stock market. Let’s get started.
- Agent – A brokerage firm or organisation can be termed an agent when it acts on behalf of a client while purchasing shares.
- Ask/Offer – The term “ask/offer” refers to the lowest price at which the seller will sell the stock.
- Assets – Asset is a group of investments of everything a firm owns to its name, such as equities (e.g., stocks), fixed income (e.g., bonds), cash and cash equivalents, real estate, and commodities that show the total wealth of the company.
- Bear Market – It is a situation when the stock market is experiencing a downfall of stock prices approximately 20% or more than that from the recent highs. It may happen due to the widespread pessimism and investors’ negative sentiment. Further, it may also accompany general economic downturns such as a recession.
- Beta – It is a measurement of the relationship between the price of a stock and the movement of the overall market. If a beta is greater than 1 meaning that the stock is more volatile or changeable than the whole market. On the other hand, if it is lesser than 1, then it suggests a stock with lower volatility (changeability) than the entire market. High-beta stocks are riskier than low-beta stocks, but at the same time, provide higher return potential.
- Bid – It is the highest price a buyer is willing to pay for buying a stock. Think of it as the exact opposite of “ask/offer”. Remember, the bid price will always be lesser than the “ask” price. The difference between the bid price and ask price is known as the “spread”, making the two terms “Bid-ask spread”.
- Blue Chip Stock – The stocks of large, well-established and financially sound companies are known as “Blue Chip Stock”. These big companies hold a record of consistently paying dividend payments to their stock-holders. The phrase is thought to be derived from the blue gambling chips, the highest denomination of chips used in the casinos. Besides, these chips typically have a market capitalization of thousands of crores.
- Board Lot – It is the standard trading unit defined by the particular exchange board. To be more precise, the minimum number of shares one can buy or sell at a specific price range is known as board lot. It usually depends on the per-share price. Some of the common board lot sizes are 50, 100, 500, and 1000 units.
- Bonds – It is a promissory note issued by companies or the government to its buyers. Bonds are used to record the particular time and the specific amount held by the buyer.
- Book – An electronic record of managing all the pending buy and sell orders of particular stocks.
- Broker/Brokerage Firm – A registered securities organisation is called a brokerage firm. On the other side, an individual person who works with the brokerage firm as an employee or on his own is termed as a broker. Brokers act as advisors or registered representatives to buy or sell the listed stocks for their clients. In return, they charge a commission for their service.
- Bull Market – When the stock prices in a market are increasing consistently, it is termed a bull market. It is the exact opposite of a bear market.
- Business Day – The number of days when a person can do his trading. It is Monday to Friday, excluding public holidays.
- Call Option – An option that is given to the investor or buyer the right, but not the obligation, to purchase stock within a specified time and at a particular price. Generally, a call buyer profits when the underlying asset (stock, bond, etc.) increases in price.
- Close Price – It is the final price at which a particular stock is traded on a trading day.
- Convertible Securities – It is a financial instrument (bonds, debentures, preferred stocks) whose holder has the right to convert it into another security of the same issuer.
- Debentures – A debenture is a bond issued with no collateral. Instead, the investors rely upon the general creditworthiness and reputation of the issuer. Moreover, it is an unsecured form of investment.
- Defensive Stock – It is a stock that provides constant dividends and stable earnings even in an economic downfall. Even in the extreme critical conditions of the stock market, the companies continue to pay dividends at a constant rate.
- Delta – It is the amount of price change a derivative will see based on the price of the underlying security (e.g., stock). Delta can be positive or negative, between “0 and 1” for a call option and “-1 to 0” for a put option.
- Derivatives – A derivative is an instrument whose value is derived from the value of one or more underlying assets, which can be commodities, precious metals, currency, bonds, stocks, stocks indices, etc. The four most common examples of derivative instruments are Forwards, Futures, Options and Swaps.
- Diversification – It can be defined as the reduced investment risk by buying shares of different companies operating in various sectors.
- Dividend – A stock dividend is a dividend payment to shareholders made in shares rather than as cash. Further, it has the advantage of rewarding shareholders without reducing the company’s cash balance, even though it can cut earnings per share.
- Equity – Equity, generally referred to as shareholders’ equity (or owners’ equity for privately held companies), represents the amount of money that will be returned to the shareholders of a company if all of the assets are liquidated and all debt is paid off in the case of liquidation.
- Face Value – It is a financial term used to describe the nominal or rupee value of a security, as stated by its issuer. In terms of stocks, face value is the original cost of the stock, as listed on the certificate. Besides, the face value for bonds is often referred to as “par value” or simply “par.”
- Hedge – A strategy to reduce the risk of unfavourable price movements of assets.
- Income Stock – Income stocks are stocks that offer regular and steady income, usually in the form of dividends, over a period of time with low exposure to risk.
- Index – It is the statistical measurement of change in the economy or security market. These are calculated using their own formula and help investors compare current stock price levels with past prices to calculate market performance.
- Initial Public Offering (IPO) – When a private company first sells shares of stock to the public, this process is known as IPO. It basically means that a company’s ownership changes from private to public. Various companies go public from a private organisation to raise funds to expand their business.
- Internet Trading – It is a platform with the Internet as a medium. Internet trading execution occurs through an order routing system that conveys traders’ orders to the exchange trading system. Thus traders sitting in any part of the world can trade using their broker’s Internet Trading System.
- Leverage – When you use leverage, you borrow shares in a stock from your broker to increase your profit. Further, if you borrow shares and sell them all at a higher price, you return the shares and keep the difference. It is too risky to do it.
- Limit Order – A limit order uses a pre-specified price to buy or sell a security. For example, if a trader is looking to purchase a share with a fee of 15$, they will buy the stock for 15$ or less. It sets a minimum price the seller is willing to accept and the maximum price the buyer is willing to pay for it.
- Listed Stocks – It describes that a company is listed on a stock exchange to trade its stocks. To be listed on an exchange, the firm has to pay fees and abide by the rules and regulations of the stock exchange to keep the listing privilege.
- Market Capitalisation – It is the market valuation of a publicly-traded company’s shares. Market capitalisation is calculated depending on the total number of shares and the company’s current market price. Based on Market Cap, companies sizes are categorised as small-cap, mid-cap, or large-cap.
- Moving Average – A stock’s average price-per-share during a specific period of time is called its moving average. Some common time frames to study the moving average of stock include 50- and 200-day moving averages.
- Mutual Fund – When one or more professional money managers collect money from several investors to invest in securities like stocks, bonds, money market instruments, and other assets, it is called a mutual fund. The managers further use that pool of money to generate capital gains or income for the fund’s investors. There will be various T&C applied on mutual funds.
- Odd Lot – A number of shares either greater or lesser than but never equal to the board lot size. For example, if the board lot size is 100 shares, an odd lot would be 99 or 101 shares. Usually, odd lots are arduous for trading and are not accepted easily in the market.
- One-sided Market – It is a market where the market makers only quote either the bid or the ask price. To be more precise, a one-sided market contains only potential sellers or potential buyers but not both at the same time.
- Out-of-The-Money (OTM) – It is an expression used to describe an option contract that only includes an extrinsic value. The stock price will be below or above the strike price for call options and put options, respectively.
- Portfolio – A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end funds and exchange-traded funds (ETFs).
- Positions Limit – A position limit is a preset level of ownership established by exchanges or regulators that limits the number of shares or derivative contracts that a trader, or any affiliated group of traders and investors, may own.
- Pre-opening Session – The Pre-opening Session is a duration of 15 mins, i.e. from 9:00 to 9:15 AM. In this session, the order entry, modification and cancellation takes place.
- Price Earnings (P/E) Ratio – It is the ratio for valuing a company that measures its current share price relative to its last 12 months earnings per share (EPS). For example, if any company’s final traded share price is INR 100 and earnings in the past 12 months per share is INR 5, then the P/E ratio of that company will be INR 20 (100/5).
- Put Option – It is the exact opposite of the call option. It gives the traders the right but not the obligation to sell a stock at a specific price (known as the strike price) by a particular time – at the option’s expiration. In order to do that, the put buyer pays the seller a sum of money known as a premium.
- Risk – It is defined in financial terms as the chance that an outcome or investment’s actual gains will differ from an expected outcome or return. Risk includes the possibility of losing some or all of the original investment.
- Securities – It is a transferable ownership certificate for investment in products such as stocks, bonds, future contracts and options that an individual holds.
- Strike Price – It is that price at which the holder of an option can buy or sell the securities they hold when the option is executed.
- Stock Split – When a company divides the existing shares of its stock into multiple new shares to boost the stock’s liquidity, it is termed a stock split. Some of the most common split ratios are 2:1 or 3:1, meaning that the stockholder will have two or three shares, respectively, for every share held earlier. But the most important thing is that there will be no change to the company’s market capitalisation.
- Thin Market – A thin market on any stock exchange is a period of time that is characterised by a low number of buyers and sellers, whether it’s for a single stock, a whole sector, or the entire market. It is also known as a narrow market that can lead to price volatility.
- Trading session – The time period from 9:15 AM to 3:30 PM is open for trading for both sellers and buyers, and within this timeline, all the orders of the day must be executed – It is known as trading session.
- Yield – It refers to the earnings generated and realised on investment over a specific time frame. Stock yield is calculated by dividing the share’s current price by the company’s annual dividend paid for that share. For example, if the share’s current price is INR 2000 and the dividend paid is INR 200 per share annually, the stock yield is 10%.