The Stock Market is a place/arrangement where investors and traders can buy or sell equity shares of companies. Traders intend to earn profits by taking the benefit of minor changes in equity share price during a trading session. However, investors tend to have a long-term aim of earning a good capital appreciation over a period. In India, NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) are two prominent platforms for stock trading.
The settlement cycle runs on the T+2 Format. In this format, on day 1 the trades are executed and the participant gets the sales/shares proceeds on the 3rd day i.e. after two working days from day 1. The sellers and buyers place orders on NSE and BSE through agents/brokers who utilize online trading services.
To understand the stock market and how it functions, you need to have a basic knowledge of the associated jargon. And we are going to help you with a list of common terms that every trader and investor must know about the stock market.
Common Terms Used in the Stock Market
Here are a few stock market terminologies to know:
1) Stock: It is a term that refers to a certificate that indicates a company’s ownership.
2) Stock Exchange: You can use the stock exchange facility to find the list of stocks for sale and purchase. These days, you can access stocks online from a brokerage firm.
3) Share: This term indicates a stock certificate of a specific company. Thus, if an investor is the owner of 10 stocks, it can mean he/she shares from different companies. But if the investor is purchasing 100 shares, he/she is buying the shares of a single organization.
4) Share Market: This is a marketplace or stock exchange where you can purchase or sell shares. The Indian share market consists of stock exchanges in India. But, you can also sell or buy shares outside the Indian share market.
5) Bull Market: When the prices of stocks rise, the market is called bullish or bull market.
6) Bear Market: When the prices of stocks in the market fall, then the market is called bearish or a bear market.
7) Trading Volume: In a day, the number of shares that are traded is known as the trading volume.
8) Liquidity: This refers to the flexibility of selling a stock. For instance, a stock when sold quickly in high trade volume can be said to as highly liquid, and vice-versa.
9) IPO/Initial Public Offering: When a company puts its shares on the stock exchange for trading, you buy it from the previous share owner, and not directly from the company. But you can buy the shares from the company directly in case of an IPO.
10) Bonds: The government or company releases a promissory note to its buyers. Bonds thus indicate a specific time period for which a particular amount is held by the purchaser.
11) Equity: These are the preferred and common stocks that represent shares in the company’s ownership.
12) Commodities: These are products traded on only authorized commodities platform. Commodities are used for commerce and usually comprise natural resources and agricultural products.
13) Derivatives: It is security. The price of a derivative stems from one or more assets such as bonds, stocks, currencies, commodities, market indexes, and interest rates.
14) Market Capitalisation: It specifies the company’s value (current value of its shares together) according to the stock market.
15) Board Lot: It is the standard trading unit. The size of a Board Lot is as per the particular exchange board. The sizes can be 50, 100, 500, 1000 units. The same depends on the per unit share price.
16) Index: The portfolio managers and investors use a benchmark to measure market performance. Common indexes/benchmarks are Sensex and Nifty.
17) Blue Chip Stock: These are stocks with a market capitalization of thousands of crores. Such stocks are from financially robust and well-established companies with a consistent record of increasing the pay rate of dividends for years together.
18) Bid: The amount that you are willing to pay for a share is the bid amount.
19) Offer/Ask: This is the amount at which you want to sell the share.
20) 52-week High/Low: If the reference is ‘52-week high’, it means the highest point at which a particular stock has been traded in the last 52 weeks. 52 weeks also marks a year. Similarly, ’52-week low’ means the lowest point at which a particular stock is traded in a period of the last 52 weeks.
21) Yield: Yield is expressed in terms of a percentage. It measures the returns on investments. When it comes to a stock yield, the calculation is done by dividing the share’s current price by the annual dividend that the company pays for the share.
22) Portfolio: This refers to the complete collection of investments done by an investor.
23) Face Value: Also known ‘as par value’, a Face Value is the money amount or cash denomination which the holder of individual security earns from the security’s issuer during maturity.
24) Hedge: This is a step taken to reduce the risk of an asset’s adverse price movement in the market.
25) At the Money: This is the scenario when an option’s strike price is the same as that of the underlying securities. When options are at the money, the options trading activity is usually high.
26) Out-of-The-Money (OTM): Here, the stock price for call options is lower than the strike price. When it comes to put options, the stock price is over the strike price.
27) Diversification: To diversify is to reduce the risk in investment by purchasing shares from different companies that operate in different sectors.
28) Beta: This measures the relationship between a stock’s price and its movement in the entire market.
29) Delta: It is also called a hedge ratio. The ratio has a range from 0 to 1. It compares the price change of underlying assets to its concurrent price change of a derivative.
30) Close Price: It is the final price at which you can trade the stock on a particular trading day.
31) OHLC: It stands for Open, High, Low, and Close and is related to stock price. ‘O’ refers to the opening stock price for the day, ‘H’ stands for the highest price at which the trading of stock happens in the day, ‘L’ is the lowest price for the same activity, and ‘C’ is the stock’s closing price for the day.
32) Haircut: It is a thin spread between the asking price and bid for a given stock. This may also indicate a scenario when a stock price reduces to a particular percentage for any purpose or margin trade.
33) Debentures: This is a debt instrument, basically an unsecured form of investment. It is not secured by physical collateral or asset but backed by the reputation or creditworthiness of the issuer.
34) Convertible Securities: This refers to security such as preferred stocks, debentures, bonds, etc. It is by an issuer and as the name suggests, can be converted to other securities. The conversions may happen at the option of the issuer or holder.
35) Mutual Funds: This is a form of investment, wherein you can invest across a huge array of stocks by pooling funds with other investors. You can diversify investments through Mutual Funds even if you are low on funds. You can also hire a fund manager to select the apt stock for investment.
36) Defensive Stock: Even during an economic meltdown, this type of stock offers stable earning and constant dividends at a steady rate.
37) Exchange-Traded Funds: These are basically known as ETFs. They can track an index. You can trade these mutual funds like you trade shares on the stock exchange.
38) Dividends: Companies share profits they earn in a year with shareholders. A dividend is the profit portion distributed by a company to its shareholders.
39) Over-the-counter: In case you trade security, but the same is not listed on the stock exchange, then such trade is known as over-the-counter.
40) Intra-day Trading: If you buy and sell stocks on one particular day so that before the trading hours end on that day, all the positions close, then it is intra-day trading.
41) Order: This depicts the intent to sell or buy shares within a provided price range. For instance, you place an order to purchase 50 shares of a company at Rs. 60 per share as the maximum amount.
42) Limit Order: It is advisable to use limit orders when trading shares. This is an order to give shares over a set price. It can also be an order to buy shares below a given price.
43) Market Order: A market order is an order to buy or sell shares at the market price. As the trade price can be turbulent, it is suggested not to place a market order.
44) Day Order: This is a type of order that is productive only till the end of a particular trading day. If the same is not executed till the market closes, then the order is canceled.
With knowledge of stock market terminologies, you can better understand trading and investing in the stock exchange. The above list provided is not exhaustive, but sufficient to give you a healthy start at understanding the stock market in depth.