A stock market is a place where the equity of companies is bought and sold by the investors. If you are new to the stock market or a seasoned investor, being familiar with these terms in the stock market is essential.
Here are the frequently used terminologies in the Stock Market that you need to know as an investor –
1. Share
Share is the smallest unit or proportion of ownership in a company.
2. Stock/Equity
It is the collection of shares of a single company or multiple companies.
Two (2) main types of stocks –
- Common Stocks – Securities that represent part ownership of a company, owner of these stocks generally have voting rights in the company’s management.
- Preferred Stocks – These stocks vary from common stocks on 2 key points – a) Preferred Stocks dividends are paid before common stocks’ dividends. b) Shareholders who own preferred stocks do not have voting rights in the company’s management.
Other types of stocks are Growth Stocks, Value Stocks, Dividend Stocks, Penny Stocks, Blue-Chip Stocks, etc.
3. Trading Volume
Trading volume is the total nos. of shares that are traded during a particular period of time. High trading volume means higher liquidity and an active market for buyers & sellers.
4. Stock Exchange
It is a place where stocks of companies are listed for sale/purchase. Stock exchanges are online these days and can be accessed through an agent/brokerage firm. In India, two (2) big stock exchanges are the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) –
- Bombay Stock Exchange (BSE) – In operation since 1885, the oldest and largest stock exchange in India, around 8900 stocks of different companies are traded through it.
- National Stock Exchange (NSE) – Established in 1992, NSE is ranked 4th in the world in the trade equity segment.
5. Agent or Broker or Brokerage firm
A brokerage firm or an individual that buys or sells shares/securities on behalf of clients or investors in the stock market for a commission and has a proper license to do the same.
6. Portfolio
It is the holdings of various securities of an investor or institution. A portfolio may contain different stocks and quantities, usually done to maintain risk-reward in the share market. It may also include various financial instruments/securities such as shares, bonds, options, commodities, futures, funds, etc.
7. Securities
These are stocks, shares, bonds, options, futures, funds, commodities, indexes, currencies, etc. that are traded in the market.
8. Assets
Assets are the things an individual or a company owns such as land, equipment, money, securities, etc.
9. Liabilities
Liabilities are debts and obligations that a company or an individual has to pay to their lenders and creditors.
10. Net Worth (Also referred to as Shareholders’ equity)
It is the difference between total assets and total liabilities of a company or an individual.
You can also read our article on “How to calculate Net Worth of a person and its importance” to know more about Net worth.
11. Bonds
A bond is basically a promissory note issued by the Government or a Company to its investors/buyers, which consists of details of invested amount and period of time of investment at a variable or fixed interest rate.
12. Mutual Funds
It is the fund managed by an expert fund manager who invests the funds received by pooling your money with other investors into various investments such as stocks, bonds, options, options, and other securities.
13. Options
Options are the contracts that provide the right to holders to buy or sell the underlying securities at a specified price and time however it is not obligatory for the holder to buy or sell underlying securities.
Standard type of Options –
- Put Option – Option wherein the investor has the right to sell the securities/shares at a specified price and time on or before its expiration date.
- Call Option – Option wherein the investor has the right to buy the securities/shares at a specified price and time on or before its expiration date.
- European-Style Option – These can be exercised (i.e. put or call) only on the expiry date of a particular option.
- American-Style Option – These can be exercised (i.e. put or call) only before the expiry date of a particular option.
14. Commodities
Commodities are generally the natural products and natural resources such as crude oil, metals, wheat, corn, natural gas, etc. These products are traded on the authorized commodities exchange.
15. Futures
It is a financial contract wherein there is a financial obligation upon the investor to buy or sell the underlying asset on an agreed future date at preset prices. Futures has many types such as commodity futures, index futures, stock futures, currency futures, etc.
16. Derivatives
Derivatives are securities whose prices are derived from underlying assets. For e.g. Futures, Options, etc.
17. Convertible Securities
Securities like preferred stocks, debentures, bonds that can be converted into other securities of that issuer at the option of the holder but it may occur at the option of the issuer also.
18. Defensive Stock
These stocks provide consistent dividends during periods of recession or economic downturn.
19. Debentures
Debentures are types of debt instruments issued by corporations or governments that are not secured by any collateral or physical assets from an issuer.
20. Trading session
In India, the stock market opens at 9:15 AM and closes at 3:30 PM for placing orders on working days Monday to Friday, excluding public holidays.
21. Volatility
The volatility of a stock is defined as the degree to which stock prices change or fluctuate constantly. High volatile stocks show fast ups and downs during the trading session that can result in huge gains or big losses.
22. Beta and Alpha
- Beta – Beta is the measure between equity’s volatility and the overall movement of the stock market. If beta > 1 then the stock is aggressive, carries a high risk, and provides high returns, and if beta < 1 then the stock is defensive, carries low risk, and provides low returns.
- Alpha – Alpha is used to measure the performance of a stock. It is the relative return on investment as compared to the overall market. For e.g. an Alpha of 5% means that the stock outperforms the overall market and -5% means that the stock underperforms the overall market.
23. Market Capitalization
It is the total value of the company as per the stock market. Market Capitalization = Stock Price * the Total number of shares.
For e.g.
- Stock Price of a company – INR 100/-
- Total shares issued/outstanding – 5,00,000 Nos.
- Market Capitalization – 100 * 5,00,000 = 5,00,00,000/-
Three types of stocks by market capitalization –
- Small-Cap Stocks – Stocks of companies whose market capitalization is less than INR 5,000 Crores. They are relatively smaller in size however have great potential to grow, for e.g.most start-ups and entrepreneurial business ventures.
- Mid-Cap Stocks – Stocks of companies whose market capitalization is more than INR 5,000 Crores but less than INR 20,000 Crores. These stocks have scope for tremendous growth and the possibility of exponential returns in 3 to 5 years of the horizon.
- Large-Cap Stocks – Stocks of companies whose market capitalization is more than INR 20,000 Crores and these stocks are of well-established and financially stable organizations. They have a good history of providing low-risk stable returns.
24. Bid and Ask
- Bid – It is the maximum price at which a buyer is willing to give to buy a share.
- Ask – It the minimum price a seller of a security is offering to sell his/her security.
25. Spread
It is the difference between the ‘bid’ and ‘ask’ price of a stock.
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26. Yield
Yield is the return on investments in terms of percentage (%). For e.g. Current price of a share – INR 150/- and Dividend Paid – INR 15/- annually, then stock yield – 15%.
27. Blue-Chip Stocks
These are equity shares of well-established and financially strong companies that have a market capitalization in thousands of crores and usually renowned for their regular dividends in times of adverse market conditions and economic downfalls.
28. Index
A benchmark used by investors to evaluate the market performance. SENSEX and NIFTY are such indexes/benchmarks.
- SENSEX – Sensitive Index of BSE, which is calculated by using 30 large companies’ stocks. (Visit this page for the current value of SENSEX)
- NIFTY – National Stock Exchange Fifty of NSE, which is calculated by top 50 blue-chip companies with large market capitalization. (Visit this page for the current value of NIFTY)
29. Bull and Bear Market
- Bull Market – Condition of the market when stock prices are rising consistently. It is prevalent when investors show excitement and optimism about the stock market or economy. Buying is more prominent in this scenario of the market.
- Bear Market – Exact opposite of Bull Market, it is the condition of the market when stock prices are declining continuously. It is usually caused when investors are fearful and have negative sentiments about the economy. The selling of stocks is more prominent in this condition of the market.
30. Orders
Order is an instruction given to the broker or brokerage firm by an investor for buying and selling securities.
Various types of orders are as below –
- Market Order – Order to buy or sell a share at the market price i.e. at the best current price.
- Limit Order – Order to buy the share below a set price or sell the share above a set price.
- Stop-loss Order – Using this type of order, an investor can save himself from loss by exiting a trade when the set price is reached.
- Day Order – This type of order is valid for a day, if it is not executed within that particular day it automatically gets canceled.
31. Delivery
When you buy a stock and hold it for more than a day, then it is called delivery.
32. Demat account
Short form for “Dematerialized account” where all the information related to the stock holding of an investor is held digitally. An investor needs to open this account in case he/she wants to invest in the shares on a delivery basis.
33. Annual Report
It is the financial assessment of a company that contains audited statements of income, cash flow, and Balance sheet of the company and issue by the company at fiscal year-end. It provides details about the financial condition and operations of the company.
You can also read our article “The Accounting Game – Book summary and its key lessons” to know more about financial statements and to get more grip on terms in the stock market.
34. Book
Book is an electronic record that contains the details of all pending buy and sells orders of particular stocks.
35. Face Value (Also referred to as Par Value)
For stocks, it is the original cost of the stocks as listed in the books and share certificates. For bonds, it is the price that a holder will receive at the time of maturity of the bond.
36. Close Price
Close price is the final price at which a particular stock is traded at the end of the day.
37. Initial Public Offerings (IPO)
IPO is the first time a listed company offers its securities to the general public for investment. Actually, when we buy shares, we generally get them from the previous owner, not the company directly. In the case of an IPO, we buy shares directly from the company.
38. SEBI
Securities and Exchange Board of India (SEBI) is a Government-owned organization that regulates the securities in the stock market of India.
39. One-sided Market
It is the market that has only either buyers or sellers but not both simultaneously.
40. Dividend
When a company receives a profit, then the company under no obligation chooses to give a part of its profit as a dividend to shareholders. Sometimes, the company distributes dividends even if they did not make any gain or profit to maintain a steady record of making periodic dividend payments.
41. Insider Trading
When a company’s management, its employees, or any other individual outside the company after learning the significant and confidential developments of the company, that is not known to the general public, trades in the company’s stocks then it is called Insider trading. In India, SEBI highly discourages insider trading.
42. Settlement
The process that follows when transactions of buying or selling of a stock take place. In India, T+2 settlement is adopted that means if an investor buys or sells stock on Monday, his/her trade will settle on Working Day 1 + 2 i.e. on Wednesday. Saturday, Sunday, and Public Holidays are not considered working days.
43. Open Interest
It is the total nos. of outstanding derivative contracts that are still pending for settlement.
44. Over the Counter Market
It the market wherein the securities that are not listed in stock exchange are traded.
45. Intra-day Trading
When trading of shares i.e. buying and selling of shares are done on the same day, then it is called intraday trading.
46. Free float (Also known as Public float)
It represents the portion of shares of an organization that is in the hands of public investors not held by governments, promoters or company officers, etc.
47. Price Earnings (P/E) Ratio
It is calculated by dividing the market price of shares by the company’s earnings per share. High P/E means a stock’s price is high relative to earnings and vice versa.
48. Compound Annual Growth Rate (CAGR)
CAGR is the average annual growth rate of an investment over a certain period of time. For large-cap companies, a CAGR of 5% to 12%, and for small-cap companies CAGR of 15% to 30% is considered good.
49. Exchange-Traded Funds
These funds can be traded like a stock on the stock exchange.
50. Some more important terms –
- Rally: A rapid increase in the standard price level of the market and stock.
- Basis Point: It is 1/100th of a percentage (%) point. For e.g. the difference between 6% and 5.50% is 50 basis points.
- Long: When you say you long 50 shares of ABC then this means you own 50 shares of ABC Company.
- Mahurat Trading – Stock Market is opened on the auspicious day of Diwali for few hours for trading.
So, these were the top 50 terms in the stock market an investor needs to know, although there are many other terms you should also know to be better in investing.
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It’s really admirable how you always see projects through from conception to completion.
Thanks Rashmi for your admiration!