Stock market is ever changing. If you are the one who invests or willing to invest in the stock market, then here is the list of the terms you should know!
Stock Market Terms
- Buy: Buy is a term used to describe the purchase or acquisition of shares that’s typically paid for via an exchange of money or another asset. When buyers look to acquire something of value, they assign a monetary value to that product or service.
- Sell: Sell means is to get rid of the shares that you have purchased. The selling of shares may take place either because you have achieved your goals or you want to cut down your losses.
- Bid: The bid is the maximum amount a buyer is willing to pay to acquire a stock. A buyer may purchase stock only if the price does not exceed the bid price he has placed.
- Ask: The ask price or an offer refers to the lowest amount of money that the seller of a stock is willing to accept for a share of that stock.
- Bid Ask Spread: This is the difference between the amount people are willing to spend to buy & amount at which shareholders are willing to sell a share. In the stock market, there is a difference between the bid and ask price, with the bid generally being lower than the ask price. This difference is known as the bid ask spread or spread which is primarily determined by the demand and supply.
- Bull Market: It means that the market is on an upward spiral. It is a result of investors’ palpable excitement and optimism about the market or the economy. It means that the aggregate market prices of the stocks are rising.
Also Read: How to treat income from shares?
- Bear Market:
Bear market is the exact opposite of bull market. Bear Market is the industry-specific jargon which indicates a downward trend in the overall condition of the market. It means that the cumulative market prices of the stocks listed on the stock market are declining. If the stock price of a particular stock is plunging, it’s considered to be bearish.
- Portfolio: The portfolio is a collection of all the investments that an investor has made right from purchasing a share for the first time.
- Market Order: An order to buy and sell shares at the market price.
A market order is an order to buy and sell shares at the market price. Several investors don’t go with this Order because the trade price in the market order remains volatile.
- Limit Order: An order to sell shares above a set price or buy shares below a set price is called a limit order.
- Day order: An order that is good only till the end of the trading day is called a “day order”. If the order does not get executed by the time the market closes, it would be cancelled.
Good Till Cancelled Order: An order that will stay open until it is either executed or manually cancelled. Such orders may stand for weeks if no shares are available to trade in the price range specified. For example, if you place a Good Till Cancelled (GTC) order to buy a share of Company A for Rs. 50 or less and the share is currently trading at Rs. 70. If it takes the share to hit Rs. 50 price point a week later, the order will be executed then. If it were a day order, it would have been cancelled at the end of the trading day itself.
Also Read: How to adjust profit/loss from transfer of shares?
IPO: IPO or Initial Public Offering is the initial offering or sale of securities to the public. Here the owners or private investors sell their ownership in the company and offer it for sale to the public. IPO is the route for the companies to raise capital for future growth and development. Initial Public Offering is one of the main reasons for the existence of the stock market.
- Mutual Funds:
Mutual funds is a way of investing across a large number of stocks by pooling your funds with other investors. This allows you to diversify your investment even if you have limited funds. Further, a fund manager takes care of selecting the right stocks to invest in.
- Exchange traded funds: These are mutual funds that you can trade like shares on the stock exchange. They usually track an index.
- Index: A benchmark that is used by investors and portfolio managers to measure market performance. A benchmark that is used by investors and portfolio managers to measure market performance. Sensex and Nifty are such benchmarks.
- Sensex: Sensex is BSE’s flagship index. It is a basket of 30 biggest, most actively traded stocks listed on the BSE. The term Sensex is a combination of sensitivity index.
- Nifty: Nifty 50 is a basket or collection of the 50 largest most active stocks listed on NSE. It helps investors gauge the overall market sentiments. The term Nifty 50 is a combination of National Stock Exchange and Fifty (50).
Also Read: Difference between Sensex and Nifty
- Broker: The broker is an intermediary between the stock exchange and the investors or traders who facilitate the transfer of funds and shares in exchange for a commission. A broker is a middleman that facilitates the trade between the buyers and sellers. A broker can also refer to a firm when it acts as an agent of the investors and arranges transaction between the buyers and sellers. The firm charges specific fees for these services.
- Dividend: A dividend is an amount distributed to the shareholders of the company, in proportion to the shares held by them. A dividend is the reward to the shareholders for placing trust in the management and believing in the potential of the company through the invested amount, and it often originates from a company’s net profits. However, the distribution of dividends is not guaranteed; a company can keep the entire profit to itself as retained earnings. The investor may choose to reinvest the dividends and increase his shareholdings in the company or may choose to receive it in cash. Also, a company may still distribute dividends even if it has not made any profits just to maintain the established and steady record of making periodic dividend payments.
- Intraday trading: Intraday trading is about buying and selling stocks on the same day so that all positions are closed before trading hours are over on that day.
- Trading Volume: The number of shares being traded on a given day is called trading volumes.
- Liquidity: Liquidity refers to how easily a stock can be sold off. A share that can be sold off quickly i.e. has high trade volumes is said to be highly liquid.
- Volatility: Volatility refers to the degree or the extent in fluctuation in the prices of the stock. Highly volatile stock witness abnormal highs and lows during the trading session, while low volatile stocks experience ups and downs to a lesser degree. Investing in highly volatile stocks can result in enormous gains or tremendous losses.
- Exchange: An exchange refers to a place or an electronic market where various securities are traded. i.e. one of the many stock exchanges in the country or worldwide where shares of stocks are bought and sold. The existing stock exchanges in the country are the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE).
BSE: The Bombay Stock Exchange (BSE) is the oldest stock exchange in India and Asia. It was established in 1875 under a banyan tree by five stockbrokers. Currently 5,400 shares are listed on BSE.
NSE: The National Stock Exchange (NSE) was established after the Harshad Mehta Scam in 1992. It is a leading stock exchange in India and fourth largest in the world. Over 1,600 stocks are listed on NSE.
Demat A/c: Demat or Demat A/c is an electronic account which holds financial assets like shares, mutual funds, ETFs, bonds, sovereign gold bonds, ULIPs etc. in digital form. A demat account is opened with a broker like Samco Securities, which is India’s best stockbroker.
Derivative: A derivative is a financial instrument that derives its value from the underlying asset or group of assets. Futures and Options are examples of derivatives.
Futures: Futures are financial contracts to buy or sell an asset at an agreed-upon future date at a predetermined price. They are often used to protect against price fluctuation of the underlying asset or help prevent or minimise losses from unfavourable price movements. It can also be used as a leveraged to speculate on the price movement of the underlying asset and profiteer from it. Futures contract are traded in lot sizes having different expiry dates and set prices that are known to the investor at the time of the contract itself. There are many types of futures contracts, such as commodity futures, stock futures, currency futures, etc.
Options: Options are financial contracts that provide the buyer the right but not the obligation to buy or sell the underlying asset at a predetermined price on or before the maturity date. Options are traded in lots. The specified price is known as the strike price. The amount paid in exchange for acquiring the right to buy or sell the underlying asset is known as option premium. In case the buyer does not exercise this right, his loss is limited to the option premium, he has paid. In case of the seller, the potential losses that can be incurred by him are limitless; however, the profit is limited to the option premium paid by the buyer in case the buyer refuses to exercise his right. There are two types of options: Call options and Put options.
Leverage: Leverage in the stock market means borrowing capital to invest in more shares than one is financially capable of buying with the singular motive to boost profits. Leverage means amplification of comparatively smaller investment force into a correspondingly greater profit. Leverage can result in exponential gains; however, it can also result in massive losses.
Annual Report: An annual report is a yearly report that every company prepares to impress the shareholders of their company. The annual report consists of lots of information about a company, from cash flow to management strategy.
Beta: Beta measures the volatility in the prices of the stock as compared to the overall movement of the market. If the stock has a beta value of 2, it means for every 1 point change in the entire market, the prices of the stock change by 2 points. So if the stock market declines by 1 point, the price of the stock will decrease by 2 points and vice-versa. The beta is an important measurement to gauge the risk a stock is adding to a portfolio. High beta stocks are risky as they are more volatile to the swings of the market; however, there is a higher return potential. Similarly, low beta stock presents a lower risk but correspondingly lower returns as well.
Alpha: Alpha is the relative return on investment as compared to the overall market, or the benchmark index. Alpha shows how well or poorly a stock has performed in comparison to the overall market. Sometimes, a stock may provide a nominal rate of return such as 5% but that 5% would be the result of the general movement in the market and not an actual barometer of the performance of an investment. Hence, Alpha is a precise measurement of performance of a stock independent of the market movements. Alpha tracks the historical active return of an investment. Therefore an Alpha of 10% means that the investment outperforms the overall market by 10%. Similarly, -10% means that investment underperforms the overall market by 10%.
Blue Chip Stocks: Blue Chip Stocks belong to the top 100 well-established companies which have high market capitalisation with an array of high-quality, widely accepted products and services. These companies often have a history of providing hefty dividends to their shareholders and are appreciated for their sound and effective management practices. They often drive and lead the market in times of a booming economy and optimistic investors’ sentiments. Blue chip stocks have an envious record of stable and reliable growth in the times of adverse market conditions and economic downturns. They represent a significant chunk in the stock market, and the movement in the prices of these stock can have outsized ramifications on the overall trend of the market.
Growth Stocks: Growth stocks are those companies expected to grow sales and earnings at a faster rate than the market average. They are considered to have the potential and the ability to outperform the market in the future. Growth companies have generated considerable, sustainable, and better-than-average returns in the market and are expected to continue providing substantial returns. In simple words, growth stocks are backed by healthy and consistent earnings and robust performance in the past and are touted to continue their growth pattern in the future as well.
Large Cap Stocks: Large-cap stocks are stocks of well-established companies with a market capitalisation above Rs 20,000 crores. Large-cap stocks are generally considered to be low-risk as they have a strong presence in the market, and have a history of providing potent and stable returns. Information about large companies is easily accessible. Most of the companies disclose timely information about the operations, products, expansion plans through media such as newspapers.
Mid cap stocks: Mid-cap stocks are stocks of companies with a market capitalisation between Rs 5,000 crores and 20,000 crores. Mid-cap stocks attract investors as they provide the possibility of earning exponential returns in the long-term. However, mid-cap companies are discrete about the internal operations of the company and expansion plans, as they endeavour to trump over the competition, and hence are furtive about the information of the company. This makes it cumbersome for the investors to judge the potential of the stocks. Therefore, conservative investors stay away from such stocks.
Small cap stocks: Most small-cap companies are early start-ups and entrepreneurial ventures that present the opportunity to earn astronomical returns. Understandably they are companies with inconsistent returns and low revenues. Many of these companies can go bust. But at the same time, many such companies are unicorns that are trading abysmally below their intrinsic value. The information about these companies is not readily available. Hence these small-cap stocks are a winner for investors with a long investment horizon and an appetite for high risks.
Now that you know about the terms related to the stock market, make use of these terms while investing!
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