The stock market attracts numerous investors, including the first timers and the seasoned investors. While seasoned investors may be well versed with the various terminologies associated with stock market investments, it is the new investors who may lack confidence due to lack of knowledge on these terms.
Are you too thinking of investing in the stock markets? If you think it is tricky to invest in the stock markets only because some of the commonly used terminologies may seem complex, think again! Most of the terms associated with stock markets are easy to understand and get a hang of with experience. Here, we have shared the top 25 basic stock market terms that every new investor should know before starting off with stock market investments.
A commonly used and important term in stock trading is equity.
It refers to:
- the amount of capital invested by a shareholder in a company
- stocks of a company
Equity shares of a company give the shareholder an equivalent degree of ownership in that company. These are bought and sold between investors and traders in the stock or equity markets.
2. Initial Public Offering
Initial public offering or IPO is:
- a private company’s route to go public
- a way for companies to raise capital
When a company first offers its shares to the public, it is called the IPO process. These are issued in the primary market and can be subsequently traded in the secondary market.
Did you know?
You can fetch substantial listing gains through an IPO investment, depending on how well-researched your investment is and influence of market sentiments.
3. Market capitalisation
Market capitalization or market cap is a company’s aggregate valuation. It is calculated as:
Market cap = current share price X total number of outstanding stocks.
For example, if a company has 1 crore outstanding shares and the current market price of its shares is Rs. 50 per share, its market capitalisation will be Rs. 50 crores.
Market capitalisation is an important indicator that helps investors to find out the risk level and return on a share.
Portfolio is the total investment holdings of an individual or enterprise.
It can include
- different types of securities
- Securities of multiple companies of different sectors.
A diverse portfolio can be beneficial in tiding over market volatilities and absorbing market shocks. An investor should try to construct an investment portfolio as per personal risk appetite and investment objective.
5. Price-to-Earnings Ratio
This ratio is used for valuing a company.
Price to earnings ratio estimates a company’s value using its current share price in combination with its earnings per share.
This ratio is also known as:
- price multiple
- earning multiple.
A high P/E ratio means:
- a company’s stock is overvalued or
- investors expect a high future growth rate
How to calculate PE ratio?
P/E = Current stock price/ earnings per share
6. Stock split
Stock split results in an increase in the total number of outstanding shares of a company as a result of splitting its existing shares.
Why stock split?
This is mostly done by companies to improve their share availability in the market.
What happens in a stock split?
The commonly used split ratio is 2:1 or 3:1. This means that a company has split one share into two or three. The company’s share price reduces as a result of stock split, since the total number of outstanding shares increases.
7. Trading session
Trading session is the time during which a stock exchange is open for trading. In most Indian stock exchanges, trading sessions are from 9:15 am to 3:30 pm. All buy/sell orders are to be placed within this time.
8. Bull market
When most stocks in a stock market are on a rise for a reasonable period of time, it is termed as a bull market. During such market phases, investors are generally more optimistic.
9. Bear market
Bear market is referred to as a market phase when stock prices consistently fall for a prolonged period. Typically, the prices are seen to fall at least 20% as compared to recent highs. This is mainly attributed to negative sentiments of investors prevailing in the markets.
10. Face value
Each share issued by a company carries a face value at the time of issuance. The face value is also known as the intrinsic value of a share. It is fixed by the company while issuing shares to raise capital. It is usually in denominations of Rs. 5, Rs. 10, Rs. 100, etc.
Bonus shares are additional shares that a company issues to its shareholders. Once bonus shares are issued, the total number of shares of a company rises.
How does this work?
If an investor holds 200 shares of a company that further declares 4:1 bonus shares, it means that for every share held; the investor gets 4 shares for free. Therefore, an investor gets 800 shares for free and the total holdings rise to 1000 shares (200+800).
Dividend is the portion of earnings that a company pays out to its shareholders. This can be issued as:
- Cash or
- Stocks or
- Any other form that the company decides
While many companies offer dividends to shareholders, it is not mandatory for a company to declare dividends after making profits. Many companies choose to reinvest profits back into the business to attain further growth.
To know whether a stock’s performance is up to the mark or not, investors can compare it against a benchmark. A benchmark is a standard to compare a stock’s performance against. Market indices like BSE Sensex and NSE Nifty are mostly used as benchmarks for tracking stock performance.
14. Stock exchange:
A stock exchange is a secure marketplace for trading of securities. Here, securities are bought and sold as per the rules and regulations set by the stock market regulator. Stock exchanges help companies to raise capital and allow investors to make informed investment decisions using real-time price data. In India, the two major stock exchanges are the Bombay Stock Exchange / BSE and the National Stock Exchange/NSE.
Over-the-counter or OTC is buying and selling securities outside an official stock exchange.
The securities could include bonds, penny stocks, derivatives, currencies, etc. OTC markets allow buyers and sellers to trade using a dealer-broker network as an intermediary.
Liquidity refers to the time, and cost required for converting a security into cash or liquidating it.
Therefore, how easily one can sell a security tells us how much liquidity it offers.
17. Exchange-Traded Funds:
ETFs are passively managed mutual funds that pool money from investors to further invest in securities, including stocks, bonds, commodities, etc. These funds track a selected benchmark index and may, therefore, invest in the same composition of securities as the index itself. ETFs attract beginners or new investors since these have low expense ratio and are considered safer for long-term investments.
18. Intra-day trading:
Intraday trading is buying and selling of securities on the same day with positions being closed off before the trading day ends. It does not involve a transfer of ownership of securities, since the buy and sell positions are squared off against each other.
An ask or offer price is the lowest amount of money a seller is willing to accept for a stock. For example, an investor willing to buy a stock should estimate the price that a seller is willing to sell the security for. This is when the ask price comes into picture, that is, the lowest price someone may be willing to sell a stock for.
A bid price is the maximum amount that a potential buyer is ready to pay for a stock. For example, if an investor wishes to sell a stock, he/she has to determine how much someone is willing to pay for it. That’s the bid price.
In the stock markets, there is generally a difference between the price that a seller demands for a security and the price that a buyer is willing to pay for it. This is essentially the difference between bid and ask price, as the bid is often lower than the ask price. The difference between bid and ask prices is called the spread, or bid-ask spread. This is mostly influenced by the demand and supply of the specific security.
A stock market investor can invest in securities through an intermediary who connects him/her to the stock exchange. This intermediary is known as a broker. A broker essentially buys or sells securities on behalf of an investor in return for a commission.
23. Trading Account
A trading account is essential for trading in the stock markets. It is like a bridge between an investor’s Demat and bank account and is opened with a stockbroker. When an investor buys shares, he/she has to transfer the amount required for purchasing the shares from the bank account to the trading account. A buy transaction is initiated only once the amount is credited.
24. Demat account
The Demat account is another essential account required for investing in the stock markets. This account is used to hold the stocks or securities in digital format.
SEBI, or Securities and Exchange Board of India, is a regulatory body that regulates and supervises the Indian financial markets. It ensures efficient trading on stock exchanges across India through fair practices. It aims to protect investor interest by ensuring accurate information is shared with them by stock market participants.
Stock market is a vast space and consists of many aspects that may be unfamiliar even for seasoned investors. For new investors, however, reading up the above-mentioned basic terminologies and their meanings can help in gaining the required confidence while getting started with stock market investments.
Apart from equities, stock markets also involve dealings in instruments like futures, options, derivatives, commodities, etc.
Stocks can be chosen by screening various options available in the market as per valuation, profitability, risk, and other factors. It is advisable to use fundamental and technical analysis while evaluating the right stock for investment.
There is no specific right time to buy stock for maximising profits. Chances of profits are dependent on the market conditions, personal risk appetite, investment analysis and growth potential of specific stocks.
There are a variety of risks involved in trading, such as market risk, price risk, company-specific risk, industry risk, liquidity risk, etc.
Stock prices are mostly determined by growth prospects and profitability of the company. Investors look at the P/E ratio while also checking the demand and supply to gauge whether the stock price is justified.