Want to invest in stock market? But you are afraid of various terms and jargons used by investors and financial advisors in the stock market, right?
One of the toughest parts for beginning your journey as an investor in the stock market is encountering the terms that you don’t understand.
It can seem immense in the beginning but, like anything, once you get the hang of those terms, you realize there was no reason to be scared.
In this article
- 32 Key Stock Market terms you must know
- 1. Annual Report
- 2. Arbitrage
- 3. Ask Price
- 4. Bear Market
- 5. Beta coefficient
- 6. Bid price
- 7. Blue Chip Stocks
- 8. Bull Market
- 9. Broker
- 10. Correction
- 11. Crash
- 12. Day Trading
- 13. Dividend
- 14. Exchange
- 15. Execution
- 16. Haircut
- 17. Index
- 19. Leverage
- 20. Market capitalization
- 21. Margin Trading
- 22. P/E Ratio
- 23. Primary market
- 24. Portfolio
- 25. Quote
- 26. Rally
- 27. Secondary market
- 28. Short Selling
- 29. Spread
- 30. Volatility
- 31. Volume
- 32. Yield
- The Bottom Line
32 Key Stock Market terms you must know
Here are the most important stock market terms you will encounter as you learn how to trade in stocks.
1. Annual Report
An annual report is a comprehensive report prepared by a listed company that is intended to impress and inform shareholders and other interested people about the company’s activities and financial performance.
It contains a lot of information about the company, from its cash flow to its management strategy for short and long term.
When you go through an annual report, you are judging the company’s current solvency and financial situation plus get an idea about the future path to be followed by it.
Arbitrage refers to buying and selling the same stocks in different markets in order to take advantage of differing prices for the same asset.
if stock ABC is trading at ₹100 on one market and ₹105 on another, the trader could buy N number of shares for ₹100 and sell them for ₹105 on the other market, pocketing the difference.
3. Ask Price
Ask price is the lowest price that a seller of stock is willing to accept for a share of that given stock.
For buying a stock you are going to get the ask price.
4. Bear Market
A bear market is a time frame marked with declining stock prices. The confidence of investors is extremely low in a bear market.
So, many investors opt to sell off their stocks for the fear of further losses, thus fuelling a vicious cycle of negativity in the stock market.
If a stock price plummets, it is very bearish.
5. Beta coefficient
One of the most popular indicators of risk in the stock market is a statistical measure of the beta coefficient.
Beta coefficient, or simply beta, is a measure of a stock’s volatility in relation to the market. Market analysts use this measure all the time to get a sense of stocks’ risk profiles.
The market has a beta of 1, and individual stocks are ranked according to their volatility with respect to the market conditions.
Over time, stocks that swing more than the market, have a beta above 1 and if stocks move less than the market, the beta is less than 1.
If stock ABC has a beta of 1.5, that means that for every 1 point move in the market, stock ABC moves 1.5 points and vice versa.
6. Bid price
The bid price is the amount of money a trader is willing to pay per share for a given stock in the market.
If you are selling your stocks, you are going to get the bid price from buyers.
7. Blue Chip Stocks
Blue chip stocks are the stocks of very large and well-recognized companies with a long history of sound financial performance over the years.
These stocks are known to have capabilities to endure high volatility in market conditions and provide decent returns in good market conditions.
8. Bull Market
A bull market is a time frame marked with increasing or expected increase in stock prices. The confidence of investors is very high in a bull market.
So, many investors opt to buy or invest in stocks in the hope to gain profits.
If a stock price rises over a prolonged period, it is very bullish.
Broker or stock broker, is an individual or a firm, that act as a mediator between you, as an investor, and the stock exchange.
Brokers buy or sell an investment for you in exchange for a fee known as the commission.
A correction in market refers to a price decline of at least 10% of any stock or market index following a temporary upswing in the market price of a security from its most recent peak.
Market corrections can occur in individual stocks, indexes, commodities, currencies or any asset that is traded on an exchange.
A crash in stock market is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of investors wealth.
Crashes are driven by panic among investors as much as by underlying economic factors. They often follow speculative stock market bubbles.
12. Day Trading
The process of buying and selling of stocks within the same trading day, i.e., before the close of the markets on that day, is known as day trading.
Traders who participate in the process of day trading are often called as active traders or day traders.
A portion of a company’s earnings (profits) that is paid to its shareholders i.e., people that own that company’s stock, on a quarterly or annual basis is known as a dividend.
But remember that not all companies pay dividends.
Exchange or stock exchange act as a platform or place for trading in securities between investors/traders with the help of brokers.
The most well-known exchanges in the Indian stock market are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
Execution is the completion of a buy or sell order for a stock.
The execution of an order occurs when it gets completed, not when the investor places it.
When the investor submits the trade for a buy or a sell, it is sent to a broker, who then determines the best way for it to be executed.
A Haircut is a difference between the market value of the stocks and the loan that the lender (brokers) gives to you in order to trade in the stock market.
And, it is generally expressed in terms of percentage.
An index is a measurement of a section or portion of the stock market.
Among all the stocks listed on the stock exchange, some similar stocks are selected and grouped together to form an index.
This classification may be on the basis of the company size, sector the companies belong to, market capitalization of the company or some other criterion.
Nifty and Sensex are the most closely watched index in India
18. Initial Public Offering (IPO)
The process of becoming a public company is called an Initial Public Offering (IPO), i.e. it is the first time a company’s share is appearing on the stock exchange.
IPO happens when a company decides to go public rather than remain solely owned by private or inside investors.
The Securities and Exchange Board of India (SEBI) has strict rules that Indian companies must follow before issuing an IPO.
The leverage in the stock market involves borrowing capital (especially from brokers) to invest in more stock than what you can afford on your own.
20. Market capitalization
The market capitalization of a company is calculated by multiplying its current share price with its number of outstanding shares in stock market.
In India, SEBI has defined these three categories, based on market capitalization.
- Large Cap Stocks: Stocks of top 100 companies in terms of market capitalization
- Mid Cap Stocks: Stocks of 101st- 250th companies in term of market capitalization
- Small Cap Stocks: Stocks of 251st company on wards in terms of market capitalization
21. Margin Trading
For margin trading, you require a margin account.
A margin account lets an investor borrow money from a stock broker to purchase an investment (stocks).
The difference between the amount of the money borrowed and the price of the stocks is called the margin.
Margin trading can be dangerous because, if you are wrong about the direction in which the stock price will go, you can lose a significant amount of money.
22. P/E Ratio
Stands for the price earnings ratio, is the ratio for valuing a company that measures its current stock price in market relative to its earnings per share (EPS).
P/E Ratio in stock market gives an idea of what the market (investor) is willing to pay for company’s earnings.
Investors often use P/E ratio as it provides them a better sense of the value of the company’s share and helps them in analyzing how much they should pay for a stock based on its current earnings.
23. Primary market
The stock market which provides the channel for sale of new shares by a company to get listed in a stock exchange is known as the primary market.
The primary market provides an opportunity to issuers of stocks, especially corporates, to raise resources to meet their requirements of investment and/or discharge some obligation and liabilities
A range of investment instruments owned by an investor makes up his or her portfolio.
Investors can have as few as one stock in their portfolio and can also have an infinite amount of stocks or other securities in their portfolio.
A quote for a specific stock provides information, such as its bid price, its ask price, last-traded price and volume traded.
Rally is a period of sustained increase in the price level of the stock market or of the price of a stock.
This type of price level movement can happen during either a bear or a bull market, when it is known as either a bear market rally or a bull market rally, respectively.
27. Secondary market
The secondary market refers to the stock market where shares of a company are traded after being initially offered to the public in the primary market and/or listed on the stock exchange.
Majority of the trading in stock markets is carried out in the secondary market.
28. Short Selling
Short selling is a strategy involving the sale of a stock when an investor expects a stock’s price will decline.
It is a way to take advantage of a stock that an investor believes will decrease in price.
After an investor sells short, he/she can buy back the shares at the lower price point and take the difference in price as his/her profit.
Spread is the difference between the bid price and the ask prices of a stock, or the amount for which someone is willing to buy it and the amount for which someone is willing to sell it.
If a trader is willing to trade stock ABC for ₹100 and a buyer is willing to pay ₹90 for it, the spread is ₹10.
Volatility is a statistical measure of the dispersion of returns for a given stock or market index.
In simple words, the movements in the price of a stock or the stock market as a whole is known as volatility.
Highly volatile stocks are those with extreme daily up and down in its price level movements.
The number of shares of a particular company traded during a particular time period, normally measured in average trading volume.
Volume can also mean the number of shares you purchase of a given stock in the market.
Yield, in the stock market, represents the ratio between the share price paid and the dividend paid.
A stock ABC is trading at ₹100 per share, with a dividend that amounts to ₹5 per year, you divide the ₹5 by ₹100 and turn it into a percentage to get the yield of this stock.
In this example, the yield would be 5%.
The Bottom Line
Knowing the terms used in stock market will definitely make you a better investor.
It takes time to grasp the intricacies of stock trading, but once you do, the stock market terms above will become part of your daily vocabulary.
Disclaimer: the views expressed here are of the author and do not reflect those of Groww.