If you are a beginner investor or trader, the stock market may seem like a complicated and daunting environment to navigate. Fortunately, you can make your stock market journey a lot less intimidating by simply learning a few basic terminologies of the stock market.
In this article, we are going to look at some fundamental stock market terms that every new investor and trader must know before starting their journey.
Basic Stock Market Terminology
Mastering this stock market terminology will empower you to make informed investment decisions and position yourself for long-term financial growth:
Share
A share, also known as an equity share, represents a unit of ownership in a company. When you buy the shares of a company, you essentially become a partial owner of that company and are entitled to a few rights. These include the right to vote in general meetings and entitlement to the profits generated by the company.
Bid and ask
Bid and ask are two of the most important stock market terms you should know. The bid is the highest price that a buyer is willing to pay for a stock at any given moment in time. The ask, meanwhile, is the lowest price a seller is willing to sell the stock at. The difference between the bid and ask prices is known as the bid-ask spread.
Broker
A broker, also known as a stockbroker, is an entity that provides a platform that facilitates the purchase and sale of equity shares and other securities. In exchange for providing you with a trading platform, stockbrokers often levy a brokerage fee. In addition to providing you with a platform for buying and selling securities, brokers also offer access to a gamut of stock market research tools and other value-added services.
Volume
Volume refers to the total number of shares that were bought and sold during a specific period, typically a day. High volume often indicates active trading and is a sign of liquidity in the market, whereas low volume may suggest limited investor interest or participation.
Liquidity
Another one of the many terms related to the stock market you are likely to encounter frequently is liquidity. It represents how easily (or not) an asset can be purchased or sold in the market without any major changes to its price. Highly liquid stocks can be quickly converted into cash at your desired price, whereas stocks with low liquidity may take more time to sell or may require you to compromise on the selling price.
Volatility
Volatility is a measure of the speed and frequency of change in the price of a security over time. The price of stocks with high volatility tends to move rapidly and unpredictably. On the other hand, the price of stocks with low volatility moves stably and predictably. You can rely on volatility indicators to measure the periods of high and low volatility in a stock.
Market capitalisation
Market capitalisation is a crucial metric used to gauge the overall value of a listed company. It is calculated by multiplying the current market price of a company's shares by the total number of outstanding shares. This metric is often used to classify companies into categories such as large-cap, mid-cap, and small-cap, providing investors with a benchmark to assess their relative size and potential investment risk.
Initial Public Offering (IPO)
An IPO marks a significant milestone in a company's journey, as it introduces its shares to the public for the first time. This process allows the company to raise capital through the sale of equity to investors. Following an IPO, the company's shares are listed on a stock exchange, enabling them to be traded freely in the secondary market. IPOs can often generate considerable interest and volatility, making them a focal point for investors and market observers.
Stock split
A stock split is a corporate action where a company increases the number of its outstanding shares while simultaneously reducing the price per share. This adjustment is typically done to make the shares more affordable and accessible to a wider range of investors. For instance, a 2-for-1 split would result in each shareholder receiving an additional share for every share they own, while the share price is halved. Despite the change in the number of shares, the overall market value of the company remains unchanged.
Blue-chip stocks
Blue-chip stocks are generally considered to be among the most financially sound and stable companies in their respective industries. These stocks have a proven track record of consistent earnings, reliable dividends, and strong market positions. Investors often view blue-chip stocks as relatively low-risk investments with the potential for steady returns. Examples of blue-chip companies in India might include Reliance Industries, Tata Consultancy Services, and HDFC Bank.
Repo Annualisation
Repo annualisation is a financial calculation used to determine the equivalent annual interest rate of a repurchase agreement (repo). A repo is a short-term loan where one party sells a security to another party with an agreement to repurchase it at a slightly higher price at a later date. The difference in price represents the interest earned. To annualise a repo rate, the daily interest rate is multiplied by the number of days in a year. This provides a measure of the annualised return on the investment.
Arbitrage
Arbitrage is a trading strategy that involves simultaneously buying and selling an asset in different markets to profit from price discrepancies. In essence, it's the practice of taking advantage of price differences between two or more markets.
Market order and limit order
Market order and limit order are among the basic terms related to the stock market that every trader and investor must know. A market order is essentially an instruction to buy or sell an asset at the best available price in the market. Such orders are often executed instantly, provided there is enough liquidity. On the contrary, a limit order is an instruction to buy or sell an asset at a specific price. Such orders may or may not be executed immediately, depending on the level of liquidity.
Also read: Who is a sub-broker?
Bull and bear markets
Bull and bear markets are two of the most used share market terms. A bull market represents a period of rising stock prices and high investor optimism. It is typically accompanied by good economic growth and strong corporate earnings. A bear market represents a period of falling stock prices and investor pessimism. Such periods are usually driven by economic downturns or weak corporate earnings.
Dividend
A dividend is a distribution of a company's profits to its shareholders. Fundamentally strong companies with established businesses typically pay dividends regularly. However, not all companies pay dividends, as some may reinvest earnings back into the business for growth.
Earnings
Earnings, also known as profits, represent a company's net income after accounting for all possible expenses, taxes, and other deductions. Earnings are a key measure of a company's financial performance and are closely watched by investors and analysts.
P/E ratio
The price-to-earnings (P/E) ratio is a valuation metric that is calculated by dividing the current market price of a company's shares by its earnings per share (EPS). A high P/E ratio may indicate that a stock is overvalued, while a lower P/E ratio may suggest undervaluation.
Index
Index is another one of the many terms related to the stock market that you should know. An index is a measure of the performance of a group of stocks or other securities. They serve as indicators of overall market trends and are used for comparative analysis and benchmarking. Some of the popular market indices include the Nifty 50, Sensex, and Nifty 100, among others.
ETF
An exchange-traded fund (ETF) is a type of mutual fund that invests in assets such as stocks, bonds, or a combination of both. However, unlike traditional mutual funds, ETFs are listed and traded on stock exchanges like individual stocks.
Stop loss
A stop-loss order is an instruction to sell a security when it reaches a predetermined price level, known as the stop price. Stop-loss orders are used to limit potential losses and manage risk by automatically triggering a sale if the stock price moves against the investor's position.
Additional read: Share Market Timings
Conclusion
As someone new to the stock market, mastering these basic stock market terminology is crucial to building a solid foundation. By understanding these concepts, you can make more informed decisions, manage risk effectively and navigate the various complexities of the stock market with confidence.
