Basic Stock Market Terms

A few basic terms can help you avoid common mistakes when buying or selling shares.

• A share means part ownership in a company.
• Bid is the highest price a buyer currently offers.
• Ask is the lowest price a seller currently wants.
• LTP means the price of the latest completed trade.
• A market order trades at available market prices.
• A limit order lets you set your preferred price.
• Liquidity tells you how easily you may be able to buy or sell.
• Market capitalisation shows the market value of a company’s outstanding shares.
• EPS shows earnings per share.
• P/E ratio compares the share price with earnings per share.

Start with share, broker, trading account, and demat account.

What is a share?

A share means you own a small part of a company.

Suppose a company has 1,000 shares and you own 10.

Your ownership is:

10 ÷ 1,000 × 100 = 1%

Listed companies normally have a much larger number of shares, but the basic idea stays the same.

If the share price rises, the value of your holding may rise. If the price falls, you can lose money.

Who is a shareholder?

A shareholder is a person or organisation that owns shares in a company.

A shareholder may earn through:

• An increase in the share price
• Dividends, if the company declares them

Neither is guaranteed.

What is a stock exchange?

A stock exchange is a regulated market where shares and other securities are bought and sold.

Two major exchanges in India are:

• National Stock Exchange of India (NSE)
• BSE Limited (BSE)

The exchange brings buyers and sellers together.

What is a stock broker?

A stock broker helps you place buy and sell orders on a stock exchange.

Use a broker registered with the Securities and Exchange Board of India (SEBI).

Before opening an account, verify the broker’s registration and charges.

What is a trading account?

A trading account is used to place buy and sell orders.

Remember it this way:

Trading account = buying and selling

What is a demat account?

A demat account stores your shares electronically after settlement.

Remember it this way:

Demat account = holding your shares

So:

Trading account places the order. Demat account holds the shares.

Bid, ask, LTP, volume, and liquidity are useful because they tell you what is happening around the current market price.

What is the bid price?

The bid is the highest price a buyer currently offers.

Suppose the highest buyer is ready to pay: ₹99.80

That is the best bid.

What is the ask price?

The ask is the lowest price a seller currently wants.

Suppose the lowest seller is asking: ₹100

That is the best ask.

What is the bid-ask spread?

The difference between the ask and bid is called the bid-ask spread.

In this example:

₹100 − ₹99.80 = ₹0.20

Why does this matter to you?

Suppose you buy 1,000 shares at ₹100 and buyers are available only at ₹99.80 immediately after that.

Difference:

₹0.20 × 1,000 = ₹200

The spread can therefore affect your buying and selling cost.

What does LTP mean?

LTP means Last Traded Price.

It is the price at which the most recent trade happened.

Suppose the LTP is ₹200.

That does not guarantee that your order will also execute at ₹200.

The available price may already have changed.

What is volume?

Volume tells you how many shares have traded during a period.

High volume means more shares are changing hands.

It does not automatically mean the stock is good or that its price will rise.

What is liquidity?

Liquidity tells you how easily you may be able to buy or sell a share near the current market price.

Suppose you need to sell shares worth ₹1 lakh.

In a liquid stock, many buyers may be available.

In a stock with low liquidity, there may be few buyers. You may have to accept a lower price to exit.

What is market capitalisation?

Market capitalisation, or market cap, is the total market value of a company’s outstanding shares.

A simple formula is:

Share price × number of outstanding shares

Suppose:

• Outstanding shares: 10 crore
• Share price: ₹200

Market capitalisation:

10 crore × ₹200 = ₹2,000 crore

Market cap tells you the company’s market size.

It does not tell you whether the share is cheap or expensive.

What is EPS?

EPS means Earnings Per Share.

It shows how much of the company’s profit is attributable to each share under the applicable calculation.

Suppose:

• Profit attributable to equity shareholders: ₹100 crore
• Relevant number of shares: 10 crore

Simple EPS:

₹100 crore ÷ 10 crore = ₹10

If company profit changes, EPS can change.

EPS can also change if the number of shares changes.

What is the P/E ratio?

P/E means Price-to-Earnings ratio.

A simple formula is:

Share price ÷ EPS

Suppose:

• Share price: ₹300
• EPS: ₹15

P/E:

₹300 ÷ ₹15 = 20 times

This means the market price is 20 times the earnings per share used in the calculation.

But do not think:

Low P/E = good stock or High P/E = bad stock

A company may have a low P/E because its business has serious problems.

A company may have a higher P/E because investors expect stronger growth.

Compare valuation with profit growth, debt, cash flow, margins, and similar companies.

These are corporate actions that can affect your shares or money.

Dividend

A dividend is money that a company may distribute to eligible shareholders.

Suppose you own:

100 shares

The company declares:

₹5 dividend per share

Dividend:

100 × ₹5 = ₹500

A dividend is not guaranteed.

A company can increase, reduce, or stop paying dividends.

Bonus shares

Bonus shares are extra shares issued to eligible existing shareholders without a separate purchase payment.

Suppose you own:

100 shares

The company declares a:

1:1 bonus

You receive another:

100 shares

Total:

200 shares

Your money does not automatically double because you now hold twice as many shares. The market price adjusts for the corporate action.

Stock split

A stock split divides each existing share into more shares while changing the face value proportionately.

Suppose you own:

100 shares at about ₹1,000 each.

Approximate market value: ₹1 lakh

After a 1:10 split, you have: 1,000 shares

The theoretical market price adjusts to around: ₹100 each

Approximate value remains: ₹1 lakh

A stock split does not create profit by itself.

Rights issue

A rights issue gives eligible existing shareholders the option to buy additional shares under specified terms.

Suppose you receive a right to buy more shares.

Before paying, check:

• Issue price
• Number of shares offered
• Dates
• Why the company is raising money
• Whether you want to increase your investment

Having the right does not automatically mean buying more shares is suitable for you.

Price bands can restrict how far some securities can move during a trading session.

For applicable NSE securities, price bands can include 2%, 5%, 10%, or 20%. Different rules apply to certain securities, including those with derivatives.

Upper circuit

“Upper circuit” is commonly used when a stock reaches its permitted upper price level.

Suppose the reference price is: ₹100

If the applicable price band is 10%, the upper level is around: ₹110

But seeing ₹110 on the screen does not guarantee you can sell there.

There still needs to be a buyer and a matching trade.

Lower circuit

The lower level works in the opposite direction.

For a ₹100 reference price with a 10% band:

Lower level = ₹90

Suppose your stock reaches ₹90 and many people want to sell, but almost nobody wants to buy.

You may not be able to sell immediately.

That is why a visible market price does not always mean you can exit whenever you want.

A few more words appear regularly in stock market discussions.

IPO

IPO means Initial Public Offering.

It is the process through which a company offers shares to the public under an issue before or as part of becoming publicly listed.

After listing, those shares can normally be traded in the secondary market.

Bull market

A bull market describes a period when the broader market is generally rising.

It does not mean every stock will rise.

Bear market

A bear market describes a period when the broader market is generally falling.

It does not mean every individual share will fall.

Portfolio

Your portfolio is the collection of investments you own.

If all your savings are in one stock, your portfolio is heavily dependent on one company.

Diversification

Diversification means spreading your money across different investments instead of depending on one company or sector.

It can reduce concentration risk. It cannot remove all market risk.