It is rightly said, “It is mandatory to grasp the basics of anything for constructing a strong building”. Similarly, to invest in the stock market, one should acknowledge the basic terms used in the communication and investing activities of the stock market. Consider an example, if two intellectual investors are having a conversation in their investing language, would it be possible for a common person to understand their point? So, it is far better to learn all those terminologies needed while investing. This article brings you all those relevant concepts of the stock market. Besides, the categories the stock market varies are also expected to know by investors. And after learning all those concepts, we will understand the working of the stock market and the participants involved in it. Let’s learn each of them.

Stock Market Terminologies

• Annual report

An annual report is a corporate document circulated to shareholders that spells out the company’s financial condition and operations over the previous year. It is disclosed at the annual general meeting, which is held once every financial year.

• Arbitrage

Arbitrage is the simultaneous purchase and sale of the same asset in different markets to earn profit from tiny differences in the asset’s listed price. For example, gold may be traded on New York and Tokyo stock exchanges. It is also legal trading in the United States, contributing to market efficiency.

• Averaging down

When a trader purchases an asset, the asset’s price drops; if the trader purchases more, it is referred to as averaging down. It is called averaging down because the average cost of the asset or financial instrument has been lowered.

• Bear market

A bear market is when a market experiences extended price declines. It describes a condition where securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment. The first and most famous bear market was ‘The Great Depression.

• Broker

A broker is an individual or a firm that executes ‘buy’ and ‘sell’ orders for an investor for a fee or commission. He is the middleman between the buyer and seller and can help make a transaction go smoothly—for example, a real estate or stockbroker who facilitates the sale of a property. 

• Dividend

A dividend is the distribution of a company’s earnings to its shareholders and is determined by the company’s board of directors. It is a compulsory expenditure given to the shareholders. Once a dividend is declared, then it cannot be revoked.

• Sensex

The BSE SENSEX is a free-float market-weighted stock market index of 30 well-established and financially sound companies listed on the Bombay Stock Exchange. A stock market analyst Deepak Mohoni introduced the term Sensex.

• Nifty

Nifty is the index used by the National Stock Exchange and is made by the combination of National and Fifty (Nifty). Nifty is calculated using the float-adjusted, market capitalization-weighted methodology. The base value of the Nifty is 1000 and the base year of the Nifty is 1995.

• Quote

A stock quote is a stock’s price as quoted in an exchange’s decimals. A stock quote is generally displayed with supplemental information, such as high and low prices for a given security in a day or its change in value.

• Share market

The stock market consists of exchanges in which publicly held companies’ stock, shares, and other financial securities are bought and sold. 

• Bull market

A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything traded, such as bonds, real estate, currencies, and commodities.

• Bid price and Ask price

The term “bid” refers to the highest price a buyer will pay to buy a specified number of shares of a stock at any given time. The term “ask” refers to the lowest price at which a seller will sell the stock. The bid price will almost always be lower than the ‘ask’ or “offer” price.

• Order

An order is a set of instructions to a broker to buy or sell an asset on a trader’s behalf. There are multiple order types, which will affect the price they buy or sell, when they will buy or sell, or whether their order will be filled.

• Trading volume

Trading volume measures how much a given financial asset has traded. For stocks, volume is measured in the number of shares traded. For futures and options, volume is based on how many contracts have changed hands.

• Market capitalization

Market capitalization refers to the total value of all a company’s shares of stock. It is calculated by multiplying the price of a stock by its total number of outstanding shares.

Market Capitalization formula = Current Market Price per share * Total Number of Outstanding Shares.

• Intra-day trading

Intraday trading means buying and selling stocks on the same trading day. Share prices keep fluctuating throughout the day, and intraday traders try to draw profits from these price movements by buying and selling shares during the same trading day.

• Market order

A market order is an order to buy or sell a security immediately. This type of order guarantees that the order will be executed but does not guarantee the execution price. A market order generally will execute at or near the current bid, for a sell order or ask, for a buy order price.

• Day order

A day order is a stipulation placed on an order to a broker to execute a trade at a specific price that expires at the end of the trading day if it is not completed.

• Limit order

A limit order is a direction a broker gives to buy or sell a security at a specific price or better. It is a way for traders to execute trades at desired prices without having to monitor markets constantly. It is also a way to hedge risk and ensure losses are minimised by capturing sale prices at certain levels.

• Portfolio

A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, including closed-end and exchange-traded funds (ETFs).

• Liquidity

A stock’s liquidity generally refers to how rapidly shares of a stock can be bought or sold without substantially impacting the stock price. Stocks with low liquidity may be difficult to sell and may cause you to take a bigger loss if you cannot sell the shares when you want to.

• Secondary sharing

A company’s shares are already being traded on a stock market rather than those that have just been made available.

Categories of stock market

• Income Stocks

Income stocks offer regular and rapid income in the form of dividends over time with a low subject to risk. It offers a high yield which may generate the majority of the security’s overall returns. The ideal income stock would have very low volatility and show a history of increasing dividends regularly to keep up with inflation—for example, telecommunication, utilities, consumer staple, healthcare, petroleum, and energy.

• Penny Stocks

It refers to the stock of a small company that trades for less than $5 per share, having a lack of liquidity or ready buyers in the marketplace. Because of the low liquidity, investors might have difficulty finding a price that accurately reflects the market—for example, Vodafone Idea, Morepen Laboratories, TV18 BROADCAST LTD.

• Speculative Stocks

A speculative company is a corporation that bets its money on risky ventures. On the other hand, a speculative stock is one that a trader uses when speculating on the market’s direction. Companies associated with these stocks tend to be fairly risky and may even have sketchy business models. For example, it is mostly seen in the industries like mining, energy, or biotechnology.

• Growth Stocks

A growth stock is a company’s share that is anticipated to grow at a significant rate above the average growth for the market. The main feature of the stock is that they do not pay dividends to shareholders; the only opportunity the investors have is to earn by selling shares.

• Cyclical stocks

It refers to the stock primarily affected by market and business cycle fluctuations. Companies enjoy these stocks at times of boom in the country’s economy, whereas individuals reduce their demand significantly during the downturn of the business cycle.

• Value Stocks

Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value. Warren Buffett has been a well-known value investor in recent times. For example, Bank of America Corporation (BAC), JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC), and Citigroup Inc. (C) all trade at a significant discount to the market based on earnings.    

• Defensive Stocks

This is the best stock for an investor as it provides continuous and stable dividends accompanied by consistent earnings. Along with this, they have a constant demand for their products, so they are stable in various phases of business cycles—for example, water, gas, electric utilities, consumer staples, and health care.

Well! It must have now cleared that the stock market is dynamic and not static. It tends to keep on fluctuating, and to understand its movements; it is necessary to know these core facts of it. After a brief understanding, we would now see the working of the stock market and who the participants involved. Besides, the formation of the National Stock Exchange and Bombay Stock Exchange is also a new reform for the country and an investing platform for already invested and upcoming investors. 

Working on the Stock Market!

The SEBI’s Arrival

‘Securities and Exchange Board of India’ is the regulator of India’s capital markets formed to protect investors’ interest and their investments. In the stock market, a regulatory body, i.e. SEBI,, oversees the functioning and fairness of the stock market and the entities involved in financial activity. The major role of SEBI in capital markets are:

• Protect investors’ interest by conducting awareness programs.
• Regulates the activities of the market.
• Prevents fraud and malpractices.
• Strictly follows the rules and regulations of the market.
• Provides investment advisory licenses.

Stock Exchanges in India

The stock exchange, also known as a securities exchange, is a trading platform. It facilitates the registered stockbrokers and investors to transact in securities electronically. India has two major stock exchanges: National Stock Exchange (NSE) and the BSE Limited (BSE).  

Listed Companies 

If the company plans to release its Initial Public Offering, its shares will either get registered in NSE or BSE or both. Thus, the journey from just a company to Public Listed Company is decided after its IPO release on stock exchanges.

Investors and Traders

After the IPO or FPO release, the investors and traders would buy and sell these shares in the secondary market. Thus, these investors and traders proceed from the primary market to the secondary market. 

Investors are the ones who trade in long-term equity holdings along with trading in stocks and exchange-traded funds. Traders invest in short-term stock intending to earn profit from price fluctuations of the stock.

Thus, after their participation, the entire activity of trading takes place. The share price is determined by the demand and supply in the market. When the demand for shares is more than the supply, the price rises and vice-versa, so, if you want to invest in the stock market, ensure that you have proper guidance about its dynamics. Invest and multiply your income!