This post is a collection of important stock market terms and their meanings. The intention of this post is to help you familiarize yourself with important terms relating to the stock markets that you would frequently come across in your journey as a stock market investor.
1. Beta: Beta is a measure of the sensitivity of the stock relative to the stock market.
2. Bull Market: A rising market where the overall market sentiment is positive.
3. Bear Market: Market condition characterized by falling prices and an overall negative sentiment among the investors. Opposite to that of a bear market.
4. Bid Price: The price at which an investor is willing to buy a security.
5. Basis Point: One-hundredth of a percentage point. .
6. Dividend: Portion of the company’s profits distributed among the shareholders.
7. Derivative Contract: A contract whose value is ‘derived’ from the value of an underlying asset. Forwards, Futures, Options, and Swaps are all examples of a derivative contract.
8. Long and Short: Simply put, going ‘long’ means buying and going ‘short’ signifies selling.
9. Square off: Taking an opposite position from the one currently held to close out open trades. For example if you go long 100 shares of X Ltd @ Rs 100 per shares and then subsequently sell them @ Rs 105, you’ve squared off your long position.
9. Intraday Trading: A trading strategy where the trader ‘squares of’ his trades before the close of markets for the day.
10. Swing Trading: A trading strategy where overnight positions are held for open for a few days in-order to capitalize on short term ‘swings’ in stock prices.
11. IPO: Initial Public Offer – a company offering its shares for the very first time for public subscription through a stock exchange.
12. Further Public Offer (FPO) – Any fresh offer of shares for public subscription post an IPO.
13. Rally: A rapid increase in the price of a stock and/or the overall market capitalisation (as measured by an index like the NIFTY).
14. Offer: The price at which an investor is willing to sell a stock held by him.
15. Spread: The difference between the bid price and the offer price.
16. Circuit Breaker: A measure deployed by stock exchanges to prevent extreme volatility in stocks by halting trade in a particular stock when the price of the said stock rises or falls by a certain percentage over the closing price of the previous trading session.
17. P/E Ratio: The ratio between the market price of a share and its earnings per share (EPS). [Read more about P/E Ratio]
18. Right Shares: Shares offered by a company to its existing shareholders.
19. Stock Split: A stock split occurs when a company increases the number of its shares by reducing the face value of its shares. For example in a 2:1 split, a company will issue 2 shares of Rs 5 each to every share-holder holding 1 share of the face value of Rs 10 in the company.
20. Bonus Issue: In a bonus issue a company will issue new shares free of cost to its existing shareholders by capitalizing its reserves.
21. Ex date: The date on which a security goes ‘ex’, the market price of the security is adjusted for the most recently announced corporate action with may be a dividend declaration, a bonus issue or a stock split.
22. Short Selling: Short selling involves selling a stock which you don’t own and then buying it back later in order to square your position.
23. Dematerialisation: Dematerialisation is the process of converting physical shares into an electronic format. Post conversion the shares are held in an account that the ‘beneficial owner’ maintains with a Depository Participant.
24. Reverse Stock Split: Consolidation of two or more shares of a company into one share whereby the face face of the stock increases while the number of shares outstanding goes down.
25. Earnings Per Share (EPS): EPS is arrived at by dividing the total profit of a company available to equity shareholders by the number of shares outstanding. You can find this information in the company’s financial statements.
26. Settlement: The process of exchanging securities and funds after a trade/deal is concluded.
27. Stock Market Index: A Stock Market Index is an indicator of Market Momentum or Sentiment. An Index is created by selecting stocks that are representative of the entire market or a specific sector of the market. It indicates the market movement by tracking the changes in Market Capitalisation of Stocks that represent the Index
28. Market Capitalisation: Market Capitalisation is a term which is used to define a company’s worth. It is arrived at by multiplying the total outstanding shares of a company by its current market price.
29. Portfolio: The collection of stocks owned by an investor.
30. Stock Exchange: Stock Exchange is a regulated market place for buying and selling securities.
31. Brokerage: Buy and sell orders in the stock market have to placed through a registered Broker. A commission is charged by the broker from the buyer or seller of securities which is known as brokerage.
32. DeMat Account: An account belonging to an investor where all shares held by him are stored in the electronic format.
33. Headwinds: Situations or Events (both internal and external) facing a company that restrict company growth. Example: Entry of a strong competitor in the market.
34. Tailwinds: Situations or Events (both internal and external) facing a company that help the company to grow further. For example Government policies that favourably benefit a particular company.
35. Equity: Part of the capital of the company contributed by the owners in the form of Common Stocks and Preferred Stocks
36. Risk: Risk is the probability that the actual returns from an investment will fall short of the returns expected.
37. Futures: Future Contracts or Futures, are exchange-traded contracts between two parties to buy and sell a standardized quantity of a particular asset (the underlying), on a given ‘future’ date, at a pre-determined price.
38. Options: Option contracts or simply ‘options’ are derivative contracts that give you the option (a right but not an obligation) to buy/sell a particular security or a ‘lot’ of securities at a predetermined price.