The stock market is where investors buy and sell shares of companies. It’s a set of exchanges where companies issue shares and other securities for trading. It also includes over-the-counter (OTC) marketplaces where investors trade securities directly with each other (rather than through an exchange).
What Is the Stock Market?
Stock market is a place where equity shares of companies are bought and sold by the participants (buyers and sellers of stocks). The participants can be investors and traders who seek profits over the short time or the long run. The investors mainly have a long-term horizon and benefit from capital appreciation over time. Traders, however, look for quick profits by focusing on the small price changes in equity shares which mostly last for a few minutes or the whole trading session.
In India, the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) are the major platforms where most of the stock trading happens. Here, the buyers and sellers place orders through brokers who offer online trading services. The settlement cycle follows the T+2 format. In simple terms, you have two days for the trade cycle to be completed from initiation to final settlement.
The first step of the trade life cycle involves placing the order. It is followed by the matching and execution of the placed order. The clearing house of the stock exchange would then clear the trade. The final stage is the settlement which involves the pay in and pay out of funds and securities which takes place on the last day of the trade cycle.
Why should you know about stock market terminology?
Stock market terminology relates to industry-specific jargon which are used in the stock markets regularly. Even the experts and amateurs use these terms frequently to explain trading strategies, indices, stock market patterns and other components of the stock market. As an equity enthusiast, you must know these terms really well in order to make money in the stock markets. Moreover, it will also enhance your understanding of the relationship between stock markets and events happening in the economy.
Some of the most common terms used in the stock market are the bull and the bear market. When the stock market is on the rise and the economy is sound, you have a bull market. If the stock market experiences prolonged periods of price declines, you have a bear market. It’s typically a condition where the prices of securities fall by 20% from the recent highs.
How Does the Stock Market Work?
Companies raise money on the stock market by selling ownership stakes to investors. These equity stakes are known as shares of stock. By listing shares for sale on the stock exchanges that make up the stock market, companies get access to the capital they need to operate and expand their businesses without having to take on debt. Investors benefit by exchanging their money for shares on the stock market. As companies put that money to grow and expand their businesses, it profits the investors as their shares of stock become more valuable over time, leading to capital gains. In addition, companies pay dividends to their shareholders as their profits grow.The performances of individual stocks vary widely over time but taken as a whole, the stock market has historically rewarded investors with average annual returns of around 10%, making it one of the most reliable ways of growing your money.
Basic Stock Market Terms you should know
- Agent:
An agent is a stock brokerage firm which does the buying/selling of shares on behalf of the investor in the stock market. - Ask/Offer:
It refers to the lowest price at which the owner of the equity share is willing to sell the share in the stock market. - At the money:
Under this scenario, the strike price of an option is equal to the market price of the underlying asset which it represents. - Broker
A person who purchases or sells investments/stocks on behalf of the investor/trader in return for a commission. - Bear Market:
It refers to a period in which the prices of equity shares fall consistently. It’s usually a condition where share prices fall by 20% from recent hghs. - Bull Market:
An opposite of the bear market, a bull market is a market where the prices of the stocks are increasing over a prolonged period of time. A single stock and a sector can be bullish at one time and bearish at another time. - Beta:
It measures the association between the price of an equity share and the overall movement of the stock market. Beta of the market is assumed to be 1. A stock’s beta of more than 1 shows a higher risk than the market. A beta of less than 1 shows that stock is less riskier than the market or it would fall lower as compared to the market. - Bid:
It is the highest price that the buyer of a stock is ready to pay for a particular stock. - Blue Chip Stock:
These are equity shares of companies which are well-established and financially stable. These generally have a relatively high market capitalization. - Board Lot:
Each exchange board defines a standard trading unit which relies on the per share price. Some of the popular board lot sizes are 50, 100, 500, 1000 units. - Bonds:
A bond is a fixed income investment which is issued by the government or a company to its buyers. It shows a specified amount which an investor lends to the issuer of the bond for a specified period of time at a variable or fixed interest rate called the coupon rate. - Book:
It relates to an electronic record which is used to organise all the buy and sell orders of particular stocks which have remained pending. - Call Option:
In this, the buyer of the option gets the right but not the obligation to purchase the underlying asset at a specified price and time. - Close Price:
It is the final price on a specific trading day at which the equity shares of a company are sold or traded. - Convertible Securities:
It is a security like preferred stocks, bonds, debentures which are issued by an issuer capable of being converted into other securities of that issuer. - Debentures:
It is a form of fixed-income instrument which is not backed by security of any physical assets or collateral of the issuer. - Defensive Stock:
These stocks offer consistent earnings and stable dividends irrespective of the state of the stock market. FMCG, Pharma and IT are popular defensive sectors. - Delta:
A delta relates to the ratio of change in the price of a derivative in response to change in the price of the underlying asset. A higher delta suggests higher sensitivity to the price changes of the underlying asset. - Face value:
It relates to the amount of money or the value in cash that the holder of a security will obtain from the issuer of the security when the security matures at the specific date. - Moving Average
It refers to the average price per unit of an equity share with respect to a specific period of time. Some popular time frames used to study the moving average of a stock include 50- and 200-day moving averages. - One-sided Market:
It refers to a situation wherein a market only contains potential sellers/ buyers instead of both being present simultaneously. Market makers show only the bid price or an offer price indicating that the market is heading in one direction. - Spread
It refers to the difference between the bid and the ask prices of an equity share. You may perceive it as the difference between the amount at which you would like to buy and the amount at which you would like to sell a stock. - Volatility
It refers to the fluctuations in the price of an equity share. Highly volatile stocks witness severe ups and downs during trading sessions. These are highly risky bets which can bring huge profits for the skilled trader. However, stocks may crash in a short time and extreme volatility could result in a severe loss. - Volume
It shows the average number of stocks which are traded during a particular time, usually the daily trading volume. - Dividend Yield
It shows how much a company or firm pays out in dividends every year as compared to the stock price.
FAQs
What is the difference between stocks and shares?
Stocks and shares are used interchangeably to refer to financial equities, specifically, securities that denote ownership in a public company.
In simple terms, a share is a small part of a company’s stock. It is often used to describe a part of ownership of one or more companies. Stock on the other hand, refers to the ownership of a particular company.
What is stock market trading?
Stock market trading is the process of buying or selling of shares in a company. Stock trading takes place in the stock market. There are 5 types of stock market trading-
- Day trading
- Scalping
- Swing trading
- Momentum trading
- Position trading
What is bear and bull market?
Bear markets refers to a fall in stock prices and economy. Whereas, in bull market, the companies tend to generate more revenue and hence, the stock prices go up.
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