Stock Trading Terms Every Trader Needs to Know
Why you should know about Stock Market terminology?
Knowing stock market terminologies can help you better understand markets and make prudent investment decisions. You can accurately gauge market movements and be in control of your investments. At the same time, it helps you analyse expert opinions, read between the lines, and make an informed choice.
Here is a list of some important terms that you should be aware of:
Bull market
When the stock market as a whole is on the rise for a sustained period of time, it is called as a bull market. During such a rise, investors are typically more optimistic. The opposite of a bull market is a bear market. In such a period, the market witnesses a prolonged decline in value
Bear market
Bear market reflects a prolonged fall in prices of stocks on a consistent basis. Typically, when stock prices fall by 20% or more from recent highs due to prevailing negative sentiments of investors, markets are said to be in a bearish phase.
Several internal and external factors such as changes in government’s policies, economic downturns, and recession, among others, could lead to a bear market.
Face value
When a company issues shares, each share has a face value. This refers to the value of the stock at the time of issuance. The company that issues the stock decides the face value and it does not change over time. And in case you hear someone say par value instead of face value, don’t panic. Both terms mean the same thing.
Bonus shares
As the word indicates, bonus shares are extra or additional shares that a company gives to its shareholders. And yes, they come at no additional cost. The number of bonus shares you get depends on the number of shares you originally own.
For example, imagine that you own a hundred shares of company X. Now, if the company announces a 2:1 bonus, you get two shares free for every share you own. That is, you would get 200 free shares and your total holding rises up to 300 shares.
Trend
The general direction in which the stock market (or even an individual share) moves is known as trend.
For example, if the market has been rising up for the past one month, you say that the market is on an upward trend. And if it is going down, the market has a downward trend. There is no specific time limit for a trend. A trend can happen for a short term, the medium term, or even the long term.
Dividend
Dividend is the amount of money a company pays to its shareholders out of its profits. They can be issued in the form of cash, stocks or any other form that the company chooses. A number of companies offer dividends to their shareholders. However, it is not compulsory for a company to give dividends even if it makes a profit. Many companies reinvest their profits back into the business itself for growth and expansion.
Overvalued stock
When a stock is said to be overvalued, it means that the current price of the stock is considered to be higher than what it should be. You can find out whether a stock is overvalued through certain mathematical metrics such as the Price-to-Earnings ratio. If a stock is considered to be overvalued, the price of the stock is expected to drop down.
Undervalued stock
An undervalued stock is the opposite of an overvalued stock. It means that a stock is being traded at a value that is lower than its intrinsic value. For example, imagine that the intrinsic value of a stock is Rs 100 but it is being traded at Rs 50/share. Investors try to acquire these stocks in order to get higher returns in the future at lower costs.
Market breadth
Market breadth is a ratio used in technical analysis to compare the total number of stocks that are rising against the total number of stocks that are falling. The purpose of this technique is to analyse the overall direction in which the stock market is moving.
The formula is as follows:
Market breadth = total number of rising stocks/total number of falling stocks
If the ratio is greater than one, it indicates a positive sentiment or that the market is bullish. A value less than one means negative sentiment or a bearish market.
Buy/Sell/Hold
This is perhaps the easiest jargon of the lot.
As the name suggests, ‘to buy’ in the stock market means to acquire shares in exchange for money. However, buy also means an analyst’s recommendation to purchase a particular stock.
Similarly, sell means an exchange of existing shares in your portfolio for currency. Or it could indicate an analyst’s recommendation to sell a specific stock in the market.
The concept of hold means that you neither buy nor sell the stock. So, if you already have the stock in your portfolio, then it is best that you continue to hold on to the stock. And if you don’t have the stock, it is best to wait until the volatility dies down and the recommendation changes to ‘buy’.
Support/Resistance
When it comes to trading in the stock market, the concept of support and resistance are quite popular. The concept basically tells that when the price of a stock reaches a specific predetermined level, it tends to stop and move in the opposite direction. The upper level is known as the resistance and the lower level is known as support.
For instance, imagine that you have bought 200 shares in company Z at Rs 50 each. You are expecting the price to rise. But in the next few months, the stock fails to rise beyond the value of Rs 60. In other words, the stock has hit a resistance level. Similarly, if the stock price does not drop beyond a particular point, it has hit a support level.
In case the resistance level is breached at some point, the stock tends to rise in value until it hits another resistance level.
Benchmark
How do you know whether a stock’s performance is good or not? You compare it with a benchmark. A benchmark is a standard against which any stock’s performance can be measured. There are different benchmarks available to help you get a good idea of any given stock’s performance. Market indices like BSE Sensex and NSE Nifty are a couple of well known benchmarks.
Agent
Agent refers to a brokerage firm that acts on your behalf in buying or purchasing shares. Registered with market regulator SEBI, at no point during the transaction, the agent owns the shares.
Prominent agents have their team of researchers and analysts who track every market movement and give you insights on the same. While traditional agents charge a commission on every transaction, discount agents quote a flat fee, irrespective of the volume of transaction.
Assets
Everything that a company owns on its name are assets. This includes cash, land, technology, etc. Assets reflect the wealth of a company and greater the assets, higher is its value in the market.
Companies build assets over time, and they can be tangible physical goods such as office equipment or intangible like intellectual property
Blue-chip stocks
Stocks of fundamentally sound companies with robust financials are known as blue-chip stocks. These stocks are better structured to weather market volatility and thus prevent a dip in the corpus.
Returns from blue-chip stocks are stable in the long run, and they are the first to bounce back from a market downturn.
Board lot
It refers to the standard number of shares defined by stock exchanges as a trading unit. More often than not, it refers to 100 shares.
Avoiding odd lots is the purpose of board lot, and it facilitates easy trading. Other than 100 shares, some of the popular board lots include 50, 500, and 1000 units.
Bonds
Bonds are fixed-income instruments issued by governments or an organisation. They bear a fixed repayment which needs to be paid on maturity to the investor.
When governments or companies require funds for new projects or maintain ongoing business, they can issue bonds. Bonds are also available as mutual fund units and can help earn a secure and fixed income.
Call option
It’s a derivative contract between two parties where the buyer gets the right to buy an underlying asset at a pre-defined price and time. However, it’s not an obligation.
Once the buyer exercises the call option, the seller has no other option but to sell the asset at a price initially agreed upon.
Convertible securities
As the name suggests, convertible securities refer to those securities which can be converted into other securities. Convertible preferred stock is a common convertible security.
It can be converted into a common stock. A convertible security has a lower pay-out than a security that doesn’t have this feature.
Close price
Close price refers to the final price at which a stock is traded on a given trading day. Stock exchanges have their fixed timings for closing trade for a day.
At the time the closing bell rings, the price at which a stock or security is traded becomes its close price. However, note that the price doesn’t mean the end of trading for a particular stock.
Current ratio
This ratio indicates a firm’s liquidity position. A company with a high current ratio can better meet its short-term liabilities.
In other words, the company has enough back-up, and its day-to-day workings will not be affected due to the pressure of working capital. This ratio is arrived at by dividing current assets with current liabilities.
Debenture
A debenture is a form of fixed-income instrument which isn’t backed by any collateral of the issuer. It is often used to issue loans by companies, and as a debenture holder, you become a creditor of the company.
A debenture has a fixed rate of interest, and the interest amount is payable half-yearly or yearly. Issuing it allows the company to get the required funds with ease, without diluting its equity holdings.
Defensive stock
It is a type of stock that offers stable earning and consistent dividends irrespective of the nature of the stock market. A defensive stock is also known as a non-cyclical stock.
Defensive stocks have a beta less than 1. Having them in your portfolio protects the corpus from eroding in a recession. Though they don’t generate high returns, they provide regular dividends.
Blue-chip stocks
Stocks of fundamentally sound companies with robust financials are known as blue-chip stocks. These stocks are better structured to weather market volatility and thus prevent a dip in the corpus.
Returns from blue-chip stocks are stable in the long run, and they are the first to bounce back from a market downturn.
Board lot
It refers to the standard number of shares defined by stock exchanges as a trading unit. More often than not, it refers to 100 shares.
Avoiding odd lots is the purpose of board lot, and it facilitates easy trading. Other than 100 shares, some of the popular board lots include 50, 500, and 1000 units.
Bonds
Bonds are fixed-income instruments issued by governments or an organisation. They bear a fixed repayment which needs to be paid on maturity to the investor.
When governments or companies require funds for new projects or maintain ongoing business, they can issue bonds. Bonds are also available as mutual fund units and can help earn a secure and fixed income.
Call option
It’s a derivative contract between two parties where the buyer gets the right to buy an underlying asset at a pre-defined price and time. However, it’s not an obligation.
Once the buyer exercises the call option, the seller has no other option but to sell the asset at a price initially agreed upon.
Convertible securities
As the name suggests, convertible securities refer to those securities which can be converted into other securities. Convertible preferred stock is a common convertible security.
It can be converted into a common stock. A convertible security has a lower pay-out than a security that doesn’t have this feature.
Close price
Close price refers to the final price at which a stock is traded on a given trading day. Stock exchanges have their fixed timings for closing trade for a day.
At the time the closing bell rings, the price at which a stock or security is traded becomes its close price. However, note that the price doesn’t mean the end of trading for a particular stock.
Current ratio
This ratio indicates a firm’s liquidity position. A company with a high current ratio can better meet its short-term liabilities.
In other words, the company has enough back-up, and its day-to-day workings will not be affected due to the pressure of working capital. This ratio is arrived at by dividing current assets with current liabilities.
Debenture
A debenture is a form of fixed-income instrument which isn’t backed by any collateral of the issuer. It is often used to issue loans by companies, and as a debenture holder, you become a creditor of the company.
A debenture has a fixed rate of interest, and the interest amount is payable half-yearly or yearly. Issuing it allows the company to get the required funds with ease, without diluting its equity holdings.
Defensive stock
It is a type of stock that offers stable earning and consistent dividends irrespective of the nature of the stock market. A defensive stock is also known as a non-cyclical stock.
Defensive stocks have a beta less than 1. Having them in your portfolio protects the corpus from eroding in a recession. Though they don’t generate high returns, they provide regular dividends.
Internet Trading
It refers to a trading platform where Internet is the medium. Here, the execution takes place via an order routing system that redirects traders to the exchange trading system.
With the help of the Internet Trading system, investors can conduct trade from any part of the world. Market regulator SEBI approved this trading in 2000.
Limit order
It refers to the order to buy or sell a security at a pre-defined price. The order is executed only at the specified limit price.
Though a limit order can control execution price, it can result in missed opportunities when the market is moving at an extremely fast pace. Also, it can be used in conjunction with stop order to prevent large losses.
Market capitalisation
It’s the aggregate valuation of a firm based on the current share price multiplied by the total number of outstanding stocks. For example, if a company has 20 million outstanding shares with the current market price being Rs. 100 per share, the market capitalisation of the company is Rs. 200 crores.
Market capitalisation is one of the most important characteristics that help investors find out the quantum of risk and return in a share.
Portfolio
Portfolio refers to the overall holding of an individual or enterprise. It includes various types of securities of multiple companies operating in different sectors.
A diverse portfolio helps to ride volatility better and absorb market shocks. As an investor, you must construct your portfolio according to your risk appetite and investment objective.
Price-to-Earnings Ratio
It is the ratio for valuing a company that measures the current share price to its per-share earnings. This ratio is also known as price multiple or earning multiple.
A high P/E ratio means two things - either the company’s stock is overvalued, or investors expect high growth rate in the future. You can arrive at the PE ratio by dividing the current stock price by earnings per share.
Stock split
Stock split refers to the increase in the number of outstanding shares by splitting the current ones. Companies do this to enhance the availability of their shares in the market.
The general split ratio is 2:1 or 3:1, which means that one share is split into two or three. A share’s price is also affected by a stock split. It reduces as the number of outstanding shares increases.
Strike Price
Strike price refers to the price at which a derivative can be bought or sold. In a call option, the strike price is the one when the option holder purchases the security.
On the other hand, for put options, the strike price is one at which the security is sold. Strike price is also known as exercise price.
LEVERAGE= लाभ Usage : Nepal PM wants to deepen ties with China to get more leverage in dealings with India.
Capital Gain Tax Meaning
Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price. Capital gains taxes are only triggered when an asset is realized, not while it is held by an investor. An investor can own shares that appreciate every year, but the investor does not incur a capital gains tax on the shares until they are sold. A capital gain is the difference between the purchase price (the basis) and the sale price of an asset.