Demystifying Stock Market Terminologies

Understanding the language of the stock market is crucial for any investor or trader. Below is a prioritized list of key terminologies, accompanied by explanations, to help you navigate the world of investments and trading.

These terms form the foundation of understanding stock markets and investments. For beginners, focusing on the essential terms will provide a solid base, while the advanced terms can be explored as you become more experienced. Keep learning and stay informed to make better investment decisions.

Note: This article is split into 3 main sections; Essential Terms for Beginners, Additional Key Terms and Advanced Terms. The Advanced Terms are collapsed by default. Also for each of the section, the terms have 3 parts; a Definition, Example and Detailed explanation. Similar to Advanced Terms the Detailed Explanation part of each term is collapsed by default. Please expand them if you would like to read more. Also while the terms are globally applicable, we are explaining with a special focus on their relevance in the Indian market.

Essential Terms for Beginners

Bullish Market

  • Definition: A market condition where prices are rising or are expected to rise.
  • Example: Investors are optimistic and continue buying stocks, pushing the overall market higher.
  • Detailed Explanation:
    • Investor Sentiment: In a bullish market, investors are confident about the economy and the financial health of companies. This optimism leads to increased buying activity.
    • Economic Indicators: Bull markets are often characterized by strong economic indicators such as rising GDP, low unemployment rates, and increasing corporate profits.
    • Duration: A bull market can last for months or even years and is typically marked by a consistent upward trend in stock prices.
    • Opportunities: Investors often seek to buy stocks early in a bull market to maximize their gains as prices continue to rise.

Bearish Market

  • Definition: A market condition where prices are falling or are expected to fall.
  • Example: Investors are pessimistic and start selling stocks, causing the market to decline.
  • Detailed Explanation:
    • Investor Sentiment: In a bearish market, investors are concerned about the economy and the financial health of companies. This fear leads to increased selling activity.
    • Economic Indicators: Bear markets are often associated with weak economic indicators such as declining GDP, high unemployment rates, and decreasing corporate profits.
    • Duration: A bear market can last for months or even years and is typically marked by a consistent downward trend in stock prices.
    • Opportunities: Investors may experience significant losses during a bear market, leading some to adopt defensive investment strategies or seek safe-haven assets like bonds or gold.

Staggish Market

  • Definition: A market condition where stock prices fluctuate within a certain range, neither consistently rising (bullish) nor falling (bearish). Additionally, "stag" refers to an investor who buys shares in new issues and sells them immediately for profit.
  • Example: Investors see stock prices moving up and down within a set range without a clear long-term direction.
  • Detailed Explanation:
    • Investor Sentiment: In a staggish market, investor sentiment is mixed or uncertain. There is no strong overall trend in market prices, leading to a range-bound trading pattern.
    • Market Behavior: Stock prices may move up and down frequently but stay within a certain limit, showing volatility without a clear upward or downward trend.
    • Opportunities: Traders who use short-term strategies, like day trading or swing trading, may find opportunities in a staggish market due to frequent price fluctuations.
    • Stag Investors: These investors focus on IPOs, buying shares at the offer price and selling them immediately upon listing to make quick profits. The term "staggish" can also imply market behavior influenced by such activities.

Dividend

  • Definition: A portion of a company's earnings distributed to shareholders.
  • Example: If you own 100 shares of a company and the dividend is ₹5 per share, you receive ₹500.
  • Detailed Explanation:
    • Purpose: Dividends provide a regular income to shareholders and can be a sign of a company’s financial health.
    • Forms: Dividends are usually paid out quarterly and can be in the form of cash or additional shares.
    • Significance: Receiving dividends can indicate that a company is profitable and generating sufficient earnings to share with its investors.

Equity Shares

  • Definition: Units of ownership in a company, also known as common shares.
  • Example: Buying 10 shares of SBI means you own a portion of SBI's equity.
  • Detailed Explanation:
    • Ownership: Equity shares represent ownership in a company and entitle shareholders to a portion of the profits and assets.
    • Voting Rights: Shareholders also have voting rights, allowing them to influence company decisions.
    • Dividends and Capital Gains: Equity shareholders can earn through dividends and capital gains if the company performs well.

IPO – Initial Public Offering

  • Definition: The first time a company offers its shares to the public.
  • Example: When a private company like Zomato goes public and offers its shares to investors.
  • Detailed Explanation:
    • Purpose: An IPO allows a company to raise capital from public investors.
    • Process: The process includes determining the offer price, which may be higher than the face value, reflecting the market's valuation of the company.
    • Transition: IPO marks the transition of a company from private to public status, subjecting it to regulatory scrutiny and public reporting.

Primary Market

  • Definition: The market where new securities are issued and sold for the first time.
  • Example: Purchasing shares directly from a company during an IPO.
  • Detailed Explanation:
    • Function: The primary market is crucial for companies seeking to raise funds for expansion, debt reduction, or other financial needs.
    • Transactions: It involves the issuance of new stocks or bonds directly to investors.
    • Role: Primary markets facilitate capital formation by allowing companies to reach a broader investor base.

Secondary Market

  • Definition: The market where investors buy and sell securities they already own.
  • Example: Buying shares of SBI from another investor on the NSE.
  • Detailed Explanation:
    • Function: The secondary market provides liquidity and enables investors to trade previously issued securities.
    • Platforms: Stock exchanges like NSE and BSE facilitate these transactions.
    • Importance: It ensures continuous trading of securities and reflects their current market value.

CMP - Current Market Price

  • Definition: The latest price at which a stock was traded.
  • Example: If SBI's last traded price is ₹350, that is its CMP.
  • Detailed Explanation:
    • Real-Time Indicator: CMP reflects the most recent transaction price and can fluctuate frequently based on supply and demand dynamics, market sentiment, and external factors.
    • Usage: Investors and traders use CMP to make informed buying or selling decisions.

Stock Exchange

  • Definition: A platform where stocks and other securities are bought and sold.
  • Example: BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).
  • Detailed Explanation:
    • Regulation: Stock exchanges provide a regulated environment for trading securities, ensuring transparency, liquidity, and fair pricing.
    • Services: They offer services like trade execution, settlement, and market data.
    • Role: Exchanges facilitate the efficient functioning of the secondary market by matching buyers and sellers.

Trading Account

  • Definition: An account used for buying and selling securities.
  • Example: You need a trading account to execute stock transactions.
  • Detailed Explanation:
    • Function: A trading account acts as a bridge between your bank account and the stock market, enabling you to place buy or sell orders.
    • Necessity: It is essential for participating in the stock market.
    • Providers: Typically offered by brokerage firms, a trading account comes with various features and tools for effective trading.

Demat Account

  • Definition: An account to hold securities in electronic form.
  • Example: Shares you buy are stored in your Demat account.
  • Detailed Explanation:
    • Purpose: A Demat account eliminates the need for physical share certificates, reducing the risk of loss or theft.
    • Function: It simplifies the process of trading, transferring, and managing securities.
    • Requirement: A Demat account is mandatory for trading in the stock market as per SEBI regulations.

Trading

  • Definition: The act of buying and selling financial instruments.
  • Example: Purchasing 100 shares of SBI and selling them after a week.
  • Detailed Explanation:
    • Activities: Trading involves active buying and selling of securities to capitalize on market movements.
    • Strategies: Traders can engage in various strategies like day trading, swing trading, or long-term investing.
    • Objective: The main goal is to make profits through short-term price fluctuations.

Settlement

  • Definition: The process of transferring securities to the buyer's Demat account and cash to the seller's account.
  • Example: If you buy shares on Monday, they will be credited to your Demat account by Wednesday (T+2 days).
  • Detailed Explanation:
    • Process: Settlement ensures the completion of a trade, involving the transfer of ownership of securities and payment.
    • Cycle: It typically follows a T+2 cycle, meaning transactions settle two days after the trade date.
    • Importance: Timely settlement is crucial for maintaining market integrity and trust.

Trading Time

  • Definition: The specific hours during which trading is allowed on the stock exchange.
  • Example: In India, the trading time is 9:15 AM to 3:30 PM.
  • Detailed Explanation:
    • Regulation: Trading hours are regulated by stock exchanges and can vary by country and exchange.
    • Impact: Knowing trading times is crucial for executing trades effectively and responding to market events in a timely manner.
    • After-Hours Trading: Some markets also offer after-hours trading, though it comes with lower liquidity and higher risks.

Additional Key Terms

Face Value

  • Definition: The nominal value of a share as stated by the company.
  • Example: If a share has a face value of ₹2, this is its original cost as set by the company.
  • Detailed Explanation:
    • Accounting Role: The face value is used for accounting and legal purposes, representing the initial capital of the company.
    • IPO Relation: During an IPO, shares are sold at an offer price, which is usually higher than the face value, reflecting the market's valuation.
    • Divident Calculation: Dividends are often declared as a percentage of the face value.

Capital

  • Definition: Money used to start or expand a business.
  • Example: An entrepreneur invests ₹1 crore as capital to start a new venture.
  • Detailed Explanation:
    • Types: Capital can include funds from personal savings, loans, or investor funding.
    • Usage: It is essential for purchasing assets, hiring staff, and sustaining operations until the business becomes profitable.
    • Significance: Adequate capital is crucial for a company’s growth and stability.

Issue Price

  • Definition: The price at which shares are offered to the public during an IPO.
  • Example: If a company's IPO issue price is ₹100 per share, investors can buy it at that price.
  • Detailed Explanation:
    • Determination: The issue price is set based on factors like the company’s valuation, market conditions, and investor demand.
    • Significance: It is often higher than the face value, incorporating the company's perceived market value and growth potential.
    • Impact: The success of an IPO can be influenced by how attractively the issue price is set.

Book Value

  • Definition: The net asset value of a company divided by the number of outstanding shares.
  • Example: If a company's net assets are ₹10 crore and it has 1 crore shares, the book value per share is ₹10.
  • Detailed Explanation:
    • Calculation: Book value = (Total Assets - Total Liabilities) / Number of Outstanding Shares.
    • Significance: It represents the intrinsic value of a company, providing a baseline for evaluating its stock price.
    • Comparison: Book value is often compared with the market price to assess if a stock is undervalued or overvalued.

Index (Sensex/Nifty)

  • Definition: A benchmark representing the performance of a group of stocks.
  • Example: The Sensex comprises 30 significant companies and reflects the market's overall performance.
  • Detailed Explanation:
    • Purpose: Indices measure market performance and provide a snapshot of market trends.
    • Components: Major indices include Sensex (30 companies) and Nifty (50 companies) in India.
    • Usage: Investors use indices to gauge market sentiment and compare the performance of individual stocks or portfolios.

Voting Right

  • Definition: The right of shareholders to vote on company matters.
  • Example: Shareholders vote on the election of the board of directors.
  • Detailed Explanation:
    • Influence: Voting rights enable shareholders to influence important company decisions, ensuring that management acts in their best interests.
    • Matters: Key issues include electing directors, approving mergers, and making changes to corporate policies.
    • Impact: Active participation by shareholders can shape the company’s strategic direction.

Advanced Terms

Clearing

  • Definition: The process of reconciling buy and sell orders in the stock market.
  • Example: Ensuring the buyer has the funds and the seller has the securities.
  • Detailed Explanation:
    • Function: Clearing involves matching trade details, confirming transactions, and preparing them for settlement.
    • Entities: Clearing houses like NSCCL (National Securities Clearing Corporation Limited) facilitate this process, mitigating counterparty risk.
    • Importance: It ensures the integrity and efficiency of financial markets by reducing the risk of default.

Settlement Delay

  • Definition: The time taken to transfer securities and funds after a trade.
  • Example: T+2 means the trade is settled two days after the transaction.
  • Detailed Explanation:
    • Cycle: The settlement cycle includes the time from trade execution to the final transfer of securities and funds.
    • Impact: Delays can affect liquidity and investment strategies, making it crucial for investors to understand the settlement timeline.
    • Efforts: Markets strive to minimize settlement delays to enhance operational efficiency and reduce risk.

Stag

  • Definition: An investor who buys shares in a new issue and sells them immediately for profit.
  • Example: Buying shares during an IPO and selling them once listed at a higher price.
  • Detailed Explanation:
    • Strategy: Stag investors aim to capitalize on short-term gains by exploiting the initial surge in stock prices post-IPO.
    • Behavior: They typically sell their shares as soon as trading begins, often benefiting from the initial demand.
    • Market Impact: While stag investing can provide quick profits, it also introduces volatility to newly listed stocks.

Demand and Supply

  • Definition: The relationship between the availability of a product and the desire for that product.
  • Example: High demand and low supply can drive stock prices up.
  • Detailed Explanation:
    • Principles: Demand refers to how much of a product or service is desired by buyers, while supply indicates how much the market can offer.
    • Impact on prices: Prices tend to rise when demand exceeds supply and fall when supply exceeds demand.
    • Market Dynamics: Understanding demand and supply helps investors predict price movements and make informed decisions.