When you are new to something the best thing to do is to familiarize yourself with the terminology. We have prepared a list of basic terms that will help you get started. Once you have mastered the basics it would be a good idea to delve into deeper material to get a better understanding of how the market works. Also for newbies the best piece of advice we can give is never start trading the market with real money. So in the meantime enjoy learning these key terms. You have chosen an exciting adventure and this is just the beginning.
1. Agent: A brokerage firm that acts on behalf of a client in buying or selling of shares. The agent at no point of time in the entire transaction will own the shares.
2. Ask/Offer: Lowest price an owner is willing to sell the stocks.
3. Assets: Everything a company owns in its name, including cash, equipment, land, technology etc. Assets show the total wealth of the company.
4. At the money: When options strike price is identical to the price of the underlying securities. Options trading activity tends to be high when options are at the money.
5. Bear Market: When stock prices are falling consistently in the market.
6. Beta: A measurement of relationship between stock price of any particular stock and the movement of the whole market.
7. Bid: The highest price a buyer is willing to pay for a stock. It is the opposite of ask/offer.
8. Blue Chip Stock: Stocks of large, well-established and financially-sound companies. These companies hold a record of paying stock holders’ dividends at a consistently increasing rate over decades. Blue chip stocks typically have a market capitalization in thousands of dollars.
9. Board Lot: The standard trading unit as defined by the particular exchange board. Board lot size usually depends on the per share price. Common board lot sizes are 50, 100, 500, 1000 units.
10. Bonds: A promissory note issued by companies or government to its buyers. It shows the specified amount held for a specified time period by the buyer.
11. Book: It is an electronic record of managing all the pending buy and sell orders of particular stocks.
12. Broker/Brokerage Firm: A registered securities firm is called a broker/brokerage firm. A Broker acts as an advisor for purchasing and selling of listed stocks, they do not own the securities at any point in time. Brokers charge a commission for their service.
13. Bull Market: A market in which the stock price is increasing consistently.
14. Business Day: Monday to Friday, excluding public holidays.
15. Call Option: An option that is given to investor to have the right but not obligation to buy a particular stock at a specified price within a specified time period.
16. Close Price: The final price at which the stock is traded on a given trading day.
17. Commodities: Product used for commerce that are traded on a separate authorized commodities platform. Commodities include agricultural products such as wheat and natural resources such as crude oil.
18. Convertible Securities: A security (bonds, debentures, preferred stocks) from an issuer that can be converted into other securities of that issuer. The conversion usually occurs at the option of the holder, but it may occur at the option of the issuer.
19. Debentures: This is a type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. A debenture is an unsecured form of investment.
20. Defensive Stock: A stock that provides constant dividends and stable earnings even in the periods of economic downturn i.e. even in extreme situations in the stock market these companies continue to pay dividends at a constant rate.
21. Delta: Ratio that compares the change in the price of the underlying asset to the corresponding change in the price of a derivative. Sometimes delta is referred to as the hedge ratio. It has a range from 0 to 1.
22. Derivatives: A security whose price is derived from one or more underlying assets. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
23. Diversification: Reducing the investment risk by purchasing shares of different companies operating in different sectors.
24. Dividend: A portion of the company’s earnings is paid to its shareholders in return for their investments. It is usually declared as a percentage of current share price or some specified INR value. The dividend is usually decided by the board of directors of the company.
25. Equity: Common and preferred stocks, which represents shares in the ownership of a company.
26. Face value: The cash denomination or the amount of money the holder of the individual security is going to earn from the issuer of the security at the time of maturity. It is also called par value.
27. Hedge: Strategy or an attempt to reduce risk of adverse price movements of assets.
28. Income Stock: A security which has a solid record of dividend payments and offers a dividend higher than the common stocks.
29. Index: A statistical measurement of change in the economy or security market. Indices have their own calculation methodology and are usually measured as a percentage change in the base value over time.
30. Initial Public Offering (IPO): A company’s first issue of shares to the general public. IPOs are issued by smaller, younger companies seeking funds for expansion and growth, but large companies also practice this to become publicly traded companies.
31. Internet Trading: A platform that uses an internet for trading execution. Internet trading takes place through an order routing system. Orders are routed over the internet to the exchange trading system. Traders with internet services in any part of the world can trade using their brokers Internet Trading System.
32. Limit Order: An order to buy or sell a share at a specified price. The order will be executed only at the specified limit price or even better. A limit order sets a minimum price the seller is willing to accept and maximum price the buyer is willing to pay for it.
33. Listed Stocks: Shares of an issuer that are traded on the stock exchange. The issuer has to pay fees to be listed in the stock exchange and abide by the regulations of the stock exchange to maintain listing privilege.
34. Market Capitalization: This is the total value in INR of all of a company’s outstanding shares. It is calculated by multiplying all the outstanding shares with the current market price of one share. It determines the company’s size in terms of its wealth.
35. Mutual Fund: A pool of money managed by professionals by investing in stocks, bonds and other securities with the objective of increasing their savings. These experts will create a diversified portfolio from these funds.
36. Odd Lot: A number of shares which are less than or greater than but not equal to the board lot size. For example, if the board lot size is 100 shares, an odd lot would be 99 or 101 shares. Usually odd lots are difficult for trading and it is not easily accepted in the market.
37. One-sided Market: A market that has only potential buyers or only potential sellers but not both.
38. Out-of-The-Money (OTM): For call options, this means the stock price is below the strike price. For put options, this means the stock price is above the strike price. The price of out-of-the-money options consists entirely of “time value.”
39. Portfolio: Holdings of any individual or institution. A portfolio may include various types of securities of different companies operating in different sectors.
40. Positions Limit: this is the maximum number of futures and options contract that any individual investor can hold at any given point of time.
41. Pre-opening Session: The pre-open session is for duration of 15 minutes i.e. from 9:00 AM to 9:15 AM. In pre-open session order entry, modification and cancelation takes place.
42. Price Earnings (P/E) Ratio: PE ratio is one of the most widely used tools for stock selection. It is calculated by dividing the current market price of the stock by its earning per share (EPS). It shows the sum of money you are ready to pay for each dollars’ worth of the earnings of the company.
43. Put Option: An option that is gives an investor the right to sell a particular stock at a stated price within a specified time period. Put option is purchased by those who believe that particular stock price is going to go lower than the stated price.
44. Risk: The probable chances of investments giving an actual return. Risk is usually measured by calculating the standard deviation of the historical price returns. Standard deviation is directly proportional to the degree of risk associated.
45. Securities: A transferable certificate of ownership of investment in products such as stocks, bonds, future contracts and options held by an individual or company.
46. Strike Price: The price at which the holder of an option can buy (call option) or sell (put option) the securities they hold when the option is executed.
47. Stock Split: An attempt to increase the number of outstanding shares of a company by splitting the existing shares. It is usually done to increase the availability of shares in the market. The usual split ratio is 2:1 or 3:1, i.e. one share is split into two or three.
48. Thin Market: A market in which there are comparatively low number of bids to buy and offers to sell. Since the number of transactions is low the prices are usually very volatile.
49. Trading session: The period of time from when the market is open for trading for both sellers and buyers, within this time frame all the orders of the day must be placed. Here all the orders placed in pre-opening sessions are matched and executed.
50. Yield: The measure of return on investments in terms of percentage. Stock yield is calculated by dividing the current price of the share by the annual dividend paid by the company for that share. For example, if the current price of the share is USD 100 and the dividend paid is USD 5 per share annually, then the stock yield is 5%.
Congratulations you have completed the first leg in your learning journey. Please feel free to read more of our articles. Trading can be a very rewarding experience. We have developed a highly successful market flow indicator called FlowShark why not join us in our training room to learn more about it.