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Stock market terminology are used by experts and equity analysts to explain the state of markets. Understanding these terms will help you to be successful in equity investments.

This article covers the following:

  1. What is a stock market?
  2. Why should you know about stock market terminology?
  3. Basic Stock Market Terms you should know
  4. How to Invest in Equities?

1. What is a stock market?

Stock market is an arrangement where equity shares of companies are bought and sold by the participants. The participants can be investors and traders. The investors mainly have a long-term horizon in mind and benefit from capital appreciation over the given period. Traders, however, earn profits by tapping into small price changes in equity shares which mostly last for a few minutes to 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 use online trading services.  The settlement cycle follows the T+2 format. In this, the trades are executed on Day 1 and the participants receive their shares/sales proceeds after two working days from Day 1.

2. Why should you know about stock market terminology?

Stock market terminology relates to industry-specific jargons 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 trading industry. As an equity enthusiast, you need to know these terms really well in order to make money out of the stock markets. Moreover, it will also enhance your understanding of the relationship between stock markets and events happening in the economy.

3. Basic Stock Market Terms you should know

Whether you are a budding or seasoned investor, knowledge of the basic terms used in the stock market is necessary. You will end up becoming not only a better investor but also a successful trader as your vocabulary on stock market grows. Here is a glossary of basic terms that you need to know as an investor:

  • Agent:

An agent is a brokerage firm which does 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 shares is ready to sell the shares in the stock market.

  • At the money:

    Under this scenario, the strike price of an option is equal to the price of the underlying asset which it represents.

  • Broker

    A person who purchases or sells an investment 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. You may look at it like beginning of a downward trend in the stock market.

  • Bull Market:

    An opposite of bear market, a bull market situation in which 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 price of one equity share and the overall movement of 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.

  • 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 huge 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.

  • 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 a right not an 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 is 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:

    During the tenure of recession or an economic downturn, investors holding defensive stocks like these receive  a constant rate of dividends.

  • 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 of the delta to the price changes in 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 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 large amount of profits for the skilled intra-day trader.

  • Volume

    It shows the average number of shares of stock which are traded during a particular time period usually the daily trading volume. It can also convey the number of shares which you are allowed to purchase of a given stock.

  • Yield

    You may use the yield to calculate the return on an investment which you get after receiving dividend on a share. You can find the yield by dividing the annual amount of dividend by the price paid for the stock.

    4. How to Invest in Equities?

    Many a time investing in equity becomes complex. In case you don’t possess enough financial knowledge and are finding it difficult to understand, then just go for ClearTax Invest. Here, instead of directly investing in equities, you can try investing in Equity Funds. You can choose hand-picked equity funds in a hassle-free and paperless manner.

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    Step 1: Sign in at cleartax.in
    Step 2: Enter your personal details regarding the amount of investment and period of investment
    Step 3: Get your e-KYC done in less than 5 minutes
    Step 4: Invest in your favourite debt fund from amongst the hand-picked mutual funds

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