When one decides to look at how or what investing in the stock market is, the Indian stock market may seem to be frightening to a beginner. However learning a couple of basic words would actually make the whole experience less scary and more worthwhile. Whether you are looking to invest in shares or mutual funds or even in exchange traded funds (ETFs), basic stock market vocabulary is essential. For this reason, this blog attempts to give some insight into the elementary stock market sub vocab that every novice investor should be familiar with.
1. Stock/Share
A stock or share is a financial instrument that signifies an ownership position in a corporation. Therefore, if any person buys a share, he will own a very small fraction of that corporation. In India, shares of companies are listed and traded in stock exchanges such as the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).
Example: In the case of Reliance Industries, if you acquire 100 shares of the company, you possess 100 units of shares of that company.
2. BSE and NSE
These are the two most prominent stock trading platforms in India where buying and selling of shares takes place. The Bombay Stock Exchange (BSE), which came into being in 1875, is the first Bourse in the region of Asia. The National Stock Exchange (NSE) , which was established in 1992, is popular for its computer based, electronic trading.
Example: The stock of Tata Consultancy Services (TCS), for instance, is available for purchase in the BSE as well as the NSE.
3. Sensex and Nifty
The Sensex (BSE) and the Nifty (NSE) are the stock market indices that encapsulate the total movement in the stock market. Here, the Sensex indicates the performances of the 30 largest companies in the BSE, and the Nifty does the same for the 50 of the biggest companies in the NSE . These indices are useful indicators of the Indian stock market.
For example, a rise in the Sensex indicates that the market is performing well for the 30 largest companies stocks.
4. Bull Market
It is a term used in finance to indicate a period when the prices of the securities are rising or are expected to rise. It is a period when the investors are hopeful which results in an increase in the purchasing of shares.
For instance: The year 2021 also saw a bull phase as stock market prices of several companies achieved all time highs.
5. Bear Market
On the other hand, a bear market is defined as a sustained decrease in the price of securities or that the price of securities is expected to decline. Such a market is characterized with lack of confidence from investors and is usually very pessimistic.
For instance, a bear market time was experienced in the Indian stock market when few months into the year 2020 the stock market drastically fell because of the COVID-19 pandemic.
6. IPO (Initial Public Offering)
An IPO is the first issuance and distribution of company shares to the public. It is an important occurrence because it enables the company to tap the public for funds, and it enables the shareholders to own a part of the company.
For example: Zomato’s IPO was newsworthy in 2021 as it was one of the biggest tech ipos in the country.
7. Market Capitalization (Market Cap)
The market capitalization of a company refers to the total value of the company’s shares currently being traded on the stock market. It can be calculated by taking the price of one share and multiplying it by the total number of shares which are available to the public in the stock market. Market cap is most commonly referred to in classifying companies based on their size into small, medium or large cap companies.
Example: Companies with large market caps like Reliance Industries where stocks are classified as large cap while businesses like Nykaa are mid cap.
8. Dividend
An amount of earnings distributed to shareholders of the Corporation is known as Dividend. Making profit is not the only aim of many companies as they usually pay dividends to their shareholders as a share of profits when they do so. Cash dividends or stock dividends are two forms that dividends can be disbursed in.
Example: If you hold some shares in Hindustan Unilever and the company presents a declaration of dividend of ₹10.00 per share, you being a holder of 100 shares will be paid an amount of ₹1,000.
9. P/E Ratio (Price-to-Earnings Ratio)
The P/E ratio indicates the extent of earnings for which investors are willing to pay. This is done by dividing the stock price by the earnings per share (EPS) of a given stock. The higher this ratio, the higher the investor’s expectation of the company’s growth in the future.
Example: In the case of a Company which has a P/E Ratio of 25, it indicates that for each ₹1 profit earned by the Company, an investor is prepared to pay ₹25.
10. Stock Brokerage
A stock broker can be defined as any person or business entity, which trades in stocks and constitutes other forms of securities in exchange for an investor and or investors. In India, one has to open a trading and demat account with a registered stock broker in order to begin buying and selling shares.
Example: In India, the well-established stockbrokers include Zerodha, Upstox, ICICI Direct, among others.
11. Demat Account
A ‘demat account’ means ‘dematerialised account, or that account which holds shares electronically’ and is a registered account. It is a compulsory account for any person who wants to make investments in the Indian equity market.
Example: Shares bought buy an investor will be automatically credited to his demat account, and if they are to be sold, the account will be debited.
12. Trading Account
A trading account is a type of account that allows an investor to trade in financial assets such as stocks or bonds. This, in however, is not to be confused with the demat account, which is where the shares that have been bought are kept. For one to engage in trading activity, a trading account as well as a demat account is required.
Example: Opening a trading account with Zerodha means you will buy or sell stocks through orders while your demat account remains your stock holding account.
13. Volume
Volume defines the total number of shares that have been bought or sold for a certain stock over a particular duration of time. Generally, high volume is taken to depict high interest by investors in the stock while low volume is taken to imply less interest.
Example: A certain stock may have higher volatility when compared to another stock with lower levels of trading volume.
14. Understanding Bid and Actuarial Prices
Exclusively, buyers intending to purchase a stock set a bid price while sellers set an ask price defining the extent of pressure the markets are subjected to. The distance, yet termed a premium, on the two prices is known as the spread.
Illustration: In the instance of stocks, if a supermarket quenches the demand at 500 per share and the supply is at 505 per share, the spread is 5 rupees.
15. mature investment: blue-chip stocks
Blue-chip stocks are stocks of big, established and dependable companies who have longer been making significant and steady profits. Such companies are often at the top of their respective markets and are regarded as low risks.
For instance: Stocks of companies like Tata Consultancy Services (TCS); Infosys; or HDFC Bank are termed blue chip stocks.
16. Circuit Breaker
A circuit breaker is an acceptable term within the stock exchange and it is the period which when adhered to able suspended trading to allow for retrieval in price levels emptying due to volatility. This component helps to avoid aggressive selling or buying that would result in a disorderly market.
For example: If the Sensex is went below a particular level within a given day then the exchange floor will be rang the bell to cease the trading for that day.
Conclusion
The equities market is one of the interactive methods of creating wealth but attention should be paid to the underlying language and how it relates to successful betting. If you intend to buy shares ‘a’ or pooled investment such as unit trusts and exchange traded funds, these words will be quite helpful in easing your way through the Indian stock market. Do not rush to explore the depths of the market, listen to the happenings and know that in due time, with proper patience, understanding of the market as a clement weather will allow you to invest intelligently. Best of luck!