Now before we begin a power-packed discussion about the stock market and its different aspects, I thought it’d be good for you to have a dictionary at hand if the terminology ever got confusing.
And with this chapter, I’ll try to explain to you all about these different words and concepts that stock traders use in their daily life(and some that even they don’t know).
It’s to be stated that a lot of Stock-market jargon doesn’t make intuitive sense. In simple words, you might not be able to deduce the meaning of one of these words if you are hearing them out for the first time.
Here are some of the most basic terminologies:
- Buy- As the word suggests, it means buying a share or taking a position in a company.
- Sell- Again, as must be obvious, it means selling a share or leaving the position from the company
- Ask- The Ask price refers to the lowest price at which a seller will sell his stock. Naturally, if you want to buy a stock, you must buy it at the Ask price.
- Bid- Bid is the highest price at which the buyer is willing to buy the stock. Naturally, if you have to sell a stock, you will have to sell it at the Bid price.
- Bull market- Bull markets refer to markets in which the indices are going up. This is based on the analogy that Bulls attack by throwing their victims UP with their horns.
- Bear market- Bear markets refer to markets in which the indices are going down. This is based on the analogy that Bears attack by mauling their victims DOWN with their paws.
- Limit order- While buying or selling a stock or commodity, you can specify the exact price at which the order shall be placed. If it's a limit order, the order will be placed only when the share price reaches the limit order price or a better price than that. (lower in case of buying, higher in case of selling)
- Market order- A market order will buy or sell the stock at the best available current price in the market. Market orders generally ensure that the order is executed successfully.
- Market Segments- Market segments are divisions within which a particular type of financial instrument is traded. The risk and reward parameters of each financial instrument are unique. Basically, the exchange operates in three segments.
- Capital markets- The capital markets segment offers a wide range of tradable securities such as equities(that are your shares), preference shares, warrants, exchange-traded funds, etc. More on these shall be discussed in further chapters.
- F&O- These are also referred to as the derivatives market. In these contracts, two parties agree to trade a stock asset at a predetermined price at a later date. By locking in the price beforehand, such contracts attempt to protect investors from market risks.
- Wholesale debt markets- These are market segments that deal with fixed-income securities that include assets such as government securities, treasury bills, PSU-issued bonds, corporate bonds, etc.
- Volatility- As can be understood by the word, this refers to how fast a stock is changing prices or moving up and down. A highly volatile stock is generally considered risky and it's a position that is generally preferred to be closed as soon as possible
- Going long- Going long or taking a long position generally refers to buying a share and expecting it to go up to sell it at a higher price. Similarly going short refers to selling stock and expecting it to go down to buy it again at a higher price.
- Face value- The face value of stock refers to its fixed value. It’s the value of the stock that is listed on the documents. This value remains fixed and doesn’t change with the market value of the stock.
- Float- Float shares refer to shares of a company that is actually available to be traded by the public. When a company goes public, it only releases a part of the company’s shares as publicly traded while the rest are held by stakeholders, promoters, and others.
- Authorized shares- These are the total number of shares that a company can issue to investors. Now, the difference between float shares and authorized shares is that while float shares are available for being traded by the public, authorized shares are shares that are available for the company to raise funds EITHER from the public or its investors.
- IPO- Initial public offering. It refers to the process when a privately held company goes public for the first time. In simpler words, a company would go for an IPO when it is ready to release its shares to the free market to raise funds from the public.
- Dividend- When a company earns a net profit, it has two options. A. Reinvest the profits for the company’s growth. B. Release a portion of its profits to all its shareholders, including the promoters, stakeholders, investors, FIIs, and of course retail investors. These are called dividends.
- Broker- A broker is a platform or traditionally a person that abstracts the stock trading journey for you. Meaning they buy and sell the stock on your behalf acting as an intermediary between you and the stock market.
- Margin- Margin trading refers to borrowing funds from your stock broker to buy stocks. This is actually very common and is used frequently by retail investors to buy a large number of equities with a low budget. Traders need a separate margin account for that.
- Shorting- Shorting is the exact opposite of going long as it refers to selling a stock in the expectation that it will fall down in the coming time and can then be bought back at a lower price.