Most Stock Market Terms Every Beginner Should Know

It’s a kind of misunderstanding that every novice trader experiences during the start of the journey in the stock market. Most stock market terms every beginner should know so that he never gets confused during trading journeys.

Obviously these stock market terms will improve your stock market knowledge and will guide you to become a better and successful investor.

So let us understand these most essential stock market terms that every investor should know:

• Annual Report
• Arbitrage
• Averaging Down
• Bear Market
• Broker
• Dividend
• Sensex
• Nifty
• Share Market
• Bull Market
• Bid Price
• Ask Price
• Order
• Trading Volume
• Market Capitalisation
• Intra-Day Trading
• Market Order
• Day Order
• Limit Order
• Portfolio
• Liquidity
• IPO
• Going Long

Annual Report:

An annual report of a company can be defined as  a comprehensive report on a company’s activities throughout the preceding year. Annual reports are made to give shareholders and other interested people information about the company’s activities and financial performance. This annual report is the main report via which an investor or trader decided whether the company will be able to improve in coming days or not, whether the operation anf financial condition of the company is stable or not.

Financial statements can be divided into four categories: balance sheets, income statements, cash flow statements, and equity statements.

i) Balance Sheet

Balance Sheets detail a company’s assets, liabilities, and net worth for a specific date. These sheets are typically created at the end of the fiscal year. The assets are listed in order of liquidity, while the liabilities are listed in the order that they need to be paid.

ii) Income Statement

Income statements cover either a year (annual financial statements) or a quarter (quarterly financial statements), and describe how a company arrived at their net income over that period. The details of these statements include revenues, expenses, and earnings per share, and usually includes past data to compare with.

iii) Cash Flow Statement

A cash flow statement describes a company’s inflows and outflows of money over a period of time. These flows of money come from three main activities: operating, investing, and financing. Analysts use cash flow statements to find dividends paid and the dollar value of repurchased shares.

iv) Equity Statement

Equity statements describe how the equity of a company changes over time. This change is affected by net profit or loss, individual gains or losses, shares bought and sold, and dividend payments.

Arbitrage

Arbitrage is a function of generating income from trading particular currencies, securities, and commodities in two different markets. The arbitrageurs reap a margin from the varying price of the same commodity in two different exchanges or markets.

It is a practice that takes advantage of market inefficiency. The same commodity, currency, or asset is priced differently in two or more distinct markets. It indirectly improves the markets by highlighting loopholes. But as soon as the market makes those improvements, the profitability for the arbitrageurs terminates.

Types of Arbitrage

The table below talks about the different types of arbitrage:

1) Pure Arbitrage:	The arbitrageur makes a buy or sells decision right away, without having to wait for funds to clear.
2) Retail Arbitrage:	This is a popular e-commerce activity. Arbitrageurs buy a product at a low price from a local merchant and then offer it for a high price on an e-commerce website.
3) Risk Arbitrage:	Investors frequently forecast a stock’s price rise and, as a result, buy and hold the stock. In other words, investors are anticipating a price increase in another market.
4) Convertible Arbitrage:	Arbitrageurs profit from holding a long position in convertible securities while simultaneously shorting the underlying stock.
5) Merger Arbitrage:	This is a tactical endeavor. When arbitrageurs suspect an acquisition or merger, they purchase the target company’s stock. They sell the shares when the prices rise after the merger.
6) Dividend Arbitrage:	Traders that use this strategy buy stocks immediately before the ex-dividend date. The ex-dividend date is the deadline for completing the purchase of the underlying stock by the investor. He is only then entitled to the payout on the specified date.
7) Futures Arbitrage:	The stock is bought with cash and then sold in the futures market. Futures are usually priced higher than cash to account for the future premium. On expiry, however, both prices converge, giving the trader an arbitrage profit.

Average Down

What Is Average Down?

We can say that averaging down is an investing strategy or way of mitigating the high stock price. In this event involves a stock owner purchasing additional shares of a previously initiated investment after the price has dropped. The result of this second purchase is a decrease in the average price at which the investor purchased the stock.

KEY TAKEAWAYS

• Averaging down is an investment strategy that involves adding to an existing position when its price drops.
• This technique can be useful when carefully applied with other components of a sound investing strategy.
• Adding more to a position, however, increases overall risk exposure and inexperienced investors may not be able to tell the difference between a value and a warning sign when share prices drop.

Bear Market

A bear market is a situation when the stock market experiences price declines over a period of time. Generally, a bear market is declared when the price of an investment falls at least 20% from its high.

In other words, a trend of falling stock prices for an extended period is considered a bear market. Substantial deterioration of at least 20% or more has to be recorded for a market to be classified as bearish. It is typically characterised by a falling speculative demand among residents, thereby reducing the aggregate cash flow of the capital sector in an economy. In this article, we have explained the bear market meaning in detail including other important pointers, causes, consequences, history and how to invest during a bearish market scenario.

Characteristics of a Bear Market

There are always ebbs and flows in the stock market. A bear market is signaled by the following characteristics:

• Stock market declines. In a bear market, there are sustained decreases of 20% or more in broad market indexes.
• Economic decline. The broader economy is typically weakening when stock markets enter a bear market. This is characterized by rising unemployment, decreased gross domestic product (GDP) and declining corporate profits.
• Negative sentiment. During a bear market, market sentiment is poor. Investors are pessimistic about the stock market’s prospects, making them more likely to sell assets than hold them. Investors are likely to put their money into safer investments like bonds because of concerns about future market performance.
• Duration: A bear market is more sustained than typical drops in the stock market. To be in a bear market, the decline has to last for at least two months. Bear markets last for about 10 months on average.

Brokers:

Brokers—also known as trading members—perform a vital function in the stock market. They execute transactions such as the buying and selling of stocks on behalf of their clients. In return for this, they charge a brokerage commission.

But stock market brokers provide other services too. These include portfolio management and financial advice, for example. With stock market transactions taking place online, brokers also offer multiple platforms through which investors and traders can access the stock market.

FUNCTIONS OF A BROKERAGE FIRM

• Order execution: Brokers execute their clients’ trading orders online. For this, the brokerage charges a commission. This may be either a flat fee per transaction or a percentage of the transaction value.
• Trading platforms: Having multiple secure platforms through which clients can place orders is essential nowadays. Most of the bigger brokers provide trading apps and software for smartphones, laptops, and tablets. You could also trade and invest via phone or chat.
• Financial advisory: Both new and seasoned investors depend on stock recommendations from their broker. But stockbrokers are required to disclose all information when recommending a stock—that includes being transparent about the risks.
• Margin financing: Traders who have accounts with large brokerage funds can use margin funding facilities. This essentially means borrowing funds from the broker to take bigger positions in the market.

Types of stockbrokers

Now that you know what is a stockbroker and also how they are regulated, let us take a look at the types of stockbrokers. Based on types of service provided, there are two types of stockbrokers- full-service stockbroker and a discount stockbroker.

Full-service stockbrokers: Full-service stockbrokers offer a full stack of services to its clients. They are traditional brokers who provide a trading facility coupled with advisory services. For this reason, the fees charged by full-service stockbrokers are high, and the brokerage they charge is based on the total amount of trades that are executed by the client. Full-service brokerages are established players who have branches located all over the country. Clients can visit these branches for service and advice.

Discount stockbrokers: Discount stockbrokers have come into existence due to the increased use and availability of the Internet. These brokers provide an online trading platform for their clients. However, discount brokers do not offer advisory services and research facilities. For this reason, discount brokers also charge fewer commissions, which is mostly a flat fee.

Dividend

A dividend is the distribution of a company’s earnings to its shareholders and is determined by the company’s board of directors. Dividends are often distributed quarterly and may be paid out as cash or in the form of reinvestment in additional stock.

Important Dividend Dates

Dividend payments follow a chronological order of events, and the associated dates are important to determining which shareholders qualify to receive the dividend payment.

• Announcement date: Dividends are announced by company management on the announcement date (or declaration date) and must be approved by the shareholders before they can be paid.
• Ex-dividend date: The date on which the dividend eligibility expires is called the ex-dividend date or simply the ex-date. For instance, if a stock has an ex-date of Monday, May 5, then shareholders who buy the stock on or after that day will NOT qualify to receive the dividend. Shareholders who own the stock one business day prior to the ex-date, on Friday, May 2, or earlier, qualify for the distribution.
• Record date: The record date is the cutoff date, established by the company to determine which shareholders are eligible to receive a dividend or distribution.
• Payment date: The company issues the payment of the dividend on the payment date, which is when the money gets credited to investors’ accounts.5

Sensex

The term Sensex refers to the benchmark index of the BSE in India. The Sensex is comprised of 30 of the largest and most actively traded stocks on the BSE and provides a gauge of India’s economy. It is float-adjusted and market capitalization-weighted. The Sensex is reviewed semiannually each year in June and December. Created in 1986, the Sensex is the oldest stock index in India and is operated by Standard & Poor’s (S&P). Analysts and investors use it to observe the cycles of India’s economy and the development and decline of particular industries.

KEY TAKEAWAYS

• The Sensex is India’s benchmark stock index and represents 30 of the country’s largest and most well-capitalized stocks listed on the BSE.
• The index was launched in 1986 and is operated by S&P.
• It is calculated in Indian rupees and U.S. dollars.
• The index is float-adjusted and market capitalization-weighted.
• The Sensex has grown since India opened up its economy in 1991.

Nifty

Nifty 50 is a benchmark index of the weighted average of the country’s top 50 large-cap companies listed on the NSE. It is one of the two national indices tracked by investors in India, the other being Sensex.

While there are more than 2000 stocks listed on the NSE, most investors – especially foreign investors interested in the Indian market – refer to the Nifty’s top 50 index to determine the stock market’s performance.

The Nifty 50 consists of 50 Indian company stocks in 12 different sectors, and it is one out of two stock indices that are mainly used in the stock market.

Share Market

The share market is a platform where buyers and sellers come together to trade on publicly listed shares during specific hours of the day. People often use the terms ‘share market’ and ‘stock market’ interchangeably. However, the key difference between the two lies in the fact that while the former is used to trade only shares, the latter allows you to trade various financial securities such as bonds, derivatives, forex etc.

The principal stock exchanges in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE).

Types of Share Markets

Stock markets can be further classified into two parts: primary markets and secondary markets.

• Primary Share Markets: When a company registers itself for the first time at the stock exchange to raise funds through shares, it enters the primary market. This is called an Initial Public Offering (IPO), after which the company becomes publicly registered and its shares can be traded within market participants.
• Secondary Market: Once a company’s new securities have been sold in the primary market, they are then traded on the secondary stock market. Here, investors get the opportunity to buy and sell the shares among themselves at the prevailing market prices. Typically investors conduct these transactions through a broker or other such intermediary who can facilitate this process.

Bull Market

A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, real estate, currencies, and commodities.

Because prices of securities rise and fall essentially continuously during trading, the term “bull market” is typically reserved for extended periods in which a large portion of security prices are rising. Bull markets tend to last for months or even years.

KEY TAKEAWAYS

• A bull market is a period of time in financial markets when the price of an asset or security rises continuously.
• The commonly accepted definition of a bull market is when stock prices rise by 20% after two declines of 20% each.
• Traders employ a variety of strategies, such as increased buy and hold and retracement, to profit off bull markets.
• The opposite of a bull market is a bear market, when prices trend downward.

• Bid Price
• Ask Price
• Order

Bid Price

The bid price is the highest amount of money a buyer is willing to pay for a particular commodity. Individuals and entities bid for various properties and securities from time to time, conveying the highest amount they are willing to pay to obtain ownership rights over them. While individuals are seen bidding in an auction, companies bid to ensure they crack different deals and gain project contracts.

Bids are done both online and offline via brokers or through an active channel. There are two parties involved – a seller, who puts forth the assets to bid for, and a buyer, who places relevant bids for securities.

Ask Price

An ask price is the selling price, the amount that a seller is willing to sell a security for. Investors are required to have a market order to buy at the current ask price and sell at the current bid price. In contrast to the selling price or the asking price, it is the amount that a seller is willing to sell a security for.

Investors are required by a market order to buy at the current Ask price and sell at the current bid price. In contrast, limit orders allow investors and traders to buy at the bid price and sell at the asking price.

Order

Order means the purpose of buying and selling shares in a given range of price. For example, you have placed an order to buy 200 shares from company A, at a maximum price of Rs 50 per share.

An order consists of instructions to a broker or brokerage firm to purchase or sell a security on an investor’s behalf. An order is the fundamental trading unit of a securities market. Orders are typically placed over the phone or online through a trading platform, although orders may increasingly be placed through automated trading systems and algorithms. When an order is placed, it follows a process of order execution.

Trading Volume

Trading volume means the number of shares that are traded on a particular day. Sometimes it is seen around 400 millions share traded on a single day of single share like yesbank , rcom etc etc.

Market Capitalization

We can say that market cap is calculated like price of share x no of share available in the market. Suppose a company has 10000 shares in the market and each share price is 1 rs , then its market cap will be 10000×1 =10000 rs .

Intraday Trading

Intraday trading means buying and selling your desired stocks on the same day so that before trading hours get over, all your trading positions will be closed within the same day.

Market Order

A market order is an order to buy and sell shares at the market price. Several investors don’t go with this Order because the trade price in the market order remains volatile.

Day Order

A day order is an order that remains good till the end of the trading day. If the Order does not perform by the time the market closes, the Order will be canceled.

Limit Order

A limit order is to buy shares below a fixed price and sell shares above a fixed price. It is advisable to use a limit order to trade shares.

Portfolio

The portfolio is a collection of all the investments that an investor has made right from purchasing a share for the first time.

Liquidity

Liquidity means how stocks can be sold off quickly. Shares that get sold consist of high trade volumes quickly and are called highly liquid.

IPO

When a new company directly comes to market to raise funds for their company , then they have to come via IPO ( Initial Public Offer ). After the IPO , the shares of the company gets listed in exchange where investor can buy them from exchanges.

Going Long

Its a kind of term in used for intraday. Here investor or trader can buy the stock at low price and later they can sell it at higher price. So you buy at low price and you are now going long means you are going to sell it at higher price.

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