Basic Stock Market Terminology for Beginners
What is share market?
Share market is a market where shares are issued or traded.
How many types of share markets are there?
There are two kind of share markets:
- Primary Market: where company gets registered to issue certain number of shares to raise money(capital). It is known as getting listed in a stock exchange. If company is selling shares for first time, then it is known as IPO.
- Secondary Market: when new securities are sold in primary market, these shares are traded in secondary market. Investor can trade shares in this market. One investor buys shares from another investor at the price on which both agree.
Read also: A Beginner’s Guide to Understand the Basics of Share & Stock Market
What is stock exchange?
A stock exchange is a platform where shares are traded. But to be traded on stock exchange, company has to be listed on it. Stock exchange is a meeting place of stock buyer and seller.
How many stock exchanges are there in India?
Following are 9 active stock exchanges in India.
| Name | Location |
| Bombay Stock Exchange | Mumbai |
| Calcutta Stock Exchange | Kolkata |
| India International Exchange (India INX) | Gandhinagar |
| Indian Commodity Exchange | Navi Mumbai |
| Metropolitan Stock Exchange of India | Mumbai |
| Multi Commodity Exchange of India | Mumbai |
| National Commodity & Derivatives Exchange | Mumbai |
| National Stock Exchange of India | Mumbai |
| NSE IFSC | Gandhinagar |
How to invest in share market?
Investor has to open a trading account and demat account.
What are the financial instruments traded in stock exchange?
- Bonds
- Shares
- Derivatives
- Mutual Fund
What is SEBI and its role?
Securities and Exchange Board of India (SEBI) regulates the Indian capital markets. SEBI monitors and regulates the securities market and protects the interests of the investors by enforcing certain rules and regulations.
What are dividends?
When an investor buys a share, he buys a small part of a company. When company makes profit, company distributes small portion of profit to investors as dividend.
What is market capitalization?
Market capitalization is the worth of a company that is traded in stock exchange. So, it is the multiplication of total number of shares and current market price of one share. The formula is,
Market capitalization = Current market price of one share x Total number of shares allotted by the company
What is rolling settlement cycle?
When an investor buys shares, he has to receive shares and a seller has to receive money. Rolling settlement means trade has to be settled. In India, rolling settlement cycle is T + 2. Here, T means transaction. So, Transaction conducted on day T has to be settled in T+2 working days.
What is short selling of shares?
When investor thinks that price of particular stock will go down, he sells stocks which he does not own. He borrows the stock, sells it at market price and buys when price goes down. So, selling price at higher price and buying back at lower price makes profit.
What are bull and bear market?
Bull market is the condition of financial market in which prices of stocks are rising or expected to rise. And bear market is the condition of financial market in which prices of stocks are declining or expected to decline.
What are top-down, bottom-up approaches?
These two are methods to select the stock among thousands.
Top-down: First investor analyses macroeconomy before individual stock, understand the overall market condition then choose one or more industry. Investor believes that if sector is doing well then there are chances of stocks of such sector will also perform well. So, after in depth analysis of sectors, investor select a stock to invest in. This method is good for short term investor.
Bottom-up: This method is opposite of top-down. It focuses on industry. Investor selects bunch of stocks which he thinks will perform well and study fundamental of each industry. Investor selects bunch of stocks on the basis of ratios like Price-to-Earnings ratio, Dividend-Yield ratio. Bottom-up investor believe that if one company in particular sector is doing well does not mean all companies in that sector will our perform. So, investor tries to find out company which outperform others in sector.
What does cost averaging mean?
Instead of buying stocks in lumpsum amount, investor buys in small bunches to reduce the average cost of investment. Suppose, an investor buys a share of 10 ABC company at price Rs 100 so he pays Rs 1000 but when price of ABC company goes down, he again buys 10 shares at price Rs 90. So, the cost of investment becomes Rs. 1900
What is stock volatility?
When the price of the stock fluctuates a lot, the rate at which prices of stock increase or decrease is known as volatility. When the prices of a security fluctuate rapidly in a short time span, it is termed to have high volatility. And when the prices of a security fluctuate slowly in a longer time span, it is termed to have low volatility.
What is target price and stop loss?
Price target indicates target of the price of share on higher side. It means, when the price of share reaches on price target, investor sells it and books the profit. Stop loss indicates the target of the price of share on lower side. It means, investor sets stop loss for particular stock and when the price of stock goes down to that target, investor sells stocks. When market is going down, investor puts limit to how much loss he would bear.
What is insider trading?
Trading of securities by someone who has access of information which is not available to public. Its an illegal act as its unfair with investor who do not have access to information of company and investor with insider information would big make profit.
