If you are a beginner investor or trader, the stock market may seem like a complicated and daunting environment to navigate. Fortunately, you can make your stock market journey a lot less intimidating by simply learning a few basic terminologies of the stock market.
In this article, we are going to look at some fundamental terms related to the stock market that every new investor and trader must know before starting their journey.
Basic stock market terms
Let us explore some of the basic terminologies before getting into the stock market investments:
Share
A share, also known as an equity share, represents a unit of ownership in a company. When you buy the shares of a company, you essentially become a partial owner of that company and are entitled to a few rights. These include the right to vote in general meetings and entitlement to the profits generated by the company.
Bid and ask
Bid and ask are two of the most important stock market terms you should know. The bid is the highest price that a buyer is willing to pay for a stock at any given moment in time. The ask, meanwhile, is the lowest price a seller is willing to sell the stock at. The difference between the bid and ask prices is known as the bid-ask spread.
Broker
A broker, also known as a stockbroker, is an entity that provides a platform that facilitates the purchase and sale of equity shares and other securities. In exchange for providing you with a trading platform, stockbrokers often levy a brokerage fee. In addition to providing you with a platform for buying and selling securities, brokers also offer access to a gamut of stock market research tools and other value-added services.
Volume
Volume refers to the total number of shares that were bought and sold during a specific period, typically a day. High volume often indicates active trading and is a sign of liquidity in the market, whereas low volume may suggest limited investor interest or participation.
Liquidity
Another one of the many terms related to the stock market you are likely to encounter frequently is liquidity. It represents how easily (or not) an asset can be purchased or sold in the market without any major changes to its price. Highly liquid stocks can be quickly converted into cash at your desired price, whereas stocks with low liquidity may take more time to sell or may require you to compromise on the selling price.
Volatility
Volatility is a measure of the speed and frequency of change in the price of a security over time. The price of stocks with high volatility tends to move rapidly and unpredictably. On the other hand, the price of stocks with low volatility moves stably and predictably. You can rely on volatility indicators to measure the periods of high and low volatility in a stock.
Market order and limit order
Market order and limit orderare among the basic terms related to the stock market that every trader and investor must know. A market order is essentially an instruction to buy or sell an asset at the best available price in the market. Such orders are often executed instantly, provided there is enough liquidity. On the contrary, a limit order is an instruction to buy or sell an asset at a specific price. Such orders may or may not be executed immediately, depending on the level of liquidity.
Also read: Who is a sub-broker?
Bull and bear markets
Bull and bear markets are two of the most used stock market terms. A bull market represents a period of rising stock prices and high investor optimism. It is typically accompanied by good economic growth and strong corporate earnings. A bear market represents a period of falling stock prices and investor pessimism. Such periods are usually driven by economic downturns or weak corporate earnings.
Dividend
A dividendis a distribution of a company's profits to its shareholders. Fundamentally strong companies with established businesses typically pay dividends regularly. However, not all companies pay dividends, as some may reinvest earnings back into the business for growth.
Earnings
Earnings, also known as profits, represent a company's net income after accounting for all possible expenses, taxes, and other deductions. Earnings are a key measure of a company's financial performance and are closely watched by investors and analysts.
P/E ratio
The price-to-earnings (P/E) ratio is a valuation metric that is calculated by dividing the current market price of a company's shares by its earnings per share (EPS). A high P/E ratio may indicate that a stock is overvalued, while a lower P/E ratio may suggest undervaluation.
Index
Index is another one of the many terms related to the stock market that you should know. An index is a measure of the performance of a group of stocks or other securities. They serve as indicators of overall market trends and are used for comparative analysis and benchmarking. Some of the popular market indices include the Nifty 50, Sensex, and Nifty 100, among others.
ETF
Anexchange-traded fund (ETF) is a type of mutual fund that invests in assets such as stocks, bonds, or a combination of both. However, unlike traditional mutual funds, ETFs are listed and traded on stock exchanges like individual stocks.
Stop loss
Astop-loss order is an instruction to sell a security when it reaches a predetermined price level, known as the stop price. Stop-loss orders are used to limit potential losses and manage risk by automatically triggering a sale if the stock price moves against the investor's position.
Additional read: Share Market Timings
Conclusion
As someone new to the stock market, mastering these basic stock market terms is crucial to building a solid foundation. By understanding these concepts, you can make more informed decisions, manage risk effectively and navigate the various complexities of the stock market with confidence.
