Understanding Basic Stock Market Terminology

1. Stock

A stock represents ownership in a company. When you purchase a stock, you become a shareholder, entitled to a portion of the company’s profits and voting rights in certain matters. For example, if you buy shares of Infosys, you become a part-owner of the company.

2. Share

A share is a unit of ownership in a company. It represents a claim on the company’s assets and earnings. In India, shares are typically divided into equity shares and preference shares. Equity shares offer voting rights and a share in profits, while preference shares offer a fixed dividend but no voting rights.

3. Stock Exchange

The Indian stock market operates through major stock exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). These exchanges provide a regulated platform for transparent and efficient stock trading. For instance, the BSE, established in 1875, is one of the oldest stock exchanges in Asia.

4. Index

An index is a benchmark that tracks the performance of a group of stocks. In India, the most prominent stock market index is the S&P BSE Sensex, which includes 30 large and well-established companies. The Nifty 50 is another popular index, comprising the top 50 companies listed on the NSE.

5. IPO (Initial Public Offering)

An Initial Public Offering is the first sale of a company’s stock to the public. It allows private companies to become publicly traded entities, providing opportunities for investors to buy shares. For instance, the recent IPO of Zomato, an Indian food delivery company, generated significant investor interest.

6. Dividend

A dividend is a portion of a company’s profits distributed to its shareholders. In India, companies often declare dividends on a per-share basis, and shareholders receive them in the form of cash or additional shares. For example, if you own shares of Reliance Industries, and they declare a dividend of Rs. 10 per share, you will receive Rs. 10 for each share you hold.

7. Market Capitalization

Market capitalization, or market cap, is a measure of the total value of a company’s outstanding shares. It is calculated by multiplying the current share price by the total number of shares outstanding. For example, if a company has 1 million shares and the current share price is Rs. 100, the market capitalization would be Rs. 100 million.

8. Bull Market

A bull market is a period of rising stock prices and optimistic investor sentiment. During a bull market, the overall market tends to be on an upward trend, and investors are optimistic about future returns.

9. Bear Market

A bear market is a period of declining stock prices and pessimistic investor sentiment. In a bear market, the overall market experiences a prolonged downward trend, and investors are cautious or pessimistic about future returns.

10. Demat Account

A Demat (short for dematerialized) account is an electronic account that holds shares and securities in a digital format. It eliminates the need for physical share certificates and makes trading and investing in stocks more convenient. Investors in India must have a Demat account to buy and sell shares electronically.

11. Bid Price

A bid price is simply the amount that you are willing to pay for a specific share.

12. Ask Price

The “ask price” refers to a predetermined price at which you intend to sell a share.

13. Intraday Trading

Intraday trading refers to the practice of purchasing and selling stocks within the same day. This strategy aims to close all trading positions by the end of the trading day, before market hours come to a close.

14. P/E Ratio

The Price-to-Earnings ratio (P/E ratio) is a valuation metric used to assess a company’s stock price relative to its earnings. It is calculated by dividing the stock price by the company’s earnings per share (EPS). The P/E ratio provides insights into how the market values a company’s earnings potential.

15. P/B Ratio

The Price-to-Book ratio (P/B ratio) is a valuation metric that compares a company’s stock price to its book value per share. It is calculated by dividing the stock price by the book value per share. The P/B ratio helps investors understand whether a stock is overvalued or undervalued based on its accounting value.

16. Industry P/E

The Industry Price-to-Earnings ratio (Industry P/E) is the average P/E ratio of companies within a specific industry. It provides a benchmark for comparing the valuation of a company within its industry. Investors use the industry P/E ratio to assess whether a company’s stock is relatively expensive or cheap compared to its peers.

17. Debt to Equity

The Debt to Equity ratio is a financial ratio that compares a company’s total debt to its shareholders’ equity. It indicates the proportion of a company’s financing that comes from debt compared to equity. A high debt to equity ratio may indicate higher financial risk, while a lower ratio suggests a more conservative capital structure.

18. ROE (Return on Equity)

Return on Equity is a financial ratio that measures a company’s profitability relative to its shareholders’ equity. It is calculated by dividing the company’s net income by the average shareholders’ equity. ROE is an indicator of how effectively a company is utilizing its equity to generate profits.

19. Earnings per Share (EPS)

Earnings per Share is a financial metric that represents the portion of a company’s profit allocated to each outstanding share of common stock. It is calculated by dividing the company’s net income by the average number of outstanding shares. EPS is often used by investors to assess a company’s profitability on a per-share basis.

20. Dividend Yield

Dividend Yield is a financial ratio that measures the annual dividend income received from an investment relative to its market price. It is calculated by dividing the annual dividend per share by the stock’s current market price. Dividend yield is an important consideration for income-focused investors seeking regular cash flow from their investments.

21. Book Value

Book Value represents the net value of a company’s assets after deducting its liabilities. It is calculated by subtracting the company’s total liabilities from its total assets. Book value per share is obtained by dividing the book value by the number of outstanding shares. It provides an indication of a company’s intrinsic value.

22. Face Value

The Face Value of a stock is the nominal value assigned to a share by the issuing company. It is the initial price at which a company offers its shares to the public. Face value is used for accounting purposes and is usually different from the market price of a stock.

23. Liquidity

Liquidity refers to the ease with which a stock or security can be bought or sold in the market without causing significant price changes. High liquidity is desirable as it allows investors to enter or exit positions without impacting the market price.

24. Market Volatility

Market volatility measures the rate at which the price of a stock or the overall market fluctuates. Higher volatility indicates greater price swings, which can present both opportunities and risks for investors.

25. Moving Average

A Moving Average is a technical analysis tool used to smooth out price fluctuations and identify trends over a specific period. It calculates the average price of a stock or market index over a set number of time periods and is commonly used to determine support and resistance levels.

26. Volume

Volume refers to the total number of shares or contracts traded in a particular security or market within a given time period. It is an important indicator of market activity and liquidity.

27. Exchange-Traded Funds (ETFs)

ETFs are investment funds that trade on stock exchanges, representing a diversified portfolio of assets such as stocks, bonds, or commodities. ETFs offer investors exposure to a specific market segment or index and provide diversification benefits.

28. Buyback

A buyback, also known as a share repurchase, is when a company buys back its own shares from the market. This reduces the number of outstanding shares and can be seen as a signal of confidence by the company in its own stock.

29. Arbitrage

Arbitrage refers to the practice of taking advantage of price discrepancies between different markets or securities. In the stock market, arbitrage involves buying a security at a lower price in one market and simultaneously selling it at a higher price in another market to profit from the price difference.