15 Basic Stock Market Terms Every New Investor or Trader (2024)

Summary:

The stock market often confuses new traders and investors with its technical language. To make things easier, we've put together a list of 15 essential stock market terms every beginner should know.

Stock trading is the act of buying and selling company shares on a stock exchange, which is a marketplace for these transactions. In India, the two major stock exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). To invest in the stock market, understanding the following 15 basic stock market terms is important.

• Share: Buying a share makes you a shareholder, which means you own a small fraction of the company and are entitled to a portion of its profits and assets.

• Stock: A stock is a collection of shares of a company or a group of companies.

• Bid and ask: The bid is what buyers offer to pay for a stock, and the ask is what sellers will take. The difference between these prices is the spread, which is how much the broker earns from the trade.

• Broker: A broker is a person or a company that acts as an intermediary between buyers and sellers of stocks. You need a broker to trade stocks on a stock exchange.

• Market order and limit order: A market order buys or sells at the current price. While a limit order sets a price, you're willing to pay or get. If you buy 100 bank shares with a market order, you'll pay the current price. If you set a limit order at INR 1500, you'll buy only if the price goes down to INR 1500 or less.

• Volume: Volume shows how many shares were traded in a period. If many shares are traded (high volume), it's easy to buy or sell that stock. If few shares are traded (low volume), it's harder to make trades.

• Volatility: Volatility shows how much a stock’s price changes over time. If it's high, the price changes a lot; this can be riskier but also offers more chances to make money. If it's low, the price doesn't change much, making it safer but with fewer chances to gain.

• Bull and bear market: A bull market is a period when the stock market is on the rise, and investors feel positive about the future. On the other hand, a bear market is when stock prices are dropping, and there's worry they may go down even further. For example, if the Nifty 50 index climbs by 20% within a year, it's considered a bull market. If it decreases by 20%, it's known as a bear market.

• Dividend: A dividend is a payment that a company makes to its shareholders from its profits. They are paid quarterly or annually and are expressed as a percentage of the share price or as a fixed amount per share.

• Earnings: Earnings show how well a company is doing money-wise. They're often shared as "earnings per share" (EPS), which is the total profit divided by the number of available shares. For example, if a company makes INR 10 crore and there are 100 crore shares, then the EPS is INR 0.10 for each share.

• P/E ratio: The P/E ratio tells you how much people are paying for a company’s earnings. If the P/E ratio is high, it means people think the company will do well in the future. If it’s low, they’re less sure or they think the company’s shares are a bargain.

• Index: An index groups together stocks representing a section of the stock market or economy and shows how these stocks perform. For example, the Nifty 50 includes the 50 biggest companies on the NSE. The Sensex covers the 30 largest companies on the BSE, and the Nifty Bank comprises the 12 largest banks on the NSE.

• ETF: An ETF is an exchange-traded fund, which is a type of investment that holds a basket of stocks, bonds, commodities, or other assets. It tracks an index, a sector, a theme, or a strategy. For instance, you can buy an ETF that tracks the Nifty 50, the banking sector, the gold theme, or the dividend strategy.

• Short selling: Short selling is when you borrow shares from a broker and sell them, hoping to buy them back cheaper later on. It's a tactic to make money if a stock's price is dropping. But it's risky; if the stock's price goes up, you could lose more than you initially made. Say you short-sell 100 shares at INR 100 each, getting INR 10,000. If their price falls to INR 90, you can repurchase them for INR 9,000, making INR 1,000 profit. However, if the price climbs to INR 110, buying them back will cost you INR 11,000, and you'll lose INR 1,000.

• Stop loss: A stop loss automatically sells your stock if it drops to a price you've set. Say you buy a stock at INR 100 and put a stop loss at INR 95. If the price dips to INR 95 or less, the stock sells without you having to do anything. This limits your loss to no more than INR 5 per share.

Wrapping up: Key points to remember

• Stock trading involves buying and selling shares on a stock exchange, such as NSE and BSE in India.
• Continuously educate yourself and stay informed about market trends to make informed investment decisions.
• Be careful when employing trading strategies like short selling and always use stop-loss orders to limit potential losses.

Give yourself a head start in stock trading with our jargon-free learning resources.