Commonly Used Terms In Stock Market ?
Commonly Used Terms In Stock Market ?
Have you ever encountered the following words and phrases: bird dog, barrel roll, panic rack, five by five and touchdown? Well, if you don’t belong to the aviation industry, you shouldn’t be worried. These terms are commonly used by pilots and aviation enthusiasts.
Likewise, the stock market too has its own set of unique phrases and jargon. And if you wish to invest in the market, it is necessary that you are comfortable with the different terms.
Why you should know about Stock Market terminology ?
Knowing stock market terminologies can help you better understand markets and make prudent investment decisions. You can accurately gauge market movements and be in control of your investments. At the same time, it helps you analyse expert opinions, read between the lines, and make an informed choice.
Here is a list of some important terms that you should be aware of:
When the stock market as a whole is on the rise for a sustained period of time, it is called as a bull market. During such a rise, investors are typically more optimistic. The opposite of a bull market is a bear market. In such a period, the market witnesses a prolonged decline in value
Bear market reflects a prolonged fall in prices of stocks on a consistent basis. Typically, when stock prices fall by 20% or more from recent highs due to prevailing negative sentiments of investors, markets are said to be in a bearish phase.
Several internal and external factors such as changes in government’s policies, economic downturns, and recession, among others, could lead to a bear market.
When a company issues shares, each share has a face value. This refers to the value of the stock at the time of issuance. The company that issues the stock decides the face value and it does not change over time. And in case you hear someone say par value instead of face value, don’t panic. Both terms mean the same thing.
As the word indicates, bonus shares are extra or additional shares that a company gives to its shareholders. And yes, they come at no additional cost. The number of bonus shares you get depends on the number of shares you originally own.
For example, imagine that you own a hundred shares of company X. Now, if the company announces a 2:1 bonus, you get two shares free for every share you own. That is, you would get 200 free shares and your total holding rises up to 300 shares.
The general direction in which the stock market (or even an individual share) moves is known as trend.
For example, if the market has been rising up for the past one month, you say that the market is on an upward trend. And if it is going down, the market has a downward trend. There is no specific time limit for a trend. A trend can happen for a short term, the medium term, or even the long term.
Dividend is the amount of money a company pays to its shareholders out of its profits. They can be issued in the form of cash, stocks or any other form that the company chooses. A number of companies offer dividends to their shareholders. However, it is not compulsory for a company to give dividends even if it makes a profit. Many companies reinvest their profits back into the business itself for growth and expansion.
In stock market jargon, a bottom means that it is the lowest price reached by a stock in a particular time period. Similarly, a peak is the highest price that a stock has reached in a given time period. Technical analysts use these two concepts a lot to determine the future price of a stock.
When a stock is said to be overvalued, it means that the current price of the stock is considered to be higher than what it should be. You can find out whether a stock is overvalued through certain mathematical metrics such as the Price-to-Earnings ratio. If a stock is considered to be overvalued, the price of the stock is expected to drop down.
An undervalued stock is the opposite of an overvalued stock. It means that a stock is being traded at a value that is lower than its intrinsic value. For example, imagine that the intrinsic value of a stock is Rs 100 but it is being traded at Rs 50/share. Investors try to acquire these stocks in order to get higher returns in the future at lower costs.
Market breadth is a ratio used in technical analysis to compare the total number of stocks that are rising against the total number of stocks that are falling. The purpose of this technique is to analyse the overall direction in which the stock market is moving.
The formula is as follows:
Market breadth = total number of rising stocks/total number of falling stocks
If the ratio is greater than one, it indicates a positive sentiment or that the market is bullish. A value less than one means negative sentiment or a bearish market.
The term overweight is used when an investment portfolio holds excess of a particular security when compared to the benchmark portfolio.
Let’s take an example. Imagine that Rakesh holds 15% of his investments in the banking sector.
However, the corresponding benchmark portfolio, say, the Midcap 100 index holds only 10% of banking stocks. This means that Rakesh’s portfolio is 5% overweight in the banking sector.
This term is exactly opposite to ‘overweight’. An underweight portfolio means that it does not contain an adequate amount of a particular security when compared to a benchmark portfolio.
By taking Rakesh’s example again, imagine that the banking stocks constitute 5% of his portfolio. The Midcap 100 index holds 10% of banking stocks. This time, his portfolio is underweight by 5%.
This is perhaps the easiest jargon of the lot.
As the name suggests, ‘to buy’ in the stock market means to acquire shares in exchange for money. However, buy also means an analyst’s recommendation to purchase a particular stock.
Similarly, sell means an exchange of existing shares in your portfolio for currency. Or it could indicate an analyst’s recommendation to sell a specific stock in the market.
The concept of hold means that you neither buy nor sell the stock. So, if you already have the stock in your portfolio, then it is best that you continue to hold on to the stock. And if you don’t have the stock, it is best to wait until the volatility dies down and the recommendation changes to ‘buy’.
When it comes to trading in the stock market, the concept of support and resistance are quite popular. The concept basically tells that when the price of a stock reaches a specific predetermined level, it tends to stop and move in the opposite direction. The upper level is known as the resistance and the lower level is known as support.
For instance, imagine that you have bought 200 shares in company Z at Rs 50 each. You are expecting the price to rise. But in the next few months, the stock fails to rise beyond the value of Rs 60. In other words, the stock has hit a resistance level. Similarly, if the stock price does not drop beyond a particular point, it has hit a support level.
In case the resistance level is breached at some point, the stock tends to rise in value until it hits another resistance level.
How do you know whether a stock’s performance is good or not? You compare it with a benchmark. A benchmark is a standard against which any stock’s performance can be measured. There are different benchmarks available to help you get a good idea of any given stock’s performance. Market indices like BSE Sensex and NSE Nifty are a couple of well known benchmarks.
Agent refers to a brokerage firm that acts on your behalf in buying or purchasing shares. Registered with market regulator SEBI, at no point during the transaction, the agent owns the shares.
Prominent agents have their team of researchers and analysts who track every market movement and give you insights on the same. While traditional agents charge a commission on every transaction, discount agents quote a flat fee, irrespective of the volume of transaction.
Everything that a company owns on its name are assets. This includes cash, land, technology, etc. Assets reflect the wealth of a company and greater the assets, higher is its value in the market.
Companies build assets over time, and they can be tangible physical goods such as office equipment or intangible like intellectual property
Beta measures the relationship between price of one stock and the movement of the whole market. Note that beta of the market is assumed to be 1.
If a stock’s beta is more than 1, it reflects its higher risk than the market. On the other hand, if a stock’s beta is less than 1 it shows that the stock is less risky than the market.
Stocks of fundamentally sound companies with robust financials are known as blue-chip stocks. These stocks are better structured to weather market volatility and thus prevent a dip in the corpus.
Returns from blue-chip stocks are stable in the long run, and they are the first to bounce back from a market downturn.
It refers to the standard number of shares defined by stock exchanges as a trading unit. More often than not, it refers to 100 shares.
Avoiding odd lots is the purpose of board lot, and it facilitates easy trading. Other than 100 shares, some of the popular board lots include 50, 500, and 1000 units.
Bonds are fixed-income instruments issued by governments or an organisation. They bear a fixed repayment which needs to be paid on maturity to the investor.
When governments or companies require funds for new projects or maintain ongoing business, they can issue bonds. Bonds are also available as mutual fund units and can help earn a secure and fixed income.
It’s a derivative contract between two parties where the buyer gets the right to buy an underlying asset at a pre-defined price and time. However, it’s not an obligation.
Once the buyer exercises the call option, the seller has no other option but to sell the asset at a price initially agreed upon.
As the name suggests, convertible securities refer to those securities which can be converted into other securities. Convertible preferred stock is a common convertible security.
It can be converted into a common stock. A convertible security has a lower pay-out than a security that doesn’t have this feature.
Close price refers to the final price at which a stock is traded on a given trading day. Stock exchanges have their fixed timings for closing trade for a day.
At the time the closing bell rings, the price at which a stock or security is traded becomes its close price. However, note that the price doesn’t mean the end of trading for a particular stock.
This ratio indicates a firm’s liquidity position. A company with a high current ratio can better meet its short-term liabilities.
In other words, the company has enough back-up, and its day-to-day workings will not be affected due to the pressure of working capital. This ratio is arrived at by dividing current assets with current liabilities.
A debenture is a form of fixed-income instrument which isn’t backed by any collateral of the issuer. It is often used to issue loans by companies, and as a debenture holder, you become a creditor of the company.
A debenture has a fixed rate of interest, and the interest amount is payable half-yearly or yearly. Issuing it allows the company to get the required funds with ease, without diluting its equity holdings.
It is a type of stock that offers stable earning and consistent dividends irrespective of the nature of the stock market. A defensive stock is also known as a non-cyclical stock.
Defensive stocks have a beta less than 1. Having them in your portfolio protects the corpus from eroding in a recession. Though they don’t generate high returns, they provide regular dividends.
Delta is the ratio that compares change in price of the asset to the corresponding change in the price of its derivative. It can be positive or negative depending on the option’s time. For call option, it ranges between 0-1, while for put option it ranges from -1 to 0.
This is because in a call option as the price of the underlying asset increases, the option also increases its price. On the other hand, in put option as the price increases, the value of option decreases.
Diversification refers to buying stocks of different companies in different sectors. It brings down the risk of investment by distributing risks across sectors.
The non-performance of one sector is made up for by the other. In other words, losses made by companies in one sector is nullified by the gains made by others in a different industry.
This ratio tells how much outside funding is used by the company to run its operations as against its funds. Generally, the lower debt-to-equity ratio, the better it is.
This ratio is arrived at by dividing the total liabilities by total shareholder’s equity. You can easily find this ratio in a company’s balance sheet.
Also known as common shares, an equity share represents a form of fractional ownership in a company. A vital source of raising capital, as an equity shareholder, you have voting rights.
In other words, if you own a sizeable amount of equity shares of a firm, you have the right to have your say in the company’s affairs.
Hedge refers to a strategy to reduce the risk of adverse price movement of assets, which can erode the gains of your portfolio.
To make meaningful gains from stock markets, and the fact that they are volatile in nature, you must have this strategy in place to preserve the gains made over the years.
An income stock pays regular dividends to investors and is mostly issued by firms with stable cash flow and established financial infrastructure. Also, these enterprises have a large market capitalisation.
Price of an income stock is inversely proportional to the prevailing interest rates. If interest rate increases, price decreases and vice-versa.
A stock market index is a statistical measure that reflects the changes in the stock market. It is created by picking and grouping similar kind of stocks from the listed securities on the exchange.
Criteria for stock selection may depend on the type of industry, market capitalisation, and size of the company. BSE Sensex and NSE Nifty are the two most widely used stock indices in India.
Initial Public Offering
Initial public offering or IPO is the process through which a privately held company becomes public. A way to raise capital, a company offers its shares to the public for the first time in an IPO.
These shares are issued in the primary market and then subsequently traded in the secondary market. Companies planning to go for an IPO choose a team of underwriters and an investment bank to handle the entire process.
It refers to a trading platform where Internet is the medium. Here, the execution takes place via an order routing system that redirects traders to the exchange trading system.
With the help of the Internet Trading system, investors can conduct trade from any part of the world. Market regulator SEBI approved this trading in 2000.
It refers to the order to buy or sell a security at a pre-defined price. The order is executed only at the specified limit price.
Though a limit order can control execution price, it can result in missed opportunities when the market is moving at an extremely fast pace. Also, it can be used in conjunction with stop order to prevent large losses.
It’s the aggregate valuation of a firm based on the current share price multiplied by the total number of outstanding stocks. For example, if a company has 20 million outstanding shares with the current market price being Rs. 100 per share, the market capitalisation of the company is Rs. 200 crores.
Market capitalisation is one of the most important characteristics that help investors find out the quantum of risk and return in a share.
Portfolio refers to the overall holding of an individual or enterprise. It includes various types of securities of multiple companies operating in different sectors.
A diverse portfolio helps to ride volatility better and absorb market shocks. As an investor, you must construct your portfolio according to your risk appetite and investment objective.
It is the ratio for valuing a company that measures the current share price to its per-share earnings. This ratio is also known as price multiple or earning multiple.
A high P/E ratio means two things – either the company’s stock is overvalued, or investors expect high growth rate in the future. You can arrive at the PE ratio by dividing the current stock price by earnings per share.
Similar to a call option, a put option is a derivative contract between two parties where the buyer has the right to sell an asset to the seller exercising the put option.
Once the buyer uses this option, the seller has no choice but to buy the asset at the strike price at which it was agreed upon. The buyer of the put option expects the asset’s value to decrease so that he can buy more at a lower price.
It refers to the maximum number of futures and options contract that investors can hold at any given point in time.
A position limit is established to prevent an investing entity from monopoly and exert undue control. The objective is to prevent investing entities from manipulating prices for their own advantage while hurting others.
Risk refers to the chances that the returns from an investment will differ from the expected outcome. It is assessed by considering historical behaviour and is evaluated through standard deviation.
Standard deviation is directly proportional to the degree of associated risk. Risk varies across asset classes. While equities have a higher degree of risk, debt has a lower risk.
Return on equity
Return on equity (ROE) measures the overall earning performance of a company and also helps in measuring the profitability of different companies in the same industry.
Higher ROE indicates that the management is doing a fine job in boosting business, adding to the wealth of its shareholders in the process.
It is a statistical measure of market volatility. When prices swing wildly, standard deviation is high. It means that the investment is a risky proportion.
On the other hand, when standard deviation is low, it means that prices are calm and the investment has low risk. Thus, if you want to find out the risk associated with your investment, you can use standard deviation as one of the metrics.
Stock split refers to the increase in the number of outstanding shares by splitting the current ones. Companies do this to enhance the availability of their shares in the market.
The general split ratio is 2:1 or 3:1, which means that one share is split into two or three. A share’s price is also affected by a stock split. It reduces as the number of outstanding shares increases.
Strike price refers to the price at which a derivative can be bought or sold. In a call option, the strike price is the one when the option holder purchases the security.
On the other hand, for put options, the strike price is one at which the security is sold. Strike price is also known as exercise price.
Trading session refers to the time when stock exchange is open for trading. In Indian stock exchanges, the session is from 9:15 am to 3:30 pm. Within this time, all orders must be placed.
Also, during the trading session, all pre-session orders are matched and executed. The timing for trading sessions differs across stock exchanges over the world.
Thin market refers to a period of time when there are a low number of buyers and sellers for either a single stock, sector or the whole market.
As a thin market has a lower level of participants, there is high price volatility and low liquidity. As the number of bids and asks are limited, it becomes difficult to conduct a transaction in a thin market.
It’s a measurement of return of investment (ROI) in terms of percentage. For calculating stock yield, you need to divide the current price of a share by the annual dividend paid by the company for it.
Note that higher yields are supposed to be an indicator of low risk and greater income. However, it may not always be a positive sign as in the case of rising dividend yield resulting due to a fall in stock price.
A last word
Knowing these terms can be a great help in your investment journey. They may not make you a better investor but they can surely de-jargonise the investment world and make it easier to understand. So the next time somebody says ‘market breadth’, you know exactly what the term is.