Will you ever jump into the water before learning to swim in a pool? Obviously not. The same way you should not try unknown stuff in the stock market with all your capital at once. if you start trading futures/options even before knowing how they work you’re on sure way to lose capital.
Before jumping into stocks it is always good to learn the basics. Try learning stock market terms in investing, doing paper trades and learning how wealth has been made in the past. Beginners should take it slow and learn from mistakes as they are likely to commit mistakes in early years with their capital.
As you gain experience, you can trade/invest bigger amounts. So as part of investor education series, we list some basic stock market terms every investor must know.
How stock market was born
Stock market is over two hundred years old. The colonial government in the United States started the concept of the stock market by selling bonds to finance wars. The buyers of the bonds received the promised to payment at a specified date.
During the same period, private banks also ventured into issuing stocks to the citizens to raise the capital of the bank. It helped the industry to accumulate tremendous wealth within a short period. It also provided the wealthy and the rich cadre of the society to multiply their existing financial resources.
It was in the year 1792 that twenty-four merchants joined hands to establish the New York Stock Exchange. It was also the same year, during which initiation of trading stocks and bonds, setting up daily meetings in the Wall Street took place. The United States witnessed enormous growth of its economy in the early nineteenth century.
Selling of bonds and stocks, entitled the purchasers obtain partial ownership in the government or the company that is issuing the shares. The concept soon picked up a massive pace that helped several organizations to evolve into money minting companies.
By the end of the twentieth century, trading of stocks and bonds worth billions of dollars completed for which the New York Stock Exchange stood as the platform. Stock markets across the globe evolved, after this period. Today, NYSE, LSE and Tokyo stock exchange have a significant impact on the global economic scenario.
History of the stock market has revealed that issuing stocks are helpful for any company to expand their finances and presence in the market. The economy and the commerce trading of a country relied on the value of the stock market.
For example, the rise in share prices indicates the growth of business investments and a new market that is awaiting the entrance of new players. Stock exchanges act as clearing houses for every transaction carried out. It means that the exchange collects and delivers the shares offered by the companies to the sellers with a guaranteed payment.
In simple terms, it acts as a mediator, shields the rights of the sellers and buyers(well not really:-)) as the market fluctuates according to the economic condition and the growth of the company for a stated financial year.(Detailed glossary: Stock market term/history from here)
Stock market terms/terminology for beginner investors
It is crucial for a beginner to learn the stock market terminology before entering the stock market. The glossary intends to provide basic understanding about the different transactions and the procedure adopted across the global stock markets. The following stock terminology is suitable for beginners. The most important ones are highlighted in bold for your reference:
- After-hours deal: Stock markets close their doors every day at 3.30 PM IST. In US, it is possible to continue deals, even after the closing period. In such cases, the transactions take place the following day, termed as after-hours deal.
- Annual report: The annual report contains the detailed audit report sent to shareholders every year by all the publicly traded companies. However, there is a possibility that few private entities also send annual reports to their stakeholders. It is nothing more than a management’s view of the past and future prospects of the company. It also contains the independent auditor’s report of the financials.
- Balance sheet: The balance sheet is the most important stock market document one must be aware of. It displays the assets and the liabilities of the company. In other words, tit is the financial statement that reveals the overall transactions, liquidity and other assets that fall under the authority of the company.
- Beta: It signifies the ratio of individual stock market to entire market movement. In simple words, it signifies the volatility off the stock. For eg., if ICICI Bank has beta of 1.5 it means ICICI will increase by 1.5% when Nifty will only increase/decrease by 1%.
- Bearer stocks: These stocks are usually unregistered and in the name of the owner.
- Bed and breakfast deal: it is a unique opportunity that provides the ability to set up profit or loss. Under this deal, an individual sells a particular amount of shares and repurchases the same on another day. The primary aim is for balancing the overall output and avoids excessive taxation.
- Bid price: the term indicates the selling price of a bond or a share.
- Blue button: the terminology refers to the clerk of the stockbroker. Furthermore, the clerk is the only one who gains the permission to enter the trading floor. Not much applicable from Indian retail investor point of view.
- Blue chip: Blue chip is a reputed company that enjoy higher reputation in the exchange. They usually have sound management and regular dividend payments. Typically, in casinos, blue color chips have the highest denomination/value. Hence top valued companies are called blue chip companies. Another very important stock market term which you’ll hear often.
- Bull market: Well you must have heard of this for sure. it is a common word in the stock exchange, when the share prices are on the rise. When the stock market rides on the bull, it displays the investment strength in the country and its economic growth.
- Call: A pending installment that is due on shares.
- Capital: The total amount required for establishing a company or business. Also refers to the investment you’re committing actually for trade/investment.
- Cash Settlement: Settlement through cash is a common activity in the stock exchange. Deals like gilts often take place in the stock market, which replace the money for the time being. The account settlement is complete during the next deal.
- Contract Note: The contract note is a confirmation letter from the broker. The content indicates the bargain, which he or she carried out on behalf of the investor.
- Coupon: The coupon refers to the amount payable as interest on any fixed stocks.
- Cum Dividend: The shares in this category allow the buyer to receive dividends. The benefits change according to the company and the current financial results. If the company is running in high profits, it may pay out dividends from time to time.
- Dawn Raid: The terminology refers to the action of purchase of stocks in large quantity as soon as the trading doors of the market open in the morning.
- Dealing: The terminology is standard across the business. It is the transaction term, which refers to the sale and purchase of stocks.
- Debenture: They fall under the stocks category and usually have a backing in the form of assets.
- Depreciation: A company sets aside a sum that is useful in replacing the assets.
- Dividend: The dividend is the company’s profit, which it shares with shareholders in a periodic manner. It is not mandatory for the company to declare dividend. Declaring stable, regular dividends indicates strength of the company’s financials. One of the basic stock market term to remember for long term wealth generation.
- Equities: They are the usual stocks but different from debenture and loan stocks. Equity means a share in the business represented by corresponding equity shares.
- Ex-dividend: It is a share bought by a buyer, which is not eligible for the next dividend. Sellers usually retain these dividends for that year. If you buy a share ex-dividend means you bought it after record date of dividend and hence not eligible.
- Final Dividend: The final dividend is the total calculation for a financial year, which the company declares in the annual meeting.
- Futures: It is a contract that allows the holder the right to buy or sell commodities and indexes/stocks in the future date. However, the owner sets the price for these futures today.
- Gross: It is the total amount payable without any tax deduction.
- Hedge: Hedge offers the chance to insure the risk. This is usually done by taking both sides of trade in exchange for a small fee. For example if you have 100 Reliance shares and you expect the price to go down. You can then purchase a Put option which will go up in value as the price falls. This will offset loss incurred in your cash segment to a particular extent.
- Initial Public Offering: A private company offers new shares, as it becomes a public trading company. It is done to provide an exit to existing shareholders and raise capital for company expansion.Public and institutions can buy shares offered the offer price band and become new stakeholders.
- Limit Order: The limit order allows the broker who often sets a specific price limit.
- Liquidation: Liquidation allows the company to sell its assets to convert it into cash. Usually the companies do it to get rid of debt or unwanted assets.
- Loan Stock: The loan stock has a fixed interest rate coupled to it. It is different from debenture stocks, as there is no requirement to secure with any asset.
- Nominee: He/she is the stated person who acts on behalf of another person in stock market in the documentation and other financial matters. If it refers to a nominee of demat account , then he/she will the beneficiary if something unfortunate happens to you.
- Offer price: The offering price is similar to cost price of a commodity. The individual will purchase stocks and shares at the same price as stated. Usually offer price is term used during an IPO which signifies the stocks will be sold to the public at this price.
- Options: The terminology allows the broker to sell and buy a particular share within a specific time. It is sold in blocks with a premium or discount. We will cover Options extensively in another post.
- Ordinary Share: Shares falling under the ordinary category have flexible dividends and vary according to the performance of the company in any given fiscal year.
- Over the Counter Market (OTC): The over the counter market exists outside the main stock market.
- PLC: PLC stands for Public Limited Company (formerly Ltd.). Not all the public limited companies quote their presence in the stock market.
- Portfolio: A fund or a person holds a collection of shares. It is a collective holding of asset you hold. Depending on what type of asset allocation portfolio it signifies whether it is within single asset class or multiple asset classes.
- Proxy: A person acting or signing or vote’s on behalf of the primary candidate who is unable to attend the shareholder’s meeting is a proxy.
- Yearlings: The local authorities issue bonds, which have twelve-month validity usually in US markets.
- Yield: The yield is the percentage calculated from the gross dividend divided by the share price. For eg., if you bought stock ABC for Rs.1000 and the dividend declared this year is Rs. 20 per share, then you yield is 2%.
The above terminology will help beginners understand about the technical aspects of the stock market. However, a better understanding about the terms will be feasible after entering the market and performing transactions.
Mutual funds, stocks and bonds behave according to the reputation of the company, government policies and the acceptance of the shareholders. Therefore, it is purely the individual’s risk in entering the marketing. The stock market rides on the bull and the bear at frequent intervals.
A careful trading action is necessary to reduce the risk associated with purchase or sale of stocks. And knowing the basic stock market terminology will definitely help you as beginner investor.
Were you able to understand the terms mentioned here? Comment if you din’t understand anything and we will do our best to write a detailed post on that for your benefit.