Like any field of activity, stock trading is also based on a set of very unique and specific terms. The stock market terminology for beginners can be quite wide and comprehensive. But you need to be familiar with some important terms used in stock markets. Above all, in the Indian context you must know some Indian stock market terms and definitions which are in common use. It helps you build a better conversation around the markets. Here are 10 such terms that are unique to the market.
Bull and bear market
A bull market is defined as a sustained period of uptrend in the market while a bear market is a sustained period of downtrend in the market. Most traders and investors prefer bull markets because that means your stock prices are going up on a continuous basis. Investors and traders at an individual level are basically buyers and hence bull markets are more popular.
Beta and Alpha
Beta is called market returns. If you invest in an index fund or if you buy all the stocks in the index in the same proportion, what is the return that you will earn? The risk that you take vis-à-vis this particular return is called Beta. Normally, a stock with a beta of more than 1 is called an aggressive stock and a stock with a beta of less than 1 is called defensive. The index has a beta of 1. Alpha is the excess return that you earn over and above what you desire. It is called excess returns and is used to measure performance.
Day trading and margin trading
Both are short term forms of trading. Day trading is also a form of margin trading wherein you put a small margin and take a leveraged position that is 6-7 times the value of your margin. Intraday trades have to be closed out on the same day necessarily and they do not result in delivery. Margin trades can also be carried forward and they entail interest cost.
Averaging
When you buy a stock and the price falls, most of us are tempted to buy more to reduce our cost of purchase. That is called averaging. It is normally not advised as it is tantamount to making the same mistake twice over. Also it increases your concentration to a particular stock or story.
Trade Execution
Trade execution is actual placement of your trade order on the stock exchange. You can place the order offline and get it executed over phone, or you can place the order online and get it executed over the internet. When the order placed is executed in the stock exchange system, it is called a trade and the process is called trade execution.
Stop loss
Stop loss is like insurance on your trade. Say you bought 100 shares of a stock at Rs.90. If y our maximum risk appetite is Rs.1000, then your stop loss should be placed at around Rs.80. At that point, the loss is booked and the position is closed. Stop losses are very common; in fact they are a must, in intraday trading as it is a protection against risk of market volatility. When you buy a stock, the stop loss is below the buy price and when you sell a stock, the stop loss is above the sell price. Short term traders place bracket orders which have stop losses and profit targets built in. If one of the orders is executed, the other leg is automatically cancelled.
Moving averages
This is a popular technical term. To smoothen out the price movements, the moving averages for the last 5 days, 10 days, 50 days or 100 days is considered. The moving average line gives useful inputs for traders when it cuts above or below the actual price line.
Bid and Ask
The exchange basically builds an order book. A bid is an offer to buy and an Ask is an offer to sell. When you want to buy, your will buy at the best (lowest) ask price. Similarly, when you sell shares you will sell at the best (highest) bid price. This is done automatically by the trading system at NSE or BSE. The combination of the best bid and asks form the order book for a stock.
Volatility
Volatility is another name for risk of a stock. Greater the volatility, greater is the risk in the stock. Volatility is a measure of how much the returns of the stock or index varies from the mean (average) return. The volatility of a stock is calculated using statistical measures like variance and standard deviation.
Algorithmic trading
Algorithmic trading or algo trading is the new sensation in town. It entails placing automatic orders through algos. These algos are nothing but computer programs to automatically place orders at great speeds if certain conditions are met. The simplest form of an algo is a slice algo which helps you get the best average price for buying and for selling. Algos account of for a large chunk of institutional trades and they are executed at machine speeds that humans can hardly imagine.
There are obviously a plethora of more terms on the subject of stock market trading. This is a good starting point to get familiar with the exciting world of stock trading.