Stock market A guide to essential terminologies

Introduction 

If you want to trade in the stock markets, you need to understand the rules of the game. These trading terms will act as a pathway toward your wealth-creation journey. Knowing these basic terms will help you make the right trading decisions.  

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Let’s explore the technical terms employed in stock trading and investing -

•  Stock

Also known as a share or equity, stock represents the basic ownership unit of a company. Owning stock allows you to own a portion of the company's profits and assets with voting rights in corporate decisions.

•  Stock Market

It is a marketplace where publicly held (listed) companies issue and trade their shares.

•  Volatility

As a degree of variation in a stock's trading price, it is measured by the standard deviation of returns and indicates how much a stock's price fluctuates. Increased volatility results in both chances for gain and risks.

•  Liquidity

It conveys the ease with which you can buy or sell a stock and convert it into cash. Highly liquid stocks allow for smoother transactions and better price discovery.

•  Corporate Actions

These are events initiated by a company, such as dividends, stock splits, mergers, and acquisitions, that can impact the securities issued by the company.

•  Dividend

It is a portion of a company's profits distributed periodically to its shareholders.

• Bonus Issue

When a company issues free shares to existing shareholders, increasing the total outstanding shares, this is called a bonus issue.

•  Stock Splits

It increases the number of shares outstanding by reducing the face value per share, making the stock more affordable.

•  Rights Issues

It allows existing shareholders to purchase additional shares directly from the company, often at a discounted price.

•  Bull Market

This is a period when stock prices are expected to rise. It indicates positive investor sentiment.

•  Bear Market

This is a period when stock prices are expected to fall as indicated by the negative sentiments

• Margin Amount

This is the initial deposit made by you while opening a trading account. It further acts as collateral for buying stocks on margin.

•  Margin Funding

It enables you to borrow money from your broker to buy securities. Moreover, it boosts potential gains and losses but also comes with increased risk.

•  Contract Note

A broker issues this document to clients for all transactions and contains details like trade information, brokerage, taxes, and signatures.

•  Settlement Types

Trades can be settled on a rolling basis or an account-period basis. Today, most trades are settled on a T+2 day basis. For example, transactions executed on a Monday will be settled on the following Wednesday.
 

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