Top 20 Basic Stock Market Terminology for Beginners

Whenever your friends were discussing the stock market using various jargon such as IPO, Bid Price, etc., now you don’t need to feel left out. 

In today’s blog post, we will explain to you the top 20 basic stock market terminologies which can help you get started on your investment journey with confidence.,

Basic Stock Market Terminology

The following are 20 fundamental stock market terms every beginner should know before starting to trade.

1. Share or Stock

A stock or share represents ownership in a company’s equity. The value of shares purchased by you became the part-owner of that company. Companies issue shares to raise capital and grow their business, and by owning them, you become a part of their future growth.

2. Bid and Ask Price

Bid and ask are the two most important prices that an investor must know. The bid price refers to the highest price which an investor is willing to pay to purchase a stock. Whereas the ask price which a seller is willing to sell the stock. And the difference between bid-ask prices is known as the spread.

3. Broker

The broker is an entity which acts as a middleman between you and the exchange and provides you with a platform to execute trades on the stock exchange. For their services, they charge a brokerage fee from you.Whenever your friends were discussing the stock market using various jargon such as IPO, Bid Price, etc., now you don’t need to feel left out. 

In today’s blog post, we will explain to you the top 20 basic stock market terminologies which can help you get started on your investment journey with confidence.

4. Trading Volume

The trading volume refers to the total number of shares traded or bought, or sold during a particular time period. It acts as a key indicator for traders in identifying the trend of a stock. An increasing stock price, along with the higher trading volume, indicates a bullish momentum, and vice versa.

5. Liquidity

It refers to the availability of buyers and sellers at the time of executing traders. Higher liquidity in any stock allows you to easily buy or sell it. Stocks with higher liquidity allow you to execute the shares at a fair price.

6. Volatility

Volatility in the stock market refers to how quickly the price of a stock or market index is moving up and down. Prices of stocks with higher liquidity fluctuate very rapidly compared to illiquid stocks. Higher volatility also comes with an opportunity to earn profit from quick movement in prices.

7. Market Capitalisation

Companies listed in India are categorised based on their valuation, and the method used to calculate this valuation is market capitalisation. It is calculated by multiplying the total number of outstanding shares by the current market price of a share. Based on the market capitalisation, companies are categorised into large-cap,

8. Initial Public Offering (IPO)

When a company seeks to raise capital from the public, it can do so by launching an IPO. It is the first step taken by a company to get itself listed on the stock market. This process is known as an Initial Public Offering. Once the shares are listed on a stock exchange, they can be traded freely in the market.

9. Stock Split

This is a corporate action in which a company divides its existing shares by reducing the price per share and increasing the outstanding shares. Shares were split by the company to make it more affordable and accessible to a wide range of investors. However, the share split only increases the number of outstanding shares but does not  increase the company’s overall market value.

10. Blue-chip Stock

Blue-chip stock is shares of large-cap companies. They are generally shares of large, established, and financially strong companies. Investment in blue-chip stocks carries relatively lower risk, but they have the potential of providing stable and consistent returns.

11. Market and Limit Orders

These are types of orders which one can place while executing their trades. In a Market order, the shares are executed at the best available market price. Whereas, in a limit order, the shares are executed at the price defined by the trader or at a specific price. Limit orders are not executed immediately.

12. Bull and Bear Market

These are the two common phases of the market. A bull market is a phase when the stock prices are rising or investors have an optimistic view of the market. However, in the bear phase of the market when the stock price generally falls more than 20%.

13. Dividend

When a company earns profit, it distributes a certain portion of its profit to its existing shareholders in the form of a dividend. Investment in dividend yield companies is suitable for conservative investors or for investors seeking regular income. However, not every company pays dividends; some use their profit for expansion.

14. Index

An index represents a group of stocks which reflects the performance of a particular sector. The performance of the index can be used to measure the performance of the portfolio. Examples of popular indices are Nifty 50, Nifty Mid Cap, Bank Nifty, Nifty IT, etc.

15. Stoploss

A stoploss is a tool used by traders as a risk management strategy to limit their potential loss. It is an automated order placed by the trader to buy or sell a security when the share price reaches a certain level. The primary objective of this order is to protect investors from loss without consistently monitoring the market.

16. ETF

ETF or Exchange Traded Fund is a type of investment tool offered by asset management companies. This is traded on the stock exchange like any other stock. An investor is required to have a demat and trading account if they wish to invest in it. It invests the money pooled from investors in a basket of assets such as bonds, indices, etc.

17. Demat and Trading Account

To invest in the stock market, it is essential to have a trading and demat account. A trading account allows you to execute your trades in the securities market. Whereas, in your demat account, you can hold securities or shares. Both accounts are interconnected and need to be opened with a broker.

18. Market Capitalisation

Market capitalisation is often used to calculate the market value of a company. It is calculated by multiplying the total number of outstanding shares by the current market price of the share. Based on the value calculated, the companies are divided into three different categories such as large-cap, mid-cap, and small-cap.

19. Portfolio

A portfolio is a combination of different asset classes or investments held by an individual or an institution. The wide range of financial instruments held by an investor may include equity, debt, commodities, etc.

20. Capital Gain

Whenever you earn profit from investment in the equity market, you will have to pay Capital Gain Tax on it. The applicable capital gain tax depends on the duration of investment, such as investments sold before one year are subject to tax as per the applicable tax rate of short-term capital gain, which is 20%. However, if the investment is sold after one year of investment, it will be taxed at a rate of 12.5%, after including the exemption of 125000.

Read Also: What is a good rule for investing in stocks?

Conclusion

On a concluding note, having an understanding of the stock market’s basic terminology is essential for a beginner to start investing in stocks. Initially, various terms might confuse you, but over time, you will get to understand them, and it can help you navigate the market easily. To get more clarity about any terms related to the stock market, you can read blogs, articles, and consult your investment advisor.

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