Before launching into any form of investment, it is important to first conduct a fair bit of research, develop an understanding and familiarise yourself with certain basic concepts. The world of stock market is no different. When learning the basics of trading in stocks, there are a few essential terms that are sure to crop up every now and then.
Therefore, here are the top 10 stock trading terms that can help you bridge the gap to becoming an expert.
One of the most essential terms in stock trading, equity (in stock market) refers to the amount of owned shares of a company. As an investor, when you buy the shares of a company, you buy an equivalent degree of ownership in that company. The stock market is where these shares, and therefore the equity, of companies are bought and sold from one investor to another.
In this context, the word ‘stock’ is used interchangeably with the word ‘equity’.
An ask price or an offer, in stock trading terms, refers to the lowest amount of money that the seller of a stock is willing to accept for a share of that stock. Therefore, if you are interested in buying stocks, it is the ask price of stocks that you should be on the lookout for.
A bid, on the other hand, refers to the highest amount of money that a potential buyer for a stock is willing to pay for a share of that stock. If there are multiple buyers for a stock, they will each offer their bids and lead to a bidding war. This ends only when one buyer places a bid that the other buyers cannot or do not wish to match.
In general, there is always a difference between the price that a seller asks for an object and the price the buyer is willing to pay for it. In the stock market, there is a difference between the bid and ask price, with the bid generally being lower than the ask price. This difference between the two is known as the ask-bid spread, or simply, spread. This spread is determined by various factors, the primary being the demand and supply of that particular stock.
An exchange refers to a place or an electronic market where various securities are traded. When it comes to stock trading, an exchange refers to one of the many stock exchanges in the country or worldwide where shares of stocks are bought and sold. The most popular stock exchanges in the country are the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE).
In order to trade in stocks, an investor needs to have an intermediary to connect to the exchange of his choice. This intermediary function is carried out by a registered broker, or a brokerage firm. The broker does not own securities but essentially purchases or sells stocks on behalf of an investor in exchange for a small commission.
7. Bull Market / Bear Market
News related to the stock market can often be found using the terms bear market and bull market. These two terms are indicators of the current trend that the stock market is experiencing at a given time.
Bull market refers to a period in which the prices of stocks are consistently increasing and therefore, the market is on an upward trend. On the other hand, Bear market refers to a period in which the prices of stocks are consistently falling and therefore, the market is on a downward trend.
8. Trading Account
Trading accounts are an essential tool for every investor who participates in stock trading. While trading was earlier conducted by an outcry system, the stock market has today become electronic in nature. As a result, traders are required to open an online trading account with a registered broker, to execute their trades electronically. All orders to buy or sell shares take place through this trading account.
An important feature to know about a stock before investing in it, is its volatility. Volatility refers to the rate of price fluctuations of a share. For instance, a highly volatile stock is one that experiences daily up and down movements in its price. Some traders profit off the risks involved in highly volatile stocks, while others prefer investing in less volatile stocks for the long run.
The ultimate goal of every stock trading practice is to enjoy favourable returns. This is known as the yield. Yield essentially refers to the return of investment on a stock, and is expressed in terms of percentage.
With these basic stock trading terms in tow, you too can begin your journey into stock market investing. With the considerable potential that the stock market offers, all it takes is some research, some preparation and opening a demat and trading account with a reliable brokerage firm to start investing.