Table of Content
Check out an overview of the top stock trading terms you must know.
Equity (in the stock market) refers to the amount of shares owned 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 company shares (equity) are bought and sold from one investor to another. The word ‘stock’ is synonymous with the word ‘equity’.
The ask price or an offer refers to the lowest amount of money that the seller of a stock is willing to accept for a share of that stock.
A bid 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, a bid taken between buyers ends when one buyer places a bid that the other buyers cannot or do not wish to match.
There is always a gap between the bid price and the ask price. The first one is the highest amount a buyer is willing to pay for a stock. The latter is the lowest a seller is willing to accept. The bid price is usually lower than the ask price. This difference is known as the bid-ask spread, which is primarily determined by demand and supply.
An exchange is a physical or digital market where different securities are traded. There are numerous stock exchanges in the world, where stock shares are sold and purchased. The stock exchanges in India include the Bombay Stock Exchange (BSE) and the National Stock Exchange of India (NSE).
To buy and sell stock, the investor must have an intermediary through whom to access the exchange. This middleman is the broker. They do not own securities but purchase or sell stocks on behalf of an investor in exchange for a small commission.
A bull market refers to a financial market condition where prices of securities are rising or expected to rise. It typically reflects investor confidence, strong economic indicators, and positive market sentiment. Bull markets are characterised by sustained growth over time. It leads to increased buying activity and upward trends in major stock indices.
Today, the stock market has become electronic and thus 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.
Volatility refers to the rate of price fluctuations of a share. A highly volatile stock 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.
Yield is the return earned and obtained on an investment within a given time. It comes in the form of a percentage of the cost or current market value of an investment. In equities, it usually takes the shape of the dividend yield in the form of a ratio of the share price.
Typically, a higher yield means more income potential from the stock. But an investor must take into account the financial health of the company because a dividend yield can also be high due to a low stock price.
A market order is an instruction to purchase or sell a stock immediately at the current best available price. A market order will guarantee execution, but not necessarily the price. It is typically used when speed is considered more critical than price accuracy. Market orders function optimally in highly liquid markets with zero price fluctuations. In volatile markets, the executed price may be slightly different from the anticipated one.
A bear market is a situation where stock prices fall over an extended period, generally by 20% or more from recent highs. It is an indication of widespread pessimism and poor investor sentiment regarding the economy or particular sectors. Investors tend to dispose of assets during a bear market to minimise further loss. Although it is not an easy time for traders, long-term investors sometimes see it as an opportunity to purchase undervalued stocks that can grow in the future.
Intraday trading involves buying and selling stocks on the same day of trading without any overnight positions. The traders try to earn a profit from minor price fluctuations throughout the day by making frequent trades. Continuous watch, quick judgment, and thorough knowledge about the trend in the market are required. While it can provide quick returns, it is risky as well, particularly if the trades happen against the trader. It’s suitable for experienced investors with high risk tolerance.
Delivery trading is the purchase of stocks and holding them for over a day to take physical delivery in your demat account. This, as opposed to intraday trading, is long-term holding and not subject to the short-term movement of prices. Delivery traders typically invest mostly in a company’s fundamentals and hope to see long-term appreciation in capital or dividend return. Although less risky than intraday trading, it involves more capital since no leverage is offered.
Short selling is a technique in which a share trader sells stocks that they do not possess with the hopes of acquiring them in the future at a lower price to make a profit. It constitutes borrowing stocks, selling them at the existing price, and then purchasing the shares when the price drops. This technique is risky since the potential losses are unlimited if the share price goes up instead. Short selling is usually used by experienced traders during bearish trends.
Stop-loss is a risk management tool that is employed by traders to limit potential loss in a trade. It’s an instruction placed to sell a share automatically if it falls to a specific level. This helps protect against significant losses in case the market turns against you. Stop-loss orders are crucial when markets are unpredictable and help traders stick to a disciplined approach. Stop-loss orders are used extensively in intraday and delivery trading.
The target price is an analyst’s or investor’s estimate of a stock’s future price, based on fundamental or technical analysis. It is the price level at which the investor hopes to sell and earn a profit. Specifying a target price helps the traders develop an entry and exit strategy efficiently. It may not be guaranteed, but it is a prediction of probable stock action and assists in making logical investment plans aligned with financial objectives.
Margin is borrowed cash from a broker to purchase securities, so the investor can buy more than he or she would using his or her own money. It’s the total value of the investment minus the investor’s own money. Margin trading has the greatest profits but also the greatest risk because losses get magnified. Brokers usually ask for a minimum balance and can call for a margin if the investment’s value decreases drastically.
This is a metric that compares a company’s share price to its per-share earnings. It helps in determining whether a stock is undervalued or overvalued for investors. A high P/E ratio can indicate the expectations of investors for growth. A low P /E can represent that the stock might be undervalued or track unimpressive prospects for future growth.
LTP is Last Traded Price and refers to the latest price at which a stock has been purchased or sold in the exchange. It is a true market price and is updated continuously during the trading session. LTP is used by investors to analyse the real-time price movement of a security and is an essential reference while making trades. LTP indicates market sentiment, demand-supply, and is essential in determining price trends.
If you want to trade smartly, you’ll need to master the lingo of stock trading. These 20 essential stock market terms to know form the backbone of your trading knowledge. A solid understanding of these concepts can give you the edge you need to navigate the market with confidence.
The rule is to sell a stock if it declines 7% from the purchase price to minimise losses. It helps to contain risk and preserve capital during unpredictable market activity.
There is no single best trading strategy. The optimal one will vary with your objectives and risk tolerance. Some popular strategies are swing trading and value investing.
The most widely used indicator is the Relative Strength Index. It helps identify overbought or oversold conditions. But traders often combine multiple indicators for better accuracy.
A trader should understand basic financial terms and market trends. It’s also essential to know how to read charts and indicators. One should also stay updated with economic news and company performance.
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