Following are some of the important and commonly used stock market related terms and concepts:-
Delivery And Intraday:-
Delivery is also called as investment. When a person buys shares of a company and holds them for a certain period of time say one week, one month, six months, two years, three years, five years or even more before selling them, it is called as delivery or investment. When he buys the shares, it is said that he has taken delivery of the shares and when he sells the shares, it is said that he has given delivery of shares. A demat account is required for delivery. When the shares are purchased, they are added to the demat account and when the shares are sold, they are deducted from the demat account.
Intraday is also called as day trading or margin trading. When a person buys and sells the shares of a company on the same day (long) or sells and buys the shares of a company on the same day (short), it is called as intraday or day trading or margin trading. Demat account is not required for intraday.
Long And Short:-
When a trader in intraday trading first buys a company’s shares to sell them later in the day, it is said that he is long and when he later sells those shares, it is said that he has done a long trade. The trader in a long trade expects the price of the shares to go up so that he can make profit by selling shares at a price higher than the price at which he bought them. But if the price of shares go down, he incurs loss.
When a trader in intraday trading first sells a company’s shares to buy them back later in the day, it is said that he is short and when he later buys back those shares, it is said that he has done a short trade or short sell. The trader in a short trade expects the price of shares to go down so that he can make profit by buying shares at a lower price than the price at which he sold them. But if the price of shares go up, he incurs loss.
Short sell involves selling the shares which the trader does not hold. He borrows the shares from his broker and sells them in the market and then buys them back from the market and returns them to the broker.
IPO And FPO:-
IPO means initial public offering. IPO is a process in which private unlisted companies issue shares to the public for the first time in the primary capital market to raise capital. Those issued shares are then listed on the stock exchange for the purpose of trading.
FPO means follow on public offering. FPO is a process in which already listed companies issue more shares to the public in the primary capital market to raise additional capital. Every issue of shares made by a company after the IPO is called as FPO.
There are two methods by which a company can issue shares to the public in IPO or FPO:-
(1) Fixed price method:-
In the fixed price method, the company decides a fixed price at which it is willing to offer its shares to the public and the investors have to buy the shares at that price. The issue price is decided in advance by the company and informed to the investors.
(2) Book building method:-
Book building is a price and demand discovery method. In the book building method, the company does not decide a particular fixed price at which it is willing to offer its shares to the public but instead gives a price band within which the investors have to bid for the shares. The bids are collected from the investors at various prices which are within the price band specified by the company. The issue price is decided by the company after the bidding is over based on the demand generated in the bidding process at various prices. The issue price that is decided is called as cut-off price.
Oversubscription And Undersubscription Of Shares:-
A company offers certain number of shares to the public in an IPO or FPO.
Shares of a company are said to be oversubscribed if the public applies for more shares than the number of shares offered by the company. For e.g. a company offers 500000 shares to the public but the public applies for 600000 shares, it is a case of oversubscription and it is said that the company’s issue of shares is oversubscribed.
Shares of a company are said to be undersubscribed if the public applies for less shares than the number of shares offered by the company. For e.g a company offers 500000 shares to the public but the public applies for 450000 shares, it is a case of undersubscription and it is said that the company’s issue of shares is undersubscribed.
Face Value, Book Value And Market Value Of Shares:-
When a company issues shares to the public in IPO, it gives a basic value to each share. This value is called as face value. Face value is also called as par value or nominal value. Face value of a share may be Re.1 , Rs 2, Rs 5 or rs 10. Face value of shares do not change except in the case of stock split or reverse stock split.
Book value of a share is the actual worth of the share in the company’s books. Book value of a share is the amount of money that the shareholders would get per share held by them, if the company is wound up or liquidated. Book value per share indicates the amount per share that the shareholders would get after all the assets are liquidated and all the debts are paid off by the company.
Formula for calculating book value per share is:-
Total paid up equity capital + free reserves – revaluation reserves
Number of equity shares outstanding
Market value of a share is the current price at which the company’s shares are being traded in the stock exchange. The market value per share is determined by the demand and supply of the company’s shares in the stock market.
Market capitalization or market cap is the total market value of all the shares outstanding of a company. Market cap is calculated as under:-
Market cap= number of equity shares outstanding * current market value per share.
This gives the total market capitalization of the company. Market cap keeps changing according to the changes in the market value of the company’s shares.
There is also a free float factor which is called as free float market capitalization. Free float market cap takes into consideration only those shares issued by a company that are readily available for trading in the market. It excludes promoter’s shareholding, Director’s shareholding, government shareholding, shares held by persons with controlling interest, etc and locked-in shares which would not be sold in the market. Free float market cap is calculated as under:-
Free float market cap= freely tradable equity shares * current market value per share.
Large Cap, Mid Cap And Small Cap Companies:-
Depending upon their market capitalization, companies are classified into three categories- large cap companies, mid cap companies and small cap companies.
Large cap companies are those companies which have large market capitalization and are generally old and well established companies. Stocks of most of the large cap companies are included in the market index. Stocks of large cap companies are called as large cap stocks.
Mid cap companies are those companies which have medium market capitalization. Some of the mid cap companies have the potential to become large cap companies. Stocks of mid cap companies are called as mid cap stocks.
Small cap companies are those companies which have small market capitalization and are generally new companies which are in the early stage of development. Some of the small cap companies have high growth potential. Stocks of small cap companies are called as small cap stocks.
Blue Chip Companies:-
Blue chip companies are large cap companies which are well-recognized, well established and financially sound. They have stable earnings and are known for their high quality products or services and also the ability to pay regular dividends to their shareholders. Stocks of blue chip companies are called as blue chip stocks and are generally included in the market index.
Fundamental And Technical Analysis:-
Fundamental analysis is the method of evaluating a company’s stock by determining its value which is called as intrinsic value or fair value. If a stock’s market value is currently less than its intrinsic value, it is said that the stock is undervalued and hence good for investment and if a stock’s market value is currently more than its intrinsic value, it is said that the stock is overvalued and hence not good for investment.
Fundamental analysis involves quantitative and qualitative analysis.
Quantitative analysis includes analysis of a company’s financial statements such as profit and loss account, balance sheet, cash flow statement.
Qualitative analysis includes analysis of various factors such as economy and the industry in which the company operates, company’s competitors, quality of the company’s management, company’s products and services, etc.
Fundamental analysis is mostly used by long-term investors.
Technical analysis is the method of analyzing a company’s stock by studying the historical statistics generated such as past prices and trading volume and predicting the future price movements by identifying a trend or pattern in the statistics.
Technical analysis involves studying various technical indicators such as moving average, support/resistance levels, MACD, relative strength index, stochastic, etc. For studying these indicators various charting software are used.
Technical analysis is mostly used by day traders and short-term investors.
Bull And Bear Market:-
Bull market refers to a market that is on the rise which is indicated by a sustained increase in share prices, high economic growth and strong investor confidence in the economy. In bull market, there is more demand and less supply of shares as more people are buying the shares which leads to the increase in share prices.
An investor or trader who thinks that the market will go up is called a bull. The bull has an optimistic view of the market.
Bear market refers to a market that is on the decline which is indicated by a sustained decrease in share prices, low economic growth and low investor confidence in the economy. In bear market, there is less demand and more supply of shares as more people are selling the shares which leads to the decrease in share prices.
An investor or trader who thinks that the market will go down is called a bear. The bear has an pessimistic view of the market.
Stop-loss is an order placed with the broker to buy or sell a stock when a certain specified price i.e. stop price stipulated by the trader or investor is reached. Stop loss is used to keep the losses in limit. A stop-loss order becomes a market order once the stop price is reached.
If a trader or investor buys a stock, he will give a sell stop-loss order specifying a price below his buying price at which the stock should be sold in case the position goes against him. So his loss would be limited to the stop price specified by him and not more, in case the price of the stock goes down.
If a trader short sells a stock, he will give a buy stop-loss order specifying a price above his selling price at which the stock should be bought back in case the position goes against him. So his loss would be limited to the stop price specified by him and not more, in case the price of the stock goes up.
Volatility is the measurement of the rate at which the price of a stock moves up and down i.e. fluctuates over a period of time. If the price of a stock fluctuates rapidly over a short period of time , it is said that the stock has high volatility or the stock is highly volatile. If the price of a stock does not fluctuate a lot, it is said that the stock has low volatility or the stock is less volatile.
Beta is one of the important measure of a stock’s volatility in relation to the market. According to beta measure, the market has a beta of 1. Stocks that fluctuate more than the market have a beta above 1 and the stocks that fluctuate less than the market have a beta below 1. High beta stocks are more risky but have potential for high returns while low beta stocks are less risky but give low returns.
Market maker is a firm which provides liquidity to the stocks by standing ready to buy and sell stocks on a continuous basis at publicly quoted prices. Market makers hold certain number of shares of a particular company to facilitate trading in that company’s shares. Market makers maintain bid i.e. buy and ask i.e. sell prices for a particular company’s shares and buy and sell from their own accounts. They make profit from the bid-ask spread i.e. difference between the price at which they would buy and the price at which they would sell the shares.
for e.g. an investor wants to buy or sell 100 shares of a company. For that there must be a willing seller or willing buyer respectively. It is unlikely that the investor is always going to find someone who is interested in selling or buying the exact number of shares of the same company at the exact same time. That’s where the market makers step in by selling the shares to the investor or buying the shares from the investor from their own accounts even if there are no willing sellers or buyers available at that time.
Insider trading is the buying and selling of shares by company’s insiders such as directors, employees ,etc and their relatives and friends or anyone connected with the company such as merchant bankers, share transfer agents, debenture trustees, auditors, lawyers, etc and their relatives and friends. Insider trading can be illegal or legal.
Insider trading is illegal if the insiders trade shares of the company on the basis of some unpublished price sensitive information which is only available to them and not to the public and try to profit from such information. Such illegal insider trading attracts penalty.
Insider trading can be legal if the insiders trade shares of the company on the basis of published and publicly available information and inform such trade to the SEBI.
Information about legal insider trading transactions is available on the websites of BSE and NSE.
If the value of a market index or the price of a stock decreases below a specified percentage or increases beyond a specified percentage of the previous day’s close price, it is said that the index or stock has entered into a circuit. If the index value or stock price decreases below the specified percentage, it is said that the index or stock has hit the lower circuit level and if the index value or stock price increases beyond the specified percentage, it is said that the index or stock has hit the upper circuit level.
After the index or a stock hits a lower or upper circuit level, circuit breaker is applied by which the trading in whole market is halted for some time or even for the whole day in case of index hitting the circuit level and the trading in particular stock is halted for some time or even for the whole day in case of individual stocks hitting the circuit level. The purpose of circuit breaker is to curb excessive volatility in the stock market and to control the stock market when it moves below or beyond a reasonable limit.