2 Dec, 2024
5 mins read
The stock market can feel like a maze of jargons for beginners. But at its core, it’s simply a platform where individuals and institutions trade shares of companies. These trades shape economies, fuel growth, and offer investors the opportunity to build wealth. For a beginner stepping into the world of investing, knowing the basic terminology is crucial. Here’s a breakdown of 20 essential stock market terms you should know.
A stock represents ownership in a company. When you purchase a share, you own a small piece of that company. Stocks are often referred to as "equities," and they offer investors the potential for profits if the company grows in value. Ownership might also entitle you to dividends, voting rights, or other benefits, depending on the type of stock you hold.
The stock market is a marketplace where stocks are bought and sold. Major stock exchanges like the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) in India facilitate this trade. It connects buyers and sellers, providing liquidity and a platform for price discovery based on supply and demand.
Volatility measures the extent of price swings in the stock market. High volatility often signals uncertainty, while low volatility indicates stability. For example, a sudden 5% drop or rise in the Sensex reflects high volatility, which can create opportunities but also higher risks for investors.
Liquidity refers to how easily an asset can be bought or sold in the market without affecting its price. Stocks of well established companies are easier to trade compared to smaller and unestablished companies that have low-volume resulting in a longer time to find a buyer.
Dividends are a portion of a company’s profits distributed to shareholders. For instance, if a company announces a ₹10 dividend per share, and you own 100 shares, you’ll receive ₹1,000. Dividends are usually paid quarterly and are a reward for investing in the company.
A bull market is characterized by rising stock prices and optimistic investor sentiment. For instance, if the Nifty 50 index climbs steadily for months, it’s considered a bull market, often reflecting economic growth or positive business conditions.
An IPO is when a company offers its shares to the public for the first time to raise capital. For example, Hyundai India's IPO in 2024 marked its entry into the stock market, giving investors the chance to own a stake in the company.
The P/E ratio compares a company’s stock price to its earnings per share (EPS). For ex: A P/E ratio of 20 means investors are willing to pay ₹20 for every ₹1 the company earns. It’s a tool to assess whether a stock is undervalued or overvalued.
Blue-chip stocks belong to well-established, financially stable companies with a history of strong performance. Examples in India include TCS, Infosys, and Reliance Industries, which are often seen as reliable investments during market volatility.
A portfolio is the collection of investments owned by an individual or institution. Diversification investing across stocks, bonds, and mutual funds is key to building a balanced portfolio to manage risk.
A stock split increases the number of shares while reducing the price per share proportionally. For example, a 2-for-1 split means each share you own doubles, but the price is halved, making the stock more affordable to new investors.
A capital gain occurs when you sell an investment for more than its purchase price. For instance, if you bought shares of Tata Motors at ₹400 and sold them at ₹500, the ₹100 per share profit is your capital gain. Based on the duration for which you held the investment will determine the nature of capital gains- short term or long term capital gains.
A bond is a fixed-income instrument representing a loan made by an investor to a borrower, usually a corporation or government. Bonds provide regular interest payments and return the principal upon maturity, offering stability compared to stocks.
A mutual fund pools money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. Managed by professionals, mutual funds make investing accessible and less intimidating for beginners.
An index, like the Sensex or Nifty 50, measures the performance of a group of stocks, offering insights into the broader market's performance. It serves as a benchmark for individual investments.
Insider trading involves buying or selling stocks based on confidential company information not available to the public. It’s illegal and considered unethical as it gives unfair advantage to insiders.
Margin allows you to borrow money from your broker to invest, using your existing securities as collateral. While it amplifies potential returns, it also increases risks, especially during market downturns.
Short selling involves selling stocks you don’t own, betting that their price will fall. If successful, you buy them back at a lower price, pocketing the difference. It’s a high-risk strategy requiring expertise.
Hedge funds are investment partnerships using advanced strategies to maximize returns. Unlike mutual funds, they cater to high-net-worth individuals and have fewer regulatory constraints.
Yield represents the income return on an investment, usually expressed as a percentage. For example, a bond offering a ₹20 annual dividend with a market price of ₹1,000 has a yield of 2%.
Understanding these terms is the first step toward navigating the stock market with confidence. Whether you’re building a portfolio, considering an IPO, or exploring dividends, these basics equip you to make informed decisions. Ready to start your investment journey? Explore FYERS platform to take the first step.
Calculate your Net P&L after deducting all the charges like Tax, Brokerage, etc.
Find your required margin.
Calculate the average price you paid for a stock and determine your total cost.
Estimate your investment growth. Calculate potential returns on one-time investments.
Forecast your investment returns. Understand potential growth with regular contributions.
You have successfully submitted your partnership request form. You will be hearing us soon!
Back
