Stock market guide: 10 terms you must know before investing
Even though equity markets can be riskier at times, they are not too difficult to understand. However, there is a huge list of terminology used in stock markets, here is the 10 most used terms that you must know.
Equity stock market is often regarded as a market for professionals or experts. It is considered a highly technical and risky world of investments. Even though equity markets can be riskier at times, they are not too difficult to understand. Mainly the trading in Indian stock market takes place on two of the major stock exchanges, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). There are two popular Indian market indexes, Sensex and Nifty. Sensex is the traditional index for equities, it includes shares of 30 firms listed on the BSE. While other one is the S&P Nifty, which includes 50 shares listed on the NSE.
The body who bears the sole responsibility of development, regulation and supervision of the stock market in India is the Securities and Exchange Board of India (SEBI), which was formed in 1992 as an independent authority.
There is a huge list of terminology used in stock markets, here is the 10 most used terms that you must know:
1. Intraday trading:
Many investors or traders prefer intraday trading over delivery based (long term) investments. It allows an investor to put a trade and execute it, within the trading session of the same day. Indian stock market opens at 9.15 a.m and closes at 3.30 p.m, which remains the trading session or a intraday period for day traders.
Intraday trading is often done by professionals, speculators, traders, market experts as it carries huge risk and volatility as compared to long term holdings.
2. Bluechip stocks:
A blue-chip stock generally has a a huge market capitalisation (billions) and is generally the market leader or among the top three companies in its sector. Some examples of blue-chip stocks are Reliance Industries, Tata Consultancy, SBI, HDFC Bank, ITC, ONGC, Infosys etc. These companies have stable earnings and sound financial reputation in the market. The bluechip scrips bears less volatality and risk.
3. Initial Public Offer (IPO):
It is a process of offering equity in a private corporation to the public for the first time. The company which is looking to generate capital use IPOs to raise funds from the market. While established firms sometimes use IPOs to allow the owners to sell their ownership to the public. In an IPO, the issuer, or company raising capital, brings in underwriting firms or investment banks to help determine the best kind of security to issue, offering rate, amount of shares and time frame.
4. Moving average:
A moving average (MA) is a most popular indicator used in technical analysis which helps smooth out price action by filtering out the “noise” from random short-term price fluctuations. It is a past trend based indicator as it is based on past prices. It can differ as per days average like 50 day moving average, 100 day moving average, 200 day moving average etc.
A rally is a period of constant increase in the prices of stocks, bonds or indexes. This type of price movement can happen during either a bull or a bear market, when it is known as a bull market rally or a bear market rally, respectively. However, a rally will often follow a period of flat or declining prices.
Correction refers to a decrease in prices of shares of a company in a given time. It is used by the stock advisors, investment experts and market professionals to explain the dip in share prices.
The equities are instruments for investment, while derivatives are used for speculation or hedging purposes. The value of an equity is affected by factors like performance of the company, market conditions, investor mood, volume of buying/ selling, etc.
The value of a derivative is based on the value of the underlying asset. The derivatives fetch their value from other financial instruments like bonds commodities, currencies, etc. Some derivatives also derive their value from equity such as shares and stocks.
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The option is a future contract which provides buyer, the right, but not the obligation, to buy or sell an underlying asset\instrument at a specific strike price before or on specified date, depending on the type of option. The strike price may be decided by reference to the spot price (market price) of the underlying security or commodity on the given day an option is taken out or it may be a fixed at a discounts or at a premiums. Further it is of two types 'call' and 'put'.
A dividend is the share of profits and retained earnings a company pays out to its equityholders\shareholders. Whenever company makes a profit and form retained earnings, the earnings are reinvested in the business or paid out to shareholders as dividends.
Market arbitrage is purchasing and selling the same share at the same time in different markets to take benefits of a price difference between the two separate market. It is often done by speculators and hedgers.
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