Markets are filled with complex terms and jargons that retreats the normal people from entering the world of financial markets. One interesting fact about the Indian stock market is only 2% of the total population participates in stock market as compared to the 55% participation in America. The major reason behind the low stock market participation in India is mainly because of the poor educational structure that does not provide financial education from school level to post graduate level. Without attaining proper financial education, it is difficult for a normal citizen to understand and participate in stock market. So the understand the technical terms and jargons used in our market. The stock market can be complex and are filled with jargons that may seem intimidating to novice investors. However, understanding these terms is crucial for anyone looking to navigate the world of investing. Some jargon like Market capitalization, dividend, P/E ratio, IPO, bear market, bull market, diversification, blue-chip stocks, margin, volatility, short selling, and market order vs. limit order may be intimidating for new investors and are some of the common complex terms and jargons used in the stock market. It’s important for investors to educate themselves and seek professional advice if needed to make informed investment decisions and have a better understanding about the stock markets.
Lets understand some basic terms and jargons commonly used in stock market and enhance your journey towards being a successful investor.
Market Capitalization – Market capitalization term is commonly used as market cap and it helps us to give a better understanding about the company. Companies are typically categorized into different market cap categories, such as small-cap, mid-cap, and large-cap, based on their market capitalization.
Depository – Depository owns and handles the Demat account of investors. In India there are two major depositories, they are CDSL AND NSDL.
Technical Analysis- Technical analysis is a method used by investors to analyse and predict price movements of stocks and other securities based on historical price and volume data. Technical analysts believe that historical price patterns and trends can provide insights into future price movements and help them make investment decisions.
Fundamental Analysis- Fundamental analysis is a method used by investors to evaluate the intrinsic value of a stock or other security based on its financial statements and other relevant data. Fundamental analysts study a company’s financial health, including its earnings, revenue, cash flow, balance sheet, and management, to determine its true worth and potential for growth.
Dividend- A dividend is the portion of profit a company decides to share to its shareholders. It is typically distributed from a company’s profits and is usually paid out regularly, such as quarterly or annually.
Initial Public offering (IPO) – it is the public launch of shares to the stock market by the companies which can be traded by the retail investors , financial institutions etc. IPOs are often seen as a way for companies to raise capital and expand their operations.
Bull market – The term bull / bullish is used to represent an uptrend in market. The bull concept for uptrend is acquired in market as Bulls attacks their enemy upwards. It refers to a period of time when stock prices are rising, and investor sentiment is generally positive. Bull markets are often marked by increased optimism, rising stock prices, and a favourable economic outlook.
Bear Market – The term Bear/Bearish is used in stock market is to represent a down trend in market. The bear concept is acquired in market as bears attacks their enemy downwards. A bear market is a period of time when stock prices are falling, and investor sentiment is generally negative. It is often characterized by prolonged periods of declining stock prices, widespread pessimism, and a lack of confidence in the market.
Consolidation – The term consolidation is used in market to represent a share or security is giving range bound movements. Consolidation usually gives good movement to the side where the consolidation range is broken.
P/E Ratio – The Price-to-Earnings (P/E) ratio is a valuation metric and is commonly used to assess whether a stock is overvalued or undervalued. A high P/E ratio may indicate that a stock is expensive relative to its earnings, while a low P/E ratio may suggest that a stock is undervalued.
Short position– The term short is used on a share or security when you have pessimistic view on that share or security . If I have a short view on a share means that, I speculate that the stock price will go down and I short sell it to make profits.
Long position – The term long is used when to have an optimistic view that the price of stock or security will go up. If I have a long view on HDFC bank means that I am interested in buying that stock as I speculate the price of HDFC bank share will move up.
Diversification – Diversification is a strategy used by investors to spread their investments across different asset classes, sectors, or regions in order to reduce risk. The idea behind diversification is that by investing in a variety of investments, the potential losses from one investment can be offset by gains in other investments. Diversification can help investors manage risk and build a more balanced investment portfolio.
Breakout – The shares or securities most of the times gives consolidation movements. If the share price moves up breaking the consolidation range it is called a breakout. A good movement towards upper side will be seen in a breakout due to high volume.
Breakdown – If the share or security is consolidation or giving range bound movements and the share price is moving down breaking the consolidation range it is called a breakdown. A good movement towards down side can be seen in a breakdown due to high volume.
Blue-Chip Stocks -Blue-chip stocks are shares of established companies that have a long history of stability, reliability, and strong performance. These companies are typically leaders in their industry and are known for their established brand names, large market capitalizations, and consistent dividend payments.
Market value – it is the current price at which the share is bought or sold in capital market.
Equity Market and Derivative Market – There are two types of market in stock market .They are equity market and derivative market. Equity market or cash market is where only the shares are traded. Derivative market is the market where futures and options of a share or a security are traded .
Market Order vs. Limit Order – When placing an order to buy or sell a stock, investors can choose between a market order or a limit order. Investors can use limit order if he wish to buy the stock or asset class at a specific price only and can use market order to buy the asset class at last traded price (LTP).
Volatility – volatility indicates the risk that can be caused by rapid movements in price of a security or a share. INDIAVIX is the volatility index of our country. Analysing India vix helps to understand the volatility in share market.
Margin – Margin refers to borrowing money from a broker to buy stocks or other investments. Margin allows investors to leverage their investments, potentially amplifying their gains or losses.
Stock Options- Stock options are financial contracts that give an investor the right, but not the obligation, to buy or sell a stock at a specific price within a certain timeframe.
Dollar-Cost Averaging -Dollar-cost averaging is an investment strategy where an investor consistently invests a fixed amount of money at regular intervals, regardless of the market conditions.