stock-market-basics

What is a Share or an Equity?

Share or equity is one of the equal parts of the capital. It entitles a holder with profits in the same proportion.

What is Stock Market?

Stock market is a virtual platform where buyers and sellers meet to trade various listed securities.

What is the Purpose of Stock Market?

  • Source for companies to raise money
  • Facilitate the exchange of securities between buyers and sellers thus providing a marketplace,
  • Enable price discovery
  • Act as barometer of an economy

What all kinds of participants transact in Stock market?

There is a wide gamut of participants transacting in stock markets. A small list may include Day traders, Jobber, Arbitrageur, Investor, Mutual Funds, Banks, Insurance companies, Foreign Institutional Investors etc

Who is the regulator of stock markets in India?

Securities and Exchange Board of India (SEBI)

Which are the prominent stock markets in India?

Bombay Stock Exchange (BSE)

National Stock Exchange (NSE)

Name some of the world famous indices?

INDIA- Sensex and Nifty

USA- Dow Jones, NASDAQ

UK- FTSE

JAPAN- Nikkei

HONG KONG- Hang Sang

KOREA- Kospi

SINGAPORE- Straits Times

GERMANY -DAX

CANADA -CAC

A BRIEF GLOSSORY OF COMMON JARGONS

Ask or Offer

Seller’s quote

Bid

Buyer’s quote

Bull

An investor who thinks the market, a specific security or an industry will rise.

Bear

An investor who believes that a particular security or market is headed downward. Bears attempt to profit from a decline in prices. Bears are generally pessimistic about the state of a given market.

Bull Market

A financial market of a group of securities in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market, but can be applied to anything that is traded, such as bonds, currencies and commodities.

Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. It’s difficult to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation may sometimes play a large role in the markets.

The use of “bull” and “bear” to describe markets comes from the way the animals attack their opponents. A bull thrusts its horns up into the air while a bear swipes its paws down. These actions are metaphors for the movement of a market. If the trend is up, it’s a bull market. If the trend is down, it’s a bear market.

Bear Market

A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining. As investors anticipate losses in a bear market, selling continues, which then creates further pessimism.

Not to be confused with a correction, which is a short-term trend that has a duration shorter than two months. While corrections are often a great place for a value investor to find an entry point, bear markets rarely provide great entry points as timing the bottom is very difficult to do. Fighting back can be extremely dangerous because it is quite difficult for an investor to make stellar gains during a bear market unless he or she is a short seller.

Correction

A reverse movement, usually negative, of at least 10% in a stock, bond, commodity or index. Corrections are generally temporary price declines, interrupting an uptrend in the market or asset. Its part of health market.

Crash

A major decline in a financial market.

Day Trader

A stock trader who holds positions for a very short time (from minutes to hours) and makes numerous trades each day. Most trades are entered and closed out within the same day.

Dead Cat Bounce

A temporary recovery from a prolonged decline or bear market, after which the market continues to fall.

Derivative

In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Fundamental Analysis

It is a method of examining a security in order to find its intrinsic value or fair value by studying related economic, financial and other quantitative factors. It primarily involves study of income statement, Balance sheet and other parameters of economic health of an enterprise.

Top down (Economy-Industry- Company) and Bottom up ( Company-Industry-Economy) are the two prominent approaches used for evaluation.

Technical Analysis

A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Trend

The general direction of a market or of the price of an asset. Trends can vary in length from short, to intermediate, to long term. If you can identify a trend, it can be highly profitable, because you will be able to trade with the trend.

Downtrend

It describes the price movement of a financial asset when the overall direction is downward. A formal downtrend occurs when each successive peak and trough is lower than the ones found earlier in the trend.

Uptrend

It describes the price movement of a financial asset when the overall direction is upward. A formal uptrend occurs when each successive peak and trough is higher than the ones found earlier in the trend.

Sideways Movement

It describes the price movement of a financial asset when the overall direction is restricted between a narrow range.

Drawdown

The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted as the percentage between the peak and the trough.

Liquidity

The market’s ability to sustain relatively large market orders without impacting the price of the security. This considers the overall level and breadth of open orders and usually refers to trading within an individual security.

Long

The buying of a security such as a stock, commodity or currency, with the expectation that the asset will rise in value.

Short

The sale of a security, commodity or currency with the expectation that the asset will fall in value.The intention is to buy back at lower prices.

Marketability

The ability to convert an asset to cash quickly. Also known as “marketability”.

Market Depth

The market’s ability to sustain relatively large market orders without impacting the price of the security. This considers the overall level and breadth of open orders and usually refers to trading within an individual security.

Moving Average

An indicator frequently used in technical analysis showing the average value of a security’s price over a set period. Moving averages are generally used to measure momentum and define areas of possible support and resistance.

Open Interest

Open Interest is the total number of outstanding contracts that are held by market participants at the end of the day.

It can also be defined as the total number of futures contracts or option contracts that have not yet been exercised (squared off), expired, or fulfilled by delivery.

Open interest applies primarily to the futures market. Open interest, or the total number of open contracts on a security, is often used to confirm trends and trend reversals for futures and options contracts.

Recession

A significant decline in activity spread across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).

Interest rates usually fall in recessionary times to stimulate the economy by offering cheap rates at which to borrow money.

Position

The amount of a security either owned (which constitutes a long position) or borrowed (which constitutes a short position) by an individual or by a dealer. In other words, it’s a trade an investor currently holds open.

Primary Market

Primary market is the market of issuance. It constitutes first time issuance of securities by the promoters to the investors. Example Initial Public Offer (IPO), Follow on Public Offer (FPO), Rights Issue etc

Secondary Market

It comprises of exchange of securities among investors.

Resistance

The price at which a stock or market can trade, but not exceed, for a certain period of time.

Often referred to as “resistance level”.
The stock or market stops rising because sellers start to outnumber buyers.

Security

Any paper which can be assigned value and traded.

Trough

The stage of the economy’s business cycle that marks the end of a period of declining business activity and the transition to expansion.

Volume

The number of shares or contracts traded in a security or an entire market during a given period of time. It is simply the amount of shares that trade hands from sellers to buyers as a measure of activity. If a buyer of a stock purchases 100 shares from a seller, then the volume for that period increases by 100 shares based on that transaction

Volatility

A statistical measure of the dispersion of returns for a given security or market index. Volatility can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security.