Things to know in Stock market
1. Share meaning & Stock Meaning
A share is the smallest unit by which the ownership of anybody on any company is ascertained. A stock is the collection of shares of a single company or collection of shares of multiple companies.
BSE is the shorter form of Bombay Stock Exchange. BSE is the oldest and the largest securities market in India and has been operational since 1875. Currently there 6000 stocks or shares which are traded on BSE.
NSE is the shorter form of National Stock Exchange, which is the most popular stock exchange in India as well as in the world. NSE was established in 1992 in Mumbai and it’s one of the most complicated exchanges in the world and ranked as the 4th best stock exchange in the world by trading in the equity segment in 2015.
4. Nifty or Nifty 50
Nifty 50 is the index employed by NSE to gauge the overall market sentiments of the Indian stock market. Nifty 50 is the word meaning National Stock Exchange Fifty. Conventionally 50 stocks of companies are used to calculate Nifty. Presently there are 51 scripts used to calculate Nifty 50. 51st stock is the DVR of tata motors.
5. Sensex or Sensex 30
Sensex is the market index used by BSE to gauge the sentiments of the Indian stock market. Sensex is the combination of words sensitive and index. Sensex 30 means that 30 stocks are used to calculate Sensex 30.
6. Demat Account
Demat or Demat Account is the term used to denote a repository where all information related to the stock holding of any individual is held digitally. There are mainly Depository in India, NSDL and CDSL connected through approved financial institutions like banks and stockbrokers in India.
A collection of investments owned by the investor is called Portfolio. An investor may have just one stock or multiple securities in a portfolio. A portfolio may also contain a diverse range of financial instruments like shares, bonds, futures, options, etc.
A derivative is a financial instrument that derives its value from a mutually agreed-upon underlying asset or group of assets. Futures and options are examples of derivatives. Usually, underlying assets are market indexes, shares, commodities, currencies. Derivatives can be used as leverage to magnify returns. Derivatives are contracts that provide you with exposure to a larger position than the capital you provide. Derivatives are often used to insure against price fluctuations commonly known as hedging, to gain exposure to otherwise hard-to-trade assets or markets or to leverage from price fluctuation of the underlying assets for the purpose of earning augmented returns.
Futures are financial obligations to buy or sell an asset at an agreed-upon future date at a predetermined price. Futures are often used to protect against price fluctuation of the underlying asset or help prevent or minimise losses from such unfavourable price movements. It can also be used as a leveraged to speculate on the price movement of the underlying asset and profiteer from it. Futures contract are traded in lot sizes having different expiry dates and set prices that are known to the investor at the time of the contract itself. There are many types of futures contracts, such as commodity futures, stock futures, currency futures, etc.
Options are financial contracts that are derivatives that provide the buyer of the contract the right but not the obligation to buy or sell the underlying asset at a predetermined price on or before the maturity date. Options are traded in lots. The specified price is known as the strike price. The amount paid in exchange for acquiring the right to buy or sell the underlying asset is known as option premium. In case the buyer does not exercise this right, his loss is limited to the option premium, he has paid. In the case of the seller, the potential losses that can be incurred by him are limitless; however, the profit is limited to the option premium paid by the buyer in case the buyer refuses to exercise his right. There are two types of options: Call options and Put options.
11. Call Option
A call option gives the buyer the right but not the obligation to buy an underlying asset at the strike price on or before the expiry date. The buyer of a call option speculates that the market is bullish, and the prices of the underlying asset will increase. If at the expiry date, the price of the underlying asset is below the strike price, the buyer loses the premium paid. If the price of the underlying asset is above the strike price, the profit is the current stock price minus the strike price, multiplied by the lot size, with the premium deducted as a cost of the call option.
12. Put Option
A put option gives the buyer the right but not the obligation to sell an underlying asset at the strike price on or before the maturity date. The buyer of the put option expects the price of the underlying asset to go down. If the price of the underlying asset is below the strike price, the gain is the difference between the strike price and the current price of the stock, multiple by the lot size. In case the strike price is above the stock price, the buyer loses the premium paid.
13. Open Interest
Open interest refers to the total number of outstanding derivative contracts that are yet to be settled. From the time the buyer and seller initiate the contract until the counter-party closes it, the contract is termed to be open. Open-interest provides an accurate picture of the derivatives trading activity and whether the money rolling in the derivative market is rising or declining.
14. Annual Report
Annual Report is the financial assessment of the company. The annual report provides a sneak peek at the financial condition and operations of the company. The corporate document is intended to provide shareholders with in-depth knowledge of various parameters that constitute the performance of the company in a specified financial year. It is an overview of the company’s operations and its intended or unintended results in the past or previous financial year.
The annual report is scrutinised by investors to determine the future potential of the company based on past performance. Annual reports contain a basic description of the industries the company is part of, audited statements of income, financial situation, cash flow, and may even include management’s discussion and analysis, the market price of the stock and dividends paid. It can be described as the resume of the company with reference to the previous financial year.
Arbitrage is the risk-free return earned due to market inefficiencies leading to price differences for the same security between two distinguished markets. It involves simultaneous purchase and sale of the same securities in different markets to benefit from the momentary price variations prevailing in different markets. Arbitrage ensures that the share prices don’t deviate much from the fair value of the security. Arbitrage ensures that the minor price differences in the same securities in different markets are eliminated, leading to uniformed prices across market exchanges.
16. Averaging down
Averaging down is carried out when the investor acquires more stock as the price of the stock steadily declines after the initial purchase, resulting in a lower average cost per share. It is undertaken by an investor when he feels that the share is trading lower than the perceived value, and the general consensus of the market is wrong.
17. Bear Market
Bear Market is the industry-specific jargon that indicates a downward trend in the overall condition of the market. It means that the cumulative market prices of the stocks listed on the stock market are declining. If the stock price of a particular stock is plunging, it’s considered to be bearish. Bear Market is typically caused by investors’ pessimism, fear and negative sentiments about the market or the economy.
18. Bull Market
Bull Market is the exact opposite of Bear Market. It means that the market is on an upward spiral. It is a result of investors’ palpable excitement and optimism about the market or the economy. It means that the aggregate market prices of the stocks are rising.
19. Active Return
Active Return refers to the excess returns generated by the portfolio as compared to the portfolios benchmark, index or market as a whole. Active returns are the additional returns outside the purview of the portfolio exposure to risks and return to the investments benchmark, index or market and is a consequence of the portfolio’s strength and the active management decisions taken by the portfolio manager, i.e. the deliberate decision to underweight or overweight the assets.
Volatility refers to the degree of or the extent of fluctuation in the prices of the stock. Highly volatile stock witness abnormal highs and lows during the trading session, while low volatile stocks experience ups and downs to a lesser degree. The highs and lows are not ridiculously far-flung from each other. Investing in highly volatile stocks are high-risk stocks that can result in enormous gains or tremendous losses.
Beta measures the volatility in the prices of the stock as compared to the overall movement of the market. It measures the extent of the relationship between the prices of the stock and the movement of the whole market. If the stock has a beta value of 2, it means for every 1 point change in the entire market, the prices of the stock change by 2 points. So if the stock market declines by 1 point, the price of the stock will decrease by 2 points and vice-versa. The beta is an important measurement to gauge the risk a stock is adding to a portfolio. High beta stocks are risky as they are more volatile to the swings of the market; however, there is a higher return potential. Similarly, low beta stock presents a lower risk but correspondingly lower returns as well.
Alpha is the relative return on investment as compared to the overall market, or the benchmark index is measured against. Alpha shows how well or poorly a stock has performed in comparison to the overall market. Sometimes, a stock may provide a nominal rate of return such as 5% but that 5% would be the result of the general movement in the market and not an actual barometer of the performance of an investment. Hence, Alpha is a precise measurement of the performance of a stock independent of the market movements. Alpha tracks the historical active return of an investment. Therefore an Alpha of 10% means that the investment outperforms the overall market by 10%. Similarly, -10% means that investment underperforms the overall market by 10%.
23. Blue Chip Stocks
Blue Chip stocks are the well-established, renowned conglomerates with immense clout with an array of high-quality, widely accepted products and services. Blue-Chip companies often have a history of providing hefty dividends to their shareholders and are often appreciated for their sound and effective management practices. They often drive and lead the market in times of a booming economy and optimistic investors’ sentiments. They have an envious record of stable and reliable growth in times of adverse market conditions and economic downturns. They represent a significant chunk in the stock market, and the movement in the prices of these stock can have outsized ramifications on the overall trend of the market.
The broker is an intermediary between the stock exchange and the investors or traders who facilitate the transfer of funds and shares in exchange for a commission. A broker is a middleman that facilitates the trade between the buyers and sellers. A broker can also refer to a firm when it acts as an agent of the investors and arranges transaction between the buyers and sellers. The firm charges specific fees for these services.
The bid is the maximum amount a buyer is willing to pay to acquire stock. A buyer may purchase stock only if the price does not exceed the bid price he has placed.
Ask is the minimum amount a holder of a security is willing to sell for. A seller will sell the security only if the bid price matches or exceeds the ask price.
The close refers to the time when all the trading and investing activities ceases. The closing time of the stock markets in India is 3.30 p.m. – 4.00 p.m.The closing prices of the day are determined during this time which has a significant bearing on the next day’s opening price.
28. Absolute Returns
Absolute Return is simply the rate of return on an investment attained over a specific period. It basically measures the gain earned, and loss suffered expressed as a percentage over the initial investment over a particular period.
29. Compound Annual Growth Rate (CAGR)
Compound Annual Growth Rate is the annual rate of return required to arrive at an ending balance from the beginning amount of the initial investment, considering that the profits are reinvested during the investment’s life span. It can also refer to a constant rate of return earned on an investment every year over a period considering the returns are reinvested over that particular period. CAGR merely considers the initial value and the final value. CAGR will help you evaluate the yearly return on an investment compounded annually throughout the duration of the investment. CAGR considers the time value of money as opposed to absolute returns.
30. Internal Rate of Return
Internal Rate of Return is the rate at which the future cash flows are discounted to arrive at the net present value of 0. Internal Rate Of Return is the rate of return on an investment where periodic payments are made like in a mutual fund. The Internal rate of returns assumes that the cash flows are periodic increments to an investment. It is an important metric to estimate the profitability of potential investments.
31. Extended Internal Rate of Return
Extended Internal Rate is the internal rate of return on total investment in case of inconsistent cash flows because of erratic increments and redemptions occurring throughout the investment lifespan. Extended Internal Rate Of Return abbreviated as XIRR is applicable when there are cluttered and multiple transactions occurring at various times spread over a period of time. Hence, External Internal Rate of Returns reflects the real-life scenarios as compared to Internal Rate of Return when it comes to mutual funds where usually there are intermittent and sporadic investments and redemptions over the lifespan of the mutual fund.
A dividend is an amount distributed to the shareholders of the company, in proportion to the invested amount, which represents a portion of the company’s earnings or a share in the profits and gains of the company pertaining to a particular period. The dividend is the reward to the shareholders for placing trust in the management and believing in the potential of the company through the invested amount, and it often originates from a company’s net profits. However, the distribution of dividends is not guaranteed; a company can keep the entire profit to itself as retained earnings. The investor may choose to reinvest the dividends and increase his shareholdings in the company or may choose to receive it in cash. Also, a company may still distribute dividends even if it has not made any profits just to maintain the established and steady record of making periodic dividend payments.
Stock Market Index typically tracks the aggregated movement in the prices of all the shares listed in the stock market as compared to the previous day prices to determine the market performance. It may also track the cumulative movement in the prices compared to the past prices of a hypothetical portfolio of a basket of securities belonging to a particular industry or collated and grouped based on market capitalisation. It serves as an indicator of changes in the stock market. The index serves as a benchmark for evaluating the active returns of a portfolio. It serves as a reference against which to assess the performance of a portfolio.
34. Initial Public Offering (IPO)
Initial Public offering is the initial offering or sale of securities to the public. Here the owners or private investors relinquish or dilute their ownership in the company and offer it for sale to the public. IPO is the route for the companies to raise capital for future growth and development. Through the sale of IPO, a company communicates and markets to the public that there is immense potential in the company to grow through leverage of additional funds, that the management team possesses the ingenuity, expertise to drive that change, that the company is built on strong fundamentals and robust culture and that the market is conducive for such growth. If investors are confident about the profitability of their investments in the company, they apply for the issuance. Initial Public Offering is one of the main reasons for the existence of the stock market.
Leverage in the stock market means borrowing capital to invest in more shares than one is financially capable of buying with the singular motive to boost profits. Leverage means amplification of comparatively smaller investment force into a correspondingly greater profit. Leverage can result in exponential gains; however, it can also result in massive losses.
A margin account allows the investor to borrow money from the broker to buy additional securities. The difference between the total value of securities in the investor’s Demat account and the loan taken from the broker is called margin. Trading on Margin is leveraging funds to its utmost use by purchasing additional securities than one can afford. Hence for a relatively smaller amount posted by the trader, you can buy a correspondingly greater amount of securities. However, like any leverage, it can result in massive profits but also can result in significant losses.
37. Initial Margin
Initial Margin is the amount that the buyer must pay in cash before he can borrow money from the broker or before the broker can lend him the money to buy additional securities. This is the mandatory amount that the buyer is obliged to pay in cash before he can buy more securities on margin. Initial Margin is calculated as a percentage of the total value of shares in the investor’s Demat account. E.g., if the buyer wants to invest in 100 shares worth Rs 20, but he cannot afford Rs 2000, and he has a margin account with the broker where the initial margin requirement is 50%; he is required to pay Rs 1000 upfront to the broker before the broker lends him the balance amount, i.e. Rs1000.
38. Maintenance Margin
Maintenance Margin is the minimum amount the buyer must maintain in order to keep the position open. The maintenance margin is calculated as a percentage of the total investment at the time of purchase, and the investor must ensure that the market value of the assets doesn’t fall below the maintenance margin after deducting the margin requirement. Continuing with the previous example, the maintenance margin for Rs 2000 investment, let’s say is 40% of the total value, i.e. Rs 800. Now if the price of the stock drops to Rs 15, then after accommodating the investor’s 50% margin requirement, i.e. Rs 750, the balance left is Rs 750. Hence there is a deficit of Rs 50, for the required maintenance margin. In such a case, the buyer must deposit additional funds to restore the account to the maintenance margin or liquidate certain positions in order to meet the maintenance margin requirements.
39. Margin Call
Margin Call is the intimation provided by the broker to the seller that the value of the borrowed funds has fallen below the maintenance margin and the buyer must either add more funds to the account or sell off some assets to provide for the difference between the equity share’s current price and the maintenance margin. If you do not meet the margin call, then the broker will sell off some open positions to bring the account to maintenance margin requirement.
40. Moving Average
Moving Average is the average price per share for a specific period of time. Some standard times frames are 200 days, 100 days and 50 days moving averages.
41. Short Selling
Short-selling means selling equity shares that the investors don’t own and are not present in their Demat account with the outright mandatory requirement to buy back the shares at a later date and return them to the actual owner at the time of settlement. In a short-sell, a trader borrows shares from the broker or an owner with the help of a brokerage firm, and short-sell them with the explicit obligation to return the shares at the time of settlement irrespective of any substantial profits or losses. So if the price of the stock that the investor has shorted falls, the investor can buy the shares at a lower price than the price he had sold them and make a profit.
However, if the price of the stock that the investor has shorted rises, the trader must honour the obligation of buying back the shares before the clearing period irrespective of a higher price point and suffer a loss. Short-selling is based on the speculation that the market is bearish, and the prices of the shares will fall. The investor profit from declining prices of stock.
42. One-sided market
It refers to rare occurrences wherein a market contains only potential buyers and potential sellers without both being present simultaneously. It is a situation where the market is heading in only one direction. In such a case, the market makers quote only the bid price or only the ask price.
Pyramiding is a method of leveraging the hiked up margin to increase the position size with the appraisal in the margin obtained by utilising the unrealised profits from the increment in the value of current holdings of the same security. The investor who uses pyramiding uses the increased unrealised value of the current holdings to buy more of the same security. This is usually a slow method of increasing one’s position size as opposed to purchasing securities on cash as the margin increments allow for smaller purchases.
44. Growth Stocks
Growth stocks are the stocks considered to have the potential and the ability to outperform the market in the future. Growth companies are companies that have generated considerable, sustainable, and better-than-average returns in the market and are expected to continue providing substantial returns. In simple words, growth stocks are backed by healthy and consistent earnings and robust performance in the past and are touted to continue their growth pattern in the future as well.
45. Value stocks
A value stock is a stock that the investor feels is trading at a market price below their intrinsic value. Value stocks are stocks that an investor may consider are currently undervalued but is later expected to reach its real inherent value. Value investing means uncovering the actual intrinsic value of the stocks through evaluation of financial statements, often ignored intangible assets, of the concerned company then develop the patience to wait for the prices to fall below their intrinsic value. The investor consequently purchases when the securities are trading at a price below their intrinsic value and then sell them when the prices reach their true worth. Intrinsic value is the net present value of all future cash flows expected to be generated through the lifespan of the business. Warren Buffet, the legendary investor, is the most successful practitioner of value investing.
46. Large-cap stock
Large-cap stocks are stocks of well-established companies with a market capitalisation above Rs 20000 crores. Large-cap stocks are generally considered to be low-risk as they have a strong presence in the market, and have a history of providing potent and stable returns. Information about large companies is easily accessible. Most of the companies disclose timely information about the operations, products, expansion plans through media such as newspapers
47. Mid-cap stocks
Mid-cap stocks are stocks of companies with a market capitalisation between Rs 5000 crores and 20000 crores. Mid-cap stocks attract investors as they provide the possibility of earning exponential returns in 3-5 years horizon. Mid-cap companies have tremendous scope of growth and can become an outrageous success in the future. However, mid-cap companies are discrete about the internal operations of the company and expansion plans, as they endeavour to trump over the competition, and hence are furtive about the information of the company. This makes it cumbersome for the investors to judge the potential of the stocks. Therefore, conservative investors stay away from such stocks.
48. Small-cap stocks
Most small-cap companies are early start-ups and entrepreneurial ventures that present the opportunity to earn astronomical returns. Understandably they are companies with inconsistent returns and low revenues. Many of these companies can go bust. But at the same time, many such companies are unicorns that are trading abysmally below their intrinsic value. The information about these companies is not readily available. Hence these small-cap stocks are a winner for investors with a long investment horizon and an appetite for high risks.
SEBI known as the Securities Exchange Board of India is the regulator that oversees the stock market in India. It provides a platform for investors and traders to trade efficiently, and for companies to raise capital fairly. It protects the interests of the investor and ensures accurate information is provided to the investors. It curbs fraudulent activities that can sink the stock market and obliterate the investors and traders wealth. It ensures that the company has prepared the financial statements with due diligence, and no incorrect information is provided to deceive the investors. It establishes a code of conducts for brokers, intermediaries and investors. It seeks speedy redressal of investors grievances, and safeguard the absolute rights of the investors. SEBI ensures the effective functioning of the stock market, and eliminate any discrepancies that may hinder the uninhibited activity of the stock market.