Decoded: 20 Basic Stock Market Terms You Must Know Before You Get Started

Stock market. This term is often on the receiving end of mixed reactions, isn't it?

Some blame it for sitting on a pile of losses, while some are able to generate handsome returns from investing in the same stock market. After all, it's all about how well you understand it and the timing of your decisions. That's what sets one group apart from the other.

So, when it all boils down to having a strong foundational knowledge of the stock market, doesn't it make sense to understand the nitty-gritty of the stock market before jumping into it?

Curious to understand the basic terminologies used in the stock market?

Read on as we simplify some of the commonly used stock market terms to help you get started.

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Also Read: Crazy For Crypto? 20 Terms You Must Know Before Investing In Cryptocurrency

1. Stock

A stock is a security that represents the ownership of a fraction of a company. This entitles the owner of the stock to a proportion of the company¡¯s assets and profits in proportion with how much stock they own. Further, units of stock are called "shares."

2. Stock price

The stock price is the amount of money you pay to buy a single unit of stock. If the stock price increases after you have bought the stock already, it means you have made a gain or profit on the stock. If it declines and you sell it, you incur a loss.

Also Read: Frequently (Not) Asked Question - When To Sell A Stock?

3. Bull Market

If you believe that the stock prices are likely to go up, you are bullish on the stock price. From a broader perspective, if the stock market index is going up during a particular time period, it is referred to as the bull market.

4. Bear Market

If you believe that the stock prices are likely to go down, you are bearish on the stock price. From a broader perspective, if the stock market index is going down during a particular time period, it is referred to as the bear market.

5.52 week high/low

52 week high is the highest point at which a stock has traded during the last 52 weeks (which also marks a year) and likewise, 52 weeks low marks the lowest point at which the stock has traded during the last 52 weeks. These two give a sense of the range within which the stock has traded during the past year.

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Also Read: How The Stock Market Crash Of 1929 Led To World War II

6. All-time high/low

The all-time high price is the highest price the stock has ever traded from the time it has been listed. Similarly, the all-time low price is the lowest price at which the stock has ever traded from the time it has been listed.

7. Upper Circuit/Lower Circuit

The stock exchange, like BSE and NSE, sets up a price band at which the stock can be traded in the market on a given trading day. The highest price the stock can reach on the day is the upper circuit limit, and the lowest price is the lower circuit limit. The stock exchange usually places such restrictions to control excessive volatility when a stock reacts to certain news related to the company.

8. Call & Put Option

A call option is a contract between a buyer and a seller to purchase a certain stock at a certain price up until a defined expiration date. The buyer of a call has the right (but not the obligation) to exercise the call and purchase the stocks of the particular mark. On the other hand, the seller of the call has the obligation and not the right to deliver the stock if assigned by the buyer. This option is generally taken when the stock market trader expects the price of the underlying asset to rise within a certain time frame.

As far as the put option is concerned, it gives the buyer the right to sell the stock at a certain set price at any time up to the expiration date. This option is generally taken if the stock market trader expects the price of the stock to fall within a certain time frame.

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9. Moving Average

This refers to the average price per unit of a stock with respect to a specific period of time. Some of the many time frames used to study the moving average of stock include 50 and 200-day moving averages.

10. Buy/Sell/Hold

As the name suggests, ¡®to buy¡¯ in the stock market means to purchase a stock,

similarly, sell means selling your stock and the concept of hold means that you neither buy nor sell the stock, i.e. you hold it in your portfolio

Also Read: 3 Impulsive Steps To Avoid When The Market Is Bleeding Red

11. Benchmark

This is a standard against which any stock¡¯s performance can be measured. There are different benchmark indices available to compare the stock performance with, like BSE Sensex and NSE Nifty are amongst the well known and prominent benchmarks.

12. Price-to-Earnings Ratio

The P/E ratio is the ratio of a company's stock price and earnings per share. The ratio simply indicates how much money an investor is willing to invest for a single share of a company. It is also a widely used metric for valuing companies and to find out whether they are overvalued or undervalued.

Usually, a high P/E ratio implies that either the company¡¯s stock is overvalued, or investors expect a high growth rate in the future and are that's why willing to give a higher price for it in the present.

Whereas a low P/E ratio indicates that the share price is low in comparison to company earnings and is undervalued. However, the reason behind it might be due to prevalent risk or maybe the company¡¯s underperformance over some time.

Also Read: Does It Make Sense To Cash Your Investments When The Market Crashes?

13. Trading session

The trading session refers to the time period wherein the stock exchange is open for trading. In Indian stock exchanges, the trading session is normally from 9:15 am to 3:30 pm. Within this time, all orders must be placed.

Also, during the trading session, all pre-session orders are matched and executed. Remember that the timing for trading sessions differs across stock exchanges over the world.

14. Sensex

The term Sensex, also known as BSE SENSEX, comprises two words - Sensitivity and Index, which are indicative of what Sensex reflects and calculates, i.e. the movements in the BSE.

Sensex is the stock market index for BSE (Bombay Stock Exchange), and it is a free-float market-weighted stock market index that aggregates the movements of 30 well-established and financially sounds Indian companies. Another popular stock market index is NIFTY50, which represents the weighted average of 50 of the largest Indian companies listed on the National Stock Exchange (NSE).

15. Stock Market Crash

One of the most dreaded terms for most investors is the stock market crash. so what exactly is it? Simply put, a stock market crash is a rapid, abrupt and/or often unanticipated drop in stock prices, which may trigger a prolonged bear market or signal economic trouble ahead. Reasons behind a stock market crash can be one or multiple, including an economic crisis, catastrophic events like a pandemic or natural disaster, or even the collapse of a long-term speculative bubble.

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Also Read: World's Biggest Stock Market Crashes Of The 20th Century

16. Dividend

Another commonly heard term in the stock market is dividends. Dividends are the part of profits that companies share with their shareholders. And dividend yield is obtained by dividing the dividend per share by the stock price. The higher the dividend yield, the more money you get as dividends. Whereas, a relatively low dividend yield could mean that the company is retaining more earnings toward developing the firm instead of paying stockholders, which can be indicative of future growth.

17. Herd Mentality

This is the mentality of following the crowd. Whether you have to buy a stock, sell it or take any other decision, following what the majority of others are doing or saying, is known as herd mentality.

18. Market Trend

Trends usually refer to the general market direction and expectation. If the market is declining fast, the trend is said to be bearish. Whereas if the market is trading flat with no movement, then the trend is said to be sideways. And if the market is rising up and soaring, it is termed as a bullish market.

Also Read: Why Stock Market Downfalls Are Actually A Buying Opportunity

19. Market Volatility

Volatility refers to the fluctuations, i.e. the ups and downs in the price of a stock. Highly volatile stocks witness severe ups and downs during trading sessions, whereas a less volatile stock witnesses lower degree and/or less frequent fluctuations.

20. Volume

This indicates the total number of stocks that are traded during a specified time period, like between the market¡¯s daily opening and closing time, which indicates the daily trading volume in the stock market.

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