Terms for Investing for Beginners
Formation of a new independent company from the existing company by the sale of new shares. The shareholder of the parent company gets shares in a specific ratio of the new company to compensate the loss in the parent company. This makes the potential company more attractive as now the investor has both the option of buying the company with more growth prospect.
The market timings of the derivatives segment are Normal market / Exercise market open time: 09:15 hrs. Normal market close time: 15:30 hrs. There is no trading on Saturday & Sunday. Stock Market Holidays are declared by the Indian Stock Exchange in advance.
Price to earning ratio is one of the most popular ratios for valuing a company. The PE ratio simply signifies what is the price one is ready to pay for its specific earnings. This ratio measures current share price relative to earning per share. Suppose the price of the share is Rs. 75 and it’s earning per share is Rs. 10. The PE ratio calculation of the stock would be 75/10 = 7.5. This means that for earning of Rs. 10 for every share the investor is ready to spend Rs. 75.
Beating Market Expectations
Usually, during the earning season, every company before they come out with their results research analyst, an investment bank, financial services and market makers usually come out with a report on the performance. They provide a guidance on how to expect the company to perform. If the stock performs better than what the analyst expect it is to beat the expectations. Some say they have delivered stronger than expected results. You might be interested reading the article why most people lose money.
Buy and hold
Passive investment strategy aims to maximize the returns over the long run by not churning the account. The reason behind this is to keep the charges as low as possible or even nil. In Buy and Hold the investor hold the stock over a longer period of time and fluctuations in the stock does not change the sentiment of the Investor.
The below-mentioned definition found in the Investopedia’s explains aptly.
Securities can be broadly categorized into two distinct types – debts and equities – although hybrid securities exist as well. Debt securities generally entitle their holder to the payment of principal and interest, along with other contractual rights under the terms of the issue. They are typically issued for a fixed term, at the end of which, they can be redeemed by the issuer. Debt securities only receive principal repayment and interest, regardless of the issuer’s performance. They can be protected by collateral or unsecured, and, if unsecured, may be contractually prioritized over other unsecured, subordinated debt in the case of a bankruptcy of the issuer, but do not have voting rights otherwise.
“Securities” as such are used as a general term. Securities are easily mixed up with stocks.
Ask price is the minimum price seller or sellers are ready to receive for the security. Trade happens when buyer and seller agree to the same price. The difference between the ask and bid is usually known as the spread.
Based on one’s individual risk profiling e.i. risk tolerance, for a particular or specific goal of investment asset allocation, is done to ensure that the end goal is achieved. Asset allocation is a very dynamic process with endless opportunities to invest.
A statement that gives a summary of assets and liabilities of the company at any given point in time. It has the asset on one side and liabilities on other side based on accounting rule of double entry system. It is more like a snapshot which is usually taken every quarter, half yearly or one year.
“The fact is that one of the earliest lessons I learned in business was that balance sheets and income statements are fiction, cash flow is reality.”
A continuous fall in the stock price in a market, a pessimistic outlook. A decline could continue for days, weeks or months together. A single day fall usually cannot be called as a bear market. When a majority of stock price fall over a consistent period of time results in the bear market.
“The stock market is a discounter of all known information.”
A financial market in which the majority of stocks are rising or expected to rise. A start of a bull market is when pessimism is at the highest. When prices rise for several weeks or years it results in the bull market.
The highest price a buyer is ready to pay is called the bid price. A prospective buyer highest bid for a stock is bid rate. For the trade to happen the buyer and seller when they agree at the same price at the same time the transaction happens.
A well-established company that has been in existence for many years and decades are usually blue chip stock. Essentially they are also financially very sound and have high brand value. Blue chip companies have highest market capitalization. They are kind of household name and many of them represent the country also.
A debt instrument with a coupon rate. It’s an instrument issued by the corporations, government, and companies to the individuals for receiving the debt and accept their obligation to pay the coupon rate on a regular interval . It is also known as fixed income security.
The value of the company based on the balance sheet or book of accounts.
A profit arising out of the sale of a capital asset is capital gain. The difference between the lower purchase price and higher sale price. Capital appreciate is only on books whereas capital gain arises when the asset is sold.
This is a technique which is used in asset allocation to manage and mitigate the risk. In this process, the exposure on any one particular asset class is reduced or dependence of return for a particular asset class is reduced.
Earnings are distributed among all the shareholders of the company in form of dividends. The dividend is decided by the board of directors of the company. Usually, it is the distribution of profits. A regular dividend paying company is considered to be a healthy company. Dividends are paid after the tax is deducted in the company. Hence dividend is not taxable if at all they are taxed it would lead to double taxing.
An index is a statistical measure of certain sets of stocks which usually represents a majority of sentiments.
A stock market index is a measure of the relative value of a group of stocks in numerical terms. As the stocks within an index change value, the index value changes. An index is important to measure the performance of investments against a relevant market index.Source: NSEINDIA
A stock exchange or bourse is an exchange where stock brokers and traders can buy and/or sell stocks (also called shares), bonds, and other securities. In India, there are two popular stock exchanges National Stock Exchange and Bombay Stock Exchange. Stock exchange facilitates the buyer and the seller to transact securities, derivatives & other contracts. Earlier before the computer era, these exchanges were held in separate rooms where people shout out the price either a buyer or a seller for the transaction to happen. Nowadays since its computerized one can place an order with the help of a computer or even a phone.
Margin refers to taking a position in the stock market by paying only a small percentage of money. Rest is borrowed by the trader or investor and lend by his broker. Margin trading is really high for intraday trading. Some brokers give margin as high 10X for the purpose of trading intraday.
Market Capitalization is the total value of the company arrived at the current market rate of the stock multiplied by the total number of stock outstanding. Otherwise referred as market cap.
SEBI Registered Investment Advisor
The Applicant for grant of registration as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013 should make an application to SEBI in Form A as provided in the Regulations along with all the necessary supporting documents. Generally, on receipt of Application, the applicant will receive a reply from SEBI within one month. However, the time taken for registration depends on how the applicant fulfills all the registration requirements and provides the complete
information in all respects.
Investment advice should be taken from a SEBI registered investment advisor. They are certified by SEBI to give investment advice.
This is the best definition I found for stock. The word stock is alternatively used for securities.
A stock is a general term used to describe the ownership certificates of any company. A share, on the other hand, refers to the stock certificate of a particular company. Holding a particular company’s share makes you a shareholder.-Economic Time
Yield is the percentage of return on the investment it would be debt or stock. It can be a dividend or the coupon amount e.i. the interest received from the debentures.
It is the annual fees that funds, ETF or Mutual fund charge the fee at the end of the year to the shareholders. It’s a measure of what it costs for a company to run a mutual fund. For managing the investors’ money the net expenses incurred by the organization is expense ratio. Higher the expense ratio lower is the profitability for the investors. The expense ratio is directly linked to the performance of the fund.
An offer document prepared for the first time by the company who is going to enter the secondary market with an Initial Public offer. It is a legal document to be required by and filled by Securities exchange. It’s a disclosure about the finance of the company to its potential buyers.
Initial Public offer when a privately held company offers its share for sale to the public for the very first time.
An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue, the best offering price, the amount of shares to be issued and the time to bring it to market.Source Investopedia
When a stock position is in a losing situation to take the benefit of the situation and reduced price one adds more stock at a lesser price to average down the cost of total stock acquisition and hence to profit from the same on a bounce back.
Beta is a measure of stock change of price with respect to the overall stock market. For 100 rupee change in the stock market or index, what is the movement the stock is giving? Usually stock with beta value 1 is in sync with the index. There are two types of beta value e.i. positive beta and negative beta.
An individual person or an organization regulated by the exchange. Buys and sells stock on your behalf for both retail and institutional clients over the counter or through the exchange for a certain fee or commission. Choosing the right broker is very important it brings down your cost to very large extent.
Day trading is to take a position in the stock market with an intention to make a quick immediate profit and exit the market before the end of the market on the same day. There is no intention to carry forward the trade on the next day. We have come across an interesting article which explains if day trading is meant for you.
High-Frequency Trading, Black Box Trading, Algo Trading or Computer trading are all one and the same. It is programming platform which has certain parameters and uses complex solvers with the help of a powerful computer to transact in stock exchange without the intervention of a human. A lot of orders is placed at very high speed.
An investment to reduce the risk of a position. To manage extreme price movements in an underlying asset. To mitigate adverse position impact and to reduce the risk of the current outstanding position is called hedging. A risk management tool to offset unexpected price movement in the opposite direction of the target. The myth of unlimited Losses a very interesting article.
A technical indicator used to take a position in the stock market based on the historical movement of the price. An arithmetic moving average calculated by adding the closing price of the security for a number of time periods and then dividing this total by the number of time periods. Moving average crossover is considered for a different time period and a decision is taken to go long or short in the market.
A sustained increase in the stock price over a period of time is called a rally. A rally can range from days, weeks to even months.
The last traded price of the stock is called Quote. A quote of an illiquid stock could be old and at times it’s possible not to find buyers or seller at that price.
Spread is the difference between the ask and bid price for immediate sale and purchase of a certain stock. With the advent of high-frequency trading, the concept of spread trading has evolved.
A basket of stock based on one’s risk profiling and asset allocation is called portfolio.
A stock is known by a symbol in its stock exchange. and every stock exchange has its own symbol.
The total number of stock exchanged between buyer and seller for a specific period of time is called volume.
EPS is full form of Earning Per Share and it is calculated by total earning of the company divided by total outstanding share of the company. The value arrived is earning per share of the company.
An order to buy or sell a specific stock at a specific price is called Limit order.
A market order is a buy or sell order of a specific security to be executed immediately at the market price.
Higher the volatility higher the risk. Volatility is measured by taking into the consideration how deviation is there from its historical standard movement. In other words, it is a dispersion of return for a given security.
When you are bullish on a particular stock then you go long. In other word going long means to buy a stock on an expectation that the stock price will go up.
An American depositary receipt is a negotiable INSTRUMENT issued by a U.S. bank representing a specified number of shares in a foreign stock traded on a U.S. exchange.
Exchange Traded Funds are funds that are managed by the fund house and its a replication of an index, sector etc. This instrument is beneficial for the investor who finds picking stock very tough. At the same time, the expense ratio is very low when compared to a mutual fund.
A stock with a very low price and very low market capitalization. Small investor fancy penny stock thinking or mistaking them to be very cheap stock and expected to give good returns.
List of ETF in India.
Taking the opportunity when the stock gets momentum in one particular direction over a period of time.
Momentum investing. Momentum investing is a system of buying stocks or other securities that have had high returns over the past three to twelve months, and selling those that have had poor returns over the same period.-Investopedia
A value stock is something that Warren Buffet advocates. When the value of the stock is much more than the price at which it is available its called value stock. There are various methods to arrive at the value stock.
Inflation is the rate at which general level of prices of essential goods and services are rising. Earning below the inflation rate over a long period of time could make your investment worthless.
Trading in stocks without any premises of technical or fundamental. In other words, we speculate a price of the stock to go in one direction without any study. It can also be called as gambling.
The risk to Reward Ratio is the full form which is mostly used while trading in the stock. They say that idle risk to reward ratio is 1:3 or 1:2 for every Rs.100 risked the expected profit should be Rs. 300 or Rs. 200.
In other words, it is called to get companies grapevine before taking an investing decision. Grapevine is a process to get all the information of the company which cannot be put in the balance sheet or it is not available to the general public. Certain simple information which can make a very large impact on decision-making.
Options are hedging tool along with futures. There are two types of option Call and Put. Those who write options have the obligation and those who why options have right. You would be interested in this website to know more about options trading and to start options trading from start.
A derivative is a contract where one can pay a part of the entire amount to trade the underlying contract. Derivative follows mark to market e.i. any profit or loss is transferred to your account at the end of the day.
An option which is sold without any hedging is called naked options.
A stock of a company which is stable during all the phases of the business cycle is called a defensive stock. If you need some protection in the stock market in volatile times then one can increase the allocation of defensive stock in his portfolio.
A very high yield high-risk security issued by a company to raise capital very quickly. A fixed income instrument which carries very low rating by the rating agencies because of their management or financials.
Bonds issued by the companies are called corporate bonds to raise finance for a variety of reasons. Ongoing operations, expansion of business, take over, merger etc.
Bonds issued by a country government for a fixed rate of income at a specific time.
Funds that replicate the index are called index fund. Since the amount of research required is very less the expense ratio is also very less.
A mutual fund is nothing but the collection of funds from various investors and investing in securities such as stocks, bonds, money market instruments and similar assets. A mutual fund is a trust that pools the resources of like-minded investors for investment in the capital market. By investing in the units of mutual funds, the investor is also called as a unit holder and becomes a part owner of the assets of the mutual funds.
A fund manager is responsible for implementing a fund’s investing strategy and managing its portfolio trading activities. A fund can be managed by one person, by two people as co-managers, or by a team of three or more people.
A one hundredth of one percentage point or 0.0001 in the decimal point.
A benchmark is a standard against which the performance of a security, mutual fund or investment manager can be measured. Generally, broad market and market segment stock and bond indexes are used for this purpose. In India, some treat Nifty 50 as the benchmark.
An excess return of a fund relative to its benchmark index is the funds alpha. For example, the return of the benchmark is 10% and the return of the fund is 30 then the funds alpha is 2. Higher the alpha higher the risk.
The risk associated with various positions is called Greeks. Option Greeks are Delta, Theta, Gamma, Theta, and Vega. There are two types of option greeks they are Primary greeks and secondary greeks,
Simultaneous buying and selling of securities but in different time zone, markets, places, statistical difference in order to take advantage of differing prices for the same asset. Types of arbitrage
- Arbitrage betting.
Covered interest arbitrage.
Fixed income arbitrage.
Capital preservation is a strategy in which you protect the money available for you to invest by choosing accounts which are properly hedged or high quality fixed income investment that guarantee returns.
It is a way to reduce investors loss in a position in a security. A stop-loss takes out the emotion out of a trading decision.
First time traders or new traders should usually first do a paper trade to understand the risk involved. Paper trade give a fair idea of the trade and the risk involved. There are various tools to do the paper trade. The trade executed in not entered into the system and only notional profit and loss is shown
Emerging market are usually market which is not huge in size right now but have the potential to be a sizeable size in the near future. For example a decade ago Information Technology industry is an idle example for Indian Markets.
It is one of the most important criteria for judging an investment quality of a bond or company. A higher credit quality of a company or a bond gives assurance on performance. Do not mistake this as a guarantee.
Income received from sources such as interest and dividends.
Booking loss in a stock for a particular financial year so that profit can be adjusted against the loss and the tax payable reduces.
Market cycles are classified into four types broadly statistically and mathematically there are many cycles. The four types of cycles are expansion, peak, trough and recession.
Performance by private individual investors before investing into their PMS one should always ask for a net of fee performance. Gross of fee performance can at times lead to wrong assumptions. At the time the fee charges would be so high that it will eventually eat up into the profit. Also, right comparison among the PMS is best done with a net of fee performance.
Vix is otherwise known as Volatility Index. It gauges the fear and optimism. In simple words, it can be said as a sentiment indicator. Higher the fear higher the Vix and higher the optimism lower the Vix.
Price at which specific derivative contract can be exercised. Usually, in option chain, the center value of the chain is strike price.
Trading session. The pre-open session shall be for a duration of 15 minutes i.e. from 9:00 am to 9:15 am. The pre-open session is composed of Order Entry period and order matching period.
A stock broker or a brokerage firm that charges very low commission charges at the same time does not provide any research or other additional services.
Pre-Open Session is a new innovation on exchange side to arrive at the ideal opening price of a scrip for the current trading session. The session intends to reduce the volatility that accompanies during the beginning of the day.
It is the maximum limit of option or future contract an investor is allowed to hold in an underlying stock. Or if it is market wide position limit, in that case, a certain category of investor are allowed only up to the certain limit.
A corporate action which divides existing share into multiple shares. This, in turn, increases the total number of outstanding shares but the market value remains the same.
Trading decision based on price, volume, chart pattern and other statistical and mathematical model is called technical analysis.
A person who uses a chart for technical analysis. Free charting software can be found here.
Support & Resistance
Support is a trend line where demand is very high and supports the price to go up. Resistance is a price where supply is very high and hence price usually resists at that particular point.
A style of financial chart used to describe the price movements of a security. Each candle can be shown as from 1min to 1week and 1 month also. It’s a kindly chart which was introduced by Japanese for understanding and predicting the price movement. It also covers 4 important price points. Open, Low, High & close.
When an index or a stock exceeds daily upper or lower limit of the price trading activity is halted from some time to permanently for the day based on predefined limits set by the exchange.
Demand & Supply Analysis
Apart from Technical and Fundamental analysis, there are other types of analysis which are based on demand and supply analysis. In demand and supply analysis level at which demand is more and
In lay man’s terms, a stock tip is when a person without proper research or certification gives trading ideas is called stock tip.
Secondary Market Securities
All public limited companies are listed and traded in the secondary securities market. The secondary securities market is basically the stock exchange in India. Two of the most popular stock exchange in India is NSE & BSE.
For huge accounts the number of options strategies run is many and hence this kind of account is called option portfolio.
Derivatives give the option to sell first and then buy the stock. This is done by your broker giving you the shares of the underlying in rent to short and then buy them later as the price falls.
A tool which has all the financial ratios and other data regarding the stocks listed in the market. Screener provides a certain filter based on which your stock search can be narrowed down to one from many.
Fundamental analysis focuses on the financial statements of the company being evaluated for the purpose of finding the right value of the company.
Earning before Interest, Tax, Depreciation, and Amortization is in short called EBITDA. In other words, it is the gross profit of the company.
A general direction in which something is developing and changing. There are three types of the trend in the stock market. Uptrend, Downtrend and sideway trend. In uptrend market, the price usually creates higher high and higher low. The downtrend is when stock price creates lower low and higher low. The sideways trend is when the stock price oscillates between two price zones.
When the stock trend changes from Uptrend to Down Trend it is called Trend Reversal. Vice versa is also true.
Historically it has been noted that the price movement of a stock creates certain patterns. Many times these patterns are used to predict a trend and take benefit out of it.
When a stock price is in consolidation over a long period of time and breakouts the upper range or lower range then it is called a breakout. Breakout is very important and they used for taking investment decisions.
Bubble & Crashes
An unreasonable demand in the market when too much money is running behind to little stock it creates the new price of the stock which are not justified by the value this is called a bubble. A market crash is when there are more sellers than buyers and prices have been driven down on a daily and monthly basis.
A person who is familiar with an inside person of a company and has some source of information and uses the same information to trade in a stock market to profit out of it is called insider trading. It could also be a person who is in the management of the company or on the company board.
I wish I could pick some of the words much before I had started my trading career. It would have made a lot of difference.
Wrapping up things I have ensured that all the points are covered for the beginners to start. To be very straightforward stop-loss explanation won’t do any difference until you experience your first loss. But being prepared is what makes all the difference.
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Most beginners start with Intraday Trading our thoughts are very different you might be interested in this article – IS INTRADAY DAY TRADING MEANT FOR YOU?
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