Before investing, it is important to conduct research and develop an understanding of certain basic concepts. When learning the basics of stock trading, there are a few essential terms to know and they are as follows:
Equity (in the stock market) refers to the amount of shares owned by a company. As an investor, when you buy the shares of a company, you buy an equivalent degree of ownership in that company. The stock market is where these company shares (equity) are bought and sold from one investor to another. The word ‘stock’ is synonymous with the word ‘equity’.
The ask price or an offer refers to the lowest amount of money that the seller of a stock is willing to accept for a share of that stock.
A bid refers to the highest amount of money that a potential buyer for a stock is willing to pay for a share of that stock. If there are multiple buyers for a stock, a bid taken between buyers ends when one buyer places a bid that the other buyers cannot or do not wish to match.
There is always a difference between the price that a seller asks for an object and the price the buyer is willing to pay for it. In the stock market, there is a difference between the bid and ask price, with the bid generally being lower than the ask price. This difference is known as the ask-bid spread or spread which is primarily determined by the demand and supply.
An exchange refers to a place or an electronic market where various securities are traded. i.e. one of the many stock exchanges in the country or worldwide where shares of stocks are bought and sold. The existing stock exchanges in the country are the National Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE).
To trade in stocks, an investor needs to have an intermediary to connect to the exchange, known as a broker. They do not own securities but purchase or sell stocks on behalf of an investor in exchange for a small commission.
7. Bull Market / Bear Market
These two terms are indicators of the current trend that the stock market is experiencing at a given time. The bull market refers to a period in which the prices of stocks are increasing and therefore, the market is on an upward trend. A bear market refers to a period in which the prices of stocks are falling and therefore, the market is on a downward trend.
8. Trading Account
Today, the stock market has become electronic and thus traders are required to open an online trading account with a registered broker, to execute their trades electronically. All orders to buy or sell shares take place through this trading account.
Volatility refers to the rate of price fluctuations of a share. A highly volatile stock experiences daily up and down movements in its price. Some traders profit off the risks involved in highly volatile stocks, while others prefer investing in less volatile stocks for the long run.
Yield essentially refers to the return of investment on stock and is expressed in terms of percentage.
With these basic stock trading terms, you too can begin your journey into stock market investing. With the considerable potential that the stock market offers, all it takes is some research, some preparation and opening a Demat account and trading account with a reliable brokerage firm like IIFL to start investing.