The stock market or the stock exchange plays an integral role in the functioning and development of the economy. It is an important parameter to measure or ascertain the growth of a country. It helps to channelize the savings to better avenues and leads to capital formation. Lets understand the various terminologies in context to the stock markets.
Stock Exchange:
- The stock market place a very important role in the growth of the economy.
- It is an important component of the capital market. The stock market is a place where corporate listed securities are purchased and sold.
- The stock market is an organised and regulated market, only securities that are listed within the stock exchange can be traded.
- Stock exchange is also known as a secondary market or stock market or share bazar. The term security is composed of equity shares, preference shares, debentures, government securities and bonds.
- The stock exchange works as an intermediary between the investors and companies. The Securities And Exchange Board of India (SEBI) is the regulator of the capital markets in India. Stock exchange is also known as a pulse of economy or economic mirror as it reflects the economic conditions prevailing in a country.
According to the Securities Contracts (Regulationals) Act 1956, the term stock exchange is defined as, " An association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling of business in buying, selling and dealing in securities."
Equity:
Equity share capital refers to the ownership capital of the company, it can either be in equity share capital or preference share capital.
Stock Broker:
- The stock broker is a member of a stock exchange who has been licenced by the stock exchange to buy or sell the securities on the clients behalf. He is an intermediate between the investors and the company. Broker gets the consideration in the form of commission or brokerage.
- Brokers play an integral part in the trading system of the stock market, as all orders are placed through them.
Bull:
A bull is a speculator who expects the price of a share to rise or increase in the near future and invests the money with the estimations of selling them at a higher rate in order to earn handsome profits. He has an overall optimistic approach towards the market conditions. When people invest in shares from a bullish point of view the prices of the securities rise as there is excess of purchase over sales.
Bear:
A bear is a speculator who expect the price of the shares to fall or decrease in the near future. A bearish perspective lowers the prices of securities as there is excess of sales over purchase, shareholders sell their securities at the prevailing prices to avoid losses in the future.
Stag:
A stag refers to a member who buys new issue of security from the primary market and later on sells them at higher prices at a considerable profit after its listing on the stock exchange. He/she earns the profits on the premium listings.
Lame Duck:
This refers to a stock broker who had a bearish point of view and his expectations have gone wrong. In other words, he had expected the prices of the security to decrease but instead the prices went up.
Wolves:
A wolf is an investor/trader who is a smart, these people quickly predict the trends prevailing in the market and thereby make quick profits. They usually adapt unethical mwans in order to make profits.
Settlement:
Settlement refers to the set off, of the transactions relating to the securities. It refers to the security wise closure of trades by a stock broker after the end of the trading period. For example: t (trading) + 2 days for equity transactions.
Trading Ring:
This refers to the physical buying and selling of shares, the trading of shares takes place on the floor of the stock market which is known as a trading ring. Today all the transactions take place electronically hence, there is no such trading room.
Insider Trading:
Insider trading refers to the trading of a public listed company’s securities by the members who have the access to the internal or non Public Information of the company. These are the people who have the access to the company’s confidential data and information which is not exposed to the general public. Insider trading is considered to be a fraudulent practice as it is unfair to other investors who do not have access to search information.
Day Trading:
Day trading is also known as intraday trading. This refers to the buying and selling of securities within the same trading day before the close of the markets on that day. The positions taken during the day are squared off between 3:00 to 3:30 PM.
Demat Account:
Demat account is required in order to deal in securities. A demat account facilitates the buying and selling of the secutites and holds the financial securites in the electronic form.
Derivatives:
A derivative is a financial security, whose value is derived from an underlying asset.
Dividend:
Dividend is the appropriation out of the profits of the company. It is distributed among the shareholders of the company. It refers to the return which is payable to the shareholders (members) of the company for the investment which they have made in the share capital of the company. It is a share in the annual distributable profits of the company to which the shareholders are entitled to, when it is formally declared by the company.
The Institute of Chartered Accountants of India has defined dividend as, “a distribution to shareholders out of profits or reserves available for this purpose”.
Interest:
- Interest refers to a certain amount of money paid on borrowed capital. It is the payment made for using money of another, which is the borrowed money. It is the price paid for the productive services rendered by capital.
- It is the cost of finance for borrowing and it is the revenue from lending money, for the lender. Interest is the monetary charge for borrowing the money which is expressed as an annual percentage of the principal value.
- Interest is in direct proportion to risk, higher the risk is, higher would be the rate of interest. It is determined by various factors like money supply, financial policy, the volume of borrowings, inflations.
- Interest is an obligation against the profits of the business. It is a fixed payment which needs to be paid irrespective of the company makes profits or not. Company has to make payments, if it has borrowed money from creditors like debenture holders, deposit holders, bond holders, etc.
Sensex:
Sensex is an important or benchmark trading index or parameter of the stock market to analyse the prevailing market conditions. It is the index of the BSE which represents the increase or decrease in prices of stocks of selected group of Companies. Sensitive index called as sensex is made up of 30 largest and actively traded stocks of listing companies which was created in 1986.
Nifty:
Nifty refers or represents the index of NSE. It is composed of 50 listed companies, which includes all 30 sensex stocks along with the 20 other listed companies. Nifty was created in 1996.
Index:
The index in stock market is a measurement of changes in the prices of securities.
Stock Rally:
Stock rally refers to repetitive movement of the share prices in the upward direction. If the sensex or nifty moves in the upward direction over a period of 14 to 20 training sessions it is known as rally. Bulls are active during the market rally.
Crash:
The stock market crash refers to a situation where the prices of the share drastically fall. If the sunsets or nifty moves in downward direction it is known as a crash. Bears active during the crash.
Market Capitalisation:
The market capitalisation of the company is an important parameter which tells is about its valuation and its composition. The market capitalisation helps to categorise the company as per its capital amount. For example: small cap, midcap, large cap.
It refers to the total value of the company’s outstanding or issued shares multiply by its current market value, market capitalisation directly indicates the worth of the company.
Stop Loss:
Stop loss is an order placed by the stock trader in order to minimise his risks when a trade goes wrong. It is an instruction or order given by an investor to the broker to buy or sell the security when it reaches a certain price level. It is risk management tool used by the investor when he wants to limit the loss when the stock price falls below the stop price.
SEBI (The Securities Exchange Board of India):
- SEBI stands for the Securities and Exchange Board of India, it is the regulator of the capital markets in India which was established in 1992 under the Securities and Exchange Board of India Act, 1992.
- The Act was primarily set up with the object of promoting the securities market, protecting the interest of the investors and to regulate the securites market.
- It issues rules and regulations to be followed by the issuers of security, the market intermediaries and the investors.
- To promote development of securities market and regulate the businesses prevailing in the stock exchange.
- To register and regulate the working of stock brokers, subbrokers, share tranfer agents, bankers to an issue, trust is to trust deeds, registrars to an issue, merchant bankers, underwriters, other financial intermediaries, who might be associated to the stock exchange or somehow realted to the development of the stock markets.
- To register and regulate the working of depositories, venture captal funds, credit rating agencies, foreign institutional investors.
- To prohibit fraudulent practices.
- To prohibit insider trading in securites.
The Bombay Stock Exchange (BSE):
The Bombay Stock Exchange (BSE) was founded on 9 July 1875 by cotton merchant Premchand Roychand. Back in the day it was called as The Native Share and Stock Broker’s Association. It is the first and the oldest stock exchange in Asia, located in Dalal Street in Mumbai. It works under the SEBI’s framework and guidelines, which ensures, investor protection, legal compliance, fair trading practices.
National Stock Exchange (NSE):
The National Stock Exchange was founded by a group of leading Indian Financial Institutions in 1992. It started trading activities in 1994. It is one of the leading stock exchanges in India, based in Mumbai. The NSE is the largest and most modern stock exchange in India. It is the first dematerialised stock exchange in India, which facilitates electronic trading stytem which offered easy and convenient trading facility to the investors. The NIFTY (National Stock Exchange Fifty) is the main index of NSE.
Primary Market:
In the primary market, companies issue their financial securities for the first time to raise finance. It is also known as the New Issue Market. For Example, Initial Public Offer (IPO), Further Public Offer (FPO).
Secondary Market:
In the secondary market previously issued financial securities are traded. It is known as the stock exchange or the stock market. After the issue of IPO, these securities are traded in the secondary market.
Dematerialisation:
Dematerialisation refers to the process of the conversion of physical certificate of shares into the electronically held shares. The paper form of securities are converted to the digital or electronically held securities.
Rematerialisation:
Rematerialisation is the process of conversion of electrical form of securities into the physical form. The electronic records are converted into the physical form of securities.
Asset:
- An asset refers to a thing which an either be tangible or intangible that has an economical value and can realise cash upon its sales proceeds.
- Tangible assets refer to those assets that have a physical existence and can be seen or touched. For example: Land and Building, Furniture and Fixtures, Plant and Machinery.
- Intangible assets are those which do not have a physical existence and can not be toched or seen. For example, Goodwill, Patent, Copyright, Trade mark.
Capital:
- The finance required by business is known as ‘capital’.
- Capital formation is a process of collection of capital from different sources as per the fiscal plan of a company. The capital collected will be a mix of owned capital and borrowed capital.
- The capital raised by the company with the help of owners or shareholders is known as owned capital or ownership capital. The shareholders purchase shares of the company and provide necessary capital required.
- Borrowed capital is referred to as the capital which is borrowed from creditors. It is also called as debt capital. It is raised by the way of issue of debentures, fixed deposits, credit from financial institutions.
Mutual Fund:
A mutual fund is a large pool of money managed by professionals who invest or channelise the money in the form investment in various funds. A mutual fund is formed by investing the money in various shares of companies at certain proportions and creating a mutual fund unit, which has an assigned NAV (Net Asset Value).
