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Basic Terms Used in Stock Market

Sensex

It is an index that represents the direction of the companies that are traded on the Bombay Stock Exchange, BSE. The word Sensex comes from sensitive index.
The Sensex captures the increase or decrease in prices of stocks of companies that it comprises. A number represents this movement. Currently, all the 30 stocks that make up the Sensex have reached a value of 14,355 points.
These companies represent the myriad sectors of the Indian economy. A few of these companies and the sector they represent are: ACC (cement), Bajaj Auto, Tata Motors, Maruti (automobile), Infosys, Wipro, TCS (information technology), ONGC, Reliance (oil & gas), ITC, HLL (fast moving consumer goods) etc.


List of 30 Sensex stocks

Each company has a weight assigned to it. Companies like Reliance, Infosys, and HUL have higher weightages compared to others like HDFC, Wipro, or a BHEL.


Weights assigned to Sensex Stocks
The increase or decrease in this index, the Sensex, is the effect of a corresponding increase or decrease in the stock market price of these 30 companies.


Nifty

It is the Sensex counterpart on the National Stock Exchnage, NSE.
The only difference between the two indices (the Sensex and Nifty) is that the Nifty comprises of 50 companies and hence is more broad-based than the Sensex.
Having said that one must remember that the Sensex is the benchmark that represents Indian equity markets globally.
The Nifty 50 or the S&P CNX Nifty as the index is officially called has all the 30 Sensex stocks.


List of Nifty 50 stocks

The NSE Nifty functions exactly like (explained above) the BSE Sensex.
Stock: The stock or capital stock of a business entity represents the original capital paid into or invested in the business by its promoters. The "Stock" of a Business is divided into "Shares".

Share: A part of the company or enterprise issues to public or private to rise Money for various future plans, Holders of shares can sell their holdings to others through Stock exchanges.


Equity: The value of an ownership interest in property or "Business", Generic term for "Equity" securities are called stock.


Market: A place of a variety of different systems, institutions, procedures, social relations and infrastructures whereby persons trade, goods and services are exchanged. It is an arrangement that allows buyers and sellers to exchange things or services is called as "Market".


Multibagger: Among the long-term investors "Multibagger" is a popular term. A stock with strong fundamental values to show best performance in future to increase "Investor" wealth.


Investment: Investment is the commitment of "Capital" or "Money" to purchase financial instruments / assets to gain profitable returns in the form of income, interest, dividend, or appreciation of the value of the money. In equity terms can yield price appreciation, dividend, Bonus shares, Face value(par value) split, De-mergers or any value increase.


Trade: The exchange of goods, services, or both, In the words of "Finance" a deal between buyer and seller of financial instruments.


Derivatives: Meaning of "Derivatives" is a financial instrument, an agreement between two people or two parties. It is a financial contract with a value linked to the expected future price of the share or a currency, notable kinds of derivatives are "Futures and Options".


Economy: Financial activities related to the production and distribution of goods and services in a country or particular geographic region or entire network of producers, distributors, and consumers of goods and services in a local or national level.


Demat Account: In India, refers to a dematerialized account (Demat), For individual Indian citizens to trade in listed stocks.The Securities Exchange Board of India (SEBI) requires the investors to maintain a "Demat" Account. In a demat account shares and securities are held in electronic form instead of paper certificates. A Demat Account is opened by the investor while registering with an investment broker (Stock Broker) or sub broker.


Stock Broker: A regulated professional broker who buys and sells shares and other financial securities through market makers or Agency Firms on behalf of Investors and Traders. A broker may be works to a brokerage firm. Other words an agent charges a fee or commission for executing buy and sell orders submitted by an investor.


Brokerage: Definition of "Brokerage" gives different meanings, First one is A firm engaged in buying and selling of stocks for clients, The business or Office of a broker. Second one is Fee or Charge or Commission paid to broker. stock brokers charges a fee to act as intermediary between buyer and seller.


Intraday: Complete trade process of Buy and Sell or Sell and Buy within single trading day, It means square off the open positions before market close.


Swing Trading:  "Swing Trading" is purely non intraday based at the same time not for long-term, Purely short-term means more than one day to within some weeks and profit-book at Trend reversal. Swing trading is commonly considered as a speculative activity in financial markets including Forex, Stocks, Derivatives, Commodity, etc.

Bull

A particular kind of investor who purchases shares in the expectation that the market price of that company share will increase.
S/he sells her/his stock at a higher price and pockets the profit. Simply put, the bulls buy at a lower price and sell at a higher price.
For instance, if a bull buys a company's share at Rs 100, s/he would prefer selling the same stock at Rs 120 or any price higher than Rs 100 to make a profit.
Usually, a bull buys first at a lower price and sells later at a price higher than her/his cost of purchase.
Bulls are happy when the markets (the Sensex and Nifty) move upwards. A falling market takes bulls into hibernation.


Bear

Bull's counterpart is the bear.
A bear sells stocks first that s/he owns or borrows from, say a friend, and then purchases the same quantity of shares at a lower price.
If a bear sells first, say 100 shares of Ranbaxy at Rs 400, and later purchases the same number of shares at Rs 375, then her/his profit is Rs 25 (400-375) per share.
This way s/he has got back the 100 shares of Ranbaxy and simultaneously made a profit of Rs 2500. The shares can later be returned to the bears friend if s/he had borrowed the same from a friend.
There are bears in the market that sell shares first without actually owning them unlike in the above example. Such selling is called naked short selling or going short on a stock.
Bears are happy in a falling market.
While individual investors can engage in selling first and buying later (also referred to as short selling), mutual funds and foreign institutional investors are not allowed this luxury in India yet.

 

Squaring Off

A process whereby investors/traders buy or sell shares and later reverse their trade to complete a transaction is called squaring off of a trade.
Indian equity markets remain open between 9:55 am and 3:30 pm normally (At times there are sun outages when satellites fail to link with ground infrastructure of the two exchanges (the servers where buy and sell orders are matched). During these times the trading period is extended till 4:15 pm to compensate for the time lost in between).
If you purchase 50 shares of say Infosys and sell them later before the market closes then you have squared off your buy position.
Similarly, if you sell 100 shares of Maruti and purchase them later then you have squared off your sell position.
Equity market rules in Indian allow investors/traders to engage in day trading.
Day trading is a mechanism whereby investors/traders can buy, say 100 shares of a company as soon as the BSE, NSE opens (the working hours are 9:55 am to 3:30 pm in normal times) and sell the same amount of shares later (bulls) before the two stock exchanges close. However, a stock bought on the BSE cannot be sold on the NSE and vice-versa.
Similarly investors/traders can also sell first and buy later (bears) during the course of the day to square off their sell positions.


Rally

The word suggests the gain made by the Sensex or Nifty during the course of the day. If such gains are made on a regular basis then market participants like investors, brokers etc call it as a market rally.
If the Sensex moves from 14,000 points to 15,000 points in a span of say 14 or for that matter 20 trading sessions (the stock markets remain closed on Saturdays, Sundays and other bank holidays) then the phenomenon is referred to as a rally.
Bulls are always said to be active during a market rally.


Crash

As the word suggests, crash refers to a fall in the value of Sensex and Nifty. In the first three trading days of this week (February 12-14) alone  the Sensex had crashed by more than 700 points.
The Sensex then had plummeted from around 14,700 levels to around 14,000 points. This sudden and violent 700-point fall is referred to as th crash or market crash.
Bears are said to be active and happy during the market crash as their style of trading (sell first and buy later) helps them make good money during a crash.


Correction


A correction (or a measured fall) in the Sensex and Nifty takes place when these indices rise for a few days and then retrace or shave off some of these gains.
Say if the markets rally from 13,000 to 14,000 points in 10 days and the again fall to 13,700 points in the next five-six days then this action is termed as a market correction.
It is like a woman/man resting for some time after running a long distance race. Like human beings the market too needs to take rest after a smart rally.
Market experts consider such corrections healthy because during this period the ownership of shares moves from weak hands (short-term investors) to strong hands (long-term investors). Corrections are generally considered as signs of strength after which the markets (the Sensex and Nifty) gets once again poised for a further rally.

Bonus Shares

These are the free shares that a listed company gives its shareholders.
A bonus is declared after a discussion amongst the board members that make up the management of a company.
A bonus issue is looked upon as a way of rewarding shareholders.
For instance, let us take a company A that has made a profit of Rs 100 crore in the financial year 2007 (April 1, 2006 to March 31, 2007).
Out of this amount the company may need Rs 50 crore for say buying machinery or constructing a new warehouse. And the remaining Rs 50 crore the company puts into its reserve pool or idle cash that the company has no plans to spend.
It can then issue bonus shares out of these Rs 50 crore.
When a company declares a bonus issue it converts this idle cash into shares that are then distributed amongst its shareholders. This process is called capitalizing of reserves.
A bonus is usually declared as a ratio. A bonus issue in the ratio of 1:1 means you will get one free share for every one share of the company you own.
A 2:1 bonus issue (or two for every one held) means you will get two free shares of a company for every one that you own. Similarly, a 5:1 bonus issue will give you five free shares for every one share that you own.


Dividend

It is again a way of rewarding a company's shareholders. A dividend is generally issued as a percentage of the face value of a share. Face value is the nominal price of a company's share.
A share can have different face values like Re 1, Rs 2, Rs 5, Rs 10 or Rs 100. An 80% dividend on a share of face value Rs 2 (Rs 1.6) will always be less than a dividend of 20% declared on share of face value Rs 10 (Rs 4).
Like bonus shares, dividend amount also comes from a company's free cash reserves.

Book Closure Date

This is the date on which a company closes its books for business after it announces a bonus or dividend. The company's registrar keeps a track of who owns how many shares of that particular company.

Any investor having shares in his/her demat account before this date becomes eligible for the bonus issue or the dividend declared.
Say a company A announces a 1:1 bonus issue and the book closure date is February 28, 2007.
If you don't own this company's share and want to avail of the bonus offer then you must not only buy this share before February 28 but also make sure that the number of shares purchased by you are transferred to your account from the seller before this date.
If the ownership of shares is reflected in your account after February 28 then you will not get any bonus shares. The same is also true for dividend announcements.

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