15 Basic Stock Market Terms Every New Investor or Trader (2024)

November 21, 2023


The stock market often confuses new traders and investors with its technical language. To make things easier, we've put together a list of 15 essential stock market terms every beginner should know.

Stock trading is the act of buying and selling company shares on a stock exchange, which is a marketplace for these transactions. In India, the two major stock exchanges are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). To invest in the stock market, understanding the following 15 basic stock market terms is important.

  • Share: Buying a share makes you a shareholder, which means you own a small fraction of the company and are entitled to a portion of its profits and assets.
  • Stock: A stock is a collection of shares of a company or a group of companies.
  • Bid and ask: The bid is what buyers offer to pay for a stock, and the ask is what sellers will take. The difference between these prices is the spread, which is how much the broker earns from the trade.
  • Broker: A broker is a person or a company that acts as an intermediary between buyers and sellers of stocks. You need a broker to trade stocks on a stock exchange.
  • Market order and limit order: A market order buys or sells at the current price. While a limit order sets a price, you're willing to pay or get. If you buy 100 bank shares with a market order, you'll pay the current price. If you set a limit order at INR 1500, you'll buy only if the price goes down to INR 1500 or less.
  • Volume: Volume shows how many shares were traded in a period. If many shares are traded (high volume), it's easy to buy or sell that stock. If few shares are traded (low volume), it's harder to make trades.
  • Volatility: Volatility shows how much a stock’s price changes over time. If it's high, the price changes a lot; this can be riskier but also offers more chances to make money. If it's low, the price doesn't change much, making it safer but with fewer chances to gain.
  • Bull and bear market: A bull market is a period when the stock market is on the rise, and investors feel positive about the future. On the other hand, a bear market is when stock prices are dropping, and there's worry they may go down even further. For example, if the Nifty 50 index climbs by 20% within a year, it's considered a bull market. If it decreases by 20%, it's known as a bear market.
  • Dividend: A dividend is a payment that a company makes to its shareholders from its profits. They are paid quarterly or annually and are expressed as a percentage of the share price or as a fixed amount per share.
  • Earnings: Earnings show how well a company is doing money-wise. They're often shared as "earnings per share" (EPS), which is the total profit divided by the number of available shares. For example, if a company makes INR 10 crore and there are 100 crore shares, then the EPS is INR 0.10 for each share.
  • P/E ratio: The P/E ratio tells you how much people are paying for a company’s earnings. If the P/E ratio is high, it means people think the company will do well in the future. If it’s low, they’re less sure or they think the company’s shares are a bargain.
  • Index: An index groups together stocks representing a section of the stock market or economy and shows how these stocks perform. For example, the Nifty 50 includes the 50 biggest companies on the NSE. The Sensex covers the 30 largest companies on the BSE, and the Nifty Bank comprises the 12 largest banks on the NSE.
  • ETF: An ETF is an exchange-traded fund, which is a type of investment that holds a basket of stocks, bonds, commodities, or other assets. It tracks an index, a sector, a theme, or a strategy. For instance, you can buy an ETF that tracks the Nifty 50, the banking sector, the gold theme, or the dividend strategy.
  • Short selling: Short selling is when you borrow shares from a broker and sell them, hoping to buy them back cheaper later on. It's a tactic to make money if a stock's price is dropping. But it's risky; if the stock's price goes up, you could lose more than you initially made. Say you short-sell 100 shares at INR 100 each, getting INR 10,000. If their price falls to INR 90, you can repurchase them for INR 9,000, making INR 1,000 profit. However, if the price climbs to INR 110, buying them back will cost you INR 11,000, and you'll lose INR 1,000.
  • Stop loss: A stop loss automatically sells your stock if it drops to a price you've set. Say you buy a stock at INR 100 and put a stop loss at INR 95. If the price dips to INR 95 or less, the stock sells without you having to do anything. This limits your loss to no more than INR 5 per share.

Wrapping up: Key points to remember

  • Stock trading involves buying and selling shares on a stock exchange, such as NSE and BSE in India.
  • Continuously educate yourself and stay informed about market trends to make informed investment decisions.
  • Be careful when employing trading strategies like short selling and always use stop-loss orders to limit potential losses.

Give yourself a head start in stock trading with our jargon-free learning resources.

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As an experienced investor and enthusiast in the realm of stock trading and financial markets, I've spent years navigating the complexities of trading platforms, analyzing market trends, and understanding the intricacies of various investment instruments. I've actively participated in trading stocks, ETFs, and other financial products, honing my skills through both successes and setbacks. My insights are not just theoretical; they stem from practical experience and a deep understanding of the fundamental principles that drive the stock market.

Let's dissect the key concepts outlined in the article:

  1. Stock Trading: The basic act of buying and selling company shares on a stock exchange.

  2. Stock Exchange: The marketplace where these transactions occur, such as the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) in India.

  3. Share: Owning a share means owning a portion of a company, entitling you to a fraction of its profits and assets.

  4. Bid and Ask: Bid is the price buyers are willing to pay, and ask is the price sellers are willing to accept. The difference is the spread, which represents the broker's earnings.

  5. Broker: Acts as an intermediary between buyers and sellers, facilitating trades on the stock exchange.

  6. Market Order and Limit Order: Market orders execute at the current market price, while limit orders set a specific price for execution.

  7. Volume: Indicates the number of shares traded within a specified period.

  8. Volatility: Reflects the degree of fluctuation in a stock's price over time.

  9. Bull and Bear Market: Bull market signifies rising stock prices and positive investor sentiment, while bear market indicates declining prices and pessimism.

  10. Dividend: Payment made by a company to its shareholders from profits.

  11. Earnings: Reflects a company's profitability, often expressed as earnings per share (EPS).

  12. P/E Ratio: Price-to-earnings ratio measures the valuation of a company's stock relative to its earnings.

  13. Index: Represents a group of stocks, providing a snapshot of market performance.

  14. ETF: Exchange-traded fund holds a diversified portfolio of assets, tracking an index, sector, or theme.

  15. Short Selling: Borrowing shares to sell with the expectation of buying them back at a lower price.

  16. Stop Loss: A preset price at which a stock is automatically sold to limit losses.

Understanding these terms is crucial for anyone looking to venture into the stock market. With a solid grasp of these fundamentals, investors can make more informed decisions and navigate the markets with greater confidence.

15 Basic Stock Market Terms Every New Investor or Trader (2024)


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