If you’re new to the stock market, understanding a few basic terms can make things a lot clearer. Here are some Basic Stock Market Terms and their definitions.
A stock is a basic unit of ownership in a company. When you buy a stock, you own a small part of that business.
As a shareholder, you may earn a share of the company’s profits or see the value of your stock grow if the business performs well.
Stocks are often referred to as “equities” because they represent equity ownership in a company.
A share is a single unit of stock, representing an individual’s piece of ownership in a company.
If a company issues 1,000 shares and you own 100 of them, you own 10% of the company.
Shares are the units investors buy and sell on the stock exchange.
- Definition:
- Stock:
- Refers to the overall ownership in a company. It represents a claim on a portion of the company’s assets and earnings. When people talk about stocks, they usually mean the general ownership of a company.
- Share:
- Refers to a specific unit of ownership in a company’s stock. For example, if you own shares of a company, you own a specific quantity of its stock.
- Usage:
- Stock:
- Used to describe ownership in multiple companies or as a broader term (e.g., “I invest in tech stocks”). It can also refer to the stock market in general (e.g., “the stock market is volatile”).
- Share:
- Used when discussing a specific portion of ownership in a single company (e.g., “I own 100 shares of XYZ Corporation”). Shares are counted as individual units.
- Types:
- Stock:
- Can be categorized into different types, such as common stock and preferred stock, which indicate different rights and privileges.
- Share:
- Represents the smallest unit of ownership in stock and can also refer to the specific type of stock (common shares, preferred shares, etc.).
- Investment Perspective:
- Stock:
- Refers to the broader concept of investing in equity across various companies and sectors.
- Share:
- Refers specifically to the units of stock you own in a particular company.
Here’s the information presented in a tabular format for clarity:
Aspect | Stock | Share |
Definition | Refers to overall ownership in a company. | Refers to a specific unit of ownership. |
Usage | Describes ownership in multiple companies or markets. | Used for a specific portion in a single company. |
Types | Can include common stock and preferred stock. | Represents individual units of stock (e.g., common shares, preferred shares). |
Investment Perspective | General concept of investing in equity. | Specific units of ownership in a particular company. |
This table summarizes the key differences between “share” and “stock” in a concise manner.
Equity refers to the value of an ownership interest in an asset or company.
In the stock market, equity is the ownership stake in a business. It’s essentially the net value of the company’s assets after subtracting liabilities.
Owning equity means you have a claim on a portion of the company’s profits and assets.
A stock exchange is a marketplace where stocks (and other securities) are bought and sold.
Major stock exchanges include the National Stock Exchange(NSE) and Bombay Stock Exchange(BSE).
These exchanges provide a regulated environment where investors can trade stocks.
By offering a public platform, stock exchanges make it easier for people to buy and sell shares.
An Initial Public Offering, or IPO, is the process by which a private company offers its shares to the public for the first time.
This is often a significant milestone for a company, as it transitions from private to public ownership. During an IPO, the company raises funds by selling shares to investors.
This helps the business expand while giving the public a chance to own a piece of it.
Market capitalization, or market cap, is the total value of a company’s outstanding shares.
It’s calculated by multiplying the company’s stock price by its total number of shares.
Market cap is an indicator of a company’s size and value, helping investors compare companies in terms of their financial worth. For example:
- Large-Cap: Companies with a market cap of Rs. 20,000 cr. or more. 1 to 100 companies of all the listed companies in the stock market.
- Mid-Cap: Companies valued between Rs. 5,000 crores and Rs. 20,000 crores. 101th to 250the ranked companies mostly.
- Small-Cap: Companies with a market cap of less than Rs. 5,000 crores. Beyond the rank 250th.
Market cap helps investors understand the relative size of a company and its market presence.
A dividend is a portion of a company’s earnings distributed to shareholders, usually as cash payments. Companies typically pay dividends quarterly, though some may issue them annually or semi-annually.
Not all companies offer dividends—some choose to reinvest their profits back into the business to fuel growth.
For investors, dividends provide a way to earn income from their stock holdings in addition to potential capital gains.
A bull market is a financial market condition where prices of assets, particularly stocks, are rising or expected to rise.
This optimistic trend often encourages investors to buy, anticipating further price increases.
For example, the Indian stock market experienced a prolonged bull market between 2014 and 2019, where the Nifty 50 and Sensex indices showed substantial growth due to strong economic fundamentals.
A bear market is a financial market condition where prices of assets, particularly stocks, are falling or expected to fall.
This decline often create fear among investors, leading them to sell assets to minimize losses.
An example is the global market downturn in early 2020 due to the COVID-19 pandemic, which saw widespread declines across stock markets, including India’s Sensex and Nifty.
A portfolio is a collection of various investments held by an individual or institution, including stocks, bonds, real estate, or other assets.
Portfolios are typically diversified to balance risk and return. For instance, an investor’s portfolio may consist of large-cap stocks like Infosys, government bonds, and a few international ETFs, offering a mix of growth and stability.
A broker is an individual or firm that facilitates the buying and selling of securities on behalf of investors, charging a fee or commission for their service.
In India, common brokerage firms include Zerodha, Upstox, and ICICI Direct, providing investors with access to stock trading platforms and market insights.
Trading is the act of buying and selling financial instruments, such as stocks, bonds, commodities, or currencies, on exchanges or other financial markets.
Trading can be done by individuals or institutions and varies from short-term (trading) to long-term (investment).
For instance, stock trading on the NSE (National Stock Exchange) involves investors actively buying and selling stocks based on market conditions.
- Market Order: A market order is a type of order that allow to buy or sell any financial instument immediately at the best available price. For instance, if you place a market order to buy shares of Reliance Industries, your order will be fulfilled instantly at the current market price.
- Limit Order: A limit order sets a specific price at which you want to buy or sell. For example, if Reliance Industries is trading at ₹2,000 and you set a buy limit order at ₹1,950, your order will execute only when the stock reaches ₹1,950.
- Stop Order: A stop order triggers a market order when a specified price is reached. For instance, placing a stop loss order on a stock at ₹1,800 will automatically sell the stock if its price drops to that level, limiting potential losses.
The price at which a buyer agrees to buy any financial asset is called bid price. For instance, if the bid price for TCS stock is ₹3,200, it means buyer is currently willing to pay up to ₹3,200 per share.
The price at which a seller agrees to sell any financial asset is called ask price. If the ask price for TCS stock is ₹3,205, seller is willing to sell at or above this price, creating a margin for negotiation between buyers and sellers.
The difference between the bid price and the ask price of any financial asset is called Spread.
It reflects the supply and demand for that asset and the liquidity in the market.
For example, if TCS has a bid price of ₹3,200 and an ask price of ₹3,205, the spread is ₹5. Narrower spreads often indicate a more liquid market.
Volume refers to the total number of shares or contracts traded for a specific security within a set period.
High trading volumes indicate significant interest in the asset, while low volumes suggest limited trading activity.
For instance, if Reliance Industries stock shows a high trading volume after quarterly earnings, it implies strong investor reaction to the report.
Market sentiment talks about the emotional behaviour, mood of the traders and investors toward a particular market or asset in a particular economic or market condition, often influencing buying or selling behaviors.
Positive sentiment typically leads to higher prices (bullish), while negative sentiment drives prices down (bearish).
For example, favorable government reforms can boost sentiment in the Indian market, encouraging buying activity.
Volatility measures how much the price of a security fluctuates over a certain period.
High volatility suggests large price swings, while low volatility indicates stable prices.
Stocks in emerging markets, like small-cap companies in India, often experience higher volatility, while government bonds exhibit lower volatility, offering more predictable returns.
Liquidity means how easily an asset can be bought or sold. In general, high liquidity means less bid-ask spread, and low liquidity means high bid-ask spread.
Highly liquid assets, like large-cap stocks, can be quickly traded with minimal price impact, whereas low liquidity assets may be harder to sell promptly.
For instance, shares of large companies like HDFC Bank have high liquidity on the NSE, making them easy to trade.
Leverage is kind of taking a virtual loan so that principal investment amount increases by adding that in it. This borrowed fund is used to increase the potential return on an investment.
Investors use leverage to gain greater exposure to a market with a smaller amount of personal capital.
However, leverage also magnifies losses, making it a high-risk strategy.
For example, if an investor has ₹10,000 but uses leverage to control a ₹100,000 position in a stock, any gains or losses will be based on the full ₹100,000.
This means if the stock’s value rises by 10%, the profit is ₹10,000 (a 100% return on the original ₹10,000 investment). However, if the stock price falls, the investor could also face amplified losses.
Margin is the money borrowed from a broker to purchase an investment, allowing investors to buy more shares than they could with just their available funds.
To trade on margin, investors must open a margin account with their broker and meet specific initial and maintenance margin requirements.
For example, an investor with ₹50,000 can buy ₹100,000 worth of stock if their broker offers 50% margin.
While this can amplify profits, it also increases the risk of significant losses, as the borrowed amount must be repaid even if the stock value falls.
If losses are too high, the broker may issue a “margin call,” requiring the investor to deposit more funds or sell assets to cover the losses.
Arbitrage is a trading strategy where an investor exploits price differences of the same asset in different markets to make a profit.
Arbitrage opportunities arise when there is a discrepancy in prices between two or more markets.
For example, if a stock trades for ₹500 on the Bombay Stock Exchange (BSE) but is selling for ₹510 on the National Stock Exchange (NSE), an arbitrageur could buy the stock on the BSE and simultaneously sell it on the NSE, making a risk-free profit of ₹10 per share.
Arbitrage opportunities are usually short-lived, as prices tend to align quickly once these differences are detected.
Short selling, or “shorting,” is a trading strategy where an investor borrows shares of a stock they believe will decrease in value, sells them at the current market price, and aims to repurchase them later at a lower price. The difference between the selling and repurchase prices is the profit (or loss). Short selling is used to profit from declining stock prices, but it carries high risk since potential losses are theoretically unlimited if the stock’s price rises instead of falls.
Example: Suppose an investor believes that XYZ Company’s stock, currently priced at ₹200 per share, will drop. The investor borrows 100 shares and sells them for ₹200 each, totaling ₹20,000. If the stock price drops to ₹150, the investor can buy back the 100 shares for ₹15,000, pocketing a profit of ₹5,000 (minus any fees). However, if the stock price unexpectedly rises to ₹250, the investor would need to buy back the shares at this higher price, resulting in a loss of ₹5,000.
Short selling is often used by experienced traders to hedge other positions or to profit during bear markets, but due to its high-risk nature, it’s generally recommended for advanced investors.