When you decide to invest in the stock market, you come across various jargons and terminologies. We have tried to demystify various common jargons for your knowledge.
A share is a part or component of a company. Hence, whenever a company earns a profit, it distributes a part of it to the shareholders as well. This is known as a dividend. Each year, companies distribute a portion of their earnings to shareholders in the form of dividends. This is one of the major means of income for long-term shareholders who do not book profits by selling their stocks.
• Market capitalization
Each company issues shares with a value that is different from other companies. Market capitalization is the total value of the company, which is derived by the formula:
the price of the share* number of shares issued to the public.
For example, if the price of a share is INR 20 and the number of shares that are issued to the public are 10 lakh, then there the market capitalization is INR 2 crore. Hence, market capitalization is nothing but the value of the company in the market.
Market capitalization has many applications. It is one of the main criteria while deciding on segregation of stocks into various indices. Market capitalization also determines the weightage of stock in a particular index. This implies that the price fluctuations in the company’s stock with a bigger capitalization have a larger impact on the value of the particular index.
• Bull and bear market
Bull and bear market is undoubtedly is one of the most important stock market terminologies. Markets are often termed as ’bull’ or ’bear’. If the stock market is headed upwards for a sustained period it is known as a ’bull’ market and if the stock market is headed downwards for a sustained period, it is known as a ’bear’ market. Mainly, the forces of demand and supply determine the price movement of stocks in a market. However, there are also other factors such as the macroeconomic condition in the country and across the globe, the government policies, a sudden piece of news, the monetary policy, or any other political development.
• Margin trading
Not everyone trades in the market with his or her own funds. There are many who purchase shares with borrowed money. Buying securities on credit is called margin trading. As more funds are available due to credit, there is a possibility of a bigger investment in the stock market, which also means bigger gains. However, there is also a risk element associated with margin trading. Interest payment on the borrowed money is one such risk element. Many brokerage houses offer the facility of margin trading to its customers.
• Stock volatility
Stock prices are subject to constant fluctuations. These fluctuations happen due to the change in the demand of the stock, while the degree of fluctuations depends on the number of times the stock changes hands. This is known as stock volatility. The volatility of the market also changes on a day-to-day basis. To gauge this volatility, the National Stock Exchange has launched the VIX India index. VIX rises when there is more risk, speculation, and apprehension in the market.
• Insider trading
Whenever we hear about stock market scams, we usually come across a term called insider trading. Normally, the regular investors buy and sell stocks based on the information or news that is publicly available. However, insider trading happens when trading in the stock market takes place based on the information that is not publicly available or more precisely from illegal or unofficial sources. Such kind of trading causes unnecessary volatility and fluctuations in the stock markets.
Apart from the aforementioned terminologies, you must also research on terms such as intraday trading and circuit filters among others in order to emerge as a wise and well-informed investor.