So you are going to learn basics and various terms used in stock markets in this post.
In this post,I am trying to explain about stock markets in the easiest possible way.So lets start.
First lets begin with how Stock Markets work.
Every country has its own stock market where buyers and sellers participate.
Purchase of shares or any other financial asset happens through stock exchange.
What is Stock Exchange
Stock exchange is a organisation which may have a physical location which runs a stock market.
Private companies lists themselves inside stock exchanges.And listing of shares allows them to raise capital through market participants.
Additionally stock exchange has securities like bonds,derivatives,currencies etc listed with them.
Process of listing inside Stock Exchange
When a private limited company decides to list itself inside exchange,it goes through the IPO(INITIAL PUBLIC OFFERING) process.
Regulatory body receive documents for approval.
Once its approved,company gets a price band from the regulatory body and a release date.
Investors can buy stocks of listed company within the given price band.
Price band reduces the over pricing of stock and lets the investor decide the right price for given stock.
After the IPO is release,we call it as publicly listed company.
To know more about how other securities get’s listed in stock exchange read our all financial securities listing process inside stock exchange guide.
Now lets’s move forward with few other terms in this stock market basics guide.
Speculation in Stock Markets
In simple terms,speculation is buying and selling of financial securities with goal of short term gains.
Risk of loosing capital comes along with speculation.
With this in mind,before speculating in stock markets one should know how to manage risk.
You can read our risk management in stock markets guide to get started.
How Financial Securities Price Changes
Have you ever been to any auction ?? We have auctioneer who announces prices and bidders call out there price.Same thing happens in stock market.
To understand lets assume there is a stock of ABC company.Its value is 100.
Now instead of auctioneer lets assume there are two category of people-a buyer and a seller.
Person who wants to buy stocks of ABC company might think value of this particular stock can increase in upcoming days due to various factors.
Mechanism behind buying a financial security
Now lets say there are three group of buyers.Lets name this group as Group 1,Group 2 and Group 3.
Group 1 buys stocks of ABC limited for 100.
As soon as they buy Group 2 buyers come in and looks to buy the same stock Group 1 bought.
Now group 1 buyers can offer there stock for a higher price.Lets say they offer the same stock for 101.
This is ask price as Group 1 buyers are asking price of 101 for the stock they bought at 100.
If group 2 buyers are not willing to buy at 101 and counter offer a price of 100.50,its called bid price.
This ask and bid war continues till settlement on both parties buyers and sellers happen.
If group 1 buyers agree to sell stocks of ABC limited at 100.50,you will see the price of stock change from 100 to 100.50.
Now group 3 buyers does there analysis of ABC limited company.
They come to a conclusion that chances of potential increase in demand of the products of ABC limited company in upcoming days are more.
Now if group 3 buyers place there bid for stocks of ABC limited company at 101 and group 2 buyers agree to sell at that price,you see stock price changing to 101.
This cycle of buying continues.
Reverse of above mentioned process also takes place when we have group of sellers.
To further study about this read our guide how price change happens in stock markets.
Upper Circuit and Lower Circuit
Every stock has a limit set by exchange to move up or down in a day.
Circuit breaker stocks are the one’s which breaks the limit..
Exchange sets upper and lower circuit limits.
Other names for upper circuit and lower circuit is upper freeze or lower freeze.
Circuits limit could range from 2-20 % depending on stocks.
This prevents fraudulent activity or manipulation in stock prices.
Trading in stocks hitting circuits stops temporarily for a limited time or entire trading day.
As a retail trader or investor,you open account,buy or sell stocks through registered stock broker.
Stock brokers charge commissions on every transaction you make.
For day trading or intraday it is different and for delivery it is different.
Brokerage in Stock Market
It is the commission charged by stock brokers when you make any transactions from your account.This might include other charges and taxes like stamp duty charges,service tax etc.
Delivery of Stock
When you buy a stock and hold it for more than 1 day we call it as delivery of stock.
Settlement of stocks happens within 3 working days.You purchase shares when some other investor or trader sells his positions.
During delivery, stocks transfer from seller account to buyer account.
Stock broker do this entire delivery process.
Seller receives payment of stocks from buyer in his trading account.
When you buy or sell securities and exit positions on the same day without taking delivery its called as day trading.Day trading needs proper risk management and is most difficult style of trading.
When you hold position of any financial securities for more than 1 day it comes under swing trading category.If you don’t exit your positions for more than a month we call it as positional trading.
Hedging your trades
Lets say you have 1000 stocks of ABC company.If you feel market might come down a bit in upcoming days and value of your stock can reduce drastically you can do two things.
1.Sell your stocks
2.Hedge your trade
Selling stock will exit your positions and there will be no risk for you when stock price comes down.
In second scenario when you hedge your trades,you hold onto your stocks and open a parallel position which can save you from downside risk when stock prices drop.
So for example lets say you sell equal value of ABC company stock futures.
When stock prices drop,your will make losses in your stock position.
But the short positions in stock futures will make you profits.
This entire process is called as hedging.
You can exit your short in stock futures when you feel stock prices will go up again.
Therefore you equalized the loss made in stock positions when stock prices dropped by opening a parallel short position in stock futures.
When stock prices reach the level from where you created short position in stock futures,your losses in stocks will be covered.
And this entire profit made in short selling of stock future will add up in overall profits.
It is a way of calculating how good a company is with the help of their financial statements.If company have bad figures in financial statement,it should be avoided for long term investment or value investing.
Calculations made by studying the price behavior of financial security is called as technical analysis.Usually it is done with the help of price charts like bar charts,line chart,candlestick chart etc.
Using both fundamental and technical analysis is considered the best option.
Bullish and Bearish
To name a trend investors and traders use the terms bullish and bearish.Bullish means uptrend and bearish means downtrend.A bull hits with his thorns upside,thus the uptrend is also said bullish.
And a bear strikes downside direction with hand,so a market with downtrend is called as bearish.
Float is number of outstanding shares in company which is available for retail traders trading.If a company has low number of outstanding shares to trade i.e. if float is low for any company,it will be highly volatile.
Limited number of traders can push the price up or down.
Dividends are amount payed to shareholders from company’s earnings.Shareholder gets either additional stocks as bonus or cash payments.Its paid to shareholders when companies board of director’s decide.
It could be monthly or quarterly payment.Regular dividends or bonus keeps investors moral happy.
Stock split is a way of splitting a single share into multiple shares.This increases number of shares inside a company i.e. float.For example,you own a stock of price $500.
If company decides to split it into 5 parts,your stock value becomes $500 divided by 5 i.e. $100 and you get additional 4 stocks each of value $100.
Earlier you owned just 1 stock worth $500 and after stock split you own 5 stocks worth $100 each.
This is done to decrease stock price,so that more retail investors can buy stocks at lower price.
This also increases cash flow of company.
Pre Market Hours
Trading sessions before regular market hours are pre market hours.You can place trades during this pre market session.
Traders and investors use pre market sessions to exit or enter stocks before normal trading hours.
Spread difference might be more during pre market sessions due to low number of traders.
After Market Session
Similar to pre market sessions,after market sessions are held after regular market hours.
Trend in stock markets is direction of price.If prices move up continuously,we say it as uptrend and in downtrend prices move downside.When price moves inside a range we call it as sideways trend.
It is a measure of change in prices of securities.Higher market participants,higher the volatility.Understanding of historical volatility and daily volatility provides an edge to traders and investor in making desicions.
Support is a price level where more market participants are willing to buy rather than to sell.As a retail trader,you should look to find key support levels to enter a long position.
Resistance is a price level where more market participants are willing to sell rather than to buy.Finding key resistance levels gives you new short trade setups and exit levels.
Trying to reduce your risk with an additional order to existing positions to protect you from extra losses.
Overall traded quantity for particular time frame is considered volume.For example daily volume of a stock which is bought 10 times and sold 10 times will be 20.
Basically there are various types of orders in stock markets.We are going to learn what are few most common orders.
This type of order gets executed instantly in markets and is the most basic type of order.At whatever nearest price available for your bid or ask,it will get executed.
You wont be able to control entry at specific price with this type of order.
You can control execution of your order at specific price with limit orders.If you want to buy a share at 100 $ or 100 Rs,your order will get executed only when stock price reaches 100.
Your order will be executed at 100 or lower but not above 100 and vice versa.
In stop orders,you can specify a price at which you want your order to get executed.It is usually used as stop loss order in markets to reduce risk.
GTD here stands for Good Till Date.Your orders can be carry forwarded till a specific date.If the price meets your order price it will get executed or else once the date specified in the order is reached,it gets cancelled automatically.
Although you can carry forward your order to another date manually.
Good Til Cancelled is a type of order which remain active till the user cancels it.In GTC orders you don’t have to specify a date like GTD.
GTD orders gets cancelled on selected date if not executed,whereas GTC order remains pending till user cancels it manually.Usually GTC is used as stop orders.
IOC stands for Immediate Or Cancel.If your orders are not executed instantly it will get cancelled automatically.For example if you place a buy order for 1000 shares at 100$ and only 900 quantities gets filled instantly at 100,than your pending 100 quantity which was not executed will be cancelled.
Various terms used in this stock market basics blog here is just a beginning.There are many more terms to learn inside stock markets and you can start learning all terms with our stock market terms,definitions and meanings with examples guide.