If you’re new to the share market, all the new words and phrases can be confusing. But don’t worry! This blog will help you understand some of the most common terms you’ll hear when investing in stocks. We’ll explain these words in an easy way so you can feel more comfortable and confident as you learn about the share market. Let’s get started and make sense of the basics together!
Shares/Stocks
A share in the share market is a unit of ownership in a company. When you buy shares of a company, you own a small part of that company. The value of your shares can go up or down depending on how the company performs and market conditions.
Bonds
A bond in the share market is a type of loan that investors give to a company or government. In return, the bond issuer agrees to pay back the money with interest over a set period. Bonds are generally considered safer than shares because they provide regular interest payments and return the principal amount when the bond matures.
Mutual Funds
A mutual fund is an investment where money from many people is pooled together to buy a mix of stocks, bonds, or other assets. A professional manager handles the investments, deciding what to buy or sell. This gives investors the benefit of owning a variety of investments, which helps reduce risk. There are different types of mutual funds based on what they invest in, like stocks or bonds. While mutual funds offer convenience and expert management, they usually come with fees that cover the costs of managing the fund.
ETF
An ETF (Exchange-Traded Fund) is a type of investment fund that holds a collection of assets, such as stocks, bonds, or commodities. It is traded on the stock exchange, just like a regular share. ETFs allow investors to buy a variety of investments in one single fund, offering diversification and lower costs compared to buying individual stocks.
Stock Exchange
The stock exchange in India is a vital component of the country’s financial market, providing a platform where people can buy and sell a variety of securities, including stocks, bonds, and other financial instruments. This marketplace is regulated to ensure transparency, liquidity, and efficient trading for investors. In India, there are two major stock exchanges: the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).
1. Bombay Stock Exchange (BSE)
The Bombay Stock Exchange (BSE), established in 1875 in Mumbai, is the oldest stock exchange in Asia and has over 5,000 listed companies, making it one of the largest globally. As a key player in India’s financial system, the BSE serves as a marketplace where traders, investors, and institutions can buy and sell securities, primarily stocks. It offers a wide range of companies, from large corporations to smaller businesses, providing investors with various options. The exchange ensures regulated and transparent trading, facilitating fair transactions between buyers and sellers.
2. National Stock Exchange (NSE)
The National Stock Exchange (NSE) was established in 1992, also in Mumbai, and is now the largest stock exchange in India by daily trading volume and market capitalization. The NSE was created with the aim of modernizing stock trading in the country. It introduced electronic, screen-based trading, which greatly increased the efficiency and transparency of the trading process. This innovation allowed more people from across India to participate in the stock market, making trading faster and easier for everyone involved.
Stock Market Index
In India, a stock market index is a tool used to measure the performance of a group of selected stocks. It acts as a benchmark, helping investors track the overall movement of the stock market. Stock indices are essential because they offer a clear snapshot of the market’s general trend, making it easier for investors to make informed decisions.
1. Sensex (BSE SENSEX)
The Sensex is the benchmark index of the Bombay Stock Exchange (BSE). It tracks the performance of the 30 largest and most financially stable companies listed on the BSE. These companies come from various sectors like finance, technology, and healthcare, and the Sensex reflects their overall performance. When these companies perform well, the Sensex rises, indicating growth and confidence in the market. When they face challenges, the index falls, signaling caution. The Sensex is calculated based on the market capitalization of these companies, which means it represents their total value in the stock market. Investors use the Sensex as a key indicator to understand how the market is doing and where it is headed.
2. Nifty (Nifty 50)
The Nifty is the flagship index of the National Stock Exchange (NSE) and tracks the performance of the top 50 companies listed on the exchange. These companies represent various sectors, such as banking, technology, and energy, providing a broader view of the Indian economy. When the Nifty rises, it indicates that these top companies are performing well, while a drop suggests they may be facing challenges. Like the Sensex, the Nifty is also based on the market capitalization of these companies. Investors look to the Nifty as a guide to understand market trends and to make informed investment decisions. It serves as a barometer of the overall health of the stock market.
Broker
A broker is an individual or company that helps people or businesses buy and sell financial assets like stocks and bonds, acting as a middleman between buyers and sellers in the stock market. Since most individuals cannot directly trade on exchanges like the BSE or NSE, brokers execute trades on their behalf. They provide access to the stock market through platforms, including online trading, and charge a fee or commission for their services. Brokers may also offer additional services like investment advice and research.
In India there are mainly two types of brokers: Full Service Brokers and Discount Brokers.
1. Full Service Broker (Traditional Broker)
A full-service broker offers a wide range of services beyond just executing trades, including personalized investment advice, financial planning, portfolio management, and market research. They provide clients with dedicated advisors to help meet financial goals, making them ideal for those who want more guidance. Due to the extensive services offered, full-service brokers charge higher fees compared to discount brokers. For example, ICICI Direct, HDFC Securities, etc.
2. Discount Broker
A discount broker provides basic trading services at a lower cost compared to full-service brokers. They mainly focus on offering a platform for buying and selling stocks and other financial assets with minimal additional services. Discount brokers typically do not provide personalized investment advice or in-depth financial planning, making them a cost-effective option for investors who prefer to manage their own trades and investments. Their fees or commissions are generally much lower, making them ideal for those who want to save on costs while having direct access to online trading platforms. For example, Zerodha, Upstox, etc.
Demat and Trading Accounts
A Demat account is an account that holds your shares and securities in digital form, making it easier to buy, sell, and store them safely. Instead of keeping physical share certificates, a Demat account electronically stores your investments like stocks, bonds, and mutual funds.
A trading account is used to place orders to buy or sell shares in the stock market. It acts as a link between your bank account and Demat account. When you buy shares, money is transferred from your bank account, and the shares are stored in your Demat account. Similarly, when you sell shares, they are taken from your Demat account, and the money is credited to your bank account.
IPO
An IPO (Initial Public Offering) is when a company sells its shares to the public for the first time. This means the company is going “public,” allowing regular people to buy a part of the company by purchasing its shares. Before an IPO, the company is privately owned, but after the IPO, it gets listed on a stock exchange, where investors can buy and sell its shares. Companies usually launch an IPO to raise money for growth, expansion, or paying off debts.
Face Value and Trade Value
Face Value refers to the original value of a share or bond as stated on the certificate or in official documents. For stocks, it’s the nominal value assigned to each share when the company issues it. For example, if a company sets the face value of its shares at ₹10, every share is initially valued at ₹10. This value is used for accounting purposes and doesn’t change with market fluctuations.
Trade Value is the current price at which a share or bond is bought or sold on the stock market. Unlike face value, which remains constant, trade value varies based on supply and demand, company performance, and market conditions. For example, if a stock has a face value of ₹10 but is trading at ₹50 on the market, the trade value reflects the current market price of the stock.
Shareholders
Shareholders are individuals, companies, or institutions that own at least one share of a company’s stock, making them partial owners. Their ownership is proportional to the number of shares they hold in relation to the total shares of the company. Shareholders typically have voting rights in important company decisions, like electing the board of directors or approving major business actions, which usually take place at annual general meetings (AGMs). They also have limited liability, meaning they are not responsible for the company’s debts or losses; their risk is limited to the amount they invested in purchasing the shares.
Promoters
Promoters are the people or groups who start and run a company. They are usually the ones who had the idea for the business and invested the initial money to get it started. Promoters hold a large share of the company’s stocks, which gives them control over how the company is managed. They play a key role in making decisions and shaping the company’s future.
Foreign Institutional Investors (FIIs)
Foreign Institutional Investors are big financial organizations, like banks, insurance companies, or hedge funds, from outside a country, that invest in that country’s financial markets. For example, if a US-based investment firm buys stocks in Indian companies, that firm is considered a Foreign Institutional Investor in India. FIIs often bring large amounts of money into a country’s stock market, which can influence market prices.
Domestic Institutional Investors (DIIs)
Domestic Institutional Investors are large financial institutions that are based within the country and invest in its financial markets. These include mutual funds, pension funds, and insurance companies. Unlike FIIs, DIIs are from the same country where they invest. Their role is significant in stabilizing the stock market since they tend to have a long-term perspective and invest heavily in local businesses.
Retail Investors
Retail investors are individual people like you or me who buy and sell small amounts of stocks, bonds, or other securities. They are everyday investors who use their own money (not on behalf of a company or institution) to invest in financial markets. Retail investors usually have smaller amounts of capital compared to institutional investors but play an important role in the overall market.
Capital Gain
Capital gain is the profit you make when you sell an asset, such as stocks or property, for more than what you originally paid for it. For example, if you buy a stock for ₹1,000 and later sell it for ₹1,500, the ₹500 difference is your capital gain. It’s the extra money you earn from the increase in value of your investment.
There are two types of Capital Gain:
- Short Term Capital Gain: Short-term capital gain is the profit made from the sale of an asset (like stocks or bonds) that was held for less than a year. This means you bought the asset and sold it within a year, and any profit you made is considered short-term capital gain.
- Long Term Capital Gain: Long-term capital gain is the profit made from the sale of an asset (like stocks or bonds) that was held for more than a year. This means you bought the asset and held it for over a year before selling it, and any profit you made is considered long-term capital gain.
Dividend
In the share market, a dividend is a portion of a company’s profits that is paid out to its shareholders. For example, if you own shares in a company and they declare a dividend of ₹5 per share, you receive ₹5 for each share you own. Dividends are usually paid in cash, but they can also be given as additional shares of stock. It’s a way for companies to share their profits with their investors.
Conclusion
Getting a grasp of basic share market terminology is essential for anyone new to investing. Knowing terms like stocks, IPOs, and dividends helps you build a strong foundation for understanding how the market works. With this knowledge, you’ll be better equipped to make informed decisions and gradually expand your investment skills. In the next part, we’ll explore more key terms and concepts to further guide you on your journey to becoming a confident investor.