In the previous blog, we covered a variety of essential terms that every stock market beginner should know to build a strong foundation in investing. These terms provided a basic understanding of how the stock market works and what to expect when starting out. In this blog, we will dive deeper and explore several other important terms that are crucial for expanding your knowledge and helping you make more informed investment decisions.
Depository
A depository in the Indian stock market is like a digital bank for your stocks. Just like you keep money in a bank, you keep your stocks, bonds, and other investments in a depository. When you buy shares of a company, they don’t come to you in paper form. Instead, they are kept in electronic form in your demat account with a depository. There are two main depositories in India: NSDL (National Securities Depository Limited) and CDSL (Central Depository Services Limited).
These depositories make investing easier by ensuring your shares are safe, easy to track, and can be transferred quickly when you sell or buy more. It’s a hassle-free way of holding your investments securely! In short, think of a depository as your investment vault where your stocks are kept safe and ready for you to use anytime.
SEBI
The Securities and Exchange Board of India (SEBI) is a regulatory body set up by the Indian government in 1992 to protect investors and oversee the securities market. SEBI regulates stock exchanges, mutual funds, investment advisers, and other financial intermediaries to ensure fair and transparent market practices. Its main role is to maintain market integrity, promote orderly growth, and take action against any violations, helping boost investor confidence and the smooth functioning of India’s financial markets.
Delivery
Delivery trading in the Indian stock market is a simple way to invest by buying shares and holding them in your Demat account for more than one day, unlike intraday trading where buying and selling happen within the same day. In delivery trading, you purchase shares from exchanges like NSE or BSE, and those shares are transferred to your Demat account, where you can keep them for as long as you want. For example, if you buy 10 shares of a company today at ₹100 each, these shares will be credited to your Demat account. You can hold them for months or even years, selling them later when the price increases, say to ₹150, thereby making a profit. Delivery trading is ideal for those who want to invest in stocks with a long-term perspective.
Intra Day Trading
Intraday trading, or intra trading, is all about buying and selling stocks within the same day to profit from small price movements. Unlike delivery trading, you don’t hold onto the shares overnight; everything is wrapped up before the market closes. For example, if you buy 100 shares of Reliance Industries in the morning at ₹2,500 per share, and the price rises to ₹2,530 by the afternoon, you can sell them before the market closes, making a quick ₹3,000 profit. However, intraday trading comes with higher risks as stock prices fluctuate constantly throughout the day, requiring close monitoring and a solid strategy. Many beginners are drawn to the idea of fast profits, but it’s essential to understand the risks before diving in.
Derivatives
A derivative in the stock market is like a bet on the future price of an asset (stocks, commodities, currencies). Instead of owning the asset, you’re betting on its future price.
For example, if you think gold prices will rise next month, you can enter a derivative contract to buy gold at today’s price. If prices rise, you profit; if they fall, you lose.
There are two main types of derivatives:
- Futures: A future is a contract where you agree to buy or sell an asset at a fixed price on a specific future date.
- Options: An option gives you the right, but not the obligation, to buy or sell at a predetermined price before a certain date.
Derivatives are used to either hedge risks or speculate on price changes. It’s an exciting but risky way to trade without owning the actual asset.
Quarter Reports
A quarterly report is a financial statement that publicly listed companies in India release every three months, showing their financial health and performance. It includes key details like the Profit and Loss Statement (revenue, expenses, and profits), Balance Sheet (assets, liabilities, and shareholders’ equity), and Cash Flow Statement (how cash is generated and used). Management may also share insights on the company’s performance and future outlook. These reports help investors decide whether to buy, hold, or sell stock, as stock prices often change based on the results. Companies must submit these reports to comply with SEBI regulations. The four quarters in India are Q1 (April-June), Q2 (July-September), Q3 (October-December), and Q4 (January-March).
Order Book
An order book in the Indian stock market is a list showing all the prices people want to buy or sell a stock for on exchanges like NSE or BSE. It helps traders see how much interest there is in a stock. Buyers show how much they’re willing to pay (called bids), and sellers show the price they want (called asks).
For example, if you check Tata Motors, a buyer might offer ₹600 for 50 shares, while a seller wants ₹610 for 100 shares. The difference between the highest bid and lowest ask is the bid-ask spread. A smaller spread means it’s easier to trade.
The order book helps you understand the stock’s demand and supply, making it easier to decide when to buy or sell.
Market Order
A Market Order in the Indian stock market is like saying, “I want to buy or sell this stock right now, at whatever the current price is.” It’s the quickest way to trade because your order gets executed immediately, but you won’t know the exact price until it happens.
Example: Let’s say you want to buy Reliance shares, which are trading at ₹2,500. You place a market order, and the broker buys them for you at the best available price at that moment—maybe ₹2,500 or slightly higher or lower.
It’s like walking into a store and saying, “I’ll take this item at whatever the price is right now!” Simple and fast!
Limit Order
A limit order in the Indian stock market lets you set a specific price to buy or sell a stock. The trade only happens if the stock reaches that price, giving you more control.
For example, if you want to buy TCS shares at ₹3,400 (below the current ₹3,450), you can place a limit order, and it will go through if the price drops. Similarly, you can sell shares at a higher price, like ₹3,500, by setting a limit order and waiting for the price to rise. This way, you don’t need to constantly watch the market and can secure your desired price.
Volume
Volume in the stock market shows how many shares are traded (bought or sold) in a day. It helps you understand how active or popular a stock is. A high volume means many people are trading the stock, while a low volume means fewer people are interested in buying or selling it.
Example: If HDFC Bank has a daily volume of 5 lakh shares, it means 5 lakh shares were traded that day. High volume usually indicates strong interest or important news. On the other hand, if a stock has low volume, like only 50,000 shares traded, it means not many people are interested in it, which can make it harder to buy or sell at a good price.
Think of it like a concert—when the crowd is cheering and dancing, the energy is high and exciting. But if there are only a few people and it’s quiet, everything feels slow, and it might take longer for the performers to notice the audience!
EPS
Earnings Per Share (EPS) shows how much profit a company makes for each share of its stock. It’s a key indicator of a company’s financial health and profitability. A higher EPS means more profit for each shareholder. To calculate EPS, you divide the company’s total profit by the number of outstanding shares.
For example, if ABC Ltd. earns ₹1 crore in profit and has 10 lakh shares, the EPS would be ₹10 per share.
If the EPS increases over time, it’s a sign the company is growing and making more money, which is good for investors. Checking the EPS can help you understand a company’s performance and decide if it’s a smart investment.
P/E Ratio
The Price-to-Earnings (P/E) ratio is a way to determine if a stock is priced fairly based on its earnings. It compares a company’s share price to its Earnings Per Share (EPS).
For example, if XYZ Ltd.’s share price is ₹200 and its EPS is ₹20, the P/E ratio is 10, meaning investors are paying ₹10 for every ₹1 the company earns.
A low P/E might indicate the stock is undervalued, while a high P/E could suggest investors expect future growth. Understanding the P/E ratio helps you decide if a stock is worth buying.
Dividend Yield
The dividend yield shows how much a company pays out in dividends each year relative to its stock price. It’s a way to see how much income you could earn from owning a share.
For example, if a company pays a dividend of ₹5 per share and its current stock price is ₹100, the dividend yield would be 5%. This means you earn ₹5 for every ₹100 invested.
A higher dividend yield can be attractive for income-focused investors, as it indicates a better return on investment through dividends.
Volatility
Volatility is like the ups and downs of a roller coaster for stock prices. If a stock’s price jumps up and down a lot, it’s very volatile. For example, if a stock’s price goes from ₹100 to ₹120 one day and then drops to ₹90 the next, it’s changing a lot, which means it’s volatile. High volatility means big price changes, which can lead to big gains or losses quickly.
Portfolio
In the Indian stock market, a portfolio is simply a collection of all the investments you own, like stocks, bonds, or mutual funds. It’s like a basket holding different investments, helping to spread risk. If one investment does poorly, others might do well, balancing things out. Diversifying your portfolio reduces the chance of big losses. Some investments are riskier but can give higher returns, while others are safer with smaller returns. You can manage your portfolio by buying and selling, or just hold onto your investments long-term to grow your wealth.
Conclusion
Understanding these additional stock market terms is crucial for anyone looking to navigate the world of investing with confidence. Whether it’s knowing how a depository works, interpreting quarterly reports, or calculating metrics like EPS and the P/E ratio, each of these concepts plays a vital role in making informed investment decisions. By mastering these key terms, we can not only enhance our understanding of the stock market but also approach our investment strategies with greater clarity and precision. As we continue to build our knowledge, we become better equipped to grow and manage our portfolios effectively, minimizing risks while maximizing opportunities.
Important Note: Individuals who are about to start their stock market journey should keep a few points in mind:
- Never trust Telegram channels, Instagram reels, or any social networking stock tips blindly. Always conduct detailed research before investing in any stock.
- Whether you’re considering long-term or short-term investments, thorough research is essential to making informed decisions.
- The stock market is entirely a game of patience. Therefore, always invest in good-quality stocks and stay invested for the long term. Only then will you earn returns.