Table of Contents:
I. Basics of Stock Market Investing, Trading, Important Terms
Shares, Share Price, Volume, Market Capitalization, Share Market/ Stock Market, NSE, BSE, SEBI, Demat Account, StockBrokers, Mutual Fund, Sensex, Free-Float Market Capitalization, Nifty, Bank Nifty, P/E Ratio, EPS, Candlestick, Intraday Trading, IPO, Buyback, Stock Split, Bull Market, Bear Market, Long, Short, Futures, Options, Call, Put
II. Frequently Asked Questions (FAQs)
What is the difference between Investing and Trading?
How to open a Trading Account?
What is the difference between Share and Stock?
Can we sell Call or Put options in our possession before the Expiry Date?
I. Basics of Stock Market Investing, Trading, Important Terms
Shares – Share is the smallest single unit of a company in financial terms.
Companies issue their shares on the stock market to raise capital.
Share Price – Share Price is the cost of 1 share of the company on the stock market.
For e.g. Opening Share Price of Reliance on 16/10/2020 on NSE was Rs.2215.
Volume – Volume of share denotes the number of shares of the company in the market.
It is generally in crores for a major company.
Market Capitalization – Market Capitalization is the valuation of the company derived from its Share Price and Share Volume.
For e.g. if the current Share Price of a Company is Rs.1000 and Share Volume is 5 Crores (50 Million) then its Market Capitalization = 1000 x 5 Crore = Rs. 5000 Crore.
Share Market/ Stock Market/ Stock Exchange – Share Market/ Stock Market/ Stock Exchange is the place where buying and selling of shares/ stocks take place.
The orders placed through the website or app of the broker are finally directed to the stock exchange where all the record is maintained.
NSE – NSE stands for National Stock Exchange. NSE is India’s largest stock exchange and is located in Mumbai.
BSE – BSE stands for Bombay Stock Exchange. BSE is located at Dalaal Street, Mumbai.
SEBI – The Securities and Exchange Board of India (SEBI) is a statutory body established by the Government of India to regulate Capital Markets in India.
Demat Account – Demat Account is a short term for Dematerialized Account. It is used to ‘Dematerialize’ or convert physical shares into Electronic form. The Demat Account thus facilitates the holding of company shares electronically.
StockBrokers – Stockbroker buys or shares sell on behalf of clients in return for a brokerage.
Modern Stock Brokers provide digital portals on website and app wherein clients can place buy or sell orders. Some of the stockbrokers in India are Sharekhan, Zerodha, Upstox, Angel Broking.
Mutual Fund – Mutual Fund is a professionally managed collection of money from multiple investors which is invested in various stocks, bonds, debts, and other assets.
Investors can invest in Mutual Fund with an initial lump sum amount and then through regular (e.g. monthly) SIP (Systematic Investment Planning) installments.
Some examples of Mutual Funds in India: SBI Mutual Fund, Axis Long Term Equity Fund, Invesco India MidCap Fund.
Sensex – Sensex, a short term for Sensitivity Index, is an index calculated from the stock prices and free-float market capitalization of the top 30 companies under the Bombay Stock Exchange (BSE).
Free-Float Market Capitalization – Free-float market capitalization of a company = (Total no. of shares of the company readily available for trading in the market (excluding Government’s, Promoters’ holdings, etc.)) x (Current stock price of the company)
Nifty – Nifty is a combination of two words National and Fifty. Managed and calculated by India’s National Stock Exchange (NSE Indices Ltd.), Nifty50 is a market index and is considered an indicator of the performance of the 50 constituent companies.
Bank Nifty – Bank Nifty is an index representing the 12 most liquid and large banking stocks which trade on the National Stock Exchange (NSE).
P/E Ratio – P/E (Price-to-Earnings) Ratio is the ratio of the stock price of the company to its earnings per share.
EPS – EPS (Earnings Per Share) is the ratio of the company’s profit and the number of its outstanding shares.
Candlestick – A Candlestick chart of a company/ index for a specific period, say a Day, represents the Open, Close, High, Low of that period.
Red candlestick means its price reduced for that day. Green means it increased.
Intraday Trading – Intraday Trading means stocks/ derivatives(options, futures) are bought and sold on the same day. No actual delivery of stock happens and trades are closed before day end. Some brokers thus provide additional leverage to clients for intraday trading wherein clients can place bigger orders with less amount of capital provided they close it before day end.
IPO – IPO stands for Initial Public Offering. IPO is an official process by which a private company goes public by issuing its stocks in the stock market.
Buyback – Buyback is the purchase of some of the own shares by the company administration from the open market.
Stock Split – Stock split refers to an increase in the volume of shares of a company in the market by reducing the share price accordingly. The market capitalization of the company thus remains the same. E.g. If a company has 5 Crore shares in the market at Rs.1000 price per share then a 1:1 stock split means that volume increases to 10 crore shares and the price is reduced to Rs.500.
Bull Market – Bull Market means the prices of the majority of stocks are increasing. The market is overall an up-trend.
Bear Market – Bear Market means the prices of the majority of stocks are decreasing. The market is in an overall down-trend.
Long – Having a ‘Long’ view for a stock means having a view that its price will increase in the upcoming time.
Short – Having a ‘Short’ view for a stock means having a view that its price will decrease in the upcoming time.
Futures – Futures Contracts are the contracts providing the buyer a legal obligation (i.e. legally bound) to purchase (and the seller a legal obligation to sell) the underlying stock at a set price at a future point in time.
For e.g. One can buy or sell ‘Reliance October Futures’ or ‘Nifty November Futures’ in September.
Options – Option gives traders the right (not mandatory) to either buy or sell an asset at a pre-determined price by specified expiry date.
Options have tradable premium prices and also time-dependent i.e option prices undergo time-decay.
Options are of two types: Call (CE) and Put(PE).
Call – Call options give the right to buyers to buy the asset (stocks, indices) at a pre-determined price.
Buying a Call (CE) option means expecting the price of the underlying stock/index to rise.
Selling a Call (CE) option means expecting the price of the underlying stock/index to fall.
Put – Put options give the right to buyers to sell the asset (stocks, indices) at a pre-determined price.
Buying a Put (PE) option means expecting the price of the underlying stock/index to fall.
Selling a Put (PE) option means expecting the price of the underlying stock/index to rise.
II. Frequently Asked Questions (FAQs)
What is the difference between Investing and Trading?
Investing generally refers to long term engagement of money in the underlying stock.
Trading, unlike Investing, refers to mostly intraday or short-term transactions.
How to open a Trading Account?
A trading account can now be opened completely online with Brokers like Zerodha, Upstox, etc. through e-verification by Aadhar card, PAN Card, and Bank Statement.
What is the difference between Share and Stock?
‘Share’ and ‘Stock’ both terms are generally used in a similar sense to denote the ‘small financial unit of a company’ but differ slightly in purely technical terms. Share mainly refer to a single company whereas Stock can holistically refer to many. Hence the phrases ‘Stock Portfolio’ and ‘Stock Market’ are in common use.
Can we sell Call or Put options in our possession before the Expiry Date?
Yes. In India, Call or Put which one had bought earlier can be sold at the market price at any time before expiry. No need to wait for the expiry date.