Ever felt lost in the sea of stock market terms like “equity” or “market cap”? You’re not alone! The stock market can feel like a whole new language, especially if you’re just starting out. But here’s the good news: once you understand the basics, it’s not so scary. In this post, we are going through 40 important terms in simple, everyday language. You’ll learn exactly what they mean, why they matter, and how they can help you become a smarter investor. Let’s begin!
1. Stock
• Explanation: A stock represents ownership in a company and constitutes a claim on part of the company’s assets and earnings. There are two main types of stock: common stock and preferred stock.
• Example: If you buy 10 shares of Reliance Industries, you own a small part of the company. The price of each share fluctuates based on the company’s performance and market conditions.
• Calculation: If the stock price of Reliance Industries is ₹2,500 per share and you buy 10 shares, the total cost of your investment will be:
Total Investment = 10 × 2,500 = ₹25,000
2. Share
• Explanation: A share is a single unit of ownership in a company or financial asset. When you buy shares, you own a small portion of the company.
• Example: If Tata Motors has 1 million shares, and you buy 100 shares at ₹500 each, you own a part of the company.
• Calculation: If the share price of Tata Motors is ₹500 and you buy 100 shares, the total cost of your investment will be:
Total Investment = 100 × 500 = ₹50,000
3. Stock Market
• Explanation: The stock market is a place where securities like stocks, bonds, and derivatives are bought and sold. It includes platforms like the NSE (National Stock Exchange) and BSE (Bombay Stock Exchange).
• Example: You can buy shares of companies like HDFC Bank or Infosys on the NSE.
4. Securities
• Explanation: Securities are tradable financial assets like stocks, bonds, or options that investors can buy and sell.
• Example: If you buy 100 shares of ICICI Bank or a ₹10,000 government bond, both are types of securities.
5. Equity
• Explanation: Equity refers to the value of ownership in an asset, such as stock in a company. It is calculated as the total value of shares owned.
• Example: If you own 1,000 shares of Wipro at ₹400 per share, your equity in Wipro is ₹40,000.
• Calculation: If the price of Wipro stock is ₹400 and you own 1,000 shares, your equity would be:
Equity = 1,000 × 400 = ₹4,00,000
6. Bond
• Explanation: A bond is a debt instrument where you lend money to an organization or government in exchange for regular interest payments and the return of the principal at maturity.
• Example: If you buy a ₹10,000 government bond with a 5% interest rate, you’ll earn ₹500 annually.
• Calculation: If the bond’s interest rate is 5% on ₹10,000, your annual interest would be:
Interest = 10,000 × 0.05 = ₹500
7. Debenture
• Explanation: A debenture is a type of bond that is not backed by physical assets but by the creditworthiness of the issuer.
• Example: If a company like L&T issues a ₹5,000 debenture, you’ll receive interest payments based on the company’s ability to repay.
• Calculation: If the debenture pays a 7% interest annually, for an investment of ₹5,000, your annual interest would be:
Interest = 5,000 × 0.07 = ₹350
8. Publicly Traded Company
• Explanation: A publicly traded company is one whose shares are listed and traded on a stock exchange, available for purchase by the public.
• Example: Companies like Infosys, HDFC Bank, and Tata Consultancy Services (TCS) are publicly traded on the NSE and BSE.
9. Private Company
• Explanation: A private company is one whose shares are not listed on a stock exchange and are owned by a small group of investors.
• Example: Big Basket and Ola are private companies in India.
10. Over-the-Counter (OTC)
• Explanation: OTC refers to securities traded directly between buyers and sellers without being listed on a formal exchange.
• Example: Smaller companies or less liquid stocks may be traded OTC rather than on exchanges like the NSE or BSE.
11. Stock Exchange
• Explanation: A stock exchange is a platform where stocks and other securities are bought and sold. Examples in India include the NSE and BSE.
• Example: When you buy shares of Reliance Industries, you’re purchasing them on the BSE or NSE.
12. Market Capitalization (Market Cap)
• Explanation: Market cap is the total value of a company’s outstanding shares, calculated by multiplying the stock price by the number of shares.
• Example: If Infosys has 1 billion shares and the stock price is ₹1,500, its market capitalization is:
Market Cap = 1,000,000,000 × 1,500 = ₹1,50,000 crore
13. Float
• Explanation: Float refers to the number of shares available for public trading in the market.
• Example: If a company has 10 million shares and only 6 million are available for trading, the float is 6 million shares.
• Calculation: Float = Total Shares Outstanding – Restricted Shares (held by insiders or employees).
14. Outstanding Shares
• Explanation: Outstanding shares are the total number of shares that a company has issued and are held by shareholders.
• Example: If a company like HDFC has issued 1 million shares, those 1 million shares are the outstanding shares.
• Calculation: If a company issues 1 million shares and 800,000 shares are held by the public, the outstanding shares are 1 million.
15. Initial Public Offering (IPO)
• Explanation: An IPO is when a private company offers its shares to the public for the first time.
• Example: When Zomato went public in 2021, it conducted an IPO, and shares were offered to investors at ₹76 per share.
• Calculation: If you bought 100 shares in an IPO at ₹76 per share, your investment would be:
Total Investment = 100 × 76 = ₹7,600
16. Follow-On Public Offering (FPO)
• Explanation: An FPO is when an already publicly traded company issues more shares to the public to raise additional capital.
• Example: SBI (State Bank of India) might issue more shares through an FPO to raise capital for business expansion.
• Calculation: If SBI issues 1 million new shares at ₹300 each, the total funds raised would be:
Funds Raised = 1,000,000 × 300 = ₹30,00,00,000
17. Secondary Market
• Explanation: The secondary market is where existing shares are traded between investors, after the IPO.
• Example: When you buy shares of Hindustan Unilever from another investor, you are trading in the secondary market.
18. Primary Market
• Explanation: The primary market is where new securities are issued for the first time, like during an IPO.
• Example: When Paytm went public, it issued new shares in the primary market through its IPO.
19. Stockholder
• Explanation: A stockholder is an individual or institution that owns shares in a company.
• Example: If you own 100 shares of Maruti Suzuki, you are a stockholder of the company.
• Calculation: If Maruti Suzuki shares are ₹7,000 each, the total value of your holdings would be:
Value = 100 × 7,000 = ₹7,00,000
20. Institutional Investors
• Explanation: Institutional investors are large organizations, like mutual funds or insurance companies, that invest on behalf of others.
• Example: LIC (Life Insurance Corporation) is an institutional investor in Indian companies like Reliance Industries.
21. Retail Investors
• Explanation: Retail investors are individual investors who buy and sell securities for their personal account, as opposed to institutional investors.
• Example: If you buy 50 shares of Tata Motors at ₹1,000 each, you are a retail investor in the Indian stock market.
• Calculation: If the share price is ₹1,000 and you buy 50 shares, the total cost of your investment will be:
Total Investment = 50 × 1,000 = ₹50,000
22. Ticker Symbol
• Explanation: A ticker symbol is a unique identifier used to represent a stock or security on an exchange.
• Example: The ticker symbol for Infosys on the NSE is INFY, while for Reliance Industries it is RELIANCE.
23. Index
• Explanation: An index is a collection of stocks that represents a particular market or a portion of it. It serves as a benchmark for tracking the performance of that segment.
• Example: The BSE Sensex tracks the top 30 companies listed on the Bombay Stock Exchange.
24. Market Index
• Explanation: A market index is a tool used to measure the performance of a group of stocks that represent a specific segment of the stock market.
• Example: The Nifty 50 is a market index that represents the performance of the top 50 companies listed on the NSE.
• Calculation: The Nifty 50 index is calculated based on the free float market capitalization of the 50 companies included in the index.
25. Benchmark
• Explanation: A benchmark is an indicator or standard against which the performance of an investment, portfolio, or financial product is measured.
• Example: The Nifty 50 index can serve as a benchmark for comparing the performance of an Indian equity mutual fund.
26. Exchange-Traded Funds (ETFs)
• Explanation: ETFs are investment funds that hold a collection of assets such as stocks or bonds and are traded on stock exchanges. They offer a diversified portfolio of securities in a single purchase.
• Example: The Nifty BeES ETF tracks the performance of the Nifty 50 index, and you can buy or sell it on the NSE.
• Calculation: If you buy 100 units of Nifty BeES at ₹100 each, your total investment would be:
Total Investment = 100 × 100 = ₹10,000
27. Market Liquidity
• Explanation: Market liquidity refers to how easily assets, such as stocks or bonds, can be bought or sold in the market without affecting their price.
• Example: Shares of large companies like Infosys or HDFC Bank have high liquidity because they can be bought and sold quickly without significant price changes.
28. Market Depth
• Explanation: Market depth refers to the market’s ability to sustain large buy or sell orders without significant price fluctuations.
• Example: A stock like Reliance Industries has good market depth because it can absorb large buy and sell orders without drastic price changes.
29. Breach Price
• Explanation: The breach price refers to a price level that, when reached or broken, signals a significant change in the stock’s trend. It could indicate a support or resistance level being broken.
• Example: If the Nifty 50 index has a resistance level at 18,000 and it breaks above that, 18,000 becomes the breach price.
30. Stock Split
• Explanation: A stock split occurs when a company increases the number of its outstanding shares by issuing more shares to existing shareholders. The price per share is adjusted accordingly.
• Example: If Reliance Industries announces a 2-for-1 stock split, for every share you own, you’ll receive an additional share, but the price per share will be halved.
• Calculation: If you own 100 shares at ₹2,000 each and a 2-for-1 stock split is declared, you’ll end up with 200 shares priced at ₹1,000 each, but the total value of your holdings remains the same:
Total Value = 200 × 1,000 = ₹2,00,000
31. Reverse Stock Split
• Explanation: A reverse stock split is when a company reduces the number of its outstanding shares, increasing the price per share while keeping the total value of the investment the same.
• Example: If a company like Zee Entertainment announces a 1-for-2 reverse stock split, every two shares you own will be converted into one share.
• Calculation: If you own 200 shares priced at ₹500 each and the company announces a 1-for-2 reverse stock split, you’ll have 100 shares priced at ₹1,000 each, but the total value of your holdings remains:
Total Value = 100 × 1,000 = ₹1,00,000
32. Dividends
• Explanation: Dividends are payments made by a company to its shareholders, usually in the form of cash or additional shares.
• Example: If Infosys declares a dividend of ₹20 per share and you own 50 shares, you would receive ₹1,000 in dividend payments.
• Calculation: Dividend = Number of Shares × Dividend per Share
Dividend = 50 × 20 = ₹1,000
33. Dividend Yield
• Explanation: Dividend yield is the annual dividend income expressed as a percentage of the stock price.
• Example: If a stock pays ₹20 in annual dividends and the stock price is ₹400, the dividend yield would be:
Dividend Yield = (Dividend per Share ÷ Stock Price) × 100
Dividend Yield = (20 ÷ 400) × 100 = 5%
34. Dividend Payout Ratio
• Explanation: The dividend payout ratio is the percentage of a company’s earnings that is paid to shareholders as dividends.
• Example: If a company earns ₹100 crore in profit and pays ₹30 crore in dividends, the dividend payout ratio is:
Dividend Payout Ratio = (Dividend ÷ Earnings) × 100
Dividend Payout Ratio = (30 crore ÷ 100 crore) × 100 = 30%
35. Stock Buyback
• Explanation: A stock buyback occurs when a company buys back its own shares from the market, reducing the number of outstanding shares.
• Example: If Infosys announces a buyback of 1 million shares at ₹1,500 each, it will purchase those shares from shareholders.
• Calculation: If you own 100 shares and the company buys them back at ₹1,500 per share, you would receive:
Total Buyback Amount = 100 × 1,500 = ₹1,50,000
36. Stock Dividend
• Explanation: A stock dividend is a payment made by a company to its shareholders in the form of additional shares rather than cash.
• Example: If you own 100 shares of Hindustan Unilever and the company announces a 10% stock dividend, you will receive 10 additional shares.
• Calculation: If you own 100 shares and a 10% stock dividend is declared, you will receive:
Additional Shares = 100 × 10% = 10 shares
37. Capital Gain
• Explanation: A capital gain is the profit made when selling an asset, such as stocks, for more than its purchase price.
• Example: If you bought 50 shares of Tata Steel at ₹500 each and sold them at ₹600 each, your capital gain would be:
Capital Gain = (Sale Price – Purchase Price) × Number of Shares
Capital Gain = (600 – 500) × 50 = ₹5,000
38. Capital Loss
• Explanation: A capital loss occurs when the sale price of an asset is lower than its purchase price.
• Example: If you bought 100 shares of Maruti Suzuki at ₹7,000 each and sold them at ₹6,500 each, your capital loss would be:
Capital Loss = (Purchase Price – Sale Price) × Number of Shares
Capital Loss = (7,000 – 6,500) × 100 = ₹50,000
39. Growth Stock
• Explanation: Growth stocks are shares of companies that are expected to grow at an above-average rate compared to other companies.
• Example: Companies like Infosys and HDFC Bank are considered growth stocks due to their strong historical growth and future potential.
40. Value Stock
• Explanation: Value stocks are shares of companies that are undervalued compared to their fundamentals, often with lower price-to-earnings (P/E) ratios.
• Example: If you buy shares of a company like State Bank of India (SBI) because it is trading below its intrinsic value, SBI is considered a value stock.
We’ve covered a lot of ground, from the foundational concepts to the more complex terms that shape the world of investing. Now, it’s your turn! What terms do you find most exciting or challenging? Have any of these definitions sparked new ideas or questions about your own investment strategy? Drop your thoughts, opinions, and comments below – I’d love to hear from you! Your feedback will not only help you better understand these concepts but also create a community of like-minded investors learning together. 🌟