Share Market Terminology: Part 1

1. Sensex

   Sensex is the short form of Sensitive Index. The Sensex is value-weighted index composed of 30 stocks. The Sensex is regarded as the pulse of the domestic stock markets in India. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. It is also called as BSE 30.

2. Nifty

   Nifty or Nifty 50 is the leading index for large companies on the National Stock Exchange of India. The Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. During 60s and 70s this term was used to denote 50 popular large cap stocks on the New York Stock Exchange.

3. Bull

   Bull means cause or attempt to cause prices to rise (in the stock exchange).

4. BEAR

   Investor who believes a share or the overall security market will go down.

5. Squaring Off

   Square off means to settle the position. If someone square off a trade, it means he have no position at the end of the day – only profit or loss. When you give cash order it means you give order with intention to take delivery. Thus, if you change your mind and want to sell the stock the same day (buy in case of a sell), you have to notify the broker that you are changing your trade from delivery based trade to intraday trade and thus squaring off your position.

6. RALLY

   A rally is a term used to describe a sudden rise in stock prices, especially after a period of falling ones. For example, if the stock market drops in the morning and investors rush in to buy companies at the cheaper prices, the stock market has rallied.

7. Crash

   A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth.

8. Correction

   A correction is a short term price decline of 5% to 20% or so. A correction is a downward movement that is not large enough to be a bear market.

9. Bonus Shares

   The term bonus means an extra dividend paid to shareholders in a joint stock company from surplus profits. When a company has accumulated a large fund out of profits – much beyond its needs, the directors may decide to distribute a part of it amongst the shareholders in the form of bonus. Bonus can be paid either in cash or in the form of shares.

10. Dividend

    Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend.

11. Book Closure Date

    When shares of a joint stock company invariably change hands during market trades, identifying the owner of some shares becomes difficult. So it is difficult to pass on certain benefits (like share bonus issue, splits and dividend payments) to shareholders.

    So, when a joint stock company declares dividends or bonus issues, there has to be a cut-off date for such benefits to be transferred to the shareholders. This date is termed as “Book Closure” date or “Record Date”. It is the date after which the company will not handle any transfer of shares requests until the benefits are transferred. Only shareholders marked in the company’s register at the Book Closure Date or the Record Date would be entitled to receive these benefits. In other words, shareholders that are on the company’s records as on that date are eligible for these benefits.

12. Bonds

    A bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.

13. Splits

    A stock split increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur.

    Ratios of 2-for-1, 3-for-1, and 3-for-2 splits are the most common, but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are used, though less frequently. Investors will sometimes receive cash payments in lieu of fractional shares.

    It is often claimed that stock splits, in and of themselves, lead to higher stock prices; research, however, does not bear this out. What is true is that stock splits are usually initiated after a large run up in share price. Momentum investing would suggest that such a trend would continue regardless of the stock split. In any case, stock splits do increase the liquidity of a stock; there are more buyers and sellers for 10 shares at $10 than 1 share at $100. Some companies have the opposite strategy: by refusing to split the stock and keeping the price high, they reduce trading volume and volatility. Berkshire Hathaway is a notable example of this.

14. Futures

    Investment contracts which specify the quantity and price of a commodity to be purchased or sold at a later date. On contract date, the buyer must take physical possession or make delivery of the commodity, which can only be avoided by closing out the contract(s) before that date. Futures can be used for speculation or hedging.

15. Index Trading

    Index Trading is a fairly new concept based on short term financial trades or wagers. Unlike most other emerging ways to Trade on Share markets, Index Trades are mostly contracts bought for a fixed duration with a fixed return (often up to 97% of the investment).

    Index trades rely on the trader’s ability to predict whether a Share index will effectively rise or fall over a set period.

    If the trader has picked the correct direction and their trade is successful once the time has elapsed then they are generally paid out on the agreed return within minutes. This has added to the recent popularity of Index Trading however it still hinges completely on one’s ability to predict Share index movements and it is common knowledge that such a thing is not easy.

16. Trading on Margin

    Margin buying or margin trading is buying securities with cash borrowed from a broker, using other securities as collateral. This has the effect of magnifying any profit or loss made on the securities. The securities serve as collateral for the loan. The net value, i.e. the difference between the value of the securities and the loan, is initially equal to the amount of one’s own cash used. This difference has to stay above a minimum margin requirement, the purpose of which is to protect the broker against a fall in the value of the securities to the point that the investor can no longer cover the loan.

    Most investors buy the futures, but there are times when margin trading makes more sense. If a stock is not in the futures list, the client can go for margin funding.

    Since futures are generally not available beyond one or two months, if the client has a longer view, then margin trading is better. Also, some brokers offer lower interest rates on margin trading than the prevalent rates in the futures market.

17. Stock

    The capital stock (or just stock) of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business which may fluctuate in quantity and value.

18. Bid

    The bid for securities (such as stocks, futures contracts, options, or currency pairs) is the difference between the prices quoted (either by a single market maker or in a limit order book) for an immediate purchase.

19. Broker

    A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors. A broker may be employed by a brokerage firm.

    A transaction on a stock exchange must be made between two members of the exchange—an ordinary person may not walk into the New York Stock Exchange (for example), and ask to trade stock. Such an exchange must be done through a broker.

20. Dow Jones Industrial Average

    The Dow Jones Industrial Average (DJIA), also referred to as the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. It is now owned by the CME Group, who is the majority owner of Dow Jones Indexes. The average is named after Dow and one of his business associates, statistician Edward Jones. It is an index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. It is the second oldest U.S. market index after the Dow Jones Transportation Average, which was also created by Dow.

    To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a Divisor, the Dow Divisor. The divisor is adjusted in case of stock splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA. Early on, the initial divisor was composed of the original number of component companies; which made the DJIA at first, a simple arithmetic average.

Note

This list is being compiled using definitions provided at various sources. I tried my best to give the best general explanation of all the term. If any term need correction or improvement in its explanation, please use the comment section to do so. I will look through it.

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