Seeing the current economic conditions, where inflation is skyrocketing, your so-called safe-haven debt investments or fixed deposits aren’t providing sufficient returns, and sometimes the returns are even lower than the prevailing rate of inflation, what should one do? Well, I am no financial expert, but I can tell you one thing, there’s a general perception that during these conditions, an investor tends to move towards the equity markets, or some even go for highly volatile bitcoin as a hedge against rising inflation. The equity markets are on a bull run, Nifty and Sensex are at their record high, and many investors have made a great amount of money by investing in equity. And with the advent of online trading platforms, like Upstox and Zerodha, the number of retail investors has been increased drastically. And these retail investors face the greatest risk, just because they tend to invest without even having adequate knowledge about the market. So, in this article, we’d be discussing the important terms in stock market that every investor must know before risking their precious money.
Important terms in stock market
Initial Public Offering (IPO)
Initial Public Offering is an event when the company issues its shares in the market for the first time.
Bear and Bull
In the simplest of terms, a bull is a person who speculates that the prices of shares would go up in the future, so he starts purchasing a select group of shares, or either stops selling the shares for that period of time.
On the other hand, a bear is a person who speculates that the prices of shares would go down and so he either sells the shares he has and earns his profit or he starts short-selling (short-selling is discussed below).
Hence, a bull creates scarcity in the stock market by accumulating shares, leading to the rise in share prices and the index, and creates a bullish market.
On the other hand, a bear increases the number of shares in a stock market by selling the shares, hence, it leads to the fall in share prices and the index, and creating a bearish market.
Well, I guess you’re familiar with the big bull, Harshad Mehta.
In a nutshell, short-selling means selling the shares that one hasn’t actually owned. So, when a person short-sells, he does it by borrowing a specific number of shares from a stockbroker and promises him to replace them at a future date on the speculation that the price of that share would fall by then. He gets profit if the price of that share actually falls by the future date, and faces a loss if the price increases. This is one of the ways through which bears tend to prevent the market from rising, hence creating a bullish market.
Penny stocks are shares that remain low-priced for a relatively long period of time at a stock exchange.
Book Building is a provision that is allowed by SEBI (Securities Exchange Board of India) to all Initial Public Offers in which individual investors are reserved and allotted shares by the issuing company. The issuer has to disclose the price at which the shares have been allotted, the size of the issue, and the number of shares offered to the public.
A price band is nothing but a price range that the issuing company gives and it is left upon the share applicants to quote their prices on it, and the highest bidder getting the shares.
A script share is also called a bonus share as its a share given to the existing shareholders without any charge.
Sweat share is a share given to the employees of the company without any charge.
The depositories are the institutions that hold the securities in an electronic or decentralized form. It began in India in 1996 under which stocks are converted into a paperless form, called dematerialization of shares (Demat). There are currently two depositories in India-
- National Securities Depositories Limited (NSDL)
- Central Depositories Services Limited (CDSL)
Both these depositories are located in Mumbai and are established by the Depositories Act of 1996.
Badla is when the buyers want postponement of the transaction. The Badla trading occurs when the investor buys stocks with borrowed money, with the stock exchange acting as an intermediary, at an interest rate determined by the demand of the particular stock and the maturity period not longer than 70 days. This practice is called Contango in the western world.
Undha Badla is nothing but the reverse of Badla. In Undha Badla, the sellers want the postponement of the transaction. It occurs when the sellers don’t want to give the delivery of shares sold, hence, he pays the charges for carrying over his position into the next settlement. It’s also called ‘reverse badla’ or ‘backwardation.’
Futures is a type of trading in which a future price, agreed upon by the seller and buyer, is quoted for the shares, and the payment and delivery of those shares take place on the pre-determined date. Futures involve an agreement between the buyer and the seller to buy or sell a specific quantity of a particular stock on a future date, at a price that is pre-determined between the buyer and seller.
In a rolling settlement, each trading day is considered as a trading period, and trades executed during the day are settled based on the net obligations for the day. Under the rolling settlement, all commitments of purchase and sale result in payment/delivery at the end of ‘X’ days later.
For example, at National Stock Exchange, trades in the rolling settlement are settled on a T+2 basis i.e. on the 2nd working day. And for arriving at the settlement day all intervening holidays such as bank holidays, NSE holidays, Saturdays, Sundays, etc are excluded.
Spread is the difference between the buying and selling price of a share. Spread is inversely proportional to the liquidity of a share, i.e. higher the liquidity of a share, the lower its spread, and the lower the liquidity of a share, the higher its spread. Spread is also known as ‘margin’ or ‘hair-cut.’
NSCC refers to the National Securities Clearing Corporation. It is a public sector company that takes the counter-party risk of all transactions done at the National Stock Exchange (NSE) as an intermediary to guarantee all trades.
Kerb Dealings refers to the unofficial transactions of stocks, that take place outside the official exchanges. Kerb Dealings occur after the official exchanges have been closed, i.e. after the normal trading hours.
Under demutualisation, the management, ownership and trading are segregated from each other, i.e. no broker could be included in the Board of Directors or an office-bearer in a stock exchange. The process of demutualisation was started by the SEBI in 2002.
SBT refers to Screen-Based Trading in which stocks are traded on an electronic medium such as a computer monitor, mobile phone, etc. This is the type of trading is done by the majority of retail investors and has increased drastically after the advent of online trading platforms such as Upstox and Zerodha. Screen-Based Trading was first introduced by Cantor Fitzgerald in 1972 in New York. SBT was introduced in India in 1989.
Authorised Capital is the limit up to which a company can issue (allocate to the shareholders) shares. In India the amount is fixed in the Memorandum of Association (MoA) and the Article of Association (AoA) as required by the Companies Act.
The paid-up capital of a company is simply the amount of money it has recieved from the shareholder in exchange for shares. This is created when the company sells its shares on the primary market directly to the investors. This is done mainly through an Initial Public Offering (IPO).
Subscribed Capital is the amount that has actually been paid by the shareholders or has been committed by them for contribution.
Issued Capital is the amount that is sought by a company to be raised by issuing shares that cannot exceed the authorised capital of the company.
Employee Stock Ownership Plan (ESOP)
Through the Employee Stock Ownership Plan (ESOP) a foreign company can offer its shares to employees overseas. The ESOP was allowed in India in 2005, and for this, the Multinational Company (MNC) must have at least 51% holding in its Indian Company.
Greenshoe option is also called the over-allotment provision, under which a company issuing shares for the first time is allowed to sell some additional shares to the public, generally 15%. Over-allotment got its name from the first company that was allowed to do so, which is Greenshoe Company, USA.
Well, that’s all on the list of important terms in stock market, let us know in the comment section if we’ve missed other important terms.
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