20 Stock Market Terms To Know Before Trading

Now that you have learnt about how to combine fundamental and technical analysis in trading, it is time to revise some of the key terms in trading before you enter the field!

Introduction

The global financial landscape is a complex ecosystem, demanding precise communication and a firm grasp of fundamental concepts. For both novice and seasoned investors, navigating this domain necessitates familiarity with its specialised vocabulary. This lexicon serves as the bedrock upon which informed decision-making and effective analysis are built.

The following compilation presents 25 essential terms that unlock the intricacies of trading. From foundational concepts like "bid" and "ask" to more nuanced tools like "margin" and "volatility," this glossary empowers individuals to comprehend financial reports, anticipate market trends, and ultimately, execute strategic trading maneuvers.

• Bull market -

A bull market is a situation in the stock market where the sentiment guiding a majority of the capital is that prices of assets are going to rise. As a result, people start buying more assets, driving up the prices.

• Bear market -

A bear market is a situation where the market sentiment is anticipating a fall in the prices of the assets and hence, investors are largely selling shares, leading to a fall in the price of assets.

• Ask price -

It is the price at which the sellers are willing to sell the assets that they own in the market.

• Bid price -

It is the price that buyers in the stock market are ready to pay.

• Day trading -

Day trading or intraday trading is the act of entering and exiting a position in the same day in the market, i.e. within the trading hours of the day. Assume you buy a stock, thus opening a new position. If you exit that stock before the market closes on the same day, then you have performed an intraday trade.

• Arbitrage -

Arbitrage is the simultaneous purchase and sale of assets in different markets to exploit any differences in their prices in the different markets.

• Spot Price -

This is the price at which an asset is available for sale in the market, in real time. It is also called a market price. An order to sell or buy an asset at the market price is known as a market order.

• Limit Order -

A limit order allows a trader to buy or sell an asset at the entered price or any price that is better than the limit price.

• Stop Loss Order -

A stop loss order allows you to automatically sell an asset when it reaches a certain price in order to set a loss limit.

• Margin -

It is the amount of money that you need to put up in order to enter a particular position. You can choose to borrow this money from your broker if required.

• Margin Trading Facility -

It is a specialised account with your broker, whereby you have the facility of being being able to borrow money from your broker in order to trade assets with that money, gain returns and then pay back the money with interest.

• Stock Pledging -

In order to pay the margins for a trade, you can also use your shares as collateral to unlock additional capital for borrowing. This act of putting up your stocks as collateral to get margins is called stock pledging.

• Volatility -

Volatility measures by how much an asset’s price varies within a period of time. Volatility is useful in order to understand whether a high variation is common for an asset. It helps in setting better expectations as well as set better target prices and stop loss prices.

• Implied Volatility -

Implied volatility or IV is a metric that reflects the market’s expected volatility of a security’s price. Higher IV indicates that the market expects the price to change significantly in the future.

• Momentum Indicators -

Momentum indicators measure how fast a stock is moving and how sustained that movement is likely to be. Popular examples include RSI and Stochastic Oscillator.

• Trend Indicators -

These indicators help in identifying the overall direction of price movement. Imagine a compass pointing north (uptrend) or south (downtrend). Moving Averages and MACD are well-known examples.

• Volatility Indicators -

These indicators measure the level of volatility of a stock price. Bollinger Bands and Average True Range are common examples.

• Volume Indicators -

These indicators help us analyse the amount of trading activity behind a price move. On-Balance Volume and Chaikin Money Flow are popular examples.

• Beta -

The beta value is used to measure a stock's sensitivity to market movements compared to a benchmark (e.g., Nifty 50). Think of it like a correlation coefficient, where 1 means perfectly in sync, more means disproportionately sensitive and less than one means less sensitive.

• Derivatives -

A derivative is a financial instrument that derives its value from an underlying asset like stocks, bonds, commodities, or currencies. It's a contract between two parties who agree to transfer assets for cash at a pre-determined rate on a specified date in the future.

Final Words

This compendium is not intended to be an exhaustive list, but rather a cornerstone for further academic inquiry and practical application. By internalising these core terms, investors are equipped to engage in meaningful dialogues with market professionals, decipher complex financial instruments, and embark on their trading journeys with a greater degree of confidence and precision.

In the next chapter, we will go deeper into the concepts. We shall start with the key issue of understanding the various types of charts that are available to traders and how to interpret them.