Stock Market: Introduction, Basics, and Definitions

Stock Market refers to a place where investors trade Shares of Public limited companies. In India, there is a total of 29 stock exchanges (of which only eight are active today). The two commonly used by the masses are BSE (Bombay Stock Exchange) and NSE (National Stock Exchanges), both headquartered in Mumbai, India.

We will get to know a few terminologies in this article, which are necessary for investors, especially first-time investors, to know and understand.

Stocks and Shares: A company requires capital investment in them for them to function. Stock is a fraction of the capital, representing ownership in the company. Unit of stocks is known as shares.

Price of the Share: It is that price one must pay/receive to buy or sell the shares. The share price is one of the most important factors while investing in any company. The price keeps fluctuating for a company whose shares are traded in high volumes every few seconds. The investors must understand the market’s sentiments the future prospects and then invest.

Bear and Bull Market: This topic has been extensively covered by me in another article. You can read my article here.

All-time Highs/Lows: It refers to the highest/lowest price of the stock traded since the day it was listed on the stock exchange.

52 Week High/Low: It refers to the highest/lowest price of the stock in the last 52 weeks. It basically translates to the price bracket the share has been traded over the previous year(52 weeks)

Upper Circuit/Lower Circuit: This refers to the price bracket set by respective stock exchanges between which a share would be traded during a day. This mechanism is in place so that there are lower fluctuations in the share price and helps keep the investors’ money safe. It also helps to reduce market volatility.

Market Volatility: The swings, or ups and downs, in the price of a stock are referred to as volatility. Highly volatile equities experience significant ups and downs during trading sessions, whilst less volatile stocks experience lower degrees and/or less frequent variations.

Call and Put Option: A call option is an agreement between a buyer and a seller to buy a particular stock at a specific price until a specified expiration date. A call buyer has the option (but not the responsibility) to exercise the call and acquire the stocks of a certain company. The seller of a call, on the other hand, has the obligation, not the right, to deliver the stock if the buyer assigns it. When a stock market trader predicts the underlying asset’s price to rise within a particular time frame, this option is usually chosen.

Moving Average: This refers to the average price of a share, taken with respect to a specific period of time, For example, 50 days moving average/ 200 days moving average.

PE Ratio (Price to earnings ratio): This ratio is acquired by dividing the price of the share and by EPS (Earning per Share). The price-to-earnings ratio (P/E ratio) reflects how much the market is now ready to pay for a stock based on its previous or prospective earnings. A higher PE ratio indicates that a stock’s price is high compared to its earnings and may be overpriced. A lower PE, on the other hand, may imply that the current stock price is cheap in comparison to earnings.

EPS: The net profit of a company(amount available for distribution to the shareholders) is divided by the number of shares is called earnings per share (EPS).

Trading Session: This is the time during which the stock exchanges are open to the investors to trade shares. In India, the current stock market timings are from 9:15 AM to 3:30 PM, Monday to Friday.