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Friday, January 27, 2012

Stock market Investments basic Terminologies

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Stock Market investing or dealing with Stock markets/capital market is very vast field and is even offered as 2 year MBA course. One has to understand atleast know how of various terminologies used by professionals providing stock tips on business channels. Stock Market investing needs thorough know-how about the stock you want to invest into. We all know that stock market investing has been mastered by legendary investor Warren Buffett ( you can learn Warren Buffett way of investing through this post Warren Buffett way of investing.

While following stock markets you can come across numerous terms which one should definitely know. So in this post I would list some of the terms and their meaning which you come across often while watching business channels or which are not used much often. It is a long post so bring your tea along and increase your stock market vocabulary.

PS - If I have left any terminology in my list feel free to leave a comment and I will definitely add it with a thanks, For directly finding the term I would suggest use CTRL+F and then search the term in this post. Stock market terminology is entered in alphabetical order.

Following are daily usable stock market investing terminologies you might come across:

Arbitrage: Business of buying in one stock exchange and selling in another to take advantage of price differences and making some profit out of it. Basically it is exploiting pricing mechanism between two stock exchanges.

Merger arbitrage involves buying stock in a company that has an impending buyout or merger when its stock sells below the proposed offer price. If and when the deal goes through, the spread between what you paid for the stock and the buyout price becomes your profit, although the risk of the deal not going through can leave you wishing you never tried. Arbiterage is always risk free.

Auction : A mechanism used by the Stock Exchange to fulfill its obligation to the buyer of a security. It is done when the seller is unable to deliver the scrips sold by him. The security in question is offered by a member who has ready possession of the scrips.

Bear : An operator who expects the share price to fall, for example you can check list of top 10 American Stock market bears in this post.

Bearish Market : A weak and falling market where buyers are absent and above said bears are prevelant, It is the same condition which was witnessed in 2008-till date.

Blue Chip Stocks : Shares of financially sound, well established companies with a track record of good growth and regular payment of dividends. For example-Stocks of TCS, INFY fall in this category.

Bonus Shares : Shares allotted to the existing shareholders by capitalising the reserves into additional capital.

Book Closure : A company closes its register of members for updating the records to facilitate payment of dividends or issue of rights of bonus shares. Book closure is the period during which this process is done and deliveries are not effected in the clearing house.

Bourse : An Exchange however in this blogs context it stands for Stock Exchange, Or in simple terms place where shares purchasing and selling takes place under terms and conditions laid by some governing body, for example India's Bombay Stock Exchange.

Bull : An operator who expects the share price to rise and rise and takes position in the market to sell at a later date.

Bullish Market Sentiment: A rising market where buyers are more and sellers are negligible, Stock market always have two seasons "Bullish and Bearish".

Call Option : An option where the buyer gets the right to buy the underlying security at a specified future date.

Carry Forward : Settlement where positions are carried forward from one settlement to another settlement.

Cash Settlement : Payment for transactions done in one settlement on the due date.

Circuit Breaker : Circuits are of two types - circuit for an index and for a stock. So, if an index or the price of a stock increases or declines beyond a specified threshold it is said to have entered into a circuit. The Exchange may relax the limit after a cooling off period of about half an hour. Current limit is 20 percent for full day closure and 15 percent for max 2 hours and 10 percent for max 1 hour of stock market hours.

Clearing House : It is a legal counter party to both legs of every trade. The netted purchase and sale positions of the trading Members are settled through the Clearing House.

Company Objection : In some cases, the companies send back the certificates received for transfer citing reasons for their inability to do so. The letter sent by the Company is known as Company Objection.

Cum Dividend : A shares is described as cum dividend when the purchaser is entitled for current dividend.

Cum Rights : A share is described as cum rights when the purchaser is entitled for current rights

Day Order : The quantity that remains untraded is not cancelled until the end of the day.

Dealer : A Dealer is a user who works on behalf of the Trading Member

Delivery Based Trading : When a share is bought or sold for the purpose of receiving or effecting deliveries.

Dematerialisation : Process of converting a security from physical form to electronic form

Derivatives : A financial contract between two or more parties and it is derived from the future value of an underlying asset.

Disclosed Quantity : An order entered in the system wherein only a fraction of the order quantity is disclosed to the market.

Dividend : Cash payment made to the shareholders out of the profits of the company.

Ex Bonus : A share is described as Ex Bonus when the buyer is not entitled for the Bonus. The seller remains the beneficiary.

Ex Dividend : A share is described as Ex Dividend when the buyer is not entitled for the Dividend. The seller remains the beneficiary.

Ex Rights : A share is described as Ex Rights when the buyer is not entitled for the Rights. The seller remains the beneficiary.

Expiry Date : The date and time after which a writer of an option cannot exercise his rights.

Exposure Limit : The limit allowed to the Broker by the Exchange or to the customer by broker. It is the total value upto which one is allowed to hold open positions at any point of time.

Futures Contract : An agreement between parties for a specified asset for performance on a fixed date in future.

Hedging : It is protecting an existing asset position from an adverse future position. A hedger takes an equal and opposite position in the futures market to the one he holds in the equity market.

Insider Trading : Trading carried out by people who have access to non public price sensitive information. It is very dangerous howevr and actually according to me is unethical.

Limit Order : A buy or sell order where price is specified at the time of order entry

Margin : An upfront payment made by the customer to take position in the market. His exposure limit is fixed based on the margin money brought in by him.

Mark To Market : A notional profit or loss of a long or short position as compared to the current market price.

Market Order : An order where no price specification is mentioned at the time of placement

NSCCL : National Securities Clearing Corporation Limited. The Clearing Corporation of the National Stock Exchange.

NSE : One of Indian Bourse "National Stock Exchange", Read more about National Stock Exchange

Stock Offer Price : The price at which a company offers its shares to the public through issue of a prospectus

Order Cancellation : A facility available in the trading system where one is allowed to cancel the order placed earlier.

Order Modification : A facility available in the trading system where one is allowed to modify an earlier order.

Pay In : The designated day on which the members pay securities and funds to the clearing house

Pay Out : The designated day on which the Clearing House effects payment and deliveries to the members

Price Band : It sets up the upper and lower limits for a share's movement on any given day. It is based on the previous trading day's closing price. The system will not accept the orders that are out of bound.

Price Rigging : A process where persons collude to artificially increase or decrease the price of a security

Put Option : An option where the buyer gets the right to sell the underlying security at a specified future date.

Quote : Prices at which a share can be bought or sold from the Stock market.

Record Date : The date on which the beneficial owner of the Corporate Benefits is determined.

Rematerialisation : Process of converting the shares from electronic form to physical form

Rights Issue : Issue of new share to the existing shareholders at a price which is normally lower than the current market price of the old shares. It is issued in a fixed ratio to the those shares which are already held.

SEBI : The Securities Exchange Board of India, the regulatory body controlling the functioning of Stock Exchanges in India.

Stop Loss Order : An order placed with a 'trigger price'. It is placed to minimise the losses and the order can be either for a purchase or a sale.

Total Volumes: The total number of shares that are transacted in a scrip. It helps in analyzing and understanding the reasons behind price

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