Stock Market Glossary

Stock Market Terms

Stock Market Glossary and its concept is the backbone of financial supremacy. Stock Market Terminology helps a person to know and understand the basic concept of the stock market. In Stock Market, large sums of money can be lost due to confusion caused by the use of imprecise language. That’s why it’s important to use appropriate terminology. The proper use of the following expressions removes ambiguity because they describe trading activity in precise terms. Trading terminology
can be confusing at times and often seems unnecessarily complicated. However, there are a few expressions that are critical to your understanding of both technical analysis and trading in general. Certain terms allow traders to express a concise thought in one or two syllables. Trading errors can be expensive, and often there are tremendous sums of money on the line, so it’s
important that every party involved in the trade understands exactly what is taking place. First, we will briefly discuss these terms one by one.               

Adhoc Margin

Margin collected by the Stock Exchange from the members having unduly large outstanding position or the margin levied on volatile scripts based on adhoc basis keeping in view the risk perspective.

American Depository Receipts (ADR) (U.S.)

A certificate issued in the United States in lieu of a foreign security. The original securities are lodged in Bank/Custodian abroad, and the American Depository Receipts (ADRs) are traded in the US for all intents and purposes as if they were a domestic stock. An ADR dividend is paid in US dollars, so it provides a way for American investors to buy foreign securities without having to go abroad, and without having to switch in and out of foreign currencies.

American Option

A put or call that can be exercised at any time prior to expiration. Most listed stock options, including those on European exchanges are US style options. Important exceptions are certain low strike price options and options on shares with restricted transferability. Most listed options on other instruments are also US-style options, but a number of European style options have been introduced in recent years, particularly on stock indices and currencies.

Arbitration

An alternative dispute resolution mechanism provided by a stock exchange for resolving disputes between the trading members and their clients in respect of trades done on the exchange.

Asian option

An option whose pay-off depends on the average value of an underlier over a specified period.

At-The-Money Option

Term used to describe an option or a warrant with an exercise price equal to the current market price of the underlying asset

Auction

When a seller is not in a position to deliver the securities he has sold, the buyer sends in his applications for buying-in, so that the securities can be bought from the market and delivered to him. This process by which the securities are procured on behalf of the defaulter is known as Auction.

Average Annual Growth Rate– AAGR

The average increase in the value of a portfolio over the period of a year .

Averaging

The process of gradually buying more and more securities in a declining market (or selling in a rising market) in order to level out the purchase (or sale) price.

Balance Sheet

An accounting statement of a company’s assets and liabilities, provided for the benefit of shareholders and regulators. It gives a snapshot, at a specific point of time, of the assets that the company holds and how the assets have been financed.

Basis Point

One hundredth of a percentage point. Basis points are used in currency and bond markets where the size of trades mean that large amounts of money can change hands on small price movements . Thus if the yield on a Treasury bill rose from 5.25% to 5.33% the change would have been eight basis points.

Bear

A pessimist market operator who expects the market price of shares to decline. The term also refers to the one who has sold shares which he does not possess, in the hope of buying them back at a lower price, when the market price of the shares come down in the near future.

Bear Hug

A variety of takeover strategy that seeks to hurry target company managements to recommend acceptance of a tender offer in a short period of time.

Bear Market

A weak or falling market characterized by the dominance of sellers.

Bear Trap

A false signal indicating that the rising trend of a stock or index has reversed when in fact it has not. This can occur during a bear market reversal when short sellers believe the markets will sink back to its declining ways. If the market continues to rise, the shorters get trapped and are forced to cover their position at higher prices.

Bid

An offer of a price to buy as in an auction. Business on the Stock Exchange is done through bids. Bid also refers to the price one is willing to pay for a security.

Bid Spread

The difference between the stated and /or displayed price at which a market maker is willing to sell a security and the price at which he is willing to buy it.

Bid – Ask spread

The difference between the bid price and the ask price.

Bonus Shares

Shares issued by companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.

Book Value

The net amount shown in the books or in the accounts for any asset, liability or owners’ equity item. In the case of a fixed asset, it is equal to the cost or revalued amount of the asset less accumulated depreciation. Also called carrying value. The book value of a firm is its total net assets, i.e. the excess of total assets over total liabilities.

Break Even Point

The stock price (or price) at which a particular strategy of transaction neither makes nor loses money. In options, the result is at the
expiration date in the strategy. A dynamic break-even point changes as time passes.

Bull

A market player who believes prices will rise and would, therefore, purchase a financial instrument with a view to selling it at a higher price. Opposite of a bear.

Bull Market

A rising market with abundance of buyers and relatively few sellers.

Butterfly spread

An option strategy involving the simultaneous sale of an at the money straddle and purchase of an out of the money strangle. Potential gains will be seen if the underlying remains stable while the risk is limited should the underlying move dramatically. It’s also the simultaneous buying and selling of call options at different exercise prices or at different expiry dates.

Buy back

The repurchase by a company of its own stock or bonds.

Call Money

The unpaid installment of the share capital of a company, which a shareholder is called upon to pay.

Call option

An agreement that gives an investor the right, but not the obligation, to buy an instrument at a known price by a specified date. For this privilege, the investor pays a premium, usually a fraction of the price of the underlying security.

Close-ended Fund

A type of investment company that has a fixed number of shares which are publicly traded. The price of a closed end share fluctuates based on investor supply and demand. Closed ended funds are not required to redeem shares and have managed portfolios.

Closing Price

The rate at which the last transaction in a security is struck before the close of the trading hours.

Contract Note

A note issued by a broker to his constituent setting out the number of securities bought or sold in the market along with the rate, time and date of contract.

Debentures

Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on a particular date on redemption of the debentures.

Delivery Order

An output given to each member of the Stock Exchange at the end of a settlement period containing particulars such as number of shares, value of shares, names of the receiving members etc. to enable him to deliver such shares in time.

Delivery Price

The price fixed by the Stock Exchange at which deliveries on futures are invoiced. Also the price at which the future contract is settled when deliveries are made.

Depository

A system of organisation, which keeps records of securities, deposited by its depositors. The records may be physical or simply electronic records.

Dividend

Payment made to shareholders, usually once or twice a year out of a company’s profit after tax. Dividend payments do not distribute the entire net profit of a company, a part or substantial part of which is held back as reserves for the company’s expansion. Dividend is declared on the face value or par value of a share, and not on its market price.

Ex-Dividend Date

The date on or after which the buyer of a security is not entitled to the dividend already declared.

Ex-Right Date

The date on which the official quotation for a share is marked XR i.e. ex rights, in the daily official list.

Extrinsic Value

The amount by which the market price of an option exceeds the amount that could be realized if the option were exercised and the underlying commodity liquidated. Also known as time value.

Face Value

The value that appears on the face of the scrip, same as nominal or par value of share/debentures.

Hedge

An asset, liability or financial commitment that protects against adverse changes in the value of or cash flows from another investment or liability. An unhedged investment or liability is called an “exposure”. A perfectly matched hedge will gain in value what the underlying exposure loses or lose what the underlying exposure gains.

Implied Volatility

The value of the price or rate volatility variable that would equate current option price and fair value. Alternatively, the value of the volatility variable that buyers and sellers appear to accept when the market price of an option is determined. Implied volatility is calculated by using the market price of an option as the fair value in an option model and calculating (by iteration) the volatility level consistent with that option price.

Please read this also Hilega Milega indicator

Index Fund

A mutual fund which invests in a portfolio of shares that matches identically the constituents of a well known stock market index. Hence changes in the value of the fund mirror changes in the index itself.

Initial Public Offering (IPO)

The first public issue by a public limited company.

In-The-Money

A call option is said be in the money when  it has a strike price below the current price of the underlying commodity or security on which the option has been written. Likewise when a put option has a strike price above the current price it is said to be in-the-money.

Interim Dividend

A dividend payment made during the course of a company’s financial year. Interim dividend, unlike the final dividend, does not have to be agreed in a general meeting.

LIBOR – London Interbank Offer Rate

Often used as a basis for pricing Euro loans. LIBOR represents the interest rate at which first class banks in London are prepared to offer dollar deposits to other first class banks. There are a number of similar rates like HIBOR (Hong Kong Interbank Offer Rate); SIBOR (Singapore Interbank Offer Rate); TIBOR (Toronto Interbank Offer Rate).

Listing

Formal admission of a security into a public trading system.

Long Position

When a trader expresses an intention to go long, he or she is placing a trade that will only become profitable if the price increases. The trader wants the price to rise; if it falls, the trader loses.

Margin

An advance payment of a portion of the value of a stock transaction. The amount of credit a broker or lender extends to a customer for stock purchase.

Moving Average

The average of security or commodity prices over a period of few days or up to several years showing the trends up to the last interval. Each time the average is taken , the oldest price is dropped and the latest price is added. Thus the average is moving one.

Naked Option

An option that is written without corresponding security or option position as protection in seller’s account.

Offer Price

Price at which units in trust can be bought. It often includes an entry fee. It also refers to the price at which securities are offered to the public.

Open interest

The number of contracts outstanding for a given option or futures contract.

Open Order

An order to buy and sell a security that remains in effect until it is either cancelled by the customer or executed.

Option

The contractual right, but not obligation, to buy (call option) or sell (put option) a specified amount of underlying security at a fixed price (strike price) before or at a designated future date (expiration date). The option writer is the party that sells the option. As per the Securities Contract Regulation Act (SCRA), “option in securities” means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities.

Option Seller

Also called the option writer, the party who grants a right to trade a security at a given price in the future.

Position

If a trader invests in XYZ in anticipation of making a profit, that trader has established a ‘‘position’’ in XYZ. A position can be long or short, and may involve any trading instrument-stocks, bonds, currencies, options, and so on.

Pay In/Pay Out

The days on which the members of a Stock Exchange pay or receive the amounts due to them are called pay in or pay out days respectively.

Put Option

An option that gives the right to sell a fixed number of securities at a specified price (the strike price) within a specified period of time.

Record Date

A date on which the records of a company are closed for the purpose of determining the stockholders to whom dividends, proxies rights etc., are to be sent.

Rights Issue/ Rights Shares

The issue of new securities to existing shareholders in a fixed ratio to those already held.

Short position

When a trader expresses an intention to sell short, he or she is placing a trade that will only become profitable if the price declines. The trader wants the price to fall; if it rises, the trader loses.

Split

Sub-division of a share of large denomination into shares of smaller denominations. Also means subdivision of holdings.

Stop Loss Order (or) Stop Order

An order to sell a security when it declines to a specified price.

Strike Price

The price, in contracts for put options and call options, at which the option can be exercised. Sometimes called the exercise price or basis price.

Trend

A ‘‘trend’’ is a directional bias in price movement. Trends are important because they give traders an edge; if the price is moving persistently higher or lower, traders will attempt to exploit this movement by taking trades that favor the direction of the trend. The concept of trend trading is used as the basis of many  popular trading strategies. In technical analysis, an ‘‘uptrend’’ is represented by a series of higher low prices and higher high prices. Conversely, a ‘‘downtrend’’ can be accurately described as a series of lower high prices and lower low prices. Trends can remain in effect for months or years. Almost all trends end eventually, but attempting to guess when a trend will terminate can lead to hazardous trades and disappointing results.

Time Horizon

This refers to the length of time that the trader plans to remain in the trade. A ‘‘day trader,’’ someone who enters and exits a trading position on the same day, has a very short time horizon, while a mutual fund might have a time horizon that is measured in years.

Time Frame

This term refers to the length of time measured by each point, bar, or candle on a chart. Commonly used time frames include the weekly, daily, 240-minute, 60-minute, 30-minute, 15-minute, 5-minute, and 1-minute charts.

Underlying

The designated financial instrument which must be delivered in completion of an option or futures contract.

Volatility

Volatility equates to the variability of returns from an investment. It is an acceptable substitute for risk; the greater the volatility, the greater is the risk that an investment will not turn out as hoped because its market price happens to be on the downswing of a bounce at the time that it needs to be cashed in. The problem is that future volatility is hard to predict and measures of past volatility can, themselves, be variable, depending on how frequently returns are measured (weekly or monthly, for example) and for how long. Therefore, putting expectations of future volatility into predictive models is of limited use, but resorting to using past levels of volatility is equally limited.

Voting Rights

The entitlement of a shareholder to exercise vote in the general meeting of a company.

X Dividend

A term meaning ‘without dividend’. A stock bought on or after the X- dividend day will not pay the purchaser the dividend already declared.

      I hope you have gained some knowledge about the terminology used in stock market. We will provide some more terms and its explanation in our subsequent posts. For any suggestions of comments most welcome.