Stock Markets and Essential Terms

Stock Markets and Essential Terms

Financial markets are a countries economic barometer. Stock markets enable trading of a company's stock. In India, NSE or National Stock Exchange and BSE or Bombay Stock Exchange are the most important exchanges.
Traditionally stocks are traded through a stock broker. Broker takes a commission for trading stocks. Here we list some of the most important terms you must be familiar with while dealing in shares and the stock market.

Essential Terms:

Index - What is a stock market index? There won't be many who have not at least heard of the SENSEX. SENSEX is an index. SENSEX consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. See the SENSEX through Indiamart

Other examples of indexes are NIFTY of the National Stock Exchange and American DOW Jones. Practically index is an indication for you to immediately gather how the markets are behaving generally. A birds eye view of the overall performance of all shares listed in that exchange. This means that when the SENSEX goes down, the shares that you own are likely to be loosing in value if you have participated in India. If it is up, your shares are likely to be gaining in value.

Note that your portfolio of shares does not have to rise or fall according to the SENSEX or NIFTY. However it is more likely to happen that way.

Bull Market - A bull market is a market that is constantly going up. It is a market where there is optimism of further rise, better business results and other positive factors. Bull markets can sometimes continue for years. For investors this is the preferred market trend. However no bull market can continue for very long.

Bear Market - Bear market is a market that is showing a persistent downtrend. A 15-20 % downward movement of the market is generally termed as a bear market.

Correction - A correction is a short-term reduction in stock market price or activity. This is a term retail investors are scared of but experts call for when market is in a relentless uptrend. Experts call a correction to be good for a healthy market.

Diversification - Diversification is the technique of investing in unrelated business sectors simultaneously so that a risk that affects a particular sector does not affect your overall investment. For example your portfolio of shares includes sectors like Information Technology, Real Estate, Capital goods, Auto etc.

Risks - Risks are those threats that affect stocks markets. There are risks that affect all sectors and those that affect only certain sectors and businesses. Knowledge of risks and understating the possibility of sharp downturns due to those risks are essential to any market participant. Political or economic risks are examples of risks.

DMAT - DMAT or dematerialization is a process in which the physical share certificates in paper are replaced by an equivalent number of securities in electronic form at the request of the investor. In the case of online trading you never handle physical shares. It is always dmated shares that come to you in your online account.

IPO - Initial Public Offering. This is where stocks take birth. Stocks of a company when they enter the financial markets are first sold through the primary market. When the stocks are sold for the first time by a private company is what IPO or initial public offering mean. IPOs are sold to individuals by the company directly.

Secondary Market - This is where the share trading actually happen. In secondary markets one can sell his shares directly to another through the stocks markets. Here you are dealing with another investor who is holding a company's shares directly than the issuing company.

FII or Foreign Institutional Investors. An investor or investment fund that is from or registered in a country outside of the one in which it is currently investing. Foreign institutional investors have made a sizable investment in Indian financial markets. There are currently about 900 FIIs registered in India. Their heavy selling in the Indian market normally cause havoc and their continued investment and buying often takes the market to newer heights.