The Basics Of Stock Market

Lesson -> Some Of The Commonly Used Jargons

This chapter will help you to understand some common terms and concepts related to the market.

  • Bull Market (Bullish).-Bullishness refers to the belief that stock prices will rise. A bull market is when the stock market index goes up over a certain time period.
  • Bear Market (Bearish).-Bearish investors believe stock prices will fall. If the stock market index falls during a specific time period, it's called the bear market.
  • Trend-The market's general direction and associated strength are often called a "trend". If the market is falling fast, then the trend would be considered bearish. If the market trades flat with little movement, the trend is sideways.
  • Stock face-value- The stock's face value (FV), or par value, indicates the share's fixed denomination. It is crucial to know the face value of a corporate action. When dividends or stock splits are announced, they are usually issued keeping the face worth in mind. If Infosys announces a Rs.63/- annual dividend, it would mean that the dividend paid is 1260%s (63 times 5).
  • 52 Week High/Low- The 52 Week High is the highest stock price a stock traded in the past 52 weeks. 52 Week Low is the lowest stock price a stock traded in the 52 weeks. The 52 weeks high and low give an indication of the range in which the stock traded over the course of the year. Many believe that if a stock hits 52 week high, it is indicating a bullish trend in the near future. Some traders also believe that a stock hitting a 52-week low indicates a bearish trend in the near future.
  • All-time high/low: This is the same as the 52-week high and low. The only difference is that the all-time highest price is the highest stock price ever traded since its listing. The all-time lowest price is also the lowest price the stock traded since its listing.
  • Lower Circuit/Upper Circuit - This price range is set by the exchange and allows the stock to be traded on the market during a trading day. The upper circuit limit is the maximum price the stock can trade on a given day. The lower circuit limit is the lowest. Based on the exchange's selection criteria, the stock limit is set at 2%, 5% or 10%. These restrictions are placed by the exchange to limit excessive volatility when a stock reacts negatively to news about the company.
  • Long Position - A long position, or going long, is simply a reference about the direction of your trade. If you intend to or have purchased Biocon shares, then you either plan to or are long on Biocon. You have a long position in Nifty if you bought the Nifty Index expecting that it will trade higher. Bullish is when you have a long position in a stock or index.
  • Short Position -A term that describes a transaction in a specific order. This can be a tricky concept. I will tell you about a recent incident at work that helps me understand the concept of shorting.

You may be a gadget lover like me and know that Xiaomi, a Chinese manufacturer of smartphones, recently entered into an exclusive partnership to sell their flagship smartphone model, the Mi3, in India. According to some reports, the price of Mi3 is around Rs.14,000/. To buy Mi3, one had to register on Flipkart. The phone wasn't available to non-registered users and registration was only open for a limited time. Rajesh, my colleague, had not registered for the phone. He wanted to purchase the phone but he couldn't because he hadn't registered in time.

Rajesh approached me out of pure desperation and offered to buy my phone. He offered to buy my phone for Rs. 16,500/- I was a trader by nature and agreed to sell the phone. In fact, I demanded that he pay me immediately.

I was shocked when I realized how much I had spent on the money. Take a look at the mess I have created for myself. Rajesh bought a phone that I didn't have yet, so I sold it! Thank you!

It was an okay deal. Yes, I sold a phone I didn't own. But, I could buy the phone on Flipkart, and then pass the unopened box on to Rajesh. The only thing that I was concerned about in this transaction was what happens if the price of the phone goes beyond Rs.16,500? I would lose my money in that situation and would regret having entered into this transaction. If the phone was priced at Rs.18,000, my loss is Rs.1,500 (18,000-16,500).

To my surprise, the phone was priced at Rs.14,000/. I bought it immediately on Flipkart and after delivery, I gave the phone to Rajesh. I made a tidy profit of Rs.2,500/ - (16500 -14000).

You can see that I sold the phone first to Rajesh. Then I bought the phone later on Flipkart and delivered it to Rajesh. It was sold first and then bought it later.

This type of transaction is known as a "Short Trade".

Shorting is a very strange concept. This is because shorting is not something we are used to. This transaction netted you a profit in the amount of Rs.20.

You were bullish on this stock and bought Wipro at Rs.405. The second leg was to purchase Wipro at Rs.425.

The stock trades at Rs.425, which is why you are still bearish. You believe that the stock will trade at Rs.405 within a few days. Is there any way to profit from your bearish expectations? You can profit from your bearish expectation by shorting the stock.

The stock is sold at Rs.425, then, 2 days later, assuming that the stock trades at Rs.405, the stock is repurchased.

Realize that the first leg of the trade was to sell the stock at Rs.425, while the second was to purchase the stock at Rs.405. This is the usual case when shorting: you sell the stock at a price that you believe is too high and then you buy it back at an even lower price.

The trade was actually the same as buying at Rs.405 then selling at Rs.425 in reverse.

You may be asking yourself a simple question: How do you sell Wipro shares if you don't own the company? You can, just as I did with a phone I didn't own.

You borrow the shares from another person in the market when you sell your first share. When you repurchase the shares, you return them. This happens backend. The stock exchange facilitates borrowing it and returning it.

It is so seamless that when you short stock, you won't even notice that you are borrowing it from another person. You only need to understand that if you are bearish about a stock, you can short it. The exchange will then take care of borrowing the stock for you. The exchange will return the stock if you repurchase it.

Let's sum it up...

  1. If you short the stock, you will have a bearish outlook. If the stock price falls, you will make a profit. If the stock price rises, you'll lose your short position.
  2. You will need to return the shorts you have borrowed from other market participants. This is all you need to worry about. All this will be done in the background by the system.
  3. It is simple to shorten a stock. You can either call your broker to ask him to do so, or you can do it yourself by choosing the stock you want to shorten and clicking on sell.
  4. If you wish to shorten a stock and keep the position for a few more days, it's best to do so on the derivatives market.
  5. If the stock price falls, you will make money if you are short. If the stock price rises after you have sold the stock, you will lose your money.

This summarizes the short and long positions.

Square off- This is an expression that indicates you are going to close an existing position. Square off is the term used to indicate that you intend to sell a stock, if you are long in a stock. You are not selling the stock to close a long position.

Squaring off a stock position is a way to repurchase it if you are short. Repurchase the stock to close an existing position. You are not taking a long position.

Intraday position-This is a trade position that you open with the expectation of securing the position in the next day.

OHLC - OHLC is open, high, low, and close. This will be explained in the technical analysis module. Open is the opening price for the stock, high is at the top of the stock's trading day, low is at the lowest trade price during the day and close is at the stock's closing price. The OHLC for ACC is 17Th June 2014: 1486, 1511, and 1467 respectively.

Volume- Stock prices and volume are important concepts we will discuss in detail in the technical analysis module. Volumes are the sum of all transactions (both buy-and-sell) that occurred for a stock on a given day. On 17ThJune 2014 volume on ACC: 5, 33,819 shares

Market Segment - This is the division in which a particular type of financial instrument can be traded. Each financial instrument has its own risk and reward parameters. There are three major segments that the exchange operates.

  1. Capital Market - The Capital Market segments offer a broad range of tradable securities, including equity, preference shares, and warrants. A capital Market segment is broken down into sub-segments that further classify instruments. Common shares of companies can be traded under the equity segment, abbreviated as EQ. If you buy or sell shares of a company, you are basically operating in the capital markets segment.
  2. Futures and Options– Futures and Options are generally referred to by the equity derivative segment. They would trade leveraged products. The derivatives module will provide more information about the derivative markets.
  3. Wholesale Debt Market– This wholesale market is for fixed-income securities. These include government securities, treasury bonds, bonds issued by public sector undertakings, corporate bonds, and corporate debentures.