Module for Beginners
Introduction to Stock Markets
11. Glossary: 20 terms you should know
20 terms you should know
An investment is a monetary asset that is purchased with the idea that the asset will provide income in the future, or that it will be sold at a higher price later, for a profit. It is a means to create wealth over the long term. Some examples of investment are fixed deposits, mutual funds, and real estate.
2. Portfolio diversification
Portfolio diversification is an investment strategy that helps you manage your risk. To diversify your portfolio, you need to allocate your capital across a wide variety of investments. A portfolio that consists of different kinds of assets has a greater potential to yield higher long-term returns. It also lowers the risk associated with each particular investment.
3. Financial market
Financial markets are virtual or physical spaces that are dedicated to the purchase and sale of financial assets. Assets like stocks, derivatives, and bonds are traded in financial markets.
4. Debt market
In a debt market, debt instruments like bonds and debentures are bought and sold. These instruments are issued by companies and government entities.
5. Equity market
Stocks of public limited companies are traded in the equity market. Here, you can carry out a variety of trades such as intraday transactions, delivery trades, Initial Public Offers (IPOs) and Follow on Public Offers (FPOs).
6. Money market
In a money market, monetary assets like treasury bills, commercial papers, and certificates of deposits can be bought. The investment horizon for these assets does not exceed a year.
7. Capital market
In a capital market, assets with medium-term and long-term investment horizons are traded. For instance, investors can buy assets like equity share capital and preference share capital and hold them over the long term. Capital markets are divided into primary markets and secondary markets.
8. Cash market
In the cash market, transactions are settled on a real-time basis. Here, financial assets are sold for cash and for immediate delivery
9. Futures market
In the futures market, you may pay the money at the time of making your transaction, but the delivery of the asset happens at a later date.
10. Exchange-traded market
An exchange-traded market is a centralized market that runs on standardized procedures, where transactions occur through an exchange.
11. Over-the-counter market
These are decentralized markets where buyers and sellers can interact with one another and engage in the trade of customized products, as per their requirements. There is no intermediary involved, and transactions occur electronically, over the counter.
12. Stock exchange
stock exchanges are financial intermediaries that connect buyers and sellers and facilitate a trade of the stocks listed on that exchange. In India, there are two principal exchanges - the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). In addition to these two exchanges, there are also other small exchanges such as the Calcutta Stock Exchange and the Metropolitan Stock Exchange of India that are currently operational.
A depository is an entity that allows you to store the dematerialized share certificates of the stocks you own in a dedicated account, known as a demat account. In India, there are currently two depositories that are operational - the National Securities Depository Limited (NSDL) and Central Securities Depository Limited (CDSL).
14. Depository participant
A depository participant (DP) is a registered agent who acts as an intermediary between you and the depository. As an investor, you cannot deal with or open a demat account directly with a depository. You’re required to route all your transactions with a depository only through a DP.
Stockbrokers are financial intermediaries who play a major role in the stock markets. These entities are registered with the stock exchanges as trading members. They act as a link between the stock exchanges and investors/traders like you. To be able to buy and sell shares in the stock market, you need to open a trading account with a stockbroker.
16. Institutional investors
Institutional investors are corporate entities that invest in the stock market. They’re sub-classified into two categories based on their nationality:
- Foreign Institutional Investors (FIIs)
- Domestic Institutional Investors (DIIs)
17. Retail investors
Retail investors are individual, non-professional market participants who generally invest smaller amounts than larger, institutional investors. They’re sub-classified into the following three different categories, based on their residential status:
- Resident Indian retail investors
- Non-Resident Indian (NRI) retail investors
- Overseas Citizen of India (OCI) retail investors
18. High Networth Individuals (HNIs)
Individuals who possess an investable capital of more than Rs. 2 crores and take part in the investing and trading activities in the stock market are categorized as High Networth Individuals (HNIs).
19. Stock market indices
Stock market indices are indicators that reflect the performance of the market as a whole or of a certain segment of the market. A stock market index consists of a group of companies whose shares are traded on an exchange. Each index measures the price movement and the performance of the shares of its constituent companies.
20. Clearance and settlement
Clearing is the process of updating the accounts of the trading parties and making arrangements for the transfer of the funds and the securities. Settlement is the process of the actual exchange of money and securities between the parties involved in the trade.
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