Glossary of Stock Trading Terms for New Traders

If you're new to stock trading, all the different terms and phrases can seem confusing at first. Words like "bull market," "dividend," or "P/E ratio" might leave you scratching your head. But understanding these basic terms is really important because they help you make smart trading decisions.

This blog will explain some of the most common stock trading terms in simple language. It's like a quick guide to help you understand the basics of trading. With this knowledge, you'll feel more confident and prepared when you start buying or selling stocks. This glossary aims to make your first steps in the stock market easier and help you build a strong foundation for successful trading.

Basic Terms in Stock Trading

Understanding some basic stock trading terms is essential for beginners. Here's a simplified explanation of key terms:

1. Stock

A stock represents ownership in a company. When you buy a stock, you own a small part of that company. For example, if you buy shares of TCS or Infosys, you become a partial owner of these companies.

2. Share

A share is a single unit of ownership in a company. The more shares you own, the bigger your stake in the company. If a company has 1,000 shares and you own 100, you own 10% of the company.

3. Bull Market

This refers to a period when stock prices are rising. Investors are optimistic and expect prices to keep going up. It’s like a positive trend in the market where traders look to buy stocks expecting to make a profit.

4. Bear Market

Opposite to a bull market, a bear market is when stock prices are falling, and there is a negative outlook. Investors expect prices to drop further and might sell their stocks to avoid losses.

5. IPO (Initial Public Offering)

When a company first sells its shares to the public, it's called an IPO. For instance, when Zomato or LIC offered their shares to the public for the first time, they did it through an IPO.

6. Dividend

A dividend is a part of the company's profit that is paid out to shareholders. For example, if you own shares in HDFC Bank, you might receive a portion of the bank's profits as dividends.

7. Portfolio

Your portfolio is a collection of all the stocks and other investments you own. It’s like a basket where you keep all your investments.

Types of Orders in Stock Trading

Market Order

A market order is the simplest and most common type of order used in stock trading. It instructs the broker to buy or sell a stock immediately at the best available current price. The primary advantage of a market order is its speed. It prioritises the quick execution of the trade, meaning your order is likely to be completed almost instantly during active market hours. However, the exact price at which the order is filled might differ slightly from the price seen at the moment of placing the order, especially in a rapidly changing market. This is because market orders do not guarantee a specific price; they guarantee the execution of the trade.

Example:

Suppose you want to buy shares of Infosys. You check the current price, which shows ₹1,500. If you place a market order, your broker will execute the purchase at the best available price close to ₹1,500. However, if the market is volatile, you might end up paying slightly more, say ₹1,502, or less, such as ₹1,498, depending on how quickly the price changes.

1. Limit Order

A limit order lets you set a specific price at which you want to buy or sell a stock. It gives you control over the price you pay or receive, but it does not guarantee that the trade will be executed. The order will only go through if the stock reaches your desired price.

Example: Suppose you want to buy shares of Tata Steel, currently trading at ₹120. You believe ₹115 is a fair price, so you place a limit order to buy at ₹115. The trade will only happen if the stock price drops to ₹115 or below.

2. Stop-Loss Order

A stop-loss order is designed to limit an investor’s loss on a position. It sets a price point where the stock will be automatically sold if it falls to or below a certain level. This helps protect against significant losses in case the market moves unfavourably.

Example: Let’s say you own shares of Reliance Industries, which you bought at ₹2,500. You want to minimise losses if the price drops, so you set a stop-loss order at ₹2,450. If the stock price falls to ₹2,450, the order triggers and your shares will be sold, protecting you from further decline.

3. Stop-Limit Order

A stop-limit order combines features of both stop and limit orders. It sets two prices: a stop price that activates the order and a limit price at which the trade can be executed. This type of order is used to prevent selling too low or buying too high during volatile market conditions.

Example: Imagine you hold shares of HDFC Bank, currently trading at ₹1,600. You set a stop price at ₹1,550 and a limit price at ₹1,540. If the price falls to ₹1,550, the stop-limit order is activated, and your shares will be sold only if they can get a price of ₹1,540 or higher.

4. Trailing Stop Order

A trailing stop order is a type of stop order that automatically adjusts itself as the price of a stock moves in your favour. It helps lock in profits while offering some protection against losses by following the upward movement of the stock.

Example: If you own Infosys shares trading at ₹1,800, you set a trailing stop order with a 5% margin. If the price rises to ₹1,900, the trailing stop order will now trigger if the stock falls by 5% from ₹1,900, i.e., at ₹1,805.

5. Good Till Cancelled (GTC) Order

A Good Till Cancelled (GTC) order remains active until you decide to cancel it. Unlike regular orders that expire at the end of the trading day, a GTC order stays open until it is executed or manually cancelled by you.

Example: You place a GTC limit order to buy shares of Bharti Airtel at ₹600. If the stock reaches ₹600 even after several weeks, your order will be executed unless you cancel it before the price is hit.

Some common stock trading strategies

1. Scalping

Scalping is a short-term trading strategy aimed at making multiple small profits throughout the day. Scalpers buy and sell stocks quickly, often holding a position for just a few seconds or minutes. This approach requires constant monitoring of the market and a high trading volume to be effective.

2. Day Trading

Day trading involves buying and selling stocks within the same trading day to take advantage of small price movements. Day traders aim to close all positions by the end of the day to avoid the risk of overnight market changes. This strategy relies heavily on technical analysis, market trends, and quick decision-making.

3. Swing Trading

Swing trading is a medium-term strategy where traders aim to profit from price changes over a few days or weeks. It focuses on capturing the 'swings' in stock prices. Traders use technical analysis and sometimes fundamental analysis to predict price movements.

4. Momentum Trading

Momentum trading involves buying stocks that are moving strongly in one direction with high volume and selling them before the momentum fades. This strategy is based on the idea that stocks that have performed well recently are likely to continue performing well in the short term.

5. Position Trading

Position trading is a long-term strategy where traders hold stocks for weeks, months, or even years. The goal is to take advantage of major market trends. Position traders typically use fundamental analysis to identify potential investments and then hold their position through market fluctuations.

6. Breakout Trading

Breakout trading involves entering a position when the stock price breaks through a significant level of support or resistance. The idea is to catch the start of a trend when the stock is likely to make a big move after breaking out of its previous price range.

Commonly used stock market indicators

1. Moving Averages (MA)

Moving averages smooth out price data over a specific time period to create a trend-following indicator. They help investors identify the direction of the market or stock. There are different types of moving averages, such as:

• Simple Moving Average (SMA): The average of a stock's closing prices over a specific period.
• Exponential Moving Average (EMA): Similar to the SMA but gives more weight to recent prices.

2. Relative Strength Index (RSI)

The RSI measures the magnitude of recent price changes to evaluate overbought or oversold conditions in a stock or market. An RSI above 70 indicates overbought conditions, while an RSI below 30 indicates oversold conditions.

3. Moving Average Convergence Divergence (MACD)

MACD is used to spot changes in the strength, direction, momentum, and duration of a trend. It compares the difference between a 12-day EMA and a 26-day EMA to generate buy or sell signals.

4. Bollinger Bands

Bollinger Bands consist of a middle band (SMA) and two outer bands (standard deviations above and below the middle band). These bands expand and contract based on market volatility. Prices touching the upper band suggest overbought conditions, while the lower band suggests oversold conditions.

Final Thoughts

Stock market indicators are essential tools for traders to understand and navigate the complexities of the market. They help in identifying trends, predicting market movements, and making well-informed decisions. By combining various indicators like moving averages, RSI, and volume analysis, traders can gain a more comprehensive view of market conditions. However, it's crucial to remember that no indicator guarantees success. It’s best to use these tools alongside effective risk management strategies to enhance decision-making. Platforms like TradingBells offer valuable tools and resources to help traders make informed and confident choices in the stock market.