Nobody can thrive in a professional environment without understanding the basics of the work they are doing, be it a chef, an accountant, an engineer, a writer and so on and so forth. In this article, the readers will get to know the important stock market terms which are used every day, and constitute the basics of being a trader.
The following are the 8 basic, but important, stock market terms.
A demat (short for dematerialised) account, is necessary for trading. In stock market terms this means that all of the shares, mutual funds, bonds, etc., are credited and debited through this account. A demat account can be opened by anyone through various online platforms like Zerodha, Upstox, and Delta Exchange. Certain banks also allow their customers to open a demat account.
A limit order is of two types – a buy limit order and a sell limit order. A trader buys or sells a share at a preset price or higher (In case of a sell limit order) and lower (In case of a buy limit order). In stock market terms, a limit order book is simply a record of outstanding limit orders which is kept and executed by the security specialist as and when the specified price is met by the market.
The words “clearing house” may seem straightforward in meaning, but in stock market terms it refers to an organisation which acts as a middleman between traders. After a transaction has been completed, the clearing house initiates the finalisation of the trade and ensures that both parties have been honest towards their contractual obligations. Aside from this, the clearing houses also collect margin (collateral) payments and oversee the delivery of assets.
In stock market terms, an order driven market is one where both the buyers and sellers showcase their preferred buying and selling prices, as well as the number of shares they wish to deal with. It caters mainly to market and limit orders. However, there is a considerable lack of liquidity providers or market makers, and hence, liquidity.
Market makers are either individuals or organisations which act as consultants to investors, as well as provide trading services and maintain the constant flow of the market by trading themselves. In stock market terms, this essentially means that market makers maintain the liquidity of the market by continuously buying and selling securities which they keep on behalf of their client, as and when ordered to do so.
A market order is an order which an investor or trader gives to their broker or market maker to buy and sell shares at the best possible price available in the market. In stock market terms, a market order is a price which is set by the market and not the traders.
In stock market terms, liquidity refers to those assets which do not lose their value after being converted into cash. Assets such as gold, gems, property, etc., can be considered liquid as well, but their value as a “liquid” is less than cash.
Settlement risk, while not common in trading, is still a scenario which traders should be prepared to face. In stock market terms, it is the possibility of one or both the parties failing to deliver on their end of the transaction. Settlement risk is of two types, namely, default risk and settlement timing risk. Default risk is when a trader fails to deliver entirely on the contract, even after the other party has. Settlement timing risk is less severe, as the trade still takes place, although later than the agreed-upon time period.
These were some of the most commonly used stock market terms, which are necessary for any aspiring trader to know. If you wish to learn about the functions and powers of the institutions mentioned, and the various terms used in this article in greater detail, you will find the related articles on the Booming Bulls Academy blog.