Share Market Knowledge Part - 1

                                        Share Market Basics & Terminology. 

1. Share Market

The share market is a marketplace where investors buy and sell ownership shares in companies. In India, shares of listed companies are traded through recognised stock exchanges such as NSE and BSE, usually through registered brokers.

How it works: Buyers place bids and sellers place offers. When compatible orders match, a trade takes place at an agreed price. Share prices change with supply and demand, company performance, economic conditions, interest rates, and investor expectations.

Use: Investors use the share market to build long-term wealth, receive potential dividends, and participate in company ownership. Traders may seek to profit from price movements, while companies can raise capital by issuing shares.

Example: If you buy 10 shares of a company at ₹500 each, your purchase value is ₹5,000 before charges. If the price later reaches ₹550, the shares are worth ₹5,500, representing an unrealised gain of ₹500 before charges and taxes.

2. Stock Market

The stock market is the broader marketplace for trading financial securities, particularly shares. The terms stock market and share market are often used interchangeably in India.

How it works: Exchanges provide the trading infrastructure, brokers transmit investor orders, and market prices are determined through order matching. Settlement transfers securities and funds according to the applicable settlement framework.

Use: The stock market helps investors discover prices, trade securities, allocate capital, and compare investment performance against benchmarks such as Nifty 50 and Sensex.

Example: An investor purchases shares of an NSE-listed company through a broker and later sells them through the exchange when the investor decides to exit.

3. Equity Market

The equity market is the part of the financial market where ownership interests in companies are issued and traded. Equity holders generally participate in the company's residual value after its obligations, subject to the rights attached to their share class.

How it works: Companies may issue equity to raise capital. Once listed, eligible shares can trade among investors. The market price reflects changing expectations about future profits, risks, growth, and other factors.

Use: Equity analysis helps investors evaluate ownership opportunities, company valuations, and potential returns relative to risk.

Example: Buying ordinary shares in a listed Indian company gives the investor an ownership interest in that company, rather than a loan claim like a bond.

4. Share Trading

Share trading means buying and selling company shares through a trading platform or broker. It may involve short-term trades or longer holding periods.

How it works: A trader selects a security, decides the order type and quantity, submits an order, and manages the position. A trading plan may specify entry, target, stop-loss, and maximum acceptable risk.

Use: Traders may use technical analysis, company news, market trends, or quantitative signals to guide decisions. Trading involves costs, slippage, and the possibility of loss.

Example: A trader buys 100 shares at ₹200 and sells them at ₹205. The gross profit is ₹500 before brokerage, taxes, exchange charges, and other costs.

5. Stock Trading

Stock trading is the process of buying and selling stocks to pursue a financial objective, such as capturing a price movement or managing an investment portfolio.

How it works: Trading can be intraday, swing, positional, or long-term. The approach determines the holding period, analysis timeframe, risk limits, and exit rules.

Use: In the Indian market, stock trading can involve NSE- or BSE-listed shares. Derivatives such as futures and options are related instruments but are not the same as trading the underlying shares directly.

Example: A trader who buys a stock and sells it three days later is generally conducting short-term or swing trading, depending on the strategy.

6. Equity Trading

Equity trading is the buying and selling of ownership shares in companies. It can take place in the cash market, where investors trade shares themselves, rather than derivative contracts based on those shares.

How it works: Investors place orders through brokers connected to exchanges. Orders are matched according to exchange rules, and completed trades proceed to settlement.

Use: Equity trading is used for short-term trading, swing trading, portfolio adjustments, and long-term investing.

Example: Buying 50 shares at ₹400 costs ₹20,000 before charges. Selling them at ₹420 produces a gross gain of ₹1,000.

7. Shares

Shares are units of ownership in a company. The rights associated with a share depend on its class and the company's governing documents and applicable law.

How it works: A company's share capital is divided into units. Investors who purchase eligible shares become shareholders and may receive voting rights, dividends when declared, and a residual claim on the company's value.

Use: Shares allow investors to participate in a company's financial performance and provide companies with a way to raise equity capital.

Example: If a company has 10 crore shares outstanding and an investor owns 10,000 shares, the investor owns 0.01% of those shares, assuming the stated share count includes all relevant outstanding shares.

8. Stocks

Stocks represent ownership interests in one or more companies. In everyday market language, stock often refers to a company's shares.

How it works: Stocks trade at prices determined by market supply and demand. Prices may change because of earnings announcements, business developments, economic data, institutional activity, and broader market sentiment.

Use: Investors analyse stocks to identify companies that may suit their financial objectives, risk tolerance, and investment horizon.

Example: Reliance Industries, Infosys, and HDFC Bank are examples of Indian listed companies whose stocks trade on Indian exchanges.

9. Equity Shares

Equity shares are ownership units in a company that generally carry residual economic rights and, for ordinary shares, voting rights subject to the applicable terms and law.

How it works: Companies issue equity shares to founders, investors, employees, or public investors. Shareholders may benefit if the company grows in value, but they also bear the risk of falling prices.

Use: Equity shares are the principal instrument used by investors to participate directly in the ownership of many listed Indian companies.

Example: Purchasing 100 ordinary shares of an NSE-listed company at ₹150 gives you an investment worth ₹15,000 before charges.

10. Common Shares

Common shares are ordinary ownership shares that typically provide voting rights and a residual claim on a company's assets after its liabilities and any senior claims are satisfied.

How it works: Common shareholders may benefit from dividends when declared and increases in the share price. They generally rank behind creditors and certain preferred claims if a company is liquidated.

Use: Common shares are commonly used for direct equity investment and long-term participation in a company's growth.

Example: An investor who owns ordinary shares in an Indian listed company may vote on eligible shareholder resolutions, subject to the applicable voting rights.

11. Listed Companies

A listed company is a company whose securities have been admitted to trading on a recognised stock exchange, subject to the applicable listing requirements.

How it works: A listed company must comply with relevant disclosure, governance, reporting, and exchange requirements. Investors can access information such as financial results and material announcements through official disclosures.

Use: Investors use listed-company information to analyse business performance, financial health, valuation, and risks.

Example: Before analysing a listed company, an investor can review its annual report, quarterly results, shareholding pattern, and exchange announcements.

12. Listed Stocks

Listed stocks are shares of companies admitted to trading on a recognised stock exchange.

How it works: Eligible investors place buy and sell orders through brokers. Prices change as orders interact in the market, while exchange and regulatory rules govern trading and disclosures.

Use: Listed stocks form the universe for stock screeners, technical analysis, fundamental research, and portfolio construction.

Example: A stock scanner might examine listed Indian stocks for those trading above their 50-day moving average with increasing volume.

13. Stock Exchange

A stock exchange is an organised marketplace that provides systems and rules for trading eligible securities.

How it works: The exchange facilitates order matching, publishes market information, and administers trading procedures under applicable regulations. Clearing and settlement arrangements support the completion of transactions.

Use: Stock exchanges enable investors to trade securities through an organised market with defined operating rules.

Example: The National Stock Exchange and the Bombay Stock Exchange are two major stock exchanges in India.

14. Market Capitalization

Market capitalisation, often called market cap, is the market value of a company's outstanding equity shares.

Formula:

\[ \text{Market Cap}=\text{Share Price}\times\text{Outstanding Shares} \]

How it works: Market capitalisation changes when the share price or number of outstanding shares changes. It represents the market value of equity, not the company's total enterprise value.

Use: Investors and analysts use market cap to compare company sizes, classify stocks, and understand their relative importance in some indices.

Example: A company with 10 crore outstanding shares and a share price of ₹100 has a market capitalisation of ₹1,000 crore.

15. Large-Cap Stocks

Large-cap stocks are shares of companies with relatively large market capitalisations. In India, the commonly used SEBI mutual-fund classification identifies large-cap companies as the top 100 companies by full market capitalisation, based on the prescribed classification framework.

How it works: Large-cap classification reflects company size, not a guarantee of financial strength or low risk. Large companies can still experience substantial price declines.

Use: Investors may use large-cap stocks when constructing portfolios or comparing companies by size.

Example: A research system can filter eligible Indian stocks using the applicable large-cap classification and then rank them by profitability, valuation, or momentum.

16. Mid-Cap Stocks

Mid-cap stocks represent companies of intermediate size. Under the commonly used Indian mutual-fund classification, mid-cap companies are ranked from 101st to 250th by full market capitalisation.

How it works: These companies may be expanding their businesses, entering new markets, or improving profitability. Their share prices can be more volatile than those of some larger companies, although this is not universally true.

Use: Investors analyse mid-cap stocks for potential growth while considering valuation, liquidity, governance, and business risks.

Example: An investor can screen the applicable mid-cap universe for companies with rising revenue, manageable debt, and improving operating margins.

17. Small-Cap Stocks

Small-cap stocks are shares of relatively smaller companies. Under the commonly used Indian mutual-fund classification, small-cap companies are those ranked below the top 250 companies by full market capitalisation.

How it works: Smaller companies may have greater growth opportunities, but they can also face limited liquidity, concentrated businesses, financing constraints, and larger price swings.

Use: Investors use small-cap research to identify potential growth opportunities while applying careful risk controls.

Example: A small-cap screening strategy might require minimum trading liquidity, positive operating cash flow, and manageable debt before considering a stock for further research.

18. Penny Stocks

Penny stocks are an informal category of very low-priced shares. There is no single universal definition of a penny stock across all markets.

How it works: A low share price can reflect a company's financial difficulties, a large number of outstanding shares, or other factors. A low nominal price does not necessarily mean the stock is undervalued.

Use: Traders may screen low-priced stocks for price movements, but must assess liquidity, disclosures, corporate governance, and manipulation risks.

Example: A ₹5 stock is not automatically cheaper in valuation terms than a ₹500 stock. The companies' earnings, outstanding shares, debt, and business prospects must also be considered.

19. Blue-Chip Stocks

Blue-chip stocks are shares of well-established, prominent companies that are often associated with relatively strong market positions, established operations, and substantial investor interest.

How it works: The term is descriptive rather than a universal formal classification. Blue-chip companies can still face business problems, expensive valuations, or major share-price declines.

Use: Investors may examine blue-chip stocks when building diversified portfolios or seeking exposure to established businesses.

Example: An investor researching an established Indian company might examine its long-term earnings, debt, dividend history, competitive position, and current valuation before deciding whether to invest.

20. Growth Stocks

Growth stocks are shares of companies expected to increase revenue, earnings, cash flow, or business scale faster than a relevant benchmark or the broader market.

How it works: Investors often value growth companies partly on expected future performance. If actual growth disappoints or interest-rate expectations change, their valuations may decline sharply.

Use: Investors compare growth rates, profitability, reinvestment needs, competitive advantages, and valuation to assess whether expected expansion justifies the share price.

Example: A company growing revenue by 20% annually may attract growth-oriented investors, but its valuation and ability to convert revenue growth into sustainable profits still matter.

21. Value Stocks

Value stocks are shares of companies that appear undervalued compared with their estimated fundamental worth. Investors may assess valuation using earnings, book value, cash flow, dividends, and comparable companies.

How it works: Investors estimate a company's value and compare it with its current market price. A price below estimated value may indicate an opportunity, but it can also reflect genuine business problems or declining prospects.

Use in the Indian share market: Investors use financial ratios, company reports, cash-flow analysis, and industry comparisons to identify potentially undervalued stocks.

Example: If an analyst estimates a company's fair value at ₹300 per share while it trades at ₹240, the stock may warrant further research. The ₹300 estimate is not a guaranteed future price.

22. Dividend Stocks

Dividend stocks are shares of companies that distribute part of their profits or reserves to eligible shareholders through dividends.

How it works: A company declares a dividend subject to applicable law and approvals. Eligible shareholders receive the declared amount according to the relevant record-date and settlement rules. Dividends are not guaranteed and can be reduced or discontinued.

Use: Investors may use dividend stocks as a source of investment income and assess dividend sustainability using earnings, cash flow, debt, and payout ratios.

Example: If a company declares a dividend of ₹8 per share and an investor owns 500 eligible shares, the gross dividend is ₹4,000 before applicable taxes.

23. Multibagger Stocks

A multibagger stock is a share whose price increases to a multiple of its original purchase price. The term is commonly used for stocks that deliver returns of two times, five times, ten times, or more.

How it works: Large price increases may result from sustained earnings growth, business expansion, improved profitability, industry changes, or a change in valuation. Past performance does not guarantee future returns.

Use: Investors study long-term financial performance, management quality, competitive advantages, capital allocation, and valuation to identify companies with potential for substantial growth.

Example: A stock purchased at ₹100 and later valued at ₹500 has increased fivefold. That represents a 400% price gain, excluding dividends and costs.

24. Defensive Stocks

Defensive stocks are shares of companies whose products or services may experience relatively stable demand during economic slowdowns.

How it works: Businesses supplying essential goods or services can sometimes maintain more stable revenue than highly cyclical businesses. However, their shares can still fall because of high valuations, rising costs, regulation, or company-specific problems.

Use: Investors may examine defensive businesses when constructing portfolios intended to reduce sensitivity to economic cycles.

Example: Companies in essential consumer goods or certain healthcare segments may be studied as potential defensive investments.

25. Cyclical Stocks

Cyclical stocks are shares of companies whose financial performance tends to vary with the economic cycle.

How it works: Demand for cyclical products often rises during economic expansion and weakens during downturns. Earnings and share prices may respond to changes in interest rates, employment, consumer spending, and industrial activity.

Use: Investors monitor economic indicators, commodity prices, demand trends, and company earnings to assess cyclical businesses.

Example: Automobile, steel, and some construction-related companies may experience stronger demand during periods of economic expansion.

26. Public Companies

A public company is a company whose legal status permits it to operate under the relevant public-company framework. The term does not necessarily mean its shares are listed on a stock exchange.

How it works: Public companies are governed by applicable company law and disclosure requirements. A public company may be listed or unlisted, depending on whether its securities have been admitted to exchange trading.

Use: Investors distinguish public-company status from stock-exchange listing when researching ownership, disclosures, and investment opportunities.

Example: A public company whose shares are not listed on NSE or BSE is not automatically available for ordinary exchange-based share trading.

27. Private Companies

Private companies are companies incorporated under a legal framework that restricts certain aspects of share transfer and public participation, subject to applicable law.

How it works: Ownership is generally held by founders, employees, private investors, or other permitted shareholders. Shares are not ordinarily traded on public stock exchanges in the same way as listed-company shares.

Use: Private companies are studied in venture capital, private equity, business valuation, mergers and acquisitions, and pre-IPO research.

Example: An investor purchasing shares in a privately held Indian company through a private transaction must verify the company's legal documents, transfer restrictions, valuation, and applicable regulatory requirements.

28. Market Participants

Market participants are the individuals and institutions that buy, sell, issue, regulate, clear, settle, or provide services related to financial securities.

How it works: Participants have different objectives. Retail investors may invest personal savings, institutions may manage large portfolios, market makers may provide liquidity where applicable, and brokers facilitate orders.

Use: Understanding market participants helps analysts interpret trading activity, liquidity, institutional ownership, and changes in market sentiment.

Example: If mutual funds increase their holdings in a company, an analyst may examine the shareholding disclosures alongside valuation and business performance. Institutional buying alone does not establish that a stock is undervalued.

29. Retail Investors

Retail investors are individual investors who invest or trade using their personal accounts rather than acting as large institutional investment organisations.

How it works: Retail investors commonly access markets through registered brokers and use tools such as trading platforms, financial reports, screeners, and research services.

Use: Retail investors may invest for long-term goals, dividends, capital appreciation, or short-term trading, depending on their financial situation and risk tolerance.

Example: An individual who invests ₹10,000 in an index fund or purchases listed shares through a broker is participating as a retail investor.

30. Institutional Investors

Institutional investors are organisations that invest capital or manage investments on behalf of clients, beneficiaries, policyholders, or other stakeholders.

How it works: Institutions typically follow investment mandates, risk limits, research procedures, and compliance requirements. Their transactions can be large enough to influence liquidity and prices, although the effect depends on the stock and market conditions.

Use: Analysts monitor institutional holdings and disclosures to understand ownership patterns and changes in investor positioning.

Example: A mutual fund may increase its holding in a listed Indian company after evaluating its financial performance, valuation, and portfolio objectives.

31. Shareholder

A shareholder is a person or organisation that owns shares in a company.

How it works: Shareholders hold the rights attached to their share class, which may include voting rights, eligibility for declared dividends, and a residual interest in the company's value. Rights depend on the share terms and applicable law.

Use: Shareholder information helps analysts examine ownership concentration, promoter holdings, governance, voting control, and potential conflicts of interest.

Example: Someone who owns 1,000 ordinary shares of a listed company is a shareholder and may be eligible to vote on certain resolutions under the applicable rules.

32. Stock Price

The stock price is the market price at which a share is quoted or traded.

How it works: Prices change as buy and sell orders interact. New financial results, company announcements, economic data, interest rates, liquidity, and investor expectations can all affect prices.

Use: Traders use stock prices to study trends, identify entry and exit levels, and calculate gains or losses. Investors also compare prices with business fundamentals to assess valuation.

Example: If a share rises from ₹250 to ₹275, its price has increased by ₹25, or 10%, before dividends and transaction costs.

33. Share Price

Share price is the price of one share of a company at a specified time.

How it works: A share's traded price is influenced by supply and demand, available information, expectations, and market liquidity. The nominal price alone does not reveal whether a company is expensive or cheap.

Use: Investors use share prices to calculate investment value, returns, market capitalisation, and valuation ratios.

Example: An investor holding 200 shares at a market price of ₹150 has a position worth ₹30,000 before costs and taxes.

34. Market Price

Market price is the current or most recently observed price at which a financial instrument trades, according to the relevant market and data source.

How it works: The quoted price may represent the last traded price, bid, ask, or another specified measure. These values can differ, particularly in less liquid securities.

Use: Analysts use market prices to value holdings, compare instruments, calculate indicators, and evaluate trading signals.

Example: A stock's last traded price may be ₹500 while the best available bid is ₹499.50 and the best ask is ₹500.50. The exact figures depend on the live order book.

35. Face Value

Face value, also called nominal value, is the stated value assigned to a share in the company's share capital.

How it works: Face value is a corporate accounting and legal reference. It is different from the stock's market price, which changes through trading. Stock splits and certain corporate actions may change face value.

Use: Investors use face value when interpreting share-capital disclosures, dividends quoted per share, stock splits, and corporate actions.

Example: A share with a face value of ₹10 can trade at ₹250. The difference does not itself indicate whether the share is overvalued.

36. Book Value

Book value refers to the value of assets remaining after liabilities are deducted, as recorded in a company's financial statements. For equity valuation, analysts often focus on the book value attributable to shareholders.

How it works: A common measure of book value per share is shareholders' equity divided by the relevant number of outstanding shares. The exact calculation should account for preferred claims and share-count conventions where applicable.

Use: Investors use book value to examine financial position and calculate the price-to-book ratio. It can be particularly relevant for some financial and asset-intensive businesses.

Example: If a company has shareholders' equity of ₹1,000 crore and 100 crore relevant shares, its book value per share is ₹10.

37. Intrinsic Value

Intrinsic value is an estimate of what an asset or company is worth based on its underlying economic characteristics rather than simply its current market price.

How it works: Analysts may estimate a company's intrinsic value using discounted cash flow, dividend discount models, comparable-company valuations, or other approaches. The result depends on assumptions about future cash flows, growth, risk, and discount rates.

Use: Investors compare estimated intrinsic value with market price to evaluate possible undervaluation or overvaluation. Intrinsic value is an estimate, not an objectively guaranteed price.

Example: If an analyst estimates intrinsic value at ₹400 per share while the market price is ₹320, the stock may merit further research. A different set of assumptions could produce a substantially different estimate.

38. Market Value

Market value is the value implied by current market prices for an asset or a company.

How it works: For a listed company's equity, market value is commonly represented by its market capitalisation. Enterprise value is a different measure that considers equity value, debt, cash, and other relevant adjustments.

Use: Investors use market value to compare companies, assess portfolio holdings, and understand how the market currently values a business.

Example: A company with 20 crore outstanding shares priced at ₹150 has an equity market value of ₹3,000 crore.

39. 52-Week High

A 52-week high is the highest recorded trading price of a security over the preceding 52-week period, according to the chosen data source and price convention.

How it works: A stock reaches a new 52-week high when its price exceeds the previous high within that rolling period. Some traders monitor closing-price highs, while others monitor intraday highs.

Use: Traders and investors use 52-week highs to identify strong price trends, possible breakouts, and stocks attracting market attention.

Example: If a stock's previous 52-week high was ₹480 and it trades at ₹490, it has exceeded that level. Traders may still check volume, valuation, liquidity, and the risk of a false breakout.

40. 52-Week Low

A 52-week low is the lowest recorded trading price of a security over the preceding 52-week period, using the selected data source and price convention.

How it works: A stock reaches a new 52-week low when its price falls below the previous low within the rolling period. The low may reflect deteriorating business expectations, broader market weakness, or other factors.

Use: Investors use 52-week lows to identify weak trends, investigate potential turnaround candidates, and evaluate downside risk.

Example: If a stock falls below its previous 52-week low of ₹100 to ₹92, a researcher may examine its financial results, debt, company announcements, and trading liquidity before drawing conclusions.