Before even attempting to trade or invest, it is important to be familiar with the jargon used in the capital markets. Here are a few basic terms that should help a rookie investor get started.
Equity share trading refers to the selling and buying of stock of listed (public) companies. It can either be done by the investor or by a registered and authorized broker.
A broker is the person who handles the buying and selling of stocks/securities from the market on your behalf, i.e. mediates the trade with the stock exchanges. Put simply, he/she is the middleman who links an investor to the market in return for a commission on trades. One needs to acquire a license from the markets regulator to perform the functions of a broker.
A depository is an institution that holds the securities of listed companies. Three types of institutions are generally referred to as depositories, namely credit unions, commercial banks, and savings institutions. The primary function of a depository is to transfer the ownership of securities from one account to another after a trade has been made. They also advance business loans when needed.
An exchange is the market where securities are traded. An exchange ensures the smooth functioning of the share market and the dissemination of legitimate information. It is a platform that allows listed companies, both private and government-owned, to sell their securities to interested investors. Stock exchanges were mainly developed to increase the amount of available capital for businesses to boost its growth and expansion.
Any financial institution that acts as a guard for the securities from loss or theft is known as a custodian. They either hold securities in a physical form or a digital one. The custodian often performs other functions as well, like account administration, collection and distribution of dividend and interest, transaction settlements, foreign exchange, and tax support.
Stop loss is a feature that helps you sell your stock if it falls to a predefined value. It is designed to mitigate losses and is used by someone who cannot track the share’s position at regular intervals to make efficient trading decisions.
Pay in and payout
Pay in is the day when brokers deliver securities to the exchange. Similarly, payout is the day when exchanges deliver securities to the brokers. Exchanges declare payout days through a press announcement and brokers are expected to settle clients’ accounts within 24 hours of this notice.
A derivative is a security whose price is regulated by underlying assets like stocks, bonds, commodities, etc. They are called derivatives as their prices are dependent on other factors.
Futures and options
Both futures and options are types of derivative security. While futures trading means the obligation and the right to sell or buy a security at a particular time in the future, options trading is the same minus the obligation part. The right to buy is known as the call option while the right to sell is known as the put option.