Trading Terminology
Trader vs Investor
Trader
A trader is a person who spots an opportunity and initiates the trade with an expectation of profitably exiting at the earliest given opportunity. A trader usually has a short-term view on markets. A trader is alert during market hours, constantly evaluating opportunities based on risk and reward. Traders are unbiased toward going long or short.
Types of Traders
1. Day Trader
- Initiates and closes positions during the same day
- Does not carry forward positions overnight
- Risk averse, doesn't like overnight risk
- Example: Buys 100 shares of TCS at Rs.2212 at 9:15AM, sells at Rs.2220 at 3:20PM, making Rs.800 profit
- Usually trades 5-6 stocks per day
2. Scalper
- A type of day trader
- Trades very large quantities of shares
- Holds stock for very short time with intention to make small but quick profit
- Highly risk averse
- Example: Buys 10,000 shares of TCS at Rs.2212 at 9:15AM, sells at Rs.2212.1 at 9:16AM, making Rs.1000 profit
- Places many such trades in a typical day
- Scalpers are often high-energy individuals who thrive during stress
- Requires considerable time, money, and skill
3. Swing Trader
- Holds trades for longer duration (few days to weeks)
- More open to taking risks
- Example: Buys 100 shares of TCS at Rs.2212 on June 12, sells at Rs.2214 on June 19
Famous traders: George Soros, Ed Seykota, Paul Tudor Jones, Michael Steinhardt, Van K Tharp, Stanley Druckenmiller
Investor
An investor is a person who buys a stock expecting significant appreciation. They are willing to wait for their investment to evolve. Typical holding period runs into few years.
Types of Investors
1. Growth Investors
- Objective: Identify companies expected to grow significantly due to emerging industry and macro trends
- Example (India): Buying Hindustan Unilever, Infosys, Gillette India in 1990s
- These companies witnessed huge growth due to industry landscape changes, creating massive wealth for shareholders
2. Value Investors
- Objective: Identify good companies (growth or mature phase) beaten down by short-term market sentiment, making them great value buys
- Example: L&T in Aug/Sep 2013 - collapsed from Rs.1200 to Rs.690 due to negative sentiment. At Rs.690, L&T was perceived as cheap (great value pick). Eventually scaled back to Rs.1440 by May 2014.
3. Retail Investor Categories (India)
- RII - Retail Individual Investor: Invests below Rs.2 lakhs in IPO
- HNI - High Net Worth Individual: Invests above Rs.2 lakhs
- DII - Domestic Institutional Investor: Banks, LIC, Mutual Funds, etc.
- FII/FPI - Foreign Institutional Investors / Foreign Portfolio Investors
Position Types
Long Position
"Going long" simply references the direction of your trade.
- If you have bought or intend to buy shares, you are said to be "long"
- Example: If you buy Biocon shares or Nifty Index expecting price to go up, you have a long position
- When you are long on a stock/index, you are said to be bullish
Short Position
"Going short" or "shorting" describes a transaction carried out in a particular order.
Concept: In shorting, you:
- First sell at a price you perceive as high
- Then buy back at a lower price later
Example:
- Day 1: Buy Wipro at Rs.405
- Day 3: Sell Wipro at Rs.425 → Profit Rs.20
- Day 4: Stock still at Rs.425, you expect it to fall
- Short: Sell at Rs.425 (first leg)
- 2 days later: Buy back at Rs.405 (second leg) → Profit Rs.20
Mechanism:
- When you short, you are essentially borrowing shares from someone else in the market
- When you buy back, you return the shares
- Exchange facilitates the borrowing and returning process in the backend
- From your perspective, just select the stock and click "sell"
Important Notes:
- You cannot sell shares you don't own unless you short
- Shorting works seamlessly - you won't realize you're borrowing
- When you short, you have a bearish view on the stock
- You profit if stock price goes down
- You lose if stock price goes up after shorting
- For holding short positions for few days, best done on derivatives markets
Position Summary Table
| Position | 1st Leg | 2nd Leg | Expectation | Make Money When | Lose Money If |
|---|---|---|---|---|---|
| Long | Buy | Sell | Bullish | Stock goes up | Stock price drops |
| Short | Sell | Buy | Bearish | Stock goes down | Stock price goes up |
Square Off
Square off means to close an existing position.
| When You Are | Square Off Position Is |
|---|---|
| Long | Sell the stock |
| Short | Buy the stock |
Important:
- When selling to square off a long position, you are NOT shorting
- When buying to square off a short position, you are NOT going long
Intraday Position: Trading position initiated with expectation to square off within the same day.
Short Covering & Short Squeeze
Short Covering
Short covering refers to buying back borrowed securities to close out an open short position at a profit or loss. Requires purchasing the same security initially sold short, also called "buy to cover".
- Results in either profit (if asset repurchased lower than sold) or loss (if higher)
- May be forced if there's a short squeeze and sellers become subject to margin calls
- Measures of short interest help predict chances of a squeeze
Short Squeeze
A short squeeze is an unusual condition triggering rapidly rising prices in a stock or tradable security.
Occurs when:
- Security has unusual degree of short sellers holding positions
- Price jumps higher unexpectedly
- Short sellers coincidentally decide to cut losses and exit positions
Characteristics:
- Accelerates stock price rise as short sellers bail out to cut losses
- Contrarian investors try to anticipate short squeezes
- Both short sellers and contrarians make risky moves
Key Difference: "Short covering" = buying back to close position. "Short squeeze" = situation where price increase forces mass short covering.
Market Types & Trends
Market Types
- Bull Market - Prices generally rising
- Bear Market - Prices generally falling
- Recovering Market - Market bouncing back from decline
- Market Crashes - Severe, sudden decline
- Sideways Market - Trading flat with little movement
Bull Market (Bullish)
If you believe stock prices are likely to go up, you are said to be bullish on the stock price. From broader perspective, if stock market index is going up during a particular period, it's referred to as bull market.
Bear Market (Bearish)
If you believe stock prices are likely to go down, you are said to be bearish on the stock price. From broader perspective, if stock market index is going down during a particular period, it's referred to as bear market.
Trend
The term "trend" refers to the general market direction and its associated strength.
- Bearish trend: Market declining fast
- Sideways trend: Market trading flat with no movement
Key Market Terms
OHLC - Open, High, Low, Close
- Open (O): Price at which stock opens for the day
- High (H): Highest price at which stock trades during the day
- Low (L): Lowest price at which stock trades during the day
- Close (C): Closing price of the stock
Example: ACC on June 17, 2014 - OHLC was 1486, 1511, 1467, 1499
Note: Last Traded Price (LTP) usually differs from closing price. Closing price on NSE is the weighted average price of last 30 minutes of trading.
Face Value
Face Value (FV) or par value indicates the fixed denomination of a share. Important for corporate actions.
- Dividends and stock splits are announced keeping face value in perspective
- Example: FV of Infosys is Rs.5. If they announce annual dividend of Rs.63, it means dividend paid is 1260% (63 divided by 5)
52 Week High/Low
- 52 Week High: Highest point at which stock has traded during last 52 weeks (1 year)
- 52 Week Low: Lowest point at which stock has traded during last 52 weeks
Gives sense of range within which stock has traded during the year.
Beliefs:
- Stock reaching 52-week high may indicate bullish trend for foreseeable future
- Stock hitting 52-week low may indicate bearish trend for foreseeable future
All-Time High/Low
Similar to 52-week high/low, but:
- All-Time High: Highest price stock has ever traded since listing
- All-Time Low: Lowest price stock has ever traded since listing
Upper Circuit / Lower Circuit
Exchange sets up a price band within which stock can trade on a given day.
- Upper Circuit Limit: Highest price stock can reach on the day
- Lower Circuit Limit: Lowest price stock can reach on the day
- Limits set to 2%, 5%, 10%, or 20% based on exchange's selection criteria
- Purpose: Control excessive volatility when stock reacts to company news
Gap Up / Gap Down Opening
- Gap Up Opening: Stock opens higher than previous close (green up triangle ▲)
- Gap Down Opening: Stock opens lower than previous close (red down triangle ▼)
- Unch (Unchanged): Opening same as previous close
Volume
Volumes represent total transactions (both buy and sell together) for a particular stock on a particular day.
- Example: On June 17, 2014, volume on ACC was 5,33,819 shares
- Volumes and their impact on stock prices is explored in detail in technical analysis module
Book Value
Book value reflects the total value of company's assets that shareholders would receive if company were liquidated.
- Book value literally means value of business according to its books (accounts)
- Reflected through financial statements
- Theoretically represents total amount company is worth if all assets sold and all liabilities paid back
- This is the amount creditors and investors can expect if company is liquidated
EPS (TTM) - Earnings per Share (Trailing Twelve Months)
TTM = Trailing 12 months, a term used to describe past 12 consecutive months of company's performance data for reporting financial figures.
Bid & Offer Price
- Bid Price: Buy price - Number of people wanting to buy share at this price
- Offer Price: Sell price - Number of people wanting to sell share at this price
Corporate Actions
Bonus Shares
- Example: 1:2 means one bonus share for each 2 shares held
- Ex-Bonus Date: Date on which shares start trading at revised price
- Record Date: Date on which shares should be in your demat account
- Announcement Date: Date when bonus declared
- Must buy 1 day before ex-bonus date to be entitled to bonus
Trading & Demat Accounts
Demat Account
- Demat = Dematerializing shares into digital format (not physical paper)
- Acts as a bank for shares
- Where shares bought are deposited
- Where shares sold are taken from
Trading Account
- Used to place buy or sell orders in stock market
Trading Terminology
- MIS - Margin Intraday Settlement
- CNC - Cash and Carry (select for delivery trades to hold shares for days/months/years in demat)
- NRML - Normal (for intraday or positional trades)
- BTST - Buy Today, Sell Tomorrow
- ATST - Acquire Today, Sell Tomorrow
- T+2 Day: Trade date + two days (when money/shares settle in account)
Market Sessions
Pre-Opening Session (9:00 - 9:15 AM):
- 9:00-9:07 AM: Placing orders
- 9:07-9:11 AM: Matching
- 9:11-9:15 AM: Stabilization
Normal Trading: 9:15 AM - 3:30 PM
After Market Order (AMO): 4:00 PM to 9:15 AM (approved next day at 9:15 AM)
Investment Instruments
GDR - Global Depository Receipt
A Global Depository Receipt (GDR) is a certificate issued by a depository bank which purchases shares of foreign companies and creates a security on local exchange backed by those shares.
Characteristics:
- Global equivalent of American Depositary Receipts (ADR)
- Represents ownership of underlying number of shares of foreign company
- Commonly used to invest in companies from developing/emerging markets
- Prices based on related shares' values, but traded independently
- Typically: 1 GDR = 10 underlying shares (any ratio can be used)
- Negotiable instrument denominated in freely convertible currency
- Enables company (issuer) to access investors in capital markets outside home country
Issued by: JPMorgan Chase, Citigroup, Deutsche Bank, The Bank of New York Mellon
Trading venues: Frankfurt Stock Exchange, Luxembourg Stock Exchange, London Stock Exchange (International Order Book - IOB)
CFD - Contract for Difference
The Contract for Difference (CFD) offers European traders and investors opportunity to profit from price movement without owning the underlying asset.
Characteristics:
- Calculated by asset's movement between trade entry and exit
- Computes only price change without consideration of asset's underlying value
- Accomplished through contract between client and broker
- Does not utilize stock, forex, commodity, or futures exchange
Binary Option
A binary option is a financial product where buyer receives payout or loses investment based on if option expires in the money.
Characteristics:
- Depends on outcome of "yes or no" proposition (hence "binary")
- Has expiry date and/or time
- At expiry, price of underlying asset must be on correct side of strike price (based on trade taken) for trader to make profit
Carry Trade / Carry Forex
A currency carry trade is a strategy where high-yielding currency funds the trade with low-yielding currency.
Characteristics:
- Trader attempts to capture difference between rates
- Can be substantial depending on leverage used
- One of most popular trading strategies in forex market
Popular carry trades:
- Australian dollar/Japanese yen
- New Zealand dollar/Japanese yen
- (High interest rate spreads)
Process:
- Find currency offering high yield
- Find currency offering low yield
- Borrow low-yield currency
- Invest in high-yield currency
Employee Stock Plans
| Term | Definition |
|---|---|
| Capital Gains Tax | Tax on positive return from investment where sale price > purchase price |
| Capital Loss | Negative return where sale price < purchase price |
| ESPP | Employee Stock Purchase Plan - allows employees to purchase company stock via accumulated payroll deductions, sometimes at discount |
| Holding Period | Time that stocks/options must be held before they can be sold/exercised (described in plan documents) |
| In the Money | Stock option where current market price > grant price |
| Out of the Money | Stock option "under water" where grant price > current market price |
| Positions | Stock you hold in account for particular company (e.g., hold stock in 2 companies = 2 positions) |
| RSA | Restricted Stock Award - company stock grant where rights are restricted until award vests; once vested, deposited to Fidelity Account |
| RSU | Restricted Stock Unit - grant valued in company stock, restricted until vests; after vesting, company distributes shares or cash equivalent |
| SAR | Stock Appreciation Right - provides ability to profit from appreciation in value of set number of shares over set period |
| Stock Swap | Form of option exercise where you exchange shares you currently own instead of cash to pay exercise cost |
| Stop Order | Generally used to protect profit or prevent further loss if price moves against you; can also establish position if it reaches threshold or close short position (not all securities/sessions eligible) |
| Vesting | When participant has earned right of ownership and options/restricted stock becomes available to sell; occurs after company-designated time frame |
| Vesting Schedule | Schedule of when and to what extent awards become available based on time periods |
Derivatives & Investment Vehicles
NFO - New Fund Offer
A New Fund Offer (NFO) refers to introductory offer of a scheme by an asset management company.
Characteristics:
- NFO raised when fund is launched to raise capital for purchasing securities
- Can subscribe only within limited time period
- Functions on first-come-first-serve basis
Types:
- Open-ended funds: Officially launched after NFO ends. Investors can enter/exit anytime after launch.
- Close-ended funds: Does not allow entry/exit after NFO period until maturity (typically 3-4 years). May trade on stock market but liquidity tends to be low.
SAFE Note - Simple Agreement for Future Equity
SAFE notes are simpler alternative to convertible notes, created in 2013 by Y Combinator.
Characteristics:
- Allow startups to structure seed investments without interest rates or maturity dates
- Short five-page documents
- Valuation caps are only negotiable detail
- Convertible security that allows investor to buy shares in future priced round
- Like option/warrant
- Addresses drawbacks of convertible notes
- Startups prefer because they are not debt and therefore don't accrue interest
Term Sheet
- Nonbinding agreement outlining basic terms and conditions under which investment will be made
- Most often associated with startups
- Crucial for entrepreneurs to attract investors (VCs with capital to fund enterprises)
Should include:
- Company valuation
- Investment amount
- Percentage stake
- Voting rights
- Liquidation preference
- Anti-dilutive provisions
- Investor commitment
Stock Market Crash Strategies
How should an investor deal with possibility of stock market crash? Three available options for portfolio of high-quality companies:
- Preemptive Timing: Sit on cash in anticipation of crash, deploy cash at bottom
- Ride the Tide: Stay fully invested at all times (can't time markets), do nothing during crash
- Post-facto Rebalancing: Stay fully invested, rebalance portfolio for position sizing dislocations caused by differential drawdowns during crash
Other Important Terms
Absolute Return:
The National Association of Software & Services Company (NASSCOM): Industry association for Indian IT and BPM industry
Party Fund Stocks: Get in and out quickly and use the money to party (high-risk speculative plays)
20 Market Depth: View 20 levels of bid/ask prices instead of standard 5 levels. Provides deeper insight into order book and liquidity.
Bulls, Bears, and Pigs
"Bulls make money, bears make money, but pigs get slaughtered."
- Bulls (optimists) make money in rising markets
- Bears (pessimists) make money in falling markets (via shorting)
- Pigs (greedy traders) get slaughtered by taking excessive risks
Related Topics
References
- Zerodha Varsity - Common Jargons
- Investopedia Trading Terms
- SEBI Guidelines and Regulations