Bid/Ask price – Bid price is the quote that indicates the highest price a buyer is ready to pay for a stock at present. In other words, it is the maximum price a buyer is willing to pay for the stock/index at the current trading time. If sellers quote a price above the bid price, trades will not get executed. Ask price is the quote that indicates the lowest price a seller will accept for selling a share/index. In other words, it is the minimum price a seller is ready to accept for executing a sale transaction. If a buyer quotes a price less than the ask price, the sale will not be executed. The bid and ask prices are the current market prices at which buyers/sellers can buy or sell shares in the stock market.
Bid-Ask spread – The difference between the bid price and the ask price is the spread. It reflects the liquidity of the stock (narrow spread refers to high liquidity), trading cost for investors and the supply-demand balance. The formulae for spread = ask price – bid price. For instance, let’s assume that the bid price = ₹980 and ask price = ₹982, the bid-ask spread is ₹2. This ₹2 is the cost gap between what buyers are interested to pay and what sellers wish to receive.
Price determination – It refers to the process by which the current market price of a stock/index is fixed based on the dynamics of supply and demand. It is a process by which the trading system matches the buyer's bid price and the seller's ask price and so that the actual trade is executed on the day.
Topline – In the world of finance & accounting, topline refers to a company’s gross revenue or total sales or turnover. It is the first item on the income statement and so the name. It denotes how much money/turnover the company generated from its core business activities before deducting expenses. For instance, if ABC company sold goods and services worth ₹150 crore, then the topline of the company is ₹150 crore. The topline indicates sales growth and market demand for the company’s products and therefore, if the topline increases year-over-year, it is a good sign for the company.
Bottomline – The bottomline refers to the net profit of the company and is found at the bottom line of the income statement. This is the remaining amount after deducting all expenses such as operational costs, interest paid, taxes paid, depreciation etc. For instance, in the above example, if the overall expenditure of ABC company is ₹25 crore, then the bottomline, that is, the net profit of the company is ₹125 crore. Bottomline = topline – expenses.
Last Trading Price (LTP) – LTP is the last or the most recent price at which a share/an index is purchased or sold in and exchange. LTP is not the current bid/ask price, it is the price at which the last trade was carried out successfully. The LTP of the stock/index keeps on changing throughout the trading day and is not fixed. It reflects the real-time market price of a stock and is calculated based on the demand and supply of the stock or an index.
Block deal – It is a deal when a huge chunk of shares change hands. These are large stock trades carried out between two parties at a pre-determined price. According to the Securities and Exchange Board of India (SEBI), unlike normal exchange trades, block deals involve a significant volume of shares, say at least five lakh shares or a minimum value of ₹10 crore. Usually, block deals are negotiated privately with brokers’ assistance, outside the regular market. Block-deal trades would happen during a special 15-minute window at the start of the trading day.
When compared to the price of normal trades, the prices of block-deal trades would be high as they are done in the price range of +/-1% of either the current market price or the previous day’s closing price.
Market capitalization (or Market Cap) – It is the total market value of a company’s outstanding number of shares. It also means what people think the actual value/worth the company is. In other words, it indicates how big/medium/small a company is in terms of finance. It is one of the crucial ways to categorise and compare stocks in the market. It provides investors an idea about the size of the company. It is this component that helps classification of companies into categories such as large-cap, mid-cap and small-cap. Market capitalisation = current market price of shares × number of shares in a company
Free float Market capitalisation – This method of market capitalisation varies from the standard market capitalisation and considers only the shares that are freely available (free float) for trading by the public at large, in the stock exchanges. It does not consider the number of shares held by the promoters of the company. The free float shares are not held by the promoters, governments, insiders or other long-term strategic shareholders. India follows the free float market capitalisation method. It reflects the actual investable market value/worth of a company. It gives an accurate measurement of stock liquidity and market sentiment.
Free float market capitalisation = current market price of shares × number of free float shares in a company (those not held by promoters)
Delivery-based settlement – In plain sense, it is just known as delivery trade or just delivery. When you buy a stock on delivery basis, you buy actual ownership in the company through those shares, to the extent of shares purchased. In the delivery basis, you have the liberty to hold the shares purchased as long as you want, even for decades, and sell them later. If you hold a share on delivery basis, you are entitled to receive dividends, bonus shares as and when the company gives. Further, you are eligible to participate in rights issues, and you also have voting rights as a shareholder. Delivery is a kind of a long-term trading position.
Intraday – This is a trading position taken by a trader (not investor) with an intention to make quick profits by squaring off the position on the same trading day. If you buy/sell (short) a share on intraday basis, you must compulsorily square-off the position on the same day and cannot carry forward for the next day. Further, intraday positions do not give you ownership power and do not give you voting rights, bonus shares, dividends etc. It is a kind of speculation to make quick profits but not investment.
Square-off ¬– It refers to closing an existing open position by taking the exact opposite trade. Square-off is generally done in intraday trading and derivatives. If you are long on a stock, that is, if you have purchased a stock, you will square-off the long position by selling the stock. On the other hand, if you have short a stock (sold) you will square-off the short position by buying a stock. In the spot market (cash market), shorting/short-selling is intraday, therefore, square-offs should be done before the market closes at 3.30 p.m. on the same trading day.
Understanding the nuances of stock market is a life-long journey, not a sprint. I am not done yet; I have just scratched the surface of the complex walls of the stock market jargons. I shall continue breaking down more jargons to help you trade/invest with confidence like a veteran trader/investor. Catch you later with the fourth part of the series. Until then...