What are bid and ask prices?
Bid and ask prices are terms that refer to the prices at which buyers and sellers are willing to trade a stock.
- Bid Price: This is the highest price a buyer is willing to pay for a stock. For example, if someone wants to buy shares of a company for ₹480, that’s the bid price.
- Ask Price: This is the lowest price a seller is willing to accept for a stock. If a seller wants to sell their shares for ₹500, that’s the ask price.
The difference between the bid and ask prices is called the “spread.” For instance, if the bid is ₹480 and the ask is ₹500, the spread is ₹20.
Understanding these prices can help you make better trading decisions, as they show the current demand and supply for a stock.
What is a stock split?
A stock split is when a company divides its existing shares into multiple new shares to boost liquidity and make its stock more affordable. This doesn’t change the overall value of your investment, but it reduces the price per share.
For example, in a 2-for-1 stock split, if you own 100 shares priced at ₹200 each, after the split, you would have 200 shares priced at ₹100 each. Your total investment value remains ₹20,000 (200 shares x ₹100), but now more people might find the lower price appealing, potentially increasing demand.
Companies usually split their stock when the share price is high, making it more accessible for investors.
What is a reverse stock split?
A reverse stock split is when a company reduces the number of its outstanding shares while increasing the share price. This is often done to boost the stock price if it has fallen too low, making it more attractive to investors and meeting exchange listing requirements.
For example, in a 1-for-5 reverse stock split, if you own 100 shares priced at ₹10 each, after the split, you would have 20 shares priced at ₹50 each. Your total investment value remains ₹1,000 (20 shares x ₹50), but the higher price per share might help the company appear more stable or desirable.
Reverse splits can sometimes signal financial troubles, as companies often use them to avoid being delisted from stock exchanges.
What are trading hours for stock exchanges?
Trading hours are the specific times when you can buy and sell stocks on a stock exchange. These hours can vary by exchange and country.
For example, in India, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) typically operate from 9:15 AM to 3:30 PM on weekdays. There’s also a pre-opening session from 9:00 AM to 9:15 AM where you can place orders, but they won’t be executed until the market opens.
In the U.S., the New York Stock Exchange (NYSE) operates from 9:30 AM to 4:00 PM EST. Some exchanges also offer after-hours trading, allowing for buying and selling outside of regular hours, though with lower liquidity and potentially more volatility.
Knowing trading hours is important so you can plan your trades effectively.
What is an Initial Public Offering (IPO)?
An Initial Public Offering (IPO) is the process through which a private company offers its shares to the public for the first time, allowing anyone to buy a piece of the company.
For example, if a tech startup wants to raise funds to expand, it might decide to go public by issuing an IPO. If the company sets the IPO price at ₹200 per share, investors can buy shares during the IPO process.
Once the IPO is completed and the company is listed on a stock exchange, its shares can be bought and sold by the public. This process not only raises capital for the company but also allows early investors to potentially profit as the company grows.
What are mutual funds?
Mutual funds are investment vehicles that pool money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. This allows individuals to invest in a wide range of assets without having to buy each one separately.
For example, if you invest in a mutual fund that focuses on technology companies, your money is combined with that of other investors, and the fund manager uses it to buy shares of several tech companies. This spreads out the risk, as you’re not relying on just one stock to perform well.
Mutual funds are managed by professionals, making them a good option for those who may not have the time or expertise to manage their investments actively. They also come in various types, such as equity funds, debt funds, or balanced funds, catering to different investment goals and risk tolerances.
What are exchange-traded funds (ETFs)?
Exchange-traded funds (ETFs) are investment funds that are traded on stock exchanges, similar to individual stocks. They hold a collection of assets, like stocks or bonds, and allow investors to buy shares of the entire fund.
For example, if you buy shares of an ETF that tracks the Nifty 50 index in India, you’re investing in a fund that includes shares of all 50 companies in that index. This gives you diversification, as your investment is spread across multiple stocks, which can help reduce risk.
ETFs are popular because they can be bought and sold throughout the trading day at market prices, and they often have lower fees compared to mutual funds. Additionally, they provide easy access to various sectors or asset classes, making them a flexible investment option.
What are bonds?
Bonds are debt instruments that allow you to lend money to a company or government in exchange for periodic interest payments and the return of the principal amount at maturity.
For example, when you buy a bond from a government for ₹1,000 with a 5% annual interest rate, the government agrees to pay you ₹50 each year for a set period (like 10 years). At the end of the 10 years, you get your ₹1,000 back.
Bonds are generally considered safer than stocks because they provide fixed income and return your principal at maturity, making them a popular choice for conservative investors seeking steady income. However, they do come with risks, like interest rate changes and the possibility of the issuer defaulting.
What is a hedge fund?
A hedge fund is a type of investment fund that pools money from wealthy individuals and institutional investors to invest in a wide range of assets. Hedge funds often use complex strategies, including short selling, leverage, and derivatives, aiming for high returns.
For example, a hedge fund might invest in stocks, bonds, real estate, or even commodities, and it may take both long and short positions to profit from market fluctuations. If a hedge fund believes a stock will fall, it might borrow shares to sell them now, hoping to buy them back at a lower price later.
Hedge funds are typically less regulated than mutual funds and require a significant minimum investment, making them accessible mostly to accredited investors. They can offer higher potential returns, but they also come with higher risks and fees.
What is a penny stock?
Penny stocks are shares of small companies that trade at very low prices, typically under ₹10 (or $5 in the U.S.). They are often considered high-risk investments due to their volatility and lack of liquidity.
For example, if you buy a penny stock for ₹5, you might own a small piece of a company with high growth potential. However, these stocks can be very unpredictable; they might rise dramatically in value or lose much of their worth quickly.
Investors are often attracted to penny stocks because they can offer significant upside potential, but they should be cautious, as these stocks can also lead to substantial losses and may be subject to less regulatory oversight.
What is a blue-chip stock?
Blue-chip stocks are shares of well-established, financially sound companies that have a long history of stable earnings and reliable performance. These companies are typically leaders in their industry and are known for their ability to weather economic downturns.
For example, in India, companies like Tata Consultancy Services (TCS) and Reliance Industries are considered blue-chip stocks. They tend to provide steady dividends and are viewed as safer investments compared to smaller, more volatile companies.
Investors often favor blue-chip stocks because they offer stability and are less risky than investing in smaller companies, making them a popular choice for long-term investment portfolios.
What are growth stocks?
Growth stocks are shares of companies expected to grow at an above-average rate compared to other companies in the market. These companies typically reinvest their earnings into expanding their business rather than paying dividends.
For example, a tech company developing innovative products might not pay dividends but could see its stock price rise significantly as it grows its sales and profits. Investors buy growth stocks hoping for capital appreciation, meaning they expect the stock’s price to increase over time.
While growth stocks can offer high returns, they can also be more volatile and riskier, as their prices are often based on future performance expectations rather than current profits.
What are value stocks?
Value stocks are shares of companies that are considered undervalued compared to their intrinsic worth, often trading at lower prices relative to their earnings, dividends, or other financial metrics. Investors believe these stocks are a bargain and that their prices will eventually rise as the market recognizes their true value.
For example, if a company has strong fundamentals but its stock is priced lower than its peers due to temporary issues, it might be considered a value stock. An investor might buy this stock, expecting it to rebound and generate returns.
Value stocks are typically seen as less risky than growth stocks, as they often provide dividends and have established business models. However, identifying true value can be challenging, and the stock may remain undervalued for a long time.
What are dividend stocks?
Dividend stocks are shares of companies that regularly return a portion of their profits to shareholders in the form of dividends. These payments provide investors with a steady income stream in addition to any potential capital gains from the stock price increasing.
For example, if you own shares of a company that pays a dividend of ₹2 per share annually and you hold 100 shares, you would receive ₹200 each year just for holding those shares.
Investors often favor dividend stocks for their reliability and income potential, especially those seeking passive income or looking to reinvest dividends for compounding returns. Companies that pay dividends are typically well-established and financially stable, making them a popular choice for conservative investors.
