Key Terms in Stock Broking

Key Terms in Stock Broking

Below is a glossary of essential stock broking and stock market broker terms, grouped by category for easy understanding.

Account and Participants

Stock Broking: The process of buying and selling stocks or other securities through a registered intermediary, i.e., a stock market broker.

Stock Market Broker: A Securities and Exchange Board of India (SEBI) registered intermediary who facilitates trades on behalf of investors. You cannot place trades directly in the market, you need to go through a stock market broker. Brokers may be full-service or discount brokers, offering varying levels of research, advisory, and technical tools.

Demat Account: Short for dematerialised account, it is an account that holds your shares and securities in electronic or digital form. It is opened with a Depository Participant (DP).

Trading Account: Used to place buy or sell orders in the stock market. It is linked to both your demat account and bank account.

Depository: A central institution that holds securities electronically. In India, NSDL and CDSL are the two main depositories.

Depository Participant (DP): An agent of the depository through which you open and operate your demat account. Today, most trading platforms and apps act as both a stock market broker and a DP, allowing you to buy, sell, and hold securities all in one place.

Types of Orders

Market Order: An order to buy or sell a stock immediately at the best available price.

Limit Order: An order to buy or sell a stock at a specific price or better. The order only executes when the price condition is met.

Stop-Loss Order: An order placed to automatically sell a stock when it reaches a certain price, limiting potential losses.

Cover Order (CO): A type of order that includes a compulsory stop-loss order along with the main trade. Commonly used in intraday trading.

Bracket Order (BO): A special order that includes a target price and a stop-loss in one go, ideal for disciplined intraday trading.

Trading Types and Durations

Intraday Trading: Buying and selling stocks on the same trading day before market close. Used to capitalize on short-term price movements.

Delivery Trading: Buying stocks and holding them beyond a single trading day. This is more common among long-term investors.

Margin Trading: Borrowing money from your broker to trade larger quantities than your available capital allows. Increases potential gains but can also lead to sharper losses. For instance, if your broker provides a 4x margin trading facility and you have ₹2,000 in your trading account, you can buy stocks worth ₹8,000.

T+1 Settlement: India follows a T+1 settlement cycle. This means trades are settled one day after the transaction date.

Charges and Fees

Brokerage: The fee charged by your stock market broker for facilitating a trade. It can be a flat fee or a percentage of the trade value.

Securities Transaction Tax (STT): A tax levied by the government on the purchase and sale of securities.

Exchange Transaction Charges: Fees charged by stock exchanges like NSE or BSE for executing trades.

DP Charges: Charges levied by the Depository Participant for selling shares from your demat account.

GST: Goods and Services Tax applied on brokerage and transaction fees.

Trading Journey: From Order to Settlement

• Place Order: You buy/sell a stock via your trading platform.
• Execution: The order is matched and executed on the stock exchange.
• Confirmation: You get a trade confirmation, but the settlement isn’t done yet.
• T+1 Settlement: Shares or money are transferred the next working day.
• Charges Applied: Brokerage, taxes, and DP charges are deducted.

Stock Categories and Segments

• Equity Shares: Ordinary shares that give ownership in a company and a share of profits through dividends and price appreciation.
• Derivatives : Financial contracts like futures and options whose value is derived from underlying assets like stocks or indices.
• Futures Contract: An agreement to buy or sell an asset at a future date at a pre-agreed price.
• Options Contract: Gives the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price before a specific date.
• Initial Public Offering : When a company offers its shares to the public for the first time to raise capital.
• Index: A benchmark like the Nifty 50 or Sensex that tracks the performance of a group of stocks.

Technical and Market Terms

• Bull Market: A period when stock prices are rising or expected to rise.
• Bear Market: A market trend where prices are falling or expected to fall.
• Volatility: Refers to how much and how quickly the price of a stock or market index moves.
• Liquidity: How easily a stock can be bought or sold without affecting its price.
• Volume: The number of shares or contracts traded in a security during a given period.

Regulatory and Safety Terms

• Securities and Exchange Board of India (SEBI): The regulatory authority that governs stock broking activities and protects investor interests in India.
• Know Your Customer (KYC) : A verification process mandated by SEBI to ensure brokers and financial institutions verify client identity.
• Power of Attorney (PoA) : A document that gives your broker authority to debit your demat account for settlement purposes. Optional, but often required.