Library / MiyeeStockBuddy: The Complete Guide to Indian Markets

Glossary

Every term used in this guide, in the plainest words available.

Market basics

Ask The lowest price a seller is currently willing to accept.

Bid The highest price a buyer is currently willing to pay.

Circuit limit The daily percentage band beyond which a stock cannot trade that day.

Demat account The electronic locker where your shares are held, in your name, at a depository.

Free float The portion of shares actually available to trade, excluding promoter and locked holdings.

Liquidity How easily you can buy or sell without moving the price against yourself.

Market capitalisation Share price multiplied by the number of shares. What the market says the whole company is worth.

Spread The gap between bid and ask. An invisible cost paid on every trade.

T plus 1 Settlement on the next working day after the trade.

Volume The number of shares or contracts traded in a period.

Fundamental analysis

Contingent liability A possible future obligation not yet on the balance sheet, such as a disputed tax demand.

EBITDA Operating profit before depreciation, interest and tax. Profit from the business itself.

EPS Earnings per share. Net profit divided by the number of shares.

Free cash flow Cash from operations less spending on assets. The money genuinely available to owners.

Moat Whatever stops a well funded competitor from taking the customers.

P/E ratio Price divided by earnings per share. How many years of current profit you are paying.

Promoter pledging Promoters borrowing personally against company shares. A forced selling risk.

Related party transaction Business done with entities the promoters control. Always worth reading carefully.

ROCE Return on capital employed. Profit measured against all capital, borrowed money included.

ROE Return on equity. Profit measured against shareholders’ money alone.

Working capital Money tied up in stock and in customers who have not yet paid.

Technical analysis

ADX Average Directional Index. Measures how strong a trend is, not which way it points.

ATR Average True Range. How far a stock typically moves in a day, in rupees.

Breakout Price clearing a level that previously stopped it. Real ones arrive with volume.

Divergence Price making a new extreme while an indicator does not. A warning, not a trigger.

Doji A candle whose open and close are nearly equal. Indecision.

Golden cross The 50 day moving average crossing above the 200 day.

MACD Moving Average Convergence Divergence. A momentum reading built from two averages.

Resistance A level where sellers have repeatedly stopped a rise.

RSI Relative Strength Index. How stretched a recent move has become, on a scale of 0 to 100.

Support A level where buyers have repeatedly stopped a fall.

Derivatives and options

Assignment When an option you sold is exercised and your obligation is enforced.

At the money A strike roughly equal to the current price of the underlying.

Basis The gap between the futures price and the spot price. It goes to zero at expiry.

Contract value Lot size multiplied by price. Your real exposure, which is not the margin.

Cost of carry The interest cost of holding a position, which is why futures usually trade above spot.

Delta How much the option premium moves for a one point move in the underlying.

European style Exercisable only at expiry. All Indian listed options are European style.

Expiry The date the contract dies. Being right after it is worth nothing.

Gamma How fast delta itself changes. Highest at the money and near expiry.

Implied volatility Expected future movement, worked backwards out of the option price people are paying.

India VIX Expected Nifty volatility over the next thirty days, computed from option prices.

In the money An option that would be worth exercising right now.

Intrinsic value The part of the premium that is real today. Spot minus strike for a call, never below zero.

Lot size The fixed bundle you must trade. Revised periodically by the exchange, so check it.

Margin The deposit the exchange requires to hold an obligation. Not the cost of the position.

Mark to market Daily cash settlement of futures gains and losses, every evening.

Max pain The strike at which the most option value would expire worthless. Useful only very near expiry.

Moneyness Where the current price sits relative to your strike.

Open interest Contracts currently alive and unsettled. Rises only when new money enters on both sides.

Out of the money An option with no intrinsic value. Entirely time value, and all of it decays to zero.

Physical settlement Settlement in actual shares. Applies to Indian stock derivatives, not to index ones.

Premium The price of the option. Intrinsic value plus time value, always.

Put call ratio Put open interest divided by call open interest. A sentiment gauge, best read as a change.

Rho Sensitivity to interest rates. Barely matters for short dated Indian options.

Rollover Moving a position out of the expiring contract and into the next month.

SPAN margin The exchange’s estimate of your worst plausible one day loss on a position.

Strike price The fixed price written into the option contract.

Theta Value lost each day purely from time passing. Negative for buyers, positive for sellers.

Time value Everything in the premium that is not intrinsic value. Always zero on expiry day.

Vega How much the premium moves when expected volatility changes by one percentage point.

Volatility crush The collapse in implied volatility immediately after a scheduled event.

Writer An option seller. Takes the premium and takes the obligation with it.