Stock Trading Terminologies

Stock Trading Terminologies

Margin Amount

The margin amount acts as a financial guarantee placed by the trader with the broker at the start of trading. Brokers use this to ensure traders can cover potential losses.
Its size depends on the securities and trading volume. For derivatives and margin trading, it’s compulsory and calculated using exchanges’ formulas.
Holding a sufficient margin is crucial for maintaining trading positions and avoiding forced sell-offs in case of market drops.

Margin Funding

Margin funding allows investors to leverage their trades by borrowing from brokers. For instance, if you want to buy stocks worth ₹1,00,000 but have only ₹40,000, the broker can lend the balance.
Leveraged buying can amplify profits if shares rise, but risks are notably higher—losses on borrowed funds must be repaid even if the investment loses value.
Brokers charge interest on funded amounts, and margin calls can happen when losses exceed a certain threshold, requiring additional deposits or automatic position liquidation.

Contract Note

The contract note is a legally binding document generated after trade execution. It typically arrives via email or through the broker’s portal.
Key elements:
- Broker’s details (including SEBI registration for regulatory compliance)
- Order details (buy/sell, time stamp, trade reference numbers)
- Security details (name, quantity, price per unit)
- Charges breakdown: brokerage, GST, stamp duty, Securities Transaction Tax (STT)
- Settlement and client details for trade tracking.
Regulators require brokers to share these notes for every completed transaction, promoting transparency and documentation.

Settlement Types

Rolling Settlement

Trades are settled by netting obligations each day: for example, buy 100 shares, sell 50, net buy is 50 shares.
Settlement is usually T+2—two trading days after the transaction.
This system helps ensure quick and regular settlement cycles, reducing counterparty risk.

Account Period Settlement

This older system grouped trades over several days before settling; no longer used since 2002.
Discontinued due to inefficiency and increased risk—rolling settlement is now standard.

Corporate Actions

Corporate actions are events initiated by the company altering securities or shareholder obligations.
Types:
- Dividends: cash payments from profits.
- Stock splits: dividing shares to reduce share value and encourage more trading.
- Bonus issue: allocating free shares in fixed ratios.
- Rights issue: offering existing shareholders more shares at a discount.
- Mergers/acquisitions: organizational consolidation affecting shareholdings.
Shareholders are notified in advance, with key dates like record date (who gets the benefit) and ex-date (to be eligible by this date).

Dividend

Dividends are the distribution of a company’s profit. Paid periodically if the company performs well.
Types: Interim (within the year) and Final (at year-end).
Key dates: Declaration, record, ex-, and payment date.
The company isn’t obliged to pay dividends—a decision made by the board and approved by shareholders.

Bonus Issue

A bonus issue transfers reserves to share capital, increasing shareholders’ holdings without cash payment.
Example: A 2:1 bonus gives a shareholder with 100 shares an additional 200, totaling 300.
Makes the stock more affordable and often reflects positive company performance.
No tax is paid on receipt, but capital gains tax applies on eventual sale.

Stock Split

A stock split, such as 2-for-1, doubles your share count and halves the face value per share.
The market capitalization doesn’t change, but the share price is reduced, inviting smaller investors and increasing trading liquidity.

Rights Issue

Allows existing shareholders to buy additional shares at a reduced price.
Example: For every 4 held shares, you may buy 1 more at a set discount.
Companies use rights issues to raise capital for expansion, debt repayment, or other corporate needs.
Shareholders can exercise, ignore, or sell their rights; unexercised rights can dilute ownership.