Stock Market Terminology

8/3/2019 Stock Market Terminology

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Triumphant Institute of

Management Education Pvt. Ltd.

Terminology

Accounting; Stock Markets



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Terms - A Accounting equation

The fundamental balance sheet equation: namely, assets = liabilities

+ net worth Accounts payable

Money which a company owes to vendors for products and services purchased on credit. This item appears on the company's balance sheet as a current liability, since the expectation is that theliability will be fulfilled in less than a year. When accounts payable

are paid off, it represents a negative cash flow for the company Accounts receivable

Money which is owed to a company by a customer for products andservices provided on credit. This is treated as a current asset on a

balance sheet. A specific sale is generally only treated as an accountreceivable after the customer is sent an invoice

Accumulated depreciation The depreciation that has taken place on a particular asset up to the

present time.

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A-B Acid-test ratio

The ratio of current assets less inventories to total currentliabilities. This ratio is the most stringent measure of how wellthe company is covering its short-term obligations, since theratio only considers that part of current assets which can beturned into cash immediately (thus the exclusion of inventories). The ratio tells creditors how much of the

company's short term debt can be met by selling all thecompany's liquid assets at very short notice

Book value A company's common stock equity as it appears on a balance

sheet, equal to total assets minus liabilities, preferred stock,

and intangible assets such as goodwill. This is how much thecompany would have left over in assets if it went out of business immediately

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A-B

Arbitrage

Profiting from differences in price of the samesecurity/currency traded on two or more markets. Anarbitrageur makes money by buying in the lower market andimmediately selling in the higher market, or vice versa,thereby making a profit.

American Depository Receipt (ADR)

A stock representing a specified number of shares in a foreigncorporation. ADR's are bought and sold in the Americanmarkets just like regular stocks. An ADR is issued by a U.S.Bank, consisting of a bundle of shares of a foreign corporationthat are being held in custody overseas

Basis Point (BP)

The smallest measure used in quoting yields on fixed incomesecurities. One basis point is one percent of one percent, or 0.01%.



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B

Bears

These stock market animals are pessimists, they expectshare prices or any other type of investment to fall. In a 'bear market' the general sentiment is that prices are going to golower and majority of dealers will sell as quickly as possiblefor fear of holding shares which diminish in value

Bear Market

A prolonged period of falling securities prices in a stockmarket

Bonus A free allotment of shares made in proportion to existing

shares out of accumulated reserves. A bonus share does notconstitute additional wealth to shareholders. It merely signifies

recapitalization of reserves into equity capital. However, theexpectation of bonus shares has a bullish impact on marketsentiment and causes share prices to go up.



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B Blue Chips

Blue Chips are shares of large, well established and financiallysound companies with an impressive records of earnings anddividends. The price volatility of such shares is moderate

Bull A bull is one who expects a rise in price so that he can later sell

at a higher price

Bull Market A rising market with abundance of buyers and few sellers Brokerage

Brokerage is the commission charged by the broker. Themaximum brokerage chargeable is determined by SEBI

Basket Trading Basket trading is a facility by which investors are in a position to

buy/sell all 30 scrips of Sensex in the proportion of currentweights in the Sensex, in one go.



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B-C Beta

It is a standard measure of risk for an individual stock. It is thesensitivity of the movement of the past share price of a stockto the movement of the market as a whole. The beta of themarket is taken as 1. A benchmark index (the Sensex, for instance) is taken as the proxy for the market.Stocks with betas greater than 1 tend to amplify themovement of the market. If a stock has a beta of 1.20, itmeans that if the market has moved by 1%, the stock price

would have moved by an extra 1.2% Bourse

The floor of a Stock Exchange Clearing House

Each Exchange maintains a clearing house to act as thecentral agency for effecting delivery and settlement of contracts between all members. The days on which memberspay or receive the amounts due to them are called pay-in or pay-out days respectively



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C Correction

Temporary reversal of trend in share prices. This could be a

reaction (a decrease following a consistent rise in prices) or arally (an increase following a consistent fall in prices)

Closing Price The trade price of a security at the end of a trading day.

Based on the closing price of the security, the base price atthe beginning of the next trading day is calculated

Capital Adequacy The test of a securities business's ability to meet its financial

obligation.Capital adequacy rules mean that a bank/financialinstitution has to have enough money to conduct its business

Coupon Interest rate on a debt security that the issuer promises to pay

to the holder until maturity. Usually expressed as apercentage of the face value



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C Capitalization

The total value of the company in the stockmarket.This valueis arrived at by multiplying the number of shares in issue bythe company's share price. This market capitalizationobviously fluctuates as the share price moves up and down

Consideration

Consideration is the total purchase or sale amount associatedwith a transaction. The amount you 'pay' or 'receive'. It mayalso be the basis for working out the commission, taxes andany other charges you are asked to pay

Convertible Any security is described as convertible when it carries the

right or option for the holder to at some stage convert it in for another form of security at a fixed price. Convertibles areoften bonds or loan stock



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C

Correction A correction is a term to describe a downward movement in

share prices. In other words, a shake out or even a crash or mini-cash

Cumulative preference share Preference shares whose dividends will get accumulated, if

the issuer does not make timely dividend payments. Convertible preference shares

Preference shares that can be converted into equity shares atthe option of the holder.

Commercial Paper (CP)

CPs are negotiable, short-term, unsecured, promissory noteswith fixed maturities, issued by well rated companiesgenerally sold on discount basis.



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D Deep Discount Bond

It is loan instrument different from an ordinary debenture

which is usually offered at its face value and earns periodicinterest till redemption and is redeemed with or withoutpremium. Deep discount bond is offered at a discount andfetches no periodic interest and is redeemed at the face value

Dividend This is the income you receive as a shareholder from a

company. A dividend is a cut of the profits earned by thebusiness for the year. This pay-out is not guaranteed andwhere it exists at all, the amount you'll receive will vary fromcompany to company and year to year

Debenture A loan raised by a company, paying a fixed rate of interest

and which is secured on the assets of the company. Theymay be secured by a floating charge on the company's assetsor they may be tied to specific, named assets.Debentureinterest has to be paid by a company whether it makes a profitor not



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D Demat trading

Demat trading is trading of shares that are in the electronic formor dematerialised shares. Dematerialisation is the process by

which shares in the physical form are cancelled and credit in theform of electronic balances are maintained on highly securesystems at the depository

Dividend yield Annual dividend paid on a share of a company divided by

current share price of that company. Diversification-

Investing in a basket of shares with different risk-reward profileand correlation so as to minimize unsystematic risk.

Discounted payback period Period in which future discounted cash in- flows equal the initial

outflow. Discount factor Expected rate of return by which, future cash flows are deflated



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D-E Downgrade

Refers to lowering of ratings for a share by analysts,intermediaries or investors

Earnings Per Share (EPS) This measure expresses how much the company is earning

for every share held. The calculation is 'pre-tax profit dividendby the number of shares in issue'. EPS provides a puremeasure of profitability

ESOP Employee Stock Option Plan is a trust established by a

company to allot some of its paid-up equity capital to itsemployees over a period of time. They are used to rewardemployees

Efficient capital market :-A market in which all the players have all the material informationat their disposal at the same time



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F Flotation

The first occasion on which a public company’s shares are

offered widely to investors on the market Futures

A contract for the purchase and sale of a commodity, financialinstrument or index at a fixed price at a fixed date in thefuture. Futures contracts were originally invented to allowthose who regularly buy and sell goods to protect themselves

against future changes in the price of those goods. In other words, the futures markets evolved to allow producers or consumers to hedge their risk

Forward trading Forward trading refers to trading where contracts traded today

are settled at some future date at prices decided today. Thus

a contract to buy dollars at Rs.42 per dollar after 3 months isa forward contract. The price is fixed today but the settlementwill be after 3 months



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F-G Floating Stock

The fraction of the paid-up equity capital of a company which

normally participates in day to day trading Gilts

Gilts (government bonds) are those used by the Governmentto raise money from large financial institutions like pensionfunds and from private investors. Money is needed by theGovernment because the Treasury so often finds that its

expenses exceed its income. Gilts are referred to as 'giltedged securities‘/ 'bonds‘/ 'fixed interest securities‘ Global Depositary Receipt (GDR)

These are negotiable certificates which prove ownership of acompany's shares.They are marketed internationally, mainlyto financial institutions. GDRs allow purchasers to gain

exposure to companies which are listed on foreign marketswithout having to purchase the shares directly in the marketin which they are listed



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G-H Growth Fund

A mutual funds which invests only in equity shares which offer

chances of good capital growth, rather than current income Hedging

A practice of taking one market position to offset potentialloses in another. For example using a futures contract toreduce the impact of price fluctuations in a cash or physicalmarket

Insider trading Trading on information which is not really available to the

general public. Trading in a Company's shares by aconnected person having non-public, price sensitiveinformation, such as expansion plans, financial results,

takeover bids, etc., by virtue of his association with thatCompany, is called insider trading



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I-J-K Issued Share Capital

This is the total number of shares a company has made

publicly available multiplied by the total nominal value of theshares Inactive Shares

Shares which are seldom bought and sold in the stockexchange, although they are listed. A share which istransacted less than four times a year may be called inactive

or dead. It is quite difficult to find a buyer or a seller for suchshares Jobbers

Member brokers of a stock exchange who specialise inbuying and selling of specific securities from and to fellowmembers. Jobbers do not have any direct contact with the

public Kerb Dealings Transactions done among members after the closing of the

official trading hours



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L Listed Company

A public limited company which satisfies certain listingsconditions and signs a listing agreement wit the stockexchange for trading in it securities. One important listingcondition is that 25% of its issued capital should be offered tothe public

LIBOR

LIBOR stands for London Inter Bank Offer Rate. It's the rate of interest at which banks offer to lend money to one another inthe wholesale money markets in the City of London. Moneycan be borrowed overnight or a period of in excess of fiveyears

LIBID Banks also offer to borrow money in the wholesale money

markets. The rate is called the London Inter Bank Bid Rate(LIBID)



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M Market maker

Market makers are players in the stockmarket who mayactively try to encourage/discourage trading by changing theprices they quote to tempt buyers and sellers into the market

Market lot Market lot is the minimum number of shares of a particular

security that must be transacted on the Exchange Market capitalization

Market capitalization is the market value of the equity of acompany. Simply put, it is the number of outstanding sharesmultiplied by the market price of the company

Market risk

This arises whenever one invests in a specific market. This isthe risk that every business operating in that market mustbear - and is thus not avoidable by diversification



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N Nominal Value

The nominal value is the face value of share. If the face value

of a share is Rs. 10 then it may also be stated that its nominalvalue is Rs. 10 Nasdaq

National Association of Securities Dealers AutomaticQuotation SystemAn American stock exchange. It’s alsoknown as the technology heaven for companies in that

category Odd Lot market

The market in which odd lot orders are recorded. Odd Lotorders have a quantity less than one regular lot. These sharesare illiquid in nature, cannot be transacted on the Exchange

Oversubscribed A company may offer for sale a certain number of shares. If

applications are received for shares in excess of the number offered, the issue is termed as oversubscribed



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P Panic Selling

A condition of the stock market in which not onlyinexperienced investors, but also sturdy bulls, take fright and

start selling. It may be caused by sudden unfavourable newsor rumour, or a Random Walk by shares downwards

Pari Passu This is a Latin term and it means, "having equal rights". When

shares are issued pari passu with existing shares it meansthat the new shares would be equal to and have identical

rights with the existing shares Price band

Price bands set te upper and lower limit within which asecurity price can fluctuate on a given day/settlement. Ordersoutside these price bands will not be executed by the system

Price rigging

When persons acting In concert with each other collude toartificially increase or decrease the prices of a security, thatprocess is called price rigging



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P

Portfolio The group name for the entire collection of investments

belonging to an investor or held by a financial organizationsuch as a bank, pension fund or investment trust.The idea of a portfolio is that you should invest in a diversifed selection of investments. Don't have all your eggs in one basket

Price sensitive information Price sensitive information is information about a company's

trading or other affairs which would, if generally known, beexpected to have an influence on its share price

P/E Ratio or Price-Earnings Ratio: An indicator of how highly a share is valued in the market.

Arrived at by dividing the price or a share by the earnings per share (EPS)



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R

Rights Issues

The issues of new shares to existing shareholders in a fixedratio to those already held at a price which is generally belowthe market price of the old shares. Typically, the subscriptionprice of a rights issue is significantly below the market price of the old shares

Real Return

The rate return earned on an investment after adjusting for the rate of inflation

Real Interest Rate Current interest rate less the rate of inflation

Repos

Short- term money market instrument; transaction where oneparty agrees to sell a security to another party for cash. Theseller agrees to repurchase the security later



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S Slump

The bottom of a trade cycle when prices and employment areat their lowest, reflected in the downward movement of shareprices, Recovery from a slump is often slow

Spot Spot purchase or sale implies that the deal is for immediate

cash and the shares are to be delivered immediately

Stag A stag is an investor or speculator who subscribes to a new

issue with the intention of selling them soon after allotment torealise a quick profit

Secondary MarketWhen stocks or bonds are traded or resold, they are said to be

sold on a secondary market. The majority of all securitiestransactions take place on a secondary market. They arenormally conducted through the relevant exchange

S



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S Splitting/Consolidation

The process of splitting shares that have a high face value intoshares of a lower face value is known as splitting. For e.g: A

share with a face value of Rs 100/- may be split into ten sharesof Rs 10/- each. The reverse process of combining shares thathave a low face value into one share of higher value is knownas consolidation

Share swap An arrangement by which shares of one company are swapped

for another in a specified ratio Screen Based Trading Screen based trading uses modern telecommunications and

computer technology to combine information transmission withtrading in financial assets. Trading members are connected tothe Exchange from their workstations to the central computer located at the Exchange via satellite using VSATs (Very SmallAperture Terminals). Buy and sell orders from the brokers reachthe central computer located at NSE and are matched by thecomputer

S T



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S-T Stock split

Splits are about as exciting as getting change for a Rs100

note. Depending upon the split ratio one share of a companyis split into the decided number. This is done by reducing theface value of the scrip. Stock splits are expected to improveliquidity in a stock

Turnover Limit This indicates the aggregate trade value limit on a daily basis

set for a trading member. The Exchange sets the limit for each trading member of the Capital Market. The trade valuefor both buy and sell for a day are accumulated and the totalis checked against this upper limit after every potential tradematch

Trading Member

It refers to a member of the BSE/NSE who is authorised toplace orders in the Capital Market System. The term Broker or Brokerage house is also used to convey the same meaning

U V



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U-V

Unit of Trading The minimum number of shares of a company which are accepted

for normal trading on the stock exchange. All transactions aregenerally done in multiple of trading units. Odd lots are generallytraded at a small discount

Unquoted Shares Shares in some companies, often smaller ones, are not traded on

any stock exchange. Companies are not quoted (or listed) becauseeither: they do not wish to be/ prefer to run their businesses inrelative privacy, or they do not meet the listing requirements, suchas minimum market capitalization

U V



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U-V

Underwrite Under writing is effectively a guarantee wherein the underwriter

(usually a bank, broker or financial institution) agrees to purchase acertain number of shares in the event the issue is under-subscribed for a certain fee

Volatility The rate by which the price of a security fluctuates in changing

market conditions



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V-W Volume of Trading

The total number of shares which change hands in aparticular company's securities. It is the sum of either purchases or sales which necessarily equal. This informationis useful in explaining and interpreting fluctuations in shareprices

Watered

A company that has issued shares in excess of the real valueof the business is said to have watered its capital. It is ineffect similar to the deficit financing done by somegovernments

Wash Sale In a wash sale, the seller repurchases the security

immediately. The purpose of a wash sale, which is not agenuine sale, is merely to establish a record of sale for taxpurposes or for misleading others by creating a falseimpression of rise or fall in prices



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Y-Z

Yield Yield is the annual return you receive from holding

a stock, share or unit trust - it is expressed as apercentage of its price.In the case of shares, theyield is calculated by expressing the dividend as a

percentage of the cost of the investment Yield To Maturity (YTM)

The yield earned by a bond if held to maturity

Zero Coupon Bond

A bond issued at a discount which accrues interestthat is paid in full at maturity



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SEBI

Securities & Exchange Board of India 1992 replacing CCI

Protect Investors

Promote development of market

Promote fair dealing of securities

Ensure efficient and transparent working

Regulate the market

P bli I



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Public Issues The main purpose of the public issue, amongst

others, is to raise money through public and

get its shares listed at any of the recognisedstock exchanges in India

Advantages Money non-refundable

No financial burden- interest exempt/dividend Trading and listing at Stock Exchanges Better Liquidity

Disadvantages

Time consuming/ Expensive Constant scrutiny Takeover threats/Speculative attacks



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Public Issue – Entry Norms

Unlisted Two options

1 Cr NW – 3/5 years – Offer <= 5 times NW Book Building Process – 60% QIB

Listed Intermediaries

Merchant Bankers Underwriters Registrar and Share Transfer Agents

Bankers to Issue Depositories



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Some More Terms-1

Par, Premium and Discount

What are IPO’s

Recent big IPO’s Price band What do high valuations signify Scope for scams TCS

Reliance Retail Airlines



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Some More Terms-2

Share value What does it indicate?

Is there scope for manipulation?

Present Value Concept Discounting principle



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Options

An option is a contract, which gives the buyer (holder) the right, but not the obligation, to buyor sell specified quantity of the underlyingassets, at a specific (strike) price on or beforea specified time (expiration date)

Underlying Option Premium Strike Price or Exercise Price Expiration date Exercise Date Option Holder



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Call and Put Options

Call option gives the holder the right to buy specifiedquantity of the underlying asset at the strike price onor before expiration date. The seller however, has theobligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy Ex: Infy at 3500; premium 100

Put option gives the holder the right to sell specifiedquantity of the underlying asset at the strike price onor before a expiry date. The seller of the put optionhowever, has the obligation to buy the underlyingasset at the strike price if the buyer decides to

exercise his option to sell Ex: Reliance at 300 ; premium 25



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Futures

Futures are agreements/contracts to buy or

sell specified quantity of the underlying assets

at a price agreed upon by the buyer & seller,

on or before a specified time

Buyer and Seller obligated to buy/sell Symmetric risk profile unlike options

Costs are zero for entering into a futures

contract – not so with options Options traded on DTSS



T IME

Scams

Harshad Mehta Ketan Parekh

Barings Bank

Takeover dramas–“Barbarians at the Gate” Role of Sebi in Scams

Measures

Current Scenario

Documents

Stock Market Terminology