Terminology

Accounting; Stock Markets

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 the liability
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 and
services provided on credit. This is treated as a current asset on a
balance sheet. A specific sale is generally only treated as an account
receivable after the customer is sent an invoice

Accumulated depreciation

The depreciation that has taken place on a particular asset up to the
present time.
A-B

Acid-test ratio

The ratio of current assets less inventories to total current
liabilities. This ratio is the most stringent measure of how well
the company is covering its short-term obligations, since the
ratio only considers that part of current assets which can be
turned 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 the
company'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 the
company would have left over in assets if it went out of
business immediately
A-B

Arbitrage

Profiting from differences in price of the same
security/currency traded on two or more markets. An
arbitrageur makes money by buying in the lower market and
immediately 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 foreign
corporation. ADR's are bought and sold in the American
markets just like regular stocks. An ADR is issued by a U.S.
Bank, consisting of a bundle of shares of a foreign corporation
that are being held in custody overseas

Basis Point (BP)

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

Bears

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

Bear Market

A prolonged period of falling securities prices in a stock
market

Bonus

A free allotment of shares made in proportion to existing
shares out of accumulated reserves. A bonus share does not
constitute additional wealth to shareholders. It merely signifies
recapitalization of reserves into equity capital. However, the
expectation of bonus shares has a bullish impact on market
sentiment and causes share prices to go up.
B

Blue Chips

Blue Chips are shares of large, well established and
financially sound companies with an impressive records of
earnings and dividends. 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. The
maximum 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 current
weights in the Sensex, in one go.
B-C

Beta

It is a standard measure of risk for an individual stock. It is the
sensitivity of the movement of the past share price of a stock
to the movement of the market as a whole. The beta of the
market 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 the
movement of the market. If a stock has a beta of 1.20, it
means 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 the
central agency for effecting delivery and settlement of
contracts between all members. The days on which members
pay or receive the amounts due to them are called pay-in or
pay-out days respectively
C

Correction

Temporary reversal of trend in share prices. This could be a
reaction (a decrease following a consistent rise in prices) or a
rally (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 at
the 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/financial
institution 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 a
percentage of the face value
C

Capitalization

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

Consideration

Consideration is the total purchase or sale amount associated
with a transaction. The amount you 'pay' or 'receive'. It may
also be the basis for working out the commission, taxes and
any 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 are
often bonds or loan stock
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 at
the option of the holder.

Commercial Paper (CP)

CPs are negotiable, short-term, unsecured, promissory notes
with fixed maturities, issued by well rated companies
generally sold on discount basis.
D

Deep Discount Bond

It is loan instrument different from an ordinary debenture which
is usually offered at its face value and earns periodic interest till
redemption and is redeemed with or without premium. Deep
discount bond is offered at a discount and fetches 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 the
business for the year. This pay-out is not guaranteed and where
it exists at all, the amount you'll receive will vary from company
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. They may be
secured by a floating charge on the company's assets or they
may be tied to specific, named assets.Debenture interest has to
be paid by a company whether it makes a profit or not
D

Demat trading

Demat trading is trading of shares that are in the electronic
form or dematerialised shares. Dematerialisation is the process
by which shares in the physical form are cancelled and credit in
the form of electronic balances are maintained on highly secure
systems 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 profile
and 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
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 dividend
by the number of shares in issue'. EPS provides a pure
measure of profitability

ESOP

Employee Stock Option Plan is a trust established by a
company to allot some of its paid-up equity capital to its
employees over a period of time. They are used to reward
employees

Efficient capital market :-
A market in which all the players have all the material information
at their disposal at the same time
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, financial
instrument or index at a fixed price at a fixed date in the
future. Futures contracts were originally invented to allow
those 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 is a
forward contract. The price is fixed today but the settlement
will be after 3 months
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 Government
to raise money from large financial institutions like pension
funds and from private investors. Money is needed by the
Government because the Treasury so often finds that its
expenses exceed its income. Gilts are referred to as 'gilt
edged securities‘/ 'bonds‘/ 'fixed interest securities‘

Global Depositary Receipt (GDR)

These are negotiable certificates which prove ownership of a
company's shares.They are marketed internationally, mainly
to financial institutions. GDRs allow purchasers to gain
exposure to companies which are listed on foreign markets
without having to purchase the shares directly in the market
in which they are listed
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 potential
loses in another. For example using a futures contract to
reduce the impact of price fluctuations in a cash or physical
market

Insider trading

Trading on information which is not really available to the
general public. Trading in a Company's shares by a
connected person having non-public, price sensitive
information, such as expansion plans, financial results,
takeover bids, etc., by virtue of his association with that
Company, is called insider trading
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 the
shares

Inactive Shares

Shares which are seldom bought and sold in the stock
exchange, although they are listed. A share which is
transacted less than four times a year may be called inactive
or dead. It is quite difficult to find a buyer or a seller for such
shares

Jobbers

Member brokers of a stock exchange who specialise in buying
and selling of specific securities from and to fellow members.
Jobbers do not have any direct contact with the public

Kerb Dealings

Transactions done among members after the closing of the
official trading hours
L

Listed Company

A public limited company which satisfies certain listings
conditions and signs a listing agreement wit the stock
exchange for trading in it securities. One important listing
condition is that 25% of its issued capital should be offered to
the 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 in
the wholesale money markets in the City of London. Money can
be borrowed overnight or a period of in excess of five years

LIBID

Banks also offer to borrow money in the wholesale money
markets. The rate is called the London Inter Bank Bid Rate
(LIBID)
M

Market maker

Market makers are players in the stockmarket who may
actively try to encourage/discourage trading by changing the
prices 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 a
company. Simply put, it is the number of outstanding shares
multiplied by the market price of the company

Market risk

This arises whenever one invests in a specific market. This is
the risk that every business operating in that market must
bear - and is thus not avoidable by diversification
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 nominal
value is Rs. 10

Nasdaq

National Association of Securities Dealers Automatic
Quotation SystemAn American stock exchange. It’s also
known as the technology heaven for companies in that
category

Odd Lot market

The market in which odd lot orders are recorded. Odd Lot
orders have a quantity less than one regular lot. These shares
are 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
P

Panic Selling

A condition of the stock market in which not only
inexperienced investors, but also sturdy bulls, take fright and
start selling. It may be caused by sudden unfavourable news
or 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 means
that 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 a
security price can fluctuate on a given day/settlement. Orders
outside these price bands will not be executed by the system

Price rigging
When persons acting In concert with each other collude to
artificially increase or decrease the prices of a security, that
process is called price rigging
P

Portfolio

The group name for the entire collection of investments
belonging to an investor or held by a financial organization
such 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, be
expected 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)
R

Rights Issues

The issues of new shares to existing shareholders in a fixed
ratio to those already held at a price which is generally below
the market price of the old shares. Typically, the subscription
price 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 one
party agrees to sell a security to another party for cash. The
seller agrees to repurchase the security later
S

Slump

The bottom of a trade cycle when prices and employment are
at their lowest, reflected in the downward movement of share
prices, 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 to
realise a quick profit

Secondary Market
When stocks or bonds are traded or resold, they are said to be
sold on a secondary market. The majority of all securities
transactions take place on a secondary market. They are
normally conducted through the relevant exchange
S

Splitting/Consolidation

The process of splitting shares that have a high face value into
shares 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 shares of
Rs 10/- each. The reverse process of combining shares that have
a low face value into one share of higher value is known as
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 with
trading in financial assets. Trading members are connected to the
Exchange from their workstations to the central computer located at
the Exchange via satellite using VSATs (Very Small Aperture
Terminals). Buy and sell orders from the brokers reach the central
computer located at NSE and are matched by the computer
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 company
is split into the decided number. This is done by reducing the
face value of the scrip. Stock splits are expected to improve
liquidity 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 value
for both buy and sell for a day are accumulated and the total
is checked against this upper limit after every potential trade
match

Trading Member

It refers to a member of the BSE/NSE who is authorised to
place orders in the Capital Market System. The term Broker or
Brokerage house is also used to convey the same meaning
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 are generally done in multiple of trading units.
Odd lots are generally traded 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)
because either: they do not wish to be/ prefer to run their
businesses in relative privacy, or they do not meet the listing
requirements, such as minimum market capitalization

Underwrite

Under writing is effectively a guarantee wherein the
underwriter (usually a bank, broker or financial institution)
agrees to purchase a certain 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
V-W

Volume of Trading

The total number of shares which change hands in a
particular company's securities. It is the sum of either
purchases or sales which necessarily equal. This information
is useful in explaining and interpreting fluctuations in share
prices

Watered

A company that has issued shares in excess of the real value
of the business is said to have watered its capital. It is in effect
similar to the deficit financing done by some governments

Wash Sale

In a wash sale, the seller repurchases the security
immediately. The purpose of a wash sale, which is not a
genuine sale, is merely to establish a record of sale for tax
purposes or for misleading others by creating a false
impression of rise or fall in prices
Y-Z

Yield

Yield is the annual return you receive from holding
a stock, share or unit trust - it is expressed as a
percentage of its price.In the case of shares, the
yield 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 interest
that is paid in full at maturity
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

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 recognised stock
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
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
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
Some More Terms-2

Share value

What does it indicate?

Is there scope for manipulation?

Present Value Concept

Discounting principle
Options

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

Underlying

Option Premium

Strike Price or Exercise Price

Expiration date

Exercise Date

Option Holder
Call and Put Options

Call option gives the holder the right to buy specified
quantity of the underlying asset at the strike price on
or before expiration date. The seller however, has the
obligation 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 specified
quantity of the underlying asset at the strike price on
or before a expiry date. The seller of the put option
however, has the obligation to buy the underlying
asset at the strike price if the buyer decides to
exercise his option to sell

Ex: Reliance at 300 ; premium 25
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
Scams

Harshad Mehta

Ketan Parekh

Barings Bank

Takeover dramas–“Barbarians at the Gate”

Role of Sebi in Scams

Measures

Current Scenario