Stock

Market
Terminolo
gy
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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
companys 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

A-B
Accumulated depreciation
The depreciation that has taken place on a particular asset up
to the present time
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
companys short term debt can be met by selling all the
companys liquid assets at very short notice
Book value
A companys 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. ADRs 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 businesss 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 companys 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 youll 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 companys 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 companys 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 `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
companys 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 Companys 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 `10 then it may also be stated that its nominal
value is `10
Nasdaq
National Association of Securities Dealers Automatic Quotation
SystemAn American stock exchange. Its 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 the 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 Ratiox
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 `100 may be split into ten shares of `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 `100 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 undersubscribed 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 IPOs
Recent big IPOs

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 dramasBarbarians at the
Gate
Role of Sebi in Scams
Measures
Current Scenario