Stock Market Glossary

 

Absolute Return

Absolute Return is a total return of a fund or an asset, which is achieved over a fixed span of time. It is usually expressed in terms of percentage. An Absolute Return is normally related to both mutual funds and stock markets. It’s an important criterion to perform any type of research related to market and hence it is mostly used by the investors.

An Absolute Return is entirely different from a Relative Return, which will usually be compared with another measure of benchmark like an S&P 500 market index whereas an Absolute Return depends only on the equity to which it is tied to.

 

Acceleration Covenant

Acceleration Covenant is a phrase or a sentence associated usually with debt securities or loans or swap agreements. If a company or an organization breaks any of the clauses, which includes even a downgrade and a default clause, the company may ask for the immediate repayment of loan and terminate the contract abruptly.

The Acceleration Covenant provides wider protection to those creditors who bid financing assistance to several companies, but when the company is under agony or misery, the acceleration covenant demands to repay the loan instantly.

 

Accomodation Trading

Accomodation Trading is an illegal kind of trading, which is basically used to show increase of loss on the paper in order to achieve the tax set aside. It is analogous to a “wash sale”.

For instance, suppose an investor A has a share bought at the rate of $100 and currently trading at the rate of $75 and now, he might sell this share to investor B for $50 by signing an agreement to buy the share back at $50 from him. This enables him to reject a larger loss without acquiring an actual loss. 

 

Accumulation Plan 

Accumulation Plan is an investment strategy most commonly used by the investors to increase his or her portfolio’s value. This can be achieved by adding more and more shares of presently apprehended equities. The investors can increase their profit or returns by purchasing more number of shares related to stock or mutual fund.

Accumulation Plan is usually referred as “building your nest egg” and it’s also a part of mutual fund. There are a few accumulation plans which consist of investments over several periods of time such as a ten or twenty or even a thirty year of time.

Accumulation/Distribution

Accumulation/Distribution is basically used as an indicator, which helps in monitoring the investors to determine whether they are buying (accumulating) or selling (distributing) the stocks. It can either be applied to a general market or an individual stock.

The Accumulation/Distribution indicator plays a major role at times of difference in the opinion especially when the stock markets are getting higher and A/D is losing or vice versa. The A/D indicator is most commonly used in several stock sites or in the stock charting software. Calculating or estimating the value by hand would seem needless or unnecessary.

 

Anonymous Trading

The buyers and sellers are allowed to put forth their proposals and offers for various stocks without disclosing their identity and this process is known as Anonymous Trading. This enables several buyers and sellers to deal with huge number of stocks without revealing their personal identity to other participants of the market.

However, we cannot conclude that all the trades are totally anonymous. There are a few trades which are partially anonymous enabling the buyers or sellers to reveal their self. The insider trading will always be traced or observed by the Securities & Exchange Commissions.

 

Asset Management Companies

An organization or a company that manages the funds of several investors along with their announced goals is normally known as an Asset Management Company. A lot of money market funds or the mutual funds and many more are operated by these management companies who wish to make money off fees.

Peter Lynch determined that those asset management companies, which trade publicly, have received or made better investments compared to the funds that they manage.

In particular cases, these companies also manage other kinds of assets. For instance, in 2004 banking system reform in China, illegal debt of various banks were exposed and was distributed to 4 nationalized asset management companies, thereby cleansing the banks balance sheet.

Bank Holding Company

If one or more banks in the United States are controlled by a company, then such a company is known as a Bank Holding Company. These companies can even own those banks or have controlling interest in those banks. The task of supervising and regulating these companies or organizations is done by the Federal Reserve.

Due to Recession or Global economical crisis, which took place in 2008, most of the investment banks and financial corporations namely American Express, Goldman Sachs, General Motors Acceptance Corporation and CIT Group switched to bank holding companies as they were sure that changing to a bank holding company would earn them fund and liquidity.

Beating the Gun

Prior to market’s reaction on a news related to stock, if an investor buys or sells a security at an affordable price, then such an act is known as Beating the Gun.

 

Nowadays, as each and every form of trading is converted to be computerized, the task of beating the Gun has become very difficult or impossible especially for average individual investors. Before the news could reach these investors, most professionals would have acted on this information. But however, the market may delay its reaction to such “good news”, if it is in an intensive mood.

 

Bid-Ask Spread

 

For any particular stock, the basic difference between the maximum amount that a buyer is agreeable to pay and the minimum amount that a seller is prepared to sell for is known as a Bid-Ask Spread. It will usually be tighter or smaller to those securities that have highest currency or liquidity.

 

The Bid-Ask Spread plan is practiced even with the foreign currency exchange market. Here, the United States or the Euro has a bid-ask spread of nearly 2 to 3 hundredths of a coinage whereas those currency pairs that are more vague or unclear will have a bid-as spread either five times or more than that.

 

Black Monday

On October 19^th 1987, Dow Jones Industrial Average collapsed nearly about 22% in one day, which set an historical record or testimony and this particular day is known as Black Monday.

 

Though, various reasons were given for the crash, none of them proved to be the correct cause for the crash. It was widely believed that, the only reason for such a situation was panic and fear. In order to reduce the effect of such a crash on economy, the Federal Reserve forcefully interfered into the stock market and this took place after the Black Monday.

 

 

 

 

 

 

Bill of Exchange

 

The bill of exchange is a non-interest-bearing order given in written. It’s basically used in trades, which takes place internationally and forces one party to pay a fixed amount of money to another party at a pre-specified date in the future. As this is a product, which can be transferred to any others, it can compel a party to pay a third party who was not a part of this creation. If the bill of exchange is provided by a bank or any organization run by a bank, then such a bill is known as a bank draft. It will be called as a trade draft if issued by an individual.

 

Breakout Trader

 

Breakout Trader is a kind of trading ­­which makes an attempt to buy or sell when the price of a security moves out of a combined area (upper bound) or when it moves below (lower bound) respectively.

 

Most of the systems including CANSLIM make use of breakouts to attempt when to buy. But they also maintain their selling rules strictly and this enables them to decide when to sell if at all the breakout fails. The breakout traders will achieve a profitable result even if their success rates are low. This is due to their high risk-reward ratios.

 

Bond Anticipation Notes

 

A bond anticipation note is a short term security that is issued in the expectation of a larger bond issue. Here, the government may or may not wish to combine these smaller issues into a larger one. Bond Anticipation note also includes a Callable Bond, which the issuer will transfer or redeem before reaching its maturity. Generally, a bond owner will be paid with the premium only when the particular bond is called. It is also sometimes used to access short term finance that can be paid later once the bond is issued. It can also be used by local municipalities who wish to generate fund for future projects.

 

Bottom-Up Investing

 

An approach of paying attention to the study of specific stock instead of giving more importance to the study of economy or industry is known as Bottom-Up Investing.

 

The Bottom-Up investors rely heavily on the companies they research and invest in and are usually very confident about those companies. This method will usually be practiced by institutional investors as they would be well-equipped with manpower and time to spend in research whereas the individual investors will rarely apply this method of investing.  

 

People like Buffett will spend their whole day in reading newspapers and financial reports of all the major companies from A to Z.

 

 

Chasing the Market

 

Chasing the Market is an approach of getting into a particular position where the development has been established long before. It also involves purchasing a stock, which has achieved its development over a short span of time with a hope to benefit from the force or shorting a stock, which turned down or declined majorly over a short span of time.

 

Chasing the market is considered to be a dangerous fact for all the investors. Especially, its major impact will be laid on novice investors as they enter late to the game and often incur huge loss while challenging to track the market.  

 

Cash Settlement

 

A cash transaction that has been settled along with the cash payment in the amount of profit or loss rather than the any physical delivery of a commodity or other form of underlies. Examples like, futures, indices and option contracts are included.

 

This settlement method is used in option contracts, during the expiry or exercise. The seller can transfer the associated cash position instead of financial instrument.

 

The sellers who are not willing to take the real possession of underlying cash commodity for those the cash settlement is the most convenient way for transacting futures. 

 

The settlement of futures contract in cash with out any asset is called as cash settlement.

 

Crisis

The uncontrolled huge short-sales leading to the excessively depressed prices are called as crisis.  In such cases the respective organization prohibits the short sales and fixes the minimum prices constantly. So that the sales can’t be permitted and the future dealings get closed.

The crisis is due to the failure of management issues and failure of other operations in stock market. However, if crisis occurs the key manages of the particular company plays vital role in that.

The efficient crisis management needs the perfect communication structure that can ensure the inflow of required information to the crisis communication centre. The internal and external stake holders must have to understand the corporate image.

Carry forward trading

When the settlement of trades has been postponed related to the stock exchange till the future settlement period including the interest on the account is referred as carry forward trading.

A trading in which the settlement has been postponed till the next account period on contango charges payment in which the purchases  pays only the interest on borrowed money and the short seller pays only a charge for borrowing securities.

In this we can borrow money and pay interest in order to purchase something, which has the higher rate of interest than the first one. You might borrow at low short term rates and invest that on long term bonds.

Due to the redemption there is a probability of loss of a bond or the other debt security (stocks, preference shares, and bonds) by the issuer before the maturity date. 

Capital Adequacy

This is the percentage ratio of overall primary capital of financial institutions to its assets like, investments and loans. This is a measure of the stability and financial strength.  The Bank for international settlements has made a standard for capital adequacy according to that the banks must have nearly eight percent of their assets.  The bank which lends the 12 dollars for each dollar of its capital is within the mentioned limits.

The capital adequacy is a test securities business’s capability to meet the standards of financial obligation. According to the rules of capital adequacy the financial institution must posses a required amount of money to conduct its business.

Call Risk

This is a risk in which the callable bond may get redeemed before its maturity due to the cash flow risk. The callable bonds are called by the company which has issued them. This means the bonds should be closed by the bond holder to get new bonds at lower interest rates. This facility helps the investor to reinvest their money on the next principal very soon as they expected at very lower interest rates.

This is lenders potential loss due to the repayment of the principal involved in debt instrument. A call risk is the type of reinvestment risk. Normally, its very difficult to reinvest the money on similar form of instruments with the expectation of equal yield.

Consideration

The overall percentage of total sale or purchase amount found associated with the transaction is termed as consideration. That means it includes the amount you pay or receive.  This is the main basic criteria involved in commission, taxes and related any other charges you are suppose to pay.

This is either money or any personal service, given by one person to another person in exchange of either promise or any act. Thus it’s something which has much value. A person might provide either labor or an idea to a business as a substitute for the ownership in shares. It may be cash or it might be a certain amount of equity.

Convertible

The any form of security can be called as convertible when it has an option or right of getting converted in to another form of security at the fixed price at any stage of plan. The most of the convertibles are nothing but a type of bonds or the loan stock which might carry the right to be got converted into ordinary form of share at some future date with in a specified price.

The security can be converted or exchanged to another form or to related security the option of the holder. This provides the best opportunity for the holders.

Depositories

An organization or a company, which plays an important role in keeping track of the securities that belongs to various investors, on request in an electronic form via a registered DP also known as Depository Participant are basically known as the Depositories. The Depositories functions similar to a bank and hence it can be compared to a bank. The major role of a Depository includes holding securities in an account, transferring securities between several accounts as instructed by the account holder and guiding through safe-keeping of shares. It also facilitates transferring ownership without the need to handle securities.

Depository Participant (DP)

A Depository Participant or a DP is an envoy of the depository in the system. The main task of a DP includes maintaining the securities related to a client, keeping track of his/her account balances and also regularly informing the client regarding the status of his/her holdings. According to the regulations of Security Exchange Board of India (SEBI), any form of financial institution, a bank, a stockbroker, a custodian etc can become a Depository Participant. Similar to a depository, even a DP can be compared with a bank only if a Depository is linked to a bank. Only after obtaining an appropriate registration from SEBI, a DP will be offered with depository services. 

Derivatives

Derivative is a financial contract that lies between two or more members and it’s entirely based on forthcoming value of an underlying property. Examples of a derivative include Options and similar kind of instruments. For instance, the cost of any call option on reliance varies depending on the cost of a reliance stock.

Here, the value is entirely ‘derived’ from the value of an underlying property or asset, which may include bullion, currency, live stock, commodities, securities, etc. It is similar to a hybrid contract that consists of a preset fixed time interval such as future, forward, option etc. which are united for the purpose of fulfilling the contract.

Diluted Earnings per Share

Diluted EPS is regarded as a company’s EPS or Earning per share that is estimated using fully diluted shares outstanding. It considers both the convertible bonds and the contact of stock option grants.

In order to determine the dilute EPS, basic EPS needs to be estimated for each and every category on the income statement. And then the dilutive securities are categorized based on their effects, from the most dilutive one to least dilutive and anti dilutive. Finally, the basic EPS number is reduced one by one by applying each one, by skipping those instruments that has an anti dilutive effect.

Discount Brokers

As the name suggests, a Discount Broker will charge much lower commission compared to a Full-Service Broker. Since the commission paid will be comparatively less, a Discount Broker provides you only with a fair and sensible service but not a high-spirited or exuberant service. They suit well to those investors who have spent some time in the field of market. The Discount brokers does not provide any details regarding market analysis, client reports or any additional advice. As there are some drawbacks associated with the Discount Brokers, most investors make use of both Full-Service and Discount broker.

Earnings per Share (EPS)

An Earnings per Share is a tool that is used to measure how favorable is the board of directors for the shareholders. It produces a clear overview of how much the organization benefits for each and every share. It also measures how much a company earns for every single share that is held. The value is calculated by dividing the pre-tax profit by the number of shares under issue. The EPS occupies a very important place compared to an overall reported profit figure and the reason is that an EPS offers us with a clear measure of profitability.

Eurobond

A Eurobond can either be used as a medium or a long-term interest-bearing acquaintance or bond that is created in a few particular international capital markets. A Eurobond is usually denominated in the form of a currency rather than that of a particular place where it is especially used. As Eurobond occupies a major role in any stock market, it will be issued only by a few major borrowers, which includes large multi national companies or organizations, large public bodies and governments organizations etc. Eurobond market is becoming too popular as the investors of secondary market are remaining unknown due to the purpose of evading the tax.

Final Dividend

Final Dividend is a dividend that is paid by an organization or a company to their respective shareholders who are under loss and this happens at the end of a financial year. The amount, which will be paid to a stake holder must be approved and accepted by the shareholder’s AGM or the Annual General Meeting. Here, the shareholders can either accept with the dividend that is recommended by the directors or they can even ask for reducing it, but however they cannot vote to increase the amount of final dividend.

Financial Leverage Ratio

The reliability of business over debt financing is indicated by the Financial Leverage ratio. It is estimated by dividing total asset with the shareholder’s equity. The upper suitable limit will usually be 2:1 with no more than 1/3 of the debt in long term whereas a high FL ratio indicates few difficulty in paying principal and interest while more fund is obtained. Generally, an FL ratio will be incorporated in the spreadsheets of financial statement ratio analysis and this is highlighted towards the left column that offers various definitions, explanations, formulas and calculations of each ratio.

Fundamental Analysis

The process of analyzing the stock based on the companies management and also examining its past and projected financial status and profitability is known as a Fundamental Analysis. Not every individual involved in a stock market will be capable of analyzing a balance sheet. We will be surprised to know that many individuals who play a vital role in the market cannot either analyze a balance sheet or draw a valid conclusion from it. Such persons can handover their market to a good analyst. But see to that you spend some time in revising your profit and loss account and your balance sheet.

Futures Contract

Futures Contract is a form of agreement between two or more parties for a specified asset over a fixed duration of time. It’s similar to binding an agreement legally either to buy or sell commodities or some financial securities at a fixed period of time in the future and also at a cost that is agreed upon today. In case of a Futures Contract, the period of delivery, quality and quantity of the futures contract is specified and is uniform. And the price will be fixed during the time a contract is opened, which should be accepted by both buyers and sellers.

Gilts

Gilts, which are also referred as a Government bond, are used by the Governments in order to raise money a few large institutions that are financially strong. A few of those include a pension fund or some investment from a private organization. Money is most important for a Government as sometimes their expenses exceeds their income. The gilts are usually regarded as ‘bonds’ or ‘gilt edged securities’ or fixed interest securities’. In any circumstance, gilt will usually be issued by a Treasury and in all cases; the investor will receive a fixed rate of interest only after he hands over the cash.

Hedging

Hedging is usually regarded as either offsetting or guarding against a savings or an investment risk. A hedge which incurs no-risk-no gain is basically termed as a perfect hedge and this serves as a precaution to all the investors. An approach or a conservative strategy for reducing the risk that may occur in the future or through some form of derivative is by opening a new opposite position to the one that already exists in the underlying market. Hedging is a process of taking certain positions in securities so that each would offset the other.

Investment Bank

Investment Bank is an organization or a stock brokerage firm, which is involved in accessing new companies or organization’s public IPO, consulting matters related to mergers and acquisitions and handling commercial borrowings etc. An investment bank acts as an intermediary between the investing public and an issuer of securities. The other features handled by an Investment Bank include:

·      Distribution of blocks that pertains to previously issued securities, either via negotiations or through secondary offerings

·      Managing the markets for securities, which are already distributed

·      Acts as a finder in private placements of securities.

Issuing House

Issuing House is a member or a part of the Issuing Houses Association. The major responsibility of an Issuing house is to sponsor the issue for any form of new security based on the Stock Exchange or over a counter market. The definition of an Issuing house also includes a few major merchant banks or the dealers in securities who are involved in such an issue. Its major involvement will be during the flotation process of any company and also the issuing house will advise the company on its particular time or price etc.

Jobbers

Jobbers are the member or brokers of any stock exchange who are specialized in either purchasing or selling certain specific securities from and to fellow members. The Jobbers will not directly contact the public whereas the process continues indirectly, but even though they don’t interact publicly, they provide valuable function or service imparting liquidity to the market. Here, the jobber quotes both the ‘bid’ price (the price or the cost at which he is keen to buy the stock) and the ‘ask’ price (the cost at which he is keen to sell the stock).

Low (price)

Low price is an estimation of price that a product or a security has reached in a specified duration of time. It also includes a daily low or an annual low, which can be expressed in the form of a daily, weekly, monthly or for a 52 week period. For instance, the low for a particular day can be 10, whereas the low for a particular year can be 5. The estimation of a low price assists you to get a clear view on whether today’s price is either an oddness or a rational extensive of a trend.

Margin Accounts

In contrast to a cash account, a margin account is one which provides the investor or a depositor with a line of credit. Here the investor will be allowed to purchase or buy their stocks on a margin level. The investors with margin accounts are more benefited than an investor with cash account as they are capable of purchasing more number of stocks, capable of profiting more and also losing more. Even-though, it has few advantages, the margin accounts are considered to be too riskier; hence it should not be suggested as a starting point.

Moving Average

Moving average is a rolling set of averages that are estimated over a specified time based on certain values. It corresponds to representing the data in a way that would soften few fluctuations and highlights potential trends. It doesn’t suit for amateur investors rather it serves as a way to observe the historical price levels. In order to display the average outlay over time, a moving average will consider some number of price periods. The more you stay behind the averaging period, the more delay you will observe between a regular and a most recent price.

NASDAQ Composite index

The major role of a National Association of Securities Dealers Automated Quotations (NASDAQ) Composite index is to measure all the NASDAQ domestic as well as non-U.S. based general stocks, which are listed on the NASDAQ stock markets. Basically, the NASDAQ Composite Index is a market value weighted, which states that each security that are related to a company would affects the NASDAQ index in proportion to its market depending on the outstanding of total shares. Usually, it will be estimated throughout the trading day or trading period and is closely related to the total value of index.

Opening Price

Opening price is generally estimated depending upon the price at which a stock was sold on the earlier or the previous day. Most of the exchanges have some limits of how much high or low a particular stock can trade on the following day. Opening price functions like a circuit or a limit where everything is based on the percentage of trade that was most recently traded. For instance, if the upper or the lower limit of a stock exchange is 10 and if XYZ stock has finished selling for ay 20.00 the earlier day, the minimum and the maximum opening price for the following day would be 18.00 or 22.00.

Price/Earning Ratio (P/E)

The Price/Earnings ratio gives a clear overview of how the share’s market price grows in proportion to its earnings. It is estimated by dividing the share price by both the forecast and reported annual earnings for each and every share. Regarding an investor, if the ratio of P? E is 10, and then the price would be equivalent to the ten years earnings. The Price/Earning ratio is utilized efficiently by those companies that operate on the same field. For any particular assortment, the P/E ratio is weighted as an average P/E; the greater would be the expectations for an organizations future enhancement in the earnings.

Penny Stocks

Penny Stock is a typical term that is used in the USA stock markets. It’s a low–priced issue that is often highly exploratory or speculative by selling at a minimum rate of less than $1 as a share. The term Penny Stock is used as disparagement, even-though a few of the penny stocks have grown into an investment-caliber problem. In India, the BSE maintains a separate index for the penny stock and they are generally known as low-capped stocks. It does seem unusual, if a bull market is strong to determine a best stock that outpaces the Sensex. These stocks involve larger risks but offers higher returns.

Programmed Trading

The investment strategies or approaches, which make use of computers that, are programmed to enable buying and selling of large amounts of securities in order to take advantage of the cost divergence’s involved in the options or stock index futures and the actual stocks that are represented in those averages. This method is not established to its maximum in India. With this approach, you can get to a computer that is actually involved in trading by exchanging the cheapest buy and sell with an alternative of highest price - which would generally be the objective of any business.

Stock Brokers

The Stock brokers exist in all sizes and shapes. The major role of a stock broker is to provide few guidelines to their investors to lead through the market. Those investors who are at their initial stage will often consider it useful to have a stock broker who guides them telling when to buy or sell the stocks. A good stock broker resides on top of all stock movements whereas a specialist takes care of certain parts of the market. The investors find them important as they offer up to date market trends, results and also market hypothesis.  

Sub-accounts

A Sub-account comprises of institutions (created or integrated outside India) or funds or assortments (created outside India) which is either incorporated or not and the corporate and individuals on behalf of whom savings or investments are planned to be made in India by any Foreign Institutional Investor. The NRIs and the OCBs (Overseas Corporate Bodies) are not qualified for registering in the sub-accounts. Sub-accounts are of two types:

(1) Foreign individuals and corporate who are not permitted to cross more than 5 percent of the capital issued.

(2) Broad-based or the proprietary sub-accounts, who are permitted to invest nearly 10% of the total capital issued.

Securities and Exchange Commission (SEC)

SEC is an organization that is self-regulated having control over some particular broker-dealers. The National Association of Securities Dealers (NASD) requires the member brokers for both registering and conducting examinations for fulfillment of net capital necessities and regulations. Sometime, it also performs surveillance of the market under the (OTC) over-the-counter securities market. The NASD comprises of NASDAQ as a subsidiary that enables trading to nearly 5,000 among the most active over-the-counter issues. And this can be achieved over an electronically connected network. SEC is also defined as a federal agency that stays independent overseeing the exchange of securities in order to protect the investors.

 

EBITDA

EBITDA stands for Earnings before interest, taxes, depreciation and amortization. It is mainly used to measure the cash flow of a company prior to any sought of deductions through which the investors will be able to recognize the amount of money a company makes before amortization, depreciation and taxes are being deducted. Generally, the investors will be willing to know the financial status of a company as they invest a large amount on that particular company. Hence, an EBITDA serves as a resource providing ideas to the investors about the company income. It provides great services to such companies, which newly started its business.

 

Mark-to-Market

Mark-to-Market is a process of keeping track, the prices of a portfolio, security, or account daily in order to estimate the profit or loss or at least confirm that the marginal requirements are met to some extent. The Mark-to-Market is entirely different from a mark-to-model in which the company’s asset values are based on the assumptions of management. A Market price refers to the cost at which an asset is traded in a public exchange. The concept of Mark-to-Money is derived from the accounting law of discretion. It’s basically used for valuing the future contracts where the final value of a contract will not be known until its expiration.

 

Quarterly Refunding

Quarterly Refunding occurs when a company is issued with a 5 or a 10 year notes or sometimes a 30 year bond by the Department of Treasury. It usually takes place during the month of February, May, August and November. Only a 5 or a 10-year note is issued at every quarterly refunding whereas they may be a reopening in an alternating basis. A new note of five-year is offered in the month of May and November with reopenings in August and February whereas a 10-year note is issued in the month of August and February with reopenings in November and May.

 

Yield (Bond)

Yield bond is a rate of interest that is earned through an investment over the bond. The yield amount will be equivalent to the rate of interest, if security was bought on a primary market whereas the yield amount may be lower or higher if bond was bought on a secondary market. Here, the amount depends on whether a bond was acquired through a discount or premium to the face value. While selecting a bond, the investor is required to estimate the Return on investment (ROI). This ROI indicates how profitable or well-paid a bond is, and this is known as bond yield.