Share Market Terminology: Part 2

<<<< Share Market Terminology: Part 1

1.     NASDAQ

The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange located in New York City. “NASDAQ” originally stood for “National Association of Securities Dealers Automated Quotations Systems,” but the exchange’s official stance is that the acronym is obsolete. It is the largest electronic screen-based equity securities trading market in the United States and fourth largest by market capitalization in the world. As of January 13, 2011, there are 2,872 listings. The NASDAQ has more trading volume than any other electronic stock exchange in the world.

NASDAQ has three indices; NASDAQ Composite, NASDAQ-100 and NASDAQ Biotechnology Index. Its market capitalization is US$3.08 trillion (Aug 2010).

2.     Blue Chip

A blue-chip stock is stock in a company with a national reputation for quality, reliability and the ability to operate profitably in good times and bad. The most popular index which follows blue chips is the Dow Jones Industrial Average. The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

3.     Book Value

In accounting, book value or carrying value is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost of the asset less any depreciation, amortization or impairment costs made against the asset. Traditionally, a company’s book value is its total assets minus intangible assets and liabilities. However, in practice, depending on the source of the calculation, book value may variably include goodwill, intangible assets, or both.

4.     Market Capitalization

Market capitalization (often market cap) is a measurement of size of a business enterprise (corporation) equal to the share price times the number of shares outstanding (shares that have been authorized, issued, and purchased by investors) of a publicly traded company. As owning stock represents ownership of the company, including all its equity, capitalization could represent the public opinion of a company’s net worth and is a determining factor in stock valuation. Likewise, the capitalization of stock markets or economic regions may be compared to other economic indicators. The total market capitalization of all publicly traded companies in the world was US$51.2 trillion in January 2007 and rose as high as US$57.5 trillion in May 2008 before dropping below US$50 trillion in August 2008 and slightly above US$40 trillion in September 2008.

5.     P/E Ratio

The P/E ratio (price-to-earnings ratio) of a stock (also called its “P/E”, or simply “multiple”) is a measure of the price paid for a share relative to the annual net income or profit earned by the firm per share. P/E reflects the capital structure of the company in question. P/E is a financial ratio used for valuation: a higher P/E ratio means that investors are paying more for each unit of net income, so the stock is more expensive compared to one with lower P/E ratio. The P/E ratio has units of years, which can be interpreted as “number of years of earnings to pay back purchase price”, ignoring the time value of money. In other words, P/E ratio shows current investor demand for a company share.

6.     Spread

The difference between the price paid for a bond (the bid) and the price at which it is offered to an investor (the offer).

7.     Preference Share

Capital stock which provides a specific dividend that is paid before any dividends are paid to common stock holders, and which takes precedence over common stock in the event of liquidation. Like common stock, preference shares represent partial ownership in a company, although preferred stock shareholders do not enjoy any of the voting rights of common stockholders. Also unlike common stock, preference shares pay a fixed dividend that does not fluctuate, although the company does not have to pay this dividend if it lacks the financial ability to do so. The main benefit to owning preference shares are that the investor has a greater claim on the company’s assets than common stockholders. Preferred shareholders always receive their dividends first and, in the event the company goes bankrupt, preferred shareholders are paid off before common stockholders.

8.     Equity share

Equity shares are those shares which are ordinary in the course of company’s business. They are also called as ordinary shares. These shareholders do not enjoy preference regarding payment of dividend and repayment of capital. Equity shareholders are paid dividend out of the profits made by a company. Higher the profits, higher will be the dividend and lower the profits, lower will be the dividend.

9.     Convertible Preference Share

These are preferred issues that the holders can exchange for a predetermined number of the company’s common stock. This exchange can occur at any time the investor chooses regardless of the current market price of the common stock. It is a one way deal so one cannot convert the common stock back to preferred stock.

10. Debenture

The term is used for a medium- to long-term debt instrument used by large companies to borrow money. In some countries the term is used interchangeably with bond, loan stock or note.

Debentures are generally freely transferable by the debenture holder. Debenture holders have no rights to vote in the company’s general meetings of shareholders, but they may have separate meetings or votes e.g. on changes to the rights attached to the debentures. The interest paid to them is a charge against profit in the company’s financial statements.

11. Mutual Fund

An open-ended fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. mutual funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public. Mutual funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities. For most mutual funds, shareholders are free to sell their shares at any time, although the price of a share in a mutual fund will fluctuate daily, depending upon the performance of the securities held by the fund. Benefits of mutual funds include diversification and professional money management. Mutual funds offer choice, liquidity, and convenience, but charge fees and often require a minimum investment. A closed-end fund is often incorrectly referred to as a mutual fund, but is actually an investment trust. There are many types of mutual funds, including aggressive growth fund, asset allocation fund, balanced fund, blend fund, bond fund, capital appreciation fund, clone fund, closed fund, crossover fund, equity fund, fund of funds, global fund, growth fund, growth and income fund, hedge fund, income fund, index fund, international fund, money market fund, municipal bond fund, prime rate fund, regional fund, sector fund, specialty fund, stock fund, and tax-free bond fund.

12. Open-end Mutual Fund

A fund operated by an investment company which raises money from shareholders and invests in a group of assets, in accordance with a stated set of objectives. Open-end funds raise money by selling shares of the fund to the public, much like any other type of company which can sell stock in itself to the public. Mutual funds then take the money they receive from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities. For most open-end funds, shareholders are free to sell their shares at any time, although the price of a share in an open-end fund will fluctuate daily, depending upon the performance of the securities held by the fund. Benefits of open-end funds include diversification and professional money management. Open-end funds offer choice, liquidity, and convenience, but charge fees and often require a minimum investment.

13. Closed-end Mutual Fund

A fund with a fixed number of shares outstanding, and one which does not redeem shares the way a typical mutual fund does. Closed-end funds behave more like stock than open-end funds: closed-end funds issue a fixed number of shares to the public in an initial public offering, after which time shares in the fund are bought and sold on a stock exchange, and they are not obligated to issue new shares or redeem outstanding shares as open-end funds are. The price of a share in a closed-end fund is determined entirely by market demand, so shares can either trade below their net asset value (“at a discount”) or above it (“at a premium”).

14. Asset Management Company (AMC)

An Asset Management Company (AMC) is an investment management firm that invests the pooled funds of retail investors in securities in line with the stated investment objectives. For a fee, the investment company provides more diversification, liquidity, and professional management consulting service than is normally available to individual investors.

The diversification of portfolio is done by investing in such securities which are inversely correlated to each other. They collect money from investors by way of floating various mutual fund schemes.

15. Front End Load

A sales charge paid when an individual buys an investment, such as a mutual fund, limited partnership, annuity, or insurance policy. The load is clubbed with the first payment made by an investor, so the total initial payment is higher than the later payments. The purpose of a load is to cover administrative expenses and transaction costs and sometimes to discourage asset turnover.

16. Back End Load

A sales charge or commission paid when an individual sells an investment, such as a mutual fund or an annuity, intended to discourage withdrawals.

17. Company

A company is a form of business organization. It is a collection of individuals and physical assets with a common focus and an aim of gaining profits. This collection exists in Law and therefore a company is considered a “Legal Person”.

18. Common Seal

A common seal (sometimes referred to as the corporate seal or company seal) is an official seal used by a company. Company seals were predominantly used by companies in common law jurisdictions, although in modern times, most countries have abrogated the use of seals.

Traditionally, the seal was of some legal significance because the affixing of the seal signified that the document was the act and deed of the company, whereas when a document was merely signed by a director, then that was deemed to be an act carried out on behalf of the company by its agents, which was subject to applicable restrictions and limitations under the ordinary law of agency.

Corporate seals are generally only used for two purposes by corporations today:

Documents which need to be executed as deeds (as opposed to simple contracts), may be executed under the company’s common seal

Certain corporate documents, for example share certificates are often issued under the company seal (and some countries required that share certificates be issued under the common seal)

19. Company Secretary

A company secretary is a senior position in a private company or public organization, normally in the form of a managerial position or above. In the United States it is known as a corporate secretary.

The Company Secretary is responsible for the efficient administration of a company, particularly with regard to ensuring compliance with statutory and regulatory requirements and for ensuring that decisions of the Board of Directors are implemented.

Despite the name, the role is not a clerical or secretarial one in the usual sense. The company secretary ensures that an organization complies with relevant legislation and regulation, and keeps board members informed of their legal responsibilities. Company secretaries are the company’s named representative on legal documents, and it is their responsibility to ensure that the company and its directors operate within the law. It is also their responsibility to register and communicate with shareholders, to ensure that dividends are paid and to maintain company records, such as lists of directors and shareholders, and annual accounts.

20. Subsidiary Company

A subsidiary, in business matters, is an entity that is controlled by a separate higher entity. The controlled entity is called a company, corporation, or limited liability company; and in some cases can be a government or state-owned enterprise, and the controlling entity is called its parent (or the parent company).

A parent company does not have to be the larger or “more powerful” entity; it is possible for the parent company to be smaller than a subsidiary, or the parent may be larger than some or all of its subsidiaries (if it has more than one). The parent and the subsidiary do not necessarily have to operate in the same locations, or operate the same businesses, but it is also possible that they could conceivably be competitors in the marketplace. Also, because a parent company and a subsidiary are separate entities, it is entirely possible for one of them to be involved in legal proceedings, bankruptcy, tax delinquency, indictment and/or under investigation, while the other is not.

The most common way that control of a subsidiary is achieved, is through the ownership of shares in the subsidiary by the parent. These shares give the parent the necessary votes to determine the composition of the board of the subsidiary, and so exercise control. This gives rise to the common presumption that 50% plus one share is enough to create a subsidiary. There are, however, other ways that control can come about, and the exact rules both as to what control is needed, and how it is achieved, can be complex. A subsidiary may itself have subsidiaries, and these, in turn, may have subsidiaries of their own. A parent and all its subsidiaries together are called a “group”, although this term can also apply to cooperating companies and their subsidiaries with varying degrees of shared ownership.

Subsidiaries are separate, distinct legal entities for the purposes of taxation and regulation. For this reason, they differ from divisions, which are businesses fully integrated within the main company, and not legally or otherwise distinct from it.

Note

This list is being compiled using definitions provided at various sources. I tried my best to give the best general explanation of all the term. If any term need correction or improvement in its explanation, please use the comment section to do so. I will look through it.

Share Market Terminology: Part 1

  1. Sensex

    Sensex is the short form of Sensitive Index. The Sensex is value-weighted index composed of 30 stocks. The Sensex is regarded as the pulse of the domestic stock markets in India. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. It is also called as BSE 30.

  2. Nifty

    Nifty or Nifty 50 is the leading index for large companies on the National Stock Exchange of India. The Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy. During 60s and 70s this term was used to denote 50 popular large cap stocks on the New York Stock Exchange.

  3. Bull

    Bull means cause or attempt to cause prices to rise (in the stock exchange).

  4. BEAR

    Investor who believes a share or the overall security market will go down.

  5. Squaring Off

    Square off means to settle the position. If someone square off a trade, it means he have no position at the end of the day – only profit or loss. When you give cash order it means you give order with intention to take delivery. Thus, if you change your mind and want to sell the stock the same day (buy in case of a sell), you have to notify the broker that you are changing your trade from delivery based trade to intraday trade and thus squaring off your position.

  6. RALLY

    A rally is a term used to describe a sudden rise in stock prices, especially after a period of falling ones. For example, if the stock market drops in the morning and investors rush in to buy companies at the cheaper prices, the stock market has rallied.

  7. Crash

    A stock market crash is a sudden dramatic decline of stock prices across a significant cross-section of a stock market, resulting in a significant loss of paper wealth.

  8. Correction

    A correction is a short term price decline of 5% to 20% or so. A correction is a downward movement that is not large enough to be a bear market.

  9. Bonus Shares

    The term bonus means an extra dividend paid to shareholders in a joint stock company from surplus profits. When a company has accumulated a large fund out of profits – much beyond its needs, the directors may decide to distribute a part of it amongst the shareholders in the form of bonus. Bonus can be paid either in cash or in the form of shares.

  10. Dividend

    Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders as a dividend.

  11. Book Closure Date

    When shares of a joint stock company invariably change hands during market trades, identifying the owner of some shares becomes difficult. So it is difficult to pass on certain benefits (like share bonus issue, splits and dividend payments) to shareholders.

    So, when a joint stock company declares dividends or bonus issues, there has to be a cut-off date for such benefits to be transferred to the shareholders. This date is termed as “Book Closure” date or “Record Date”. It is the date after which the company will not handle any transfer of shares requests until the benefits are transferred. Only shareholders marked in the company’s register at the Book Closure Date or the Record Date would be entitled to receive these benefits. In other words, shareholders that are on the company’s records as on that date are eligible for these benefits.

  12. Bonds

    A bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals.

  13. Splits

    A stock split increases the number of shares in a public company. The price is adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur.

    Ratios of 2-for-1, 3-for-1, and 3-for-2 splits are the most common, but any ratio is possible. Splits of 4-for-3, 5-for-2, and 5-for-4 are used, though less frequently. Investors will sometimes receive cash payments in lieu of fractional shares.

    It is often claimed that stock splits, in and of themselves, lead to higher stock prices; research, however, does not bear this out. What is true is that stock splits are usually initiated after a large run up in share price. Momentum investing would suggest that such a trend would continue regardless of the stock split. In any case, stock splits do increase the liquidity of a stock; there are more buyers and sellers for 10 shares at $10 than 1 share at $100. Some companies have the opposite strategy: by refusing to split the stock and keeping the price high, they reduce trading volume and volatility. Berkshire Hathaway is a notable example of this.

  14. Futures

    Investment contracts which specify the quantity and price of a commodity to be purchased or sold at a later date. On contract date, the buyer must take physical possession or make delivery of the commodity, which can only be avoided by closing out the contract(s) before that date. Futures can be used for speculation or hedging.

  15. Index Trading

    Index Trading is a fairly new concept based on short term financial trades or wagers. Unlike most other emerging ways to Trade on Share markets, Index Trades are mostly contracts bought for a fixed duration with a fixed return (often up to 97% of the investment).

    Index trades rely on the trader’s ability to predict whether a Share index will effectively rise or fall over a set period.

    If the trader has picked the correct direction and their trade is successful once the time has elapsed then they are generally paid out on the agreed return within minutes. This has added to the recent popularity of Index Trading however it still hinges completely on one’s ability to predict Share index movements and it is common knowledge that such a thing is not easy.

  16. Trading on Margin

    Margin buying or margin trading is buying securities with cash borrowed from a broker, using other securities as collateral. This has the effect of magnifying any profit or loss made on the securities. The securities serve as collateral for the loan. The net value, i.e. the difference between the value of the securities and the loan, is initially equal to the amount of one’s own cash used. This difference has to stay above a minimum margin requirement, the purpose of which is to protect the broker against a fall in the value of the securities to the point that the investor can no longer cover the loan.

    Most investors buy the futures, but there are times when margin trading makes more sense. If a stock is not in the futures list, the client can go for margin funding.

    Since futures are generally not available beyond one or two months, if the client has a longer view, then margin trading is better. Also, some brokers offer lower interest rates on margin trading than the prevalent rates in the futures market.

  17. Stock

    The capital stock (or just stock) of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors. Stock is distinct from the property and the assets of a business which may fluctuate in quantity and value.

  18. Bid

    The bid for securities (such as stocks, futures contracts, options, or currency pairs) is the difference between the prices quoted (either by a single market maker or in a limit order book) for an immediate purchase.

  19. Broker

    A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors. A broker may be employed by a brokerage firm.

    A transaction on a stock exchange must be made between two members of the exchange—an ordinary person may not walk into the New York Stock Exchange (for example), and ask to trade stock. Such an exchange must be done through a broker.

  20. Dow Jones Industrial Average

    The Dow Jones Industrial Average (DJIA), also referred to as the Industrial Average, the Dow Jones, the Dow 30, or simply the Dow, is a stock market index, and one of several indices created by Wall Street Journal editor and Dow Jones & Company co-founder Charles Dow. It is now owned by the CME Group, who is the majority owner of Dow Jones Indexes. The average is named after Dow and one of his business associates, statistician Edward Jones. It is an index that shows how 30 large, publicly owned companies based in the United States have traded during a standard trading session in the stock market. It is the second oldest U.S. market index after the Dow Jones Transportation Average, which was also created by Dow.

    To calculate the DJIA, the sum of the prices of all 30 stocks is divided by a Divisor, the Dow Divisor. The divisor is adjusted in case of stock splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the DJIA. Early on, the initial divisor was composed of the original number of component companies; which made the DJIA at first, a simple arithmetic average.

Note

This list is being compiled using definitions provided at various sources. I tried my best to give the best general explanation of all the term. If any term need correction or improvement in its explanation, please use the comment section to do so. I will look through it.

>>>> Share Market Terminology: Part 2

Indian Economy: 2009 Vs. 2010

Introduction

Indian Economy is the eleventh largest economy in the world by nominal GDP and the fourth largest economy in the world by purchasing power parity (PPP). India was under social democratic based government under 1947 to 1991. This economy was based on public ownership and protectionism with slow growth rate. Since 1991, India changed its policy and reformed it to a market-based economy.

The currency of India is the Indian Rupee. As of 30th Dec 2010, 44.8 INR equals to 1 USD and 1 EUR equals 59.34 INR. The major stock exchanges in India are Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). India’s GDP accounts for 57.2% service industry, 28% industrial sector and 14.6% agricultural sector. The labour force totals half a billion workers. India currently accounts for 1.5% of world trade as of 2007 according to World Trade Organization (WTO).

Indicators of Economy

An economy has various indicators which allow analysis and prediction of future performances. Some of these are Gross Domestic Product (GDP), unemployment rate, Consumer Price Index (a measure of Inflation), stock market prices and various others.

Gross Domestic Product

The gross domestic product (GDP) or gross domestic income (GDI) is the amount of goods and services produced in a year, in a country. It is the market value of all final goods and services made within the borders of a country in a year. In 2009, GDP nominal of India was $1,367 billion (11th) whereas; GDP PPP was $3,862 billion (4th). Forecast for 2010: GDP nominal will be $1,430 billion and GDP PPP will be $4,001 billion. If we compare per capita GDP, in 2009 GDP nominal per capita was $1,142 (142nd) and expected to be $1,176 for 2010. In 2009, GDP PPP per capita was $3,176 (127th) whereas in 2010 it is expected to be $3290. India’s gross domestic product (GDP) growth rate significantly slowed to 6.7% in 2008-09, but subsequently recovered to 7.2% in 2009-10

Inflation

A consumer price index (CPI) measures changes through time in the price level of consumer goods and services purchased by households. It is a measure of inflation. In India, instead of CPI, wholesale price index is calculated. The Indian method for calculating inflation, the Wholesale Price Index, is different from the rest of world. Each week, the wholesale price of a set of 435 goods is calculated by the Indian government. Since these are wholesale prices, the actual prices paid by consumers are far higher. The trend of Inflation rate is shown in the graph below. Have a look.


Figure 1: Consumer Price Index of India, Feb’09-Nov’10

The inflation rate in Apr 09 was 8.03%, lowest in the duration. It advances to sudden increase in Aug 09 at 11.89%. From there after, for four months the inflation rate was almost same. From Dec 09 it starts rising again and it goes to the max of the duration in Feb 10 with 16.22%. After that for the last 10 months it is coming down slowly and in Nov 10, inflation rate is 9.7%. Still, 9.7% is very high. But, compared to 16.22% it is much under control.

Unemployment Rate

The labour force in India is 467 million, 2nd in the world, as of 2009. The labour force division in each sector is 52% in agriculture, 14% in industry and 34% in services. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labour force. The unemployment rate of India in 2009 was 6.8% (85th rank) which is expected to increase to 10.7% (121st rank) in 2010.

Foreign Direct Investment

Following are some tables showing comparison of Stock of direct foreign investment – at home, Stock of direct foreign investment – abroad and Stock of domestic credit in USD.

Year

Stock of direct foreign investment – at home

Rank

Percent Change

Date of Information

2009

144200000000

23

50.27 %

31 December 2008 est.

2010

157900000000

24

9.50 %

31 December 2009 est.

 

Year

Stock of direct foreign investment – abroad

Rank

Percent Change

Date of Information

2009

58180000000

30

55.15 %

31 December 2008 est.

2010

76620000000

26

31.69 %

31 December 2009 est.

 

Year

Stock of domestic credit

Rank

Percent Change

Date of Information

2009

769300000000

16

0.00 %

31 December 2008

2010

973500000000

16

26.54 %

31 December 2009

 

Foreign Exchange Reserves

Foreign exchange reserves (also called Forex reserves or FX reserves) in a strict sense are only the foreign currency deposits and bonds held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. Reserves of foreign exchange and gold in India in the start of 2009 were $254 billion. In the start of 2010, it was $274.7 billion. Currently, as of Nov’10 it is $300.2 billion.

Economy on the basis of Sectors

Industry

Industry accounts for 28% of the GDP and employ 14% of the total workforce. However, about one-third of the industrial labour force is engaged in simple household manufacturing only. The major industries in India are textiles, chemicals, food processing, steel, transportation equipment, cement, mining, petroleum, machinery, software and pharmaceuticals.

Year

Industrial production growth rate

Rank

Percent Change

Date of Information

2009

4.80 %

51

-43.53 %

2008 est.

2010

8.20 %

9

70.83 %

2009 est.

Services

India is fifteenth in services output. It provides employment to 23% of work force, and it is growing fast. It has the largest share in the GDP, accounting for 54.6% in 2009 and expected to be 57% in 2010. The total no. of people getting employment in this sector in 2010 will be 34% (estimated).

Conclusion

If we sum up the conclusion from above it is quite easy to say that India is progressing rapidly for 2010 than 2009. Being an agriculture based nation, India is changing slowly to an Industry based nation with support from service sector. The main concern in India’s progress is inflation rate. Value of INR has increased in the mentioned period. No doubt India is moving towards progress and next year we can see some much nice figures and ranks in all the section.