Equity Markets - Terms Simplified

 

SENSEX

The SENSEX- was introduced by the Bombay Stock Exchange on January 1 1986. It is one of the prominent stock market indices in India. The Sensex is designed to reflect the overall market sentiments. It comprises of 30 stocks. These are large, well-established, diversified and financially sound companies from main sectors.


NIFTY

Nifty is a major stock index in India introduced by the National Stock Exchange. NIFTY was coined from the two words ‘National’ and ‘FIFTY’. The word Fifty is used because the index consists of 50 actively traded Stocks from various sectors.


Share Capital

Funds raised by issuing shares in return for cash or other considerations. The amount of share capital a company has can change over time because each time a business sells new shares to the public in exchange for cash, the amount of share capital will increase. Share capital can be composed of both common and preferred shares

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Equity Shares

An equity share, commonly referred to as ordinary share also represents the form of fractional or part ownership in which a shareholder, as a fractional owner, undertakes the maximum entrepreneurial risk associated with a business venture. The holders of such shares are members of the company and have voting rights.


Preference Shares

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 a 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.


Employee Stock Option (ESOP)

Employee Stock Option (ESOP). An Employee Stock Option Plan (ESOP) is a benefit plan for employees which make them owners of stocks in the company. ESOPs have several features which make them unique compared to other employee benefit plans. Most companies, both at home and abroad, are utilising this scheme as an essential tool to reward and retain their employees. Currently, this form of restructuring is most prevalent in IT companies where manpower is the main asset.


Debentures

An Employee Stock Option Plan (ESOP) is a benefit plan for employees which make them owners of stocks in the company. ESOPs have several features which make them unique compared to other employee benefit plans. Most companies, both at home and abroad, are utilising this scheme as an essential tool to reward and retain their employees. Currently, this form of restructuring is most prevalent in IT companies where manpower is the main asset.


Bond

A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.


Book value

1. 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. Since companies are usually expected to grow and generate more profits in the future, market capitalization is higher than book value for most companies. Since book value is a more accurate measure of valuation for companies which aren't growing quickly, book value is of more interest to value investors than growth investors.

The value of an asset as it appears on a balance sheet, equal to cost minus accumulated depreciation.


Earnings per Share (EPS)

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company's profitability.

Earnings per Share (EPS) = Net Income − Dividends on Preferred Shares / Weighted Average Number of Common Shares Outstanding


Book Closure

The time period when a company will not handle adjustments to the register, or requests to transfer shares. The book closure date is often used to identify the cut-off date determining which investors of record will be sent a given dividend payment. The stock of publicly-traded companies changes hands daily as investors buy and sell shares. Due to this, when a company declares it will pay a dividend, it must set a specific date when the company will "close" its shareholder record book and commit to send the dividend to all investors holding shares as of that date.


Dividend

A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.


Interim Dividend

The declaration and payment of a dividend prior to annual earnings determination.


Dividend Yield

A financial ratio that shows how much a company pays out in dividends each year relative to its share price. In the absence of any capital gains, the dividend yield is the return on investment for a stock. Dividend yield is calculated as follows: = Anual dividend per share/ Price per share


Bonus Share

Free shares of stock given to current shareholders, based upon the number of shares that a shareholder owns. While this stock action increases the number of shares owned, it does not increase the total value. This is due to the fact that since the total number of shares increases, the ratio of number of shares held to number of shares outstanding remains constant.


Rights Issue

A rights issue is a way in which a company can sell new shares in order to raise capital. Shares are offered to existing shareholders in proportion to their current shareholding, respecting their pre-emption rights. The price at which the shares are offered is usually at a discount to the current share price, which gives investors an incentive to buy the new shares — if they do not, the value of their holding is diluted.


Current Market Price (CMP)

The current price at which an asset or service can be bought or sold. Economic theory contends that the market price converges at a point where the forces of supply and demand meet. Shocks to either the supply side and/or demand side can cause the market price for a good or service to be re-evaluated.


Stop-Loss Order (SL)

An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor’s loss on a position in a security. Although most investors associate a stop-loss order only with a long position, it can also be used for a short position, in which case the security would be bought if it trades above a defined price. A stop-loss order takes the emotion out of trading decisions and can be especially handy when one is on vacation or cannot watch his/her position. However, execution is not guaranteed, particularly in situations where trading in the stock is halted or gaps down (or up) in price.


Intra-day Trades

Day trading refers to the practice of buying and selling financial instruments within the same trading day such that all positions will usually (not necessarily always) be closed before the market close of the trading day. This is the opposite of After-hours trading. Traders that participate in day trading are called Intra Day Trader


Buy Today Sell Tomorrow (BTST)

Buy Today Sell Tomorrow (BTST) is a facility that allows you to sell shares even one day after the buy order date, without you having to wait for the receipt of shares into your Demat account to generate trading profits.


Sell Today Buy Tomorrow (STBT)

Sell Today Buy Tomorrow (STBT) is a facility that allows you to sell shares earlier from your Demat account and eventually on market fall buy them to generate trading profits.


Market Capital

Market Cap is the market value of a company's outstanding shares. This figure is found by taking the stock price and multiplying it by the total number of shares outstanding.

Market Capitalization = Current Stock Price x Number of Shares outstanding

For a better understanding, let us see an example:

Company XYZ has 10,000,000 shares outstanding and its current share price is Rs 8. Based on the above formula, we can calculate that Company XYZ's market capitalization is Rs 80 million, or 10,000,000 shares x Rs 8 per share.>

3 main classifications when it comes to stocks -

1. Large Cap stocks

2. Mid Cap stocks

3. Small Cap stocks.

Here, the term 'cap' simply refers to the 'market capitalization' of the stock.


Large Cap Stocks

As has been mentioned above, the first category based on market capitalization is that of 'Large Cap Stocks'.

One can look at the BSE-Sensex or BSE-100 Index as a reference point for large cap stocks. Market capitalization for stocks in the BSE-100 Index, for instance, ranges from Rs 200 bn to Rs 3,500 bn.

These are stocks of usually large and well-established companies that have a strong market presence and are generally considered as safe investments. One important fact about large caps is that information regarding these companies is readily available in newspapers and magazines. Most of the large cap companies have good disclosures and therefore there is no dearth of information for an investor looking into them.

Large companies such as Hindustan Unilever, L & T, Infosys, and TCS etc. are considered as large cap stocks. These companies have been around in the industry long enough and have firmly established themselves as leading players. Their stocks are publicly traded and have large market capitalisations.


Mid Cap Stocks

Mid-caps stocks lies between large cap stocks and small cap stocks. Mid cap stocks are those that generally have a market capitalisations within the range of Rs 50 bn and Rs 200 bn. These represent mid-sized companies that are relatively more risky than large cap as investment options yet, they are not considered as risky as small cap companies. They rank between the two extremes on all the important parameters like size, revenues, employee and client base.

When one invests in mid-caps for the long term, one may be investing in companies that could become tomorrow's multi baggers - runaway success stories. Generally speaking, mid cap stocks as an investment can bring you higher returns in 3 to 5 years as opposed to their big brother large cap stocks that can bring you moderate (yet safer) returns during this timeframe.


Small Cap Stocks

Small Cap companies have smaller revenue and client bases, and usually include the start-ups or companies in the early stage of development. Small cap stocks are potentially big gainers as they are yet to be discovered within the sector and can show growth potential in large numbers once unfurled in the market. However, as these enterprises are small ventures, these should be researched properly. This is considering that a lot of small companies do not have the financial strength to survive bad times and some of them might be mismanaged businesses run by greedy promoters. Hence it is essential, especially in the case of small caps investments that one does a thorough research regarding the promoters' credentials, management strength and track record, and long and short term growth plans of the company before investing.

Small Cap Stocks are generally viewed under the misconception of being hazardous or 'quick rich' stocks. However, both these labels are untrue.

Small caps are often stated to be a platform to make big returns in a short span of time. However, one should note that small caps can prove to be a very wise 'long term' investments especially if the chosen companies have good business modules and are well-managed.


Gross Profit

A company's revenue minus its cost of goods sold. Gross profit is a company's residual profit after selling a product or service and deducting the cost associated with its production and sale.


Net Income

A company's total earnings (or profit). Net income is calculated by taking revenues and adjusting for the cost of doing business, depreciation, interest, taxes and other expenses. This number is found on a company's income statement and is an important measure of how profitable the company is over a period of time. The measure is also used to calculate earnings per share.


General Reserves

Any retained earnings from a company's profits. General reserves can be divided into either specific, general or legal. Specific reserves can include a reassignment of dividends to shareholders; general reserves are saved to offset potential future losses; legal reserves can include money set aside for litigation or revaluation.


Surplus

The amount of an asset or resource that exceeds the portion that is utilized. A surplus is used to describe many excess assets including income, profits, capital and goods. A surplus often occurs in a budget, when expenses are less than the income taken in, or in inventory when fewer supplies are used than were retained.


Turnover

The number of shares traded for a period as a percentage of the total shares in a portfolio or of an exchange.


Depository / Demat Account

In INDIA’s banking terminology, the term DEMAT Account refers to a deposit made at an Indian financial institution that can be used for INVESTING IN SHARES of stocks and other financial assets. Securities are held electronically in a DEMAT Account, thereby eliminating the need for physical paper certificates’ India, shares and securities are held electronically in a Dematerialized (or "Demat") account, instead of the investor taking physical possession of certificates. A Dematerialized account is opened by the investor while registering with an investment broker (or sub-broker). The Dematerialized account number is quoted for all transactions to enable electronic settlements of trades to take place. Every shareholder will have a Dematerialized account for the purpose of transacting shares.


Benefit to the Investor

The depository system reduces risks involved in holding physical certificates, e.g., loss, theft, mutilation, forgery, etc. It ensures transfer settlements and reduces delay in registration of shares. It ensures faster communication to investors. It helps avoid bad delivery problems due to signature differences, etc. It ensures faster payment on sale of shares. No stamp duty is paid on transfer of shares. It provides more acceptability and liquidity of securities.


International Securities Identification Number (ISIN)

A code that uniquely identifies a specific securities issue. The organization that allocates ISINs in any particular country is the country's respective National Numbering Agency (NNA).


National Securities Depository Limited (NSDL)

NSDL is an Indian central securities depository based in Mumbai. It was established in 1995 as the first electronic securities depository in India with national coverage based on a suggestion by a national institution responsible for the economic development of India.


Central Depository Services Limited (CDSL)

CDSL is the second Indian central securities depository based in Mumbai. Its main function is the holding securities either in certificated or uncertificated (dematerialized) form, to enable book entry transfer of securities.



Fundamental / Technical Terms


Price-Earnings Ratio - P/E Ratio

A valuation ratio of a company's current share price compared to its per-share earnings. PE = Market price / EPS

How does PE help?

1. Understanding PE gives the investors an idea if the stock has sufficient growth potential. Stocks with low PE can be considered good bargains as their growth potential is still unknown to the market.

2. If the PE is high, it warns of an over-priced stock. It means the stock's price is much higher than its actual growth potential. So these stocks are more liable to crash drastically. This was evident in the recent market crash when the stocks of all Reliance companies fell sharply.

3. This will allow savvy investors to sell their holdings before the stock price crashes.


Profit Before Tax (PBT)

A profitability measure that looks at a company's profits before the company has to pay corporate income tax. This measure deducts all expenses from revenue including interest expenses and operating expenses, but it leaves out the payment of tax.


Profit After Tax (PAT)

The net amount earned by a business after all taxation related expenses have been deducted. The profit after tax is often a better assessment of what a business is really earning and hence can use in its operations than its total revenues.


Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA)

EBITDA - Earnings before interest, taxes, depreciation and amortization is an indicator of a company's financial performance which is calculated in the following manner:

EBITDA = Revenue - Expenses (excluding tax, interest, depreciation and amortization).

EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions.


Price to Book Value Ratio (PVB)

The price-to-book ratio (P/B Ratio) is a ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Also known as the "price-equity ratio".

Calculated as: P/B Ratio = Stock Price/ Total Assets- Intangible Assets and Liability


Price by Volume Chart (PBV)

A horizontal histogram plotted on the chart of a security, which corresponds to the volume of shares traded at a specific price level. Price by volume histograms are found on the Y-axis and are used by technical traders to predict areas of support and resistance.


Return on Capital Employed (ROCE)

A financial ratio that measures a company's profitability and the efficiency with which its capital is employed. Return on Capital Employed (ROCE) is calculated as:

ROCE = Earnings Before Interest and Tax (EBIT) / Capital Employed


Return on Equity (ROE)

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

ROE is expressed as a percentage and calculated as: Return on Equity = Net Income/Shareholder's Equity


Return on Net-Worth (RONW)

1. Return on Net Worth (RONW) is used in finance as a measure of a company’s profitability

2. It reveals how much profit a company generates with the money that the equity shareholders have invested

3. Therefore, it is also called ‘Return on Equity’ (ROE)


Debt / Equity Ratio

A measure of a company's financial leverage calculated by dividing its total liabilities by stockholders' equity. It indicates what proportion of equity and debt the company is using to finance its assets.

Debt /Equity Ratio = Total Liabilities / Equity Capital


Operating Income

The amount of profit realized from a business's operations after taking out operating expenses - such as cost of goods sold (COGS) or wages - and depreciation. Operating income takes the gross income (revenue minus COGS) and subtracts other operating expenses and then removes depreciation. These operating expenses are costs which are incurred from operating activities and include things such as office supplies and heat and power. Operating Income is typically a synonym for earnings before interest and taxes (EBIT) and is also commonly referred to as "operating profit" or "recurring profit."

Operating Income = Gross Income - Operating Expenses - Depreciation & Amortization


Current Ratio

A liquidity ratio that measures a company's ability to pay short-term obligations.

The Current Ratio formula is:

Current Ratio= Current Assets/ Current Liabilities


Absolute Returns

The returns that an asset achieves over a certain period of time. This measure looks at the appreciation or depreciation (expressed as a percentage) that an asset - usually a stock or a mutual fund - achieves over a given period of time.

Absolute return differs from relative return because it is concerned with the return of a particular asset and does not compare it to any other measure or benchmark.


Compound Annual Growth Rate - CAGR

The year-over-year growth rate of an investment over a specified period of time.

The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.

This can be written as follows: CAGR= (ENDING VALUE/BEGINING VALUE)(1/# of Years)-1



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