Active Market: Characterized by frequent and large volume of trading of a particular share or shares in general. In such a market the gap between buying and selling prices is narrow. Also, in such a market the buying or selling activities of financial institutions tend to have a lower impact than in a Dull Market.
Active Shares: Shares in which there are frequent and day to day dealings, as distinguished from partly active shares in which dealings are not so frequent. Most shares of leading companies would be active, particularly those which are sensitive to economic and political events and are therefore, subject to sudden price movements. Some market analysts would define active shares as those which are bought and sold at least three times a week.
Advance-Decline Index: It is also called as AD-Index. It helps in detecting bullish or bearish trend in the stock Market in which one divides the number of traded shares which have risen in price by those which have fallen. For example if 100 shares have advanced and 50 declined on a particular day, the AD-Index is 2 (100/50). Numbers more than 1 indicate a bullish trend and less 1 is bearish trend.
ADR: American Depository Receipt is a negotiable certificate issued by an American Bank stating that a number of shares in a foreign company has been deposited with them. The receipt can be traded in U.S. Markets.
After Tax: When one is investing in loan instruments like debentures or bonds or fixed deposits, and when one is an income tax payer, it is the after tax return which is the real return, not the rate of interest. The relevant rate of interest on the investor’s slab of income should be deducted from the earnings, and the actual return compared with returns from tax sheltered instruments, such as tax free bonds.
A group shares: Shares are classified into A-Group, B1-Group and B2-Group:
A1 – Group Shares : Scripts having very high liquidity, company having large equity base and large public holding, company having consistently good performance over years.
B1 – Group Shares: Scripts having high liquidity. Company having an equity above Rs. 30 million. Company having fundamentals and financial parameters in line with the industry.
B2 – Group Shares: Scripts having low trading volume at the BSE indicating low investor interest. Scripts trading below par value at BSE. Company having an equity below 30 million.
B1 and B2 groups are merged as a single Group B with effect from March 2008.
Annual General Meeting: Meeting held once a year where the directions of the company report to the share holders on the year’s performance and any vacancies in the board of directors are filled by share holders consent. The chief of the company comments on the future outlook of the company and answers questions from shareholders. Notice of the meeting, along with a copy of the Annual Report has to be compulsorily sent to every share holder, who may send a proxy to attend on his behalf. Share holders can insist that 11 resolutions on company policy be voted upon by the equity share holders of the company. This meeting also receives the auditor’s report, appoints auditors and fixes their renumeration
Allotment of shares: After a company has issued a prospectus and application forms for shares, it receives applications from the investing public for varying numbers of shares. If the total number of shares applied for equals or is less than the number offered, full allotment is made. If, however more shares are applied for actual available, a basis of allotment is finalized in consultation with the stock exchange where the company is primarily listed.
Analyst: An investment professional in a journal, bank, a mutual fund, who studies the fundamentals and technical of a company or a groups of related companies, or an industry, and makes buy or sell recommendations. Successful analysts not only influence the fortunes of their employers, but of the shares listed on the stock market as well.
Annual Report: Report made by the Directors of a company to its share holders at the end of each accounting year, containing 1. Director’s report outlining a review of the company’s operations during the year, a summary of its financial results, and future projections, if any, (2) Auditor’s report, (3) Balance Sheet, (4) Profit and loss account, and (5) Schedules explaining items on the balance sheet and profit and loss account. Company law requires all companies to prepare such a report and mail it to the share holders.
Annualized Basis: Statistical computation whereby company figures covering periods of less than a year are extended to cover a full year. The computations takes into account seasonal variations if any.
Arbitrage: Profiting from the differences in price of the same share traded on two or more exchanges. An arbitrageur makes money by buying in the lower market and immediately thereafter selling in the higher market, or vice versa, thereby making a profit.
Articles of Association: Drafted along with the Memorandum of association by the ‘promoters of company, the Articles laid down the detailed rules and regulations for managing the company’s affairs. This has to be submitted to the Registrar of Companies for his approval for the incorporation of the company. The Articles are effectively the contracted terms between share holders and directors.
Asset: Anything owned by a company , tangible or intangible which has market value and saleable value.
AST: Automated Screen Trading (of equity shares, derivatives and commodities).
At a Premium: At a price higher than that printed on the share certificates, i.e., above at par. When a well established company issues new shares, either as rights or to the public, it may ask for a higher prices. The differences between the face value and the price at which a share is now being issued is called the premium.
At the close: Customer’s order to buy or sell within the final 30 seconds trading. Order not always fulfilled.
At the Market: Option trading term, meaning that a call option has a market price for the optioned stock, which is approximately the same as the call’s exercise price. Similarly with a put option.
At the Money: Option contract on a share whose current market price is the same as the strike price of a call or put option.
At the Open: An order to buy or sell at the opening of trading at the opening price. This has a much better chance of being executed if the order is not filled, it is cancelled.
Auditor’s Report: A report presented at the Annual General Meeting of the shareholders of a company, it is a mandatory part of the Annual Report. The company auditor is independent and is employed annual by, the reports, the shareholders. He examines the company’s counts, inspects records and reports on the manner in which the company’s funds have been managed.
Authorised share Capital: The maximum number of shares that a company may issue, stated in the memorandum and articles of association of the company. A company may initially issue fewer shares. The authorized capital can be increased with the consent both of the shares holders and the controller of Capital Issues.
Automated Screen Trading: Electronic Trading in Stocks through visual display units. The associates computer unit enters, matches, and executives deals. It makes possible a floor less exchange and brings transparency to deals.
Average: Properly weighted and adjusted arithmetic mean of certain significant shares to represent general market behavior, or a particular class of shares.
Averaging: Buying a share at different times, in different quantities, and at different prices. So that an advantageous average price is obtained.
Averaging In/Averaging out: Buying or selling different prices in order to build up, or liquidate, a substantial holding over a long period.
Away from the market: When a limit order to buy is lower than the current market price, or a limit order to sell is above the current market price, it is away from the market. The broker may hold such a order for a period of time, but if within this period he can’t fill it, he kills it.
Bad Debt: A loan receivable that has proved uncollectable and is written off.
Balance of Trade: Difference in value, over a period of time between a country’s imports and exports of merchandise. When export exceed imports, the country has a favorable balance of trade, and when imports exceed exports the balance is unfavorable.
Balance Sheet: State of the Financial Position of a company on a particular date, showing the nature and amount of a company’s assets and liabilities on a particular date. The assets and liabilities must balance.
Bank Rate: The rate of interest at which the Central Bank of the Country, i.e., the Reserve Bank of India, as a lender of last resort re finances other banks in the country’s banking system. It is also known as the minimum lending rate, or the base rate.
Bar Charts: A tool of Technical Analysis, these have vertical bars representing each day’s price movement. Each bar covers the distance between the day’s highest price to the day’s lowest price, with an X to mark the closing price.
Bear: A stock market operator who expects share prices to fall and keeps selling, (to pick up the shares later at a lower price for actual deliver), causing selling pressure and lowering the prices further. Term derived from the attacking posture of the bear, pushing downwards.
Bear Market: Prolonged period of falling share prices dominated by selling pressure in the market place, brought about by Bears, or adverse socio, economic and political factors.
Bear Trap: An erratic movement of share prices downwards, encouraging investors to sell short. When the market corrects itself and prices go up, unwary investors get caught in the bear trap.
Beta Shares: Shares which are listed, but infrequently trade shares of companies with a generally low equity capital.
Book Loss: Loss not actually sustained, as the investor has not sold when the price has fallen. Book loss induces some depression of mind, but does not actually pinch the investor’s pocket unless, of course, the book loss keeps mounting and the investor is forced to sell a considerable loss, if he can sell at all.
Book Profit: Making profit by selling of a share which has gone above its purchase price. When shares, which an investor holds, go up in price, the investor has made only a notional profit, which is meaningless, except in a dry run portfolio. Only when he actually sells them does he make any tangible profit.
Breadth of the Market: Indicated by the percentage of shares involved in an upward or downward movement of the stock market. If two thirds of the shares listed in a stock exchange participate during a trading session, the market is said to have a good breadth, i.e. the trend it shows is representative and is not influenced by the price of a few heavily traded shares.
Break out: When shares move between the support level and the resistance level for some time and then move upwards or downward beyond the line, they make a break out from their price limits. Technical analysts predict a substantial rise or fall in such situations.
Bull: A stock market operator who believes that share prices are going to rise, and keeps buying to sell later at a profit, from the attacking posture of the bull, giving an upward thrust.
Bull Market: Prolonged rise in the price of shares, sustained by buying pressure of actual investors or Bulls.
Bull trap: An erratic movement of share prices upwards encouraging investors to buy in anticipation of further rise in prices. When the market corrects itself, the prices come down trapping unwary investors.
Business Cycle: A period of time during which the general economic activity expands and contracts with effects on inflation, productivity and employment. Thus one recovery and one recession complete a business cycle.
Buy and Hold Strategy: Accumulating shares of a company over the years for long term growth benefits and favorable capital gains tax on profits. This requires far less of the investor’s time, than Buy and Sell Strategy, which is frequent trading in shares.
Call: A notice for payment of an installment or the entire unpaid sum of a partly paid share. It also means a demand by a brokerage firm to the client for a partial payment of the clients’ debt or deposit further securities because the value of securities he had given as a collateral has fallen.
Capital Gain: Profit arising out of the sale of transfer of an asset.
Clearing: Settlement of accounts of brokers in a stock exchange. Dates are fixed by the stock exchange for the first and last business day of each clearing.
Close-A-Position: Outright sale of a share and its delivery.
Commercial Banking: Commercial Banks perform the usual banking functions, serving both general public and business people. Commercial banking consists in serving business people rather than private individuals.
Commodities Market: Market for trading bulk and basic goods like grain, edible oil, rubber, cotton, metals etc.
Contrarian shares: Shares which behave in a fashion contrary to the general stock market trend i.e., which fall when the market is rising and rise when the market is falling.
Cooking the book: Falsifying the financial accounts of a company to keep the share holders happy and to attract investors with the lure of high profit.
CPI: Consumer price index.
Credit Rating: The need for ascertaining the credit worthiness of companies and financial institutions which approach the public for loan funds. Credit rating is not a buy or sell recommendation, but merely creating a risk awareness among the investors. The better companies are already using the rating symbols in their prospects for debt instruments although their use is not yet mandatory, as it is in the United States, where the rating of two agencies is required.
Currency options: An options contract giving the buyer the right to buy or sell a particular currency at specified exchange rate within a certain period, basically a hedge instrument in covering risks against foreign exchange exposures by companies. Also called cross currency options, as the transaction involves two currencies, it is more advantageous than currency futures in that there is no definite commitment to buy or sell at a fixed price. If the exchange rate moves in favour of buyer of the contract all that he has do is not to exercise the contract but buy or sell in the market.
Current Ratio: The ratio of current assets to current liabilities. If it is more than 1 the company’s operations are in a healthy state.
Daily Margin: An amount, to be decided by the stock exchange, to be deposited by a member, on a daily basis, for the purchase or sale of securities. The amount is to be deposited at the stock exchange. The margin is imposed to curb excessive speculation.
Daily Chain: Stock market manipulators buying and selling among themselves to give the impression that the share is being vigorously traded and that the price is rising. At a certain point in the rise the manipulators unload their shares to unwary investors, who then discover that there is no one to sell them to.
Day Trading: Buying and selling the same share during a single day, hoping to make a profit from price fluctuations.
Bear Money: Also called Right Money, obtained with difficulty as a result of government’s stringent policy regarding loans, and a at a high rate of interest. Discourages economic activity by increasing the cost of borrowing and investment.
Debt-Equity Ratio: Also called financial leverage ratio in the U.S. There are three methods of calculating this ratio, the last being more common, 1) The total liabilities of a company divided by the share holders equity, 2) The total long term debt divided by share holders equity, 3) The total long term debt plus the par value of preference shares divided by the par value of equity shares. All the three ratios measure a company’s solvency.
Deflation: Opposite of inflation. It is a reduction in national income and output, accompanied by a general fall in prices. During deflationary period the stock market usually suffers from depression.
Degearing: Replacing fixed interest loan by issuing equity shares of a comparable value.
Delisting: Striking off a company’s name from the official list of a stock exchange so that the company’s shares are not traded. It becomes an unlisted company.
Delta Stocks: The least liquid stocks in a stock exchange.
Devaluation: Lowering of the value of one country’s currency against the exchange rate of another counter’s currency.
Dividend: Payment made to share holders, usually once or twice a year out a company’s profits after tax. Dividend is declared on the face value or par value of a share.
Dollar cost Averaging: Rather than buying a large number of shares all at once, at one price, the strategy of dividing the investable amounts into a number of equal parts and buying at different intervals to take advantage of lower prices.
Double Bottom: Chart pattern in Technical Analysis, which shows a drop in price, a subsequent recovery and another drop and recovery. The double bottom level is regarded as the support level. If the price falls again and penetrates this level it is likely to fall further.
Double Taxation: Taxation of a company’s profits and further taxation of a company’s post-tax distributed profits, i.e., dividends in the shareholder’s hand.
Downtick: A sale of stock price below that of the previous sale.
Dull Market: Stock Market in which little trading takes place and where there is often a large difference between the buying and selling prices of shares. Buying in bulk of financial institutions, Mutual Funds etc. in such conditions may activate the market, just as selling in bulk may further depress it.
Dumping: Offering for sale, large numbers of shares all at once without bothering about the effect of such an action on the market. In international mode, swelling goods at a very low price, often below cost, to get rid of surplus or outdated production or to gain an advantage over competitors.
Earnings per share: Please refer EPS.
Earnings to equity ratio: Profit after tax minus dividend on preference shares divided by equity share capital plus reserves, and the sum multiplied by a hundred. This ratio indicates how profitably the company is making use of its capital.
Economic Growth Rate: Annual percentage of change in the gross national product. This is adjusted for inflation to arrive at the real economic growth rate.
Economic Indicators: These show trends in the national economy which influence share prices. The chief indicators are GNP (Gross National Product), employment figures, agricultural production, industrial production, bank deposits, imports and exports, money supply, index of wholesale prices and interest rates.
Efficient Portfolio: A portfolio which ensures maximum return for an accepted level of risk or a minimum level of risk.
EPS (OR) Earning per share: One of the most widely used indicators of the worth of a share. It shows what a company has earned for each of its shares. It is a ratio calculated by dividing the net profit after tax by the number of equity shares of a company.
Euro Currency: Currency of other countries kept in a European Bank. For example American Dollar, British pound sterling or Japanese yen kept in a Swiss bank would be euro currency.
Evening up: Buying or selling to offset an existing market position, long or short.
Exchange rate risk: Risk arising out of unfavourable foreign exchange rates variation, resulting in losses in assets and increase in liabilities.
Exim Bank: Export Import Bank which finances export and import operations.
Fera: Foreign Exchange Regulation Act, 1973.
Fighting the Tape: Going against the stock market trend. From the New York Stock Exchange, where share prices used to be reported on a ticker tape. If one is buying when the tape is showing a downtrend, or short selling when the share prices are rising, one is fighting the tape.
Financial Ratios: Ratios of values obtained from a firm’s financial statements used to study the firm’s health and the price of its shares. The more important among these are Current Ratio. P/E Ratio, Earnings to Equity Ratio, Payout Ratio, price book value ratio and quick ratio.
Financial Year: Now 1st April to 31st March for income tax purposes, although previously companies could choose one year periods of their convenience. It is the year of profit and loss accounting.
Fixed Interest Securities: A type of security which pays fixed, agreed interest at regular intervals. These comprise gilt-edged securities, bonds, preference shares and debentures. Less risky than equity shares, they offer better yield for money, but have very little scope for capital appreciation. At times of high inflation they are a poor investment as the value of the yield as well as the principal are fast eroded.
Flag: A chart pattern in technical analysis, formed when the share prices move up and down in a narrow range, forming a parallelogram, with a sharply rising or a falling mast at the beginning.
Footsie: Financial times – stock exchange 100 share index, a weighted index of the price of 100 shares of major companies traded on the London Exchange, the base being 1000 on 3rd January,1984.
Forex: Foreign Exchange- Forex in Europe and FX in United States.
Free Lunch Theorem: The theorem states that there is no such thing as a free lunch. If one wishes to make money on the stock market one must work hard and take carefully selected risks.
Free Market Economy: Also simply, market economy. An economic system in which the government does not interfere in any way with business activity. There are no price controls, no permits, no kickbacks, no trading restrictions nor foreign exchange control. India is making hesitant moves towards this economy.
Fundamental Analysis: Scientific study of the basic factors which determine a share’s value. The analyst studies the industry and the company’s sales, assets, liabilities, debt structure, earnings, products market share, evaluates the company’s management, compares company with its competitors, and then estimates the share’s intrinsic worth. The fundamental analysts tools are Financial Ratios arrived at by studying company’s balance sheet and Profit and Loss Account over a number of years.
Futures: Shares or commodities bought or sold for delivery at a future date. These can be sold at a profit before delivery if prices in the market have changed.
Futures Contract: A contractual agreement to buy or sell a specified quantity of a commodity, currency or shares at a particular price at a fixed date in the future. It differs from an option in that it does not provide an option to buy or sell, but is a definite contract to do either. Futures are a hedge against price fluctuations for those who must buy a future dates. There are speculators who buy and sell these contracts for price. A bought futures contract can only be cancelled by a sales contract.
GDP : Gross Domestic Product
Going Long: Buying a share for speculation, opposite of going short, where the operations is that of selling. Speculators who take long or short positions do not actually buy or sell shares, nor do they have a intention of doing so.
Going Short: Selling a share that the seller does not actually possess, but hopes to pick up when the price has gone further down, and so make a profit.
Grey Market: Un official premium market, in which new, not-yet listed shares are bought and sold. Although it gives some indication of share’s demand and the likely premium at which it will sell when listed, it is by no means completely reliable.
Gross Profit: Net sales minus the cost production, but without deduction of interest, depreciation and taxes.
Gun Jumping: Trading in shares on information before it is made public e.g., information that a large, successful company has decided to take over a company which has been sick and closed for a long time. Also, securing orders for a company’s shares not yet registered. Illegal.
Hair cut: The difference between the buying price and selling price of a market maker.
Hammering: Concerted selling of share by operators to bring the price down, often short-selling heavily. Term associated with bears.
Head and Shoulders: A pattern in a share price chart resembling the heads and shoulders of a person.
Hedging: Reducing exposure to risk. In the investment of one’s funds in the share market, it is done by buying different kinds of shares, so that if one falls in price another will rise, or investing in different kinds of shares, e.g., shares, debentures, bonds, gold, silver, real estate etc. Hedging against inflation is putting one’s money on assets which will neutralize inflationary increases.
Hitech Stocks: Stocks of companies dealing in IT, computers, electronics, bio-technology etc.
Homemade Portfolio: A portfolio of shares of different mutual fund companies, such a portfolio is diversification of diversified risk, carrying practically no risk.
Hot Money: Money which is transferred at short notice from one international financial centre to another for fear of exchange rate fluctuations, or in response to changes in rates of interest. Another kind of hot money in which has been acquired dishonestly.
Income Distribution: The payment of income to unit holders by a Unit Trust in proportion to their holdings.
Index: A measurement of the trend of share prices. It is not just an average of share prices, but weighted to reflect the number of shares outstanding for an individual script.
Index Futures: A new mode of stock market investment in which, instead of buying individual shares one buys so many units of a recognized index.
Inflation: Not just price increase of this or that commodity once in a while, but a general and sustained price increase, resulting in the fall of the real value of money which can buy only less and less.
Inflation Gap: Government expenditure in excess income from taxation and borrowing. The excess is financed increasing the money supply, by either printing paper money or borrowing from banks or both.
Insider Trading: An illegal activity in which persons in which a company having confidential information such as expansion plans, financial results, takeover bids etc., take advantage of such information to make a profit on the stock exchange by buying or selling shares.
Intraday Volatility: High and low prices of a traded stock in the course of a day.
Investment Analyst: A finance professional employed by banks, stock brokers, investment companies, mutual funds and unit trusts to advise them on investment.
Investment company: A firm which uses, not its own money but the pooled funds of individuals, to buy and sell shares for collective benefit.
Economic data which point to the direction in which the economy of the country is moving. These comprise, Gross National Product, Gross Domestic Product, Agricultural, Food grains and Industrial Production, Electricity Generated, Wholesale price Index, Consumer Price Index, Money Supply, Imports, Exports, Foreign currency reserves etc.
Key Industry: Industry which plays important role in nation’s economy, for e.g. Steel, Cement, Fertilizers, Automobiles, I.T., etc.
Lame Duck: A member of the stock exchange who cannot meet his obligations. Also, a company in financial difficulties.
Letter of Credit: A letter from the buyer’s banker to the seller’s banker authorizing the payment of a certain sum of money at a certain date on production of specified documents. Widely used in trade, especially foreign trade.
Limit Order: The client gives the stock broker a price limit above which he cannot buy or below which he cannot sell. There will also be time limit. In a sharply rising or falling market such an order may result in no buying or selling.
Line Charts: As distinguished from bar charts, which show everyday price movement, line charts simply connect successive days closing prices.
Liquid Assets: Quick Assets.
Listed Company: A company which has a listing agreement with a stock exchange and whose shares are quoted at the exchange and which features in the official list of quotations. Apart from paying regular listing fees, the company has to fulfill certain requirements, such as minimum asset base and publication of specific financial information, both at the time of listing and periodically thereafter. If for failure to fulfill these obligations a company is delisted, its shares cannot be traded on the exchange and these becomes extremely difficult to trade.
Listed Shares: Shares of companies which are registered by a stock exchange for trading on its floor. They have a quotation on the official list of the stock exchange.
Long Term: In the context of holding period of investments or market trends, long term means a period of one year or more, medium term between six and twelve months, and short term less than six months.
Macro Economic Forecasts: Forecasts on a nation’s economy and the state of industries based on such data as price levels, employment, rate of inflation and industrial production.
Managed Portfolio: A portfolio of shares in which decisions to buy and sell are made by a person other than the owner. Such a person is called portfolio manager.
Market Instrument: A fully negotiable instrument for short term debt.
Market Timing: The decision when to buy or sell a share or when to switch from one share to another. Technical analysis claims to advise investors correctly about market timing.
Mark Up: Opposite of Mark down. When a broker is selling from his account to a customer, he charges the best ask price and adds of commission which is mark up.
Melt down: The phenomenon of fast, uncontrolled fall in share price.
Moving Average: An average of share prices for specified periods one week, one fortnight, a month, or a year or years, showing trends of price movements, rather than daily fluctuations. For example a weekly moving average will take a week’s prices till yesterday and for tomorrow’s average it will drop the earliest day and include today.
Naked Call Writing: Selling a call option on shares the writer does not own. He expects the price to remain the same or fall, so that if the option is exercised, he can buy it from the market. If however the price rises, he has to buy from the market, incurring a loss, covered call writing on the other hand is a safe exercise.
Naked Option: A call option for which the seller does not own the underlying shares, and which he hopes to buy from the market, believing that the price will fall. If it does, he makes a profit on the difference, it does not rises, the seller is caught in a naked position, and must sustain a loss by buying at the higher price.
Naked Position: One that is not hedged from market risk.
Negative Cash Flow: When a company spends more than it earns in an accounting period, it has a negative cash flow.
Nervous Market: Stock market which is reacting sharply to economic or political events, such as an annual budget unfavorable to industrial growth, drought, imposition or removal of price controls, change of government etc.,
Nifty: A select group fifty shares of the National Stock Exchange of India. This constitute the NSE-Nifty Index.
Offer price: The price at which units can be bought from a Trust. It may or may not include an entry fee. The term also refers to the price at which the market maker is proposed to sell.
One way Market: A market dominated by only buyers or sellers.
Opec: Organization of Petroleum Exporting countries, a cartel.
Open Economy: An economy which engages in international trade, without very many import quotes and restrictive import policy. The Indian economy is still only partly open.
Open position: Trading position unprotected from price fluctuations in which an operator has bought but has not sold, or sold without having the stocks or commodity or currency in hand. In the former case, if the price drops the operator stands to lose, in the latter the loss will result if the price rises. An open position can either be a bull position or a bear position.
Operating Ratios: These measure a company’s operating efficiency by comparing various income and expenditure figures from the balance sheet and profit and loss account. Some of these ratios are sales to cost of goods sold, operating income to operating expenses, net profit to cost of goods sold, operating income to operating expenses, net profit to gross income, net income to net worth. These ratios are compared with the company’s previous results, and the industry averages.
Option: The right of choice, bought at a price called premium, to buy or sell a particular, stock, index or commodity at a particular future date at a particular price called the strike or exercise price. The buyer of an option is not obliged to buy or sell at the exercise price, he will do so only if it suits him. The buyer may let the option lapse, in which case all that he loses is the premium which he paid to buy the option. An option to buy is called a call option. An option to sell is called put option. A call option is bought in the expectation of arise in price, while one buys a put option expecting the price to fall. Options protect an investor from unfavorable fluctuations in price. Traded options can be bought and sold on the exchange. An option is not like a futures contract which is binding.
Options Contract: An options contract confers the right to buy or sell a specific quantity or a number of a particular asset at a specific price at or before some date in the future. It confers on the buyer the right but not the obligation to honor the contract. The obligation rests only with the seller or writer of the contract. If the buyer chooses not to exercise his option, the maximum loss he suffers is the premium he has paid to the writer of the contract.
Over Bought: Term used in Technical Analysis to indicate a sharp rise in the price of a share or shares as a result of hectic buying by investors and speculators in the hope of further rise. An overbought share or market is prone to an imminent correction, as there are few buyers left to push the price up further. An overbought market is identified when the days’ opening prices are substantially higher than the closing price of the previous day’s trading and there is a clear gap, considered to be signal to stay away from the share for time being.
Over Heated Market: A stock market situation in which too much money is chasing very few shares, leading to sharp rise in prices and frequent GAPS. This is the last phase of a bull cycle and it usually portends an imminent onset of a bear cycle.
Over Sold: A term used in Technical Analysis to indicate that the price of a share or shares has fallen too fast as a result of excessive selling and there are few sellers left. An over sold share or market is prone to an imminent rise in price. An oversold situation can be detected by a GAP in which the opening price is considerably low below the closing price of the previous day.
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 unfavorable news or rumor or a random walk by share downwards, or simply in bear conditions, the absence of financial institutions from the market.
Paper Loss: A loss which remains only on paper, because the investor has not really sold his shares bought at a higher price. A poor consolidation for the share prices may go down further till the investor has to sell at a much greater actual loss.
Paper Profit: A profit which remains only on paper, because the investor has not sold the shares which have appreciated in price. The only real profit on the stock market is booked profit.
Pegging: Stabilizing the price of stocks, currency, commodity or gold through intervention by the government or government controlled agencies which buy when the price falls below a certain level and sell when the price crosses a healthy level.
Perfect Competition: A theoretical market condition in which no buyer or seller has the power to influence the price. Perfect competition is said to prevail in a stock market in which the investors equally share all the information available and there are large numbers of them buying and selling.
Premium: 1. Price above the face value of a share or any other financial security. 2. Price paid for buying an option.
Price Gap: A term used in technical analysis when a share’s high and low during a day does not over lap the prices on the previous day. Such gaps tend to occur when the share is in n overbought or oversold position.
Primary Market: A market for new issues of shares, debentures and bonds, where investors apply directly to the issuer for allotment and pay application money to the issuer’s account.
Put Option: The right to sell shares at an agreed Option Price.
Qualitative Analysis: Analysis of the value of financial securities, strictly based on financial information contained in the balance sheet and profit and loss account of a company, but on other factors, such as quality of its management, labor relations or research and development programmes.
Quantitative Analysis: Analysis of the value of financial securities, strictly based on financial information contained in the balance sheet and profit and loss account, as also the financial trends in the industry.
Quick Assets Ratio: Also known as the quick ratio. A measure of the liquidity of a company.
Quotation: Highest bid and lowest offer for a share.
Quoted Price: The price at which a share was late bought and sold on the stock exchange.
Quoted Shares: The shares of a company which are officially registered on a stock exchange, and shoes prices are quoted on the Official List. These qualify for lower corporate tax rate and lower interest on borrowings.
Recession: Fall in the country’s economic activity, for at least two consecutive quarters, not as serious as depression.
Recovery Stock: A share that has fallen in price, but which has potential to rise again to the previous level.
Reflation: An expansion of the economy characterized by rising un employment and increased production as a result of government’s economic policy.
Registrar of Companies: An official appointed by the Government of India to scrutinize the “Memorandum of Association” and the ‘Articles of Association’ which the promoters of the company draft and submit to him. If he finds these in order, he will give his approval to the formation of the company through a ‘Certificate of Incorporation.’ The Registrar keeps all the documents of a company formed under the Companies Act, 1956 and any subsequent amendments of a company’s rules have to be notified to the approved by him.
Rising Bottoms: A technical chart pattern which shows a raising trend in the low prices of shares in successive curves of high and low. If this trend is accompanied by a rising trend in the tops in successive curves of highs, the trend is interpreted to be bullish.
Risk and Return: A important concept in investment which must take into account risk aversion, which is a common enough human trait. In investment generally speaking the less the risk, the lower the return. The absolute risk is the insolvency of the borrower or the company whose shares have been bought.
Saucer: A term used in technical analysis to indicate a chart pattern showing that a share price has formed a saucer like bottom and is moving up, signaling further rise. If the pattern is that of an upside down saucer, the signal is for a further fall.
Scam: Scam is a US word meaning fraud, swindle and cheating.
Secondary Market: Stock exchanges and over the counter markets where shares are traded after they have been issued, which was done in the primary market.
Selling Short: Sale of shares, which he does not posses, by a speculator. He usually borrows the shares from his stock broker promising to replace them at a future date, hoping that the price will fall by then. If the price falls, he buys the shares at the lower rate, and makes a profit on the difference. If the price has risen on the other hand, he has to buy the shares at the higher price and sustain a loss.
Sensitive Market: Market easily influenced by good or bad news.
Sentiment Indicators: Assessment of bullish and bearish sentiment of the investors. Many technical Analysis would look upon these as contrary indicators, that is if most of the investors are bullish, the market is about to fall and vice versa.
Shake out: A change in market conditions often results in the liquidation of marginally financed companies in an industry. When the market is glutted by too many companies trying to market the same class of goods or services and there are more sellers than buyers, there will be a shake out and many companies will be eliminated. Speculators in the stock markets can be shaken out too, when stock market conditions force them sell their positions, often at a big loss.
Share Transfer: The shares purchased by an investor are transferred to the Demat Account of the investor. The shares will remain in the Demat Account in electronic form until the investor wishes to sell the same.
Smart Money: Money invested wisely and successfully by people with particular knowledge of industries and economy.
Snow balling: When the price of a share reaches a certain level it activates a number of stop orders, to buy or sell. This exerts further pressure on the rising or falling market, activating more stop orders, creating further rise and fall in a snow balling effect.
Soft Loan: Loan to individuals, companies or countries at a low rate of interest for special reasons, such as self employment, investment in socially useful priority sectors or developing economies.
Squaring up: Settling of accounts on Account days.
Spread: The difference between the bid and the offer price of a share on the floor of the stock exchange. The spread may be large or small depending upon the demand and supply of shares in the market. The more frequently a share is traded in the exchange, the less will be the spread.
Stagnation: In the stock market, a period of inactivity and low volume of trading.
Stock Broker: A professional person, agency or company which buys or sells on behalf investors for a fee. The broker is registered with a stock exchange and is answerable to it for ethical practice.
Stock Indices: These measure the value of a selected group of shares which indicate the way a stock market is moving. Indices may comprise a small number of important shares or they may be broad based.
Stop Loss: A client’s order to his broker to sell a share if its market prices falls to a certain level below the current price. It is a means of protecting one’s profit, or reducing one’s loss, while waiting for the market to recover.
Stradle: A strategy used in option or futures trading, consisting of an equal number of put and call options at the same exercise price with the same maturity date. Each option can be traded or exercised separately.
Take a Bath: To suffer a big loss, either through speculation or investment so and so has taken a bath in XYZ shares.
Target Price: When an investor has bought a share, usually he has a higher price in mind which he expects the share to reach. This is the target price. It is wise in the long run to fix such a target price for every share bought and book profit when the share has reached it, rather than hold it indefinitely, hoping that the price will rise further. Most gains are made in the stock market by acting on the target price, as most losses are made in the stock market by acting on the target price, as most losses are the results of holding on to a share in the hope that it has an endless possibility of appreciating.
Technical Analysis: A method of prediction of share price movements based on study of price graphs or charts on the assumption that share price trends are repetitive, that since investor psychology follows a certain pattern, what is seen to have happened before is likely to be repeated. The technical analyst is not concerned with the fundamental strength or weakness of a company or an industry, he studies investor and price behavior.
Thin Market: Stock Market in which there is a thin volume of trading and little liquidity. Because the trading volume is low there may be a lot of volatility, as traders have to offer lower prices to attract buyers and sellers can ask for higher prices.
Top Down Investing: Basically a fundamental approach to investing, in which an investor considers important, parameters like trends in the economy, industries which these trends favour and companies within these industries which are likely to benefit most.
Trading Pattern: Finding the long term direction of a share’s price by drawing a line connecting the highest prices reached by the share and another line connecting the lowest prices on a chart over a period of time. The direction will be either up and down, showing the shares trading pattern.
Trend: Any short, medium or long time direction of the movement of stock prices, upward, downward or sideways. This shows the directions the market is moving in at a particular time.
Triangle: A chart pattern of Technical Analysis in which there are two base points and an apex on the left. If the apex is one the right it makes a reverse triangle. In a proper triangle there are a number of rallies and price drops where each succeeding rally is smaller than the preceding one and each bottom is higher than the last one. When the share’s price breaks out of the triangle formation upwards or downwards, it is supposed to indicate that the rise or fall will continue for some time.
Under valued Shares: Shares selling below their book value or the price earning ratio which analysts believe they deserve. There may be many reasons for this, the industry is out of favour, or the company has current labour trouble, or it is not well known enough or this is quite common, the company has not yet caught the investors fancy. Companies with under valued shares are often targets of the take over as their shares can be acquired cheaply.
Unlisted Share: A share which is not registered with any stock exchange and therefore does not feature on any stock exchange list. Owners of such shares are deprived of the protection that the holders of a listed share enjoys from the stock exchange. These shares are also very difficult to sell and carry a large risk. Usually, the more exchanges at which share is listed, the greater the liquidity.
Unloading: Selling shares off when prices are falling to avoid further loss. Bulls, when they get tired waiting for the price to rise, tend to un load when the market is falling, causing prices to fall further.
Unrealized profit or loss: Profit or loss on one’s holding of shares which is merely the result of a book exercise, because the shares have not been sold. Also called paper profit or loss.
Value Added: Additional value given to a commodity by means of labour or technology so that the character of the commodity is altered. For example. When a raw material has been converted to finished goods, a value has been added.
Vat: Value Added Tax. A tax ultimately paid by the customer. A cumulative tax in that at each stage of value addition as the commodity passes from one manufacturer to another, the tax has to be paid.
Venture Capital: Investment in a new start up business carrying considerable financial risk but with above average prospects of reward. Sources include wealthy individuals, business investment companies and merchant banks. Venture capitalists are rewarded with a share in profits, preference shares or promise of certain allotment of number of equity shares when the enterprise grows.
V-Formation: A chart pattern in technical analysis which forms a V which indicates that the share price has bottomed out and is on an upward course, a reverse ‘V’ will indicate the opposite trend.
Volatile: Subject to frequent and violent fluctuations. If the volatility of a share is due to inherent factors like variability in its earnings, smallness of the issue; the cyclical nature of the industry to which it belongs, it is measured by alpha factor. If on the other hand, the volatility is market related it is measured by beta factor.
Volatile Shares: Shares which are subject to sharp fluctuations in price showing a considerable difference between their highest and lowest recorded prices.
Volume: Refers to the total volume of shares traded on a particular day and over a period. It shows the strength or weakness of the market movement up and down. An increased volume shows strength of the movement, while a decline shows a weakening movement. If a low volume extends over weeks or months the market is lethargic, with only small advances or declines. Volume represented by bar charts, read along with price charts, is an important indicator in technical analysis. This is a concept of the Dow Theory.
Wall Street: Popular name for New York Stock Exchange, which is located at the corner of Board street and Wall street.
Wash Sale: Buying and selling of a share simultaneously or within a short period of time by an individual or a group to generate artificial market activity and a rise in the share’s which the manipulator’s can then cash in on.
Wedge: Technical analysis chart pattern like a Triangle, but with a slight difference. In a triangle one line rises while the other falls, where as in a wedge both the lines move in the same direction, i.e., both rise or fall until the distance between the peaks and the through closes. Where as triangle indicates a sharp breakout, a wedge indicates a temporary interruption in the rising or falling trend.
Weighted Average: Arthmetic mean that that takes into account the importance of each item making an average. For example, the prices of 32 scripts of an index will give one average, whereas the total sum at which each of the different scripts has sold in different quantities will give quite a different average.
W-Formation: Technical Analysis chart pattern, forming a ‘W’ showing that a share’s price has hit the support level (two bottoms of W) twice and is now likely to move up.
Whipsawed: To be badly mauled by volatile price movements when some one makes losing trades, i.e,., buys just before prices fall and sell just before price rice.
White Knight: A term used in Hostile Takeover context, when a company, which cannot prevent a take over looks for a friendly rescuer who might outbid the Black Knight and acquire the company on amicable terms.
Working Capital: Technically it is the difference between Current Assets and Liabilities. Some times called circulating capital.
Write off: Charging an item of assets to expense or loss.
XB: Ex-Bonus. The price of a share without the benefit of the bonus declared. There is a record date, announced by the company, after which the price of a share does not include the bonus.
XD: Ex-dividend. The price of a share without the benefit of the declared dividend. Shares registered for transfer after the record date do not carry the dividend, which goes to the previous owner.
Yield Curve: A graph showing yield in Y-axis, and period of maturity on X-axis for fixed income investments of the same kind, i.e, government bonds, debentures or other loan instruments.
Yield Gap: The difference between the average annual yield on equity dividends and the average annual yield of long term gilt edged securities. With rising equity prices, the dividend yield becomes lower, which results in negative yield.
Yield Spread: It is the differential between the dividend yield on shares and the current yield on bonds.
Zero Coupon Bond: A coupon is an interest warrant attached to a debt instrument and the coupon rate is the rate of interest. A zero coupon bond carries no interest, but is sold at a discount to its face value.