Glossary On Financial Terms

Q) What is the difference between stocks and shares?

Ans: Stock s a genera term used to descrbe the shares of any
company and "shares" refers to a specfc stock of a partcuar
company. So, f nvestors say they own stocks, they are generay
referrng to ther overa ownershp n one or more companes. If
nvestors say they own shares - the queston then becomes - shares n
what company?
Stocks : A type of securty that sgnfes ownershp n a corporaton and
represents a cam on part of the corporaton's assets and earnngs.
Shares : A unt of ownershp nterest n a corporaton or
fnanca asset. Whe ownng shares n a busness does not mean that
the sharehoder has drect contro over the busness's day-to-day
operatons, beng a sharehoder does entte the possessor to an equa
dstrbuton n any profts, f any are decared n the form of dvdends.
The two man types of shares are common shares and preferred shares.
Caital !arkets : The capta market (securtes markets) s the market
for securtes, where companes and the government can rase ong-term
funds. The capta market ncudes the stock market and the bond
market. It s a pace where nvestors come together to buy and se
shares.
"rimary !arkets: The rimary market s that part of the capta
markets that deas wth the ssuance of new securtes. Companes,
governments or pubc sector nsttutons can obtan fundng through the
sae of a new stock or bond ssue. Ths s typcay done through a
syndcate of securtes deaers. The process of seng new ssues to
nvestors s caed underwrtng. In the case of a new stock ssue, ths sae
s caed an nta pubc offerng (IPO). Deaers earn a commsson that s
but nto the prce of the securty offerng, though t can be found n the
prospectus.
Secondary !arket: The secondary market s the fnanca market for
tradng of securtes that have aready been ssued n an nta prvate or
pubc offerng.
#i$idend
The perodc, usuay quartery, payment made by a corporaton to ts
sharehoders, generay expressed as dvdend per share. Dvdends
represent earnngs that are not renvested by the corporaton. Some
stocks pay no dvdends and others, such as utty companes pay
substanta ones that represent a arge porton of the tota return a
sharehoder w get from hs nvestment. Dvdends are a type of
dstrbuton and are usuay taxabe n year receved.
%&'ity s, normay, ownershp or percentage of ownershp n a
company.
%&'ity Share s a) a share or cass of shares whether or not the share
carres votng rghts, b) any warrants, optons or rghts enttng ther
hoders to purchase or acqure the shares referred to under (a), or c.
other prescrbed securtes.
"reference Shares usuay, non-votng capta stock that pays
dvdends at a specfed rate and has preference over common stock n
the payment of dvdends and the qudaton of assets.
#ebent're
A bond ssued by a corporaton whch s secured by the genera credt or
promse to pay of the ssuer. It s not backed by
coatera such as tangbe assets.
Exampe: 1. A certfcate or voucher acknowedgng a debt.
2. An unsecured bond ssued by a cv or governmenta
corporaton or agency and backed ony by the credt
standng of the ssuer.
#eri$ati$es:
Fnanca nstruments, such as futures and optons, whch derve ther
vaue from underyng securtes ncudng bonds, bs, currences, and
equtes. Equty dervatves are fnanca dervatve products whose
vaue s dependent on the vaue of an underyng share or group of
shares.
(nderlyin) Sec'rity
The securty that must be devered when another securty s exercsed.
For exampe, f a ca opton s exercsed, then the underyng stock s
devered to the ca owner. Warrants, rghts, optons, and convertbe
securtes a have underyng securtes. For futures optons, futures are
the underyng securty.
F't'res
Investment contracts whch specfy the quantty and prce of a commodty
to be purchased or sod at a ater date. On contract date, the buyer must
take physca possesson or make devery of the commodty, whch can
ony be avoded by cosng out the contract(s) before that date. Futures
can be used for specuaton or hedgng.
Otion
A contract that gves the owner the rght, f exercsed, to buy or se a
securty or basket of securtes (ndex) at a specfc prce wthn a specfc
tme mt. Usuay, they are traded as securtes themseves, wth buyers
and seers tryng to proft from prce changes. They are generay
avaabe for 1 to 9 months, wth some onger term optons (caed LEAPS)
aso avaabe for seected securtes. Stock opton contracts are generay
for the rght to buy or se 100 shares of the underyng stock (100 s the
mutper). Tradng n optons shoud ony be undertaken by sophstcated
nvestors.
Call Otion
A ca opton gves the owner the rght, but not the obgaton, to buy the
underyng stock at a gven prce (the strke prce) by a gven tme (the
expraton date). The owner of the ca s specuatng that the underyng
stock w go up n vaue, hence, ncreasng the vaue of the opton. The
purpose can be to specuate wth the opton (hope t goes up and se for a
proft), to nvest n the underyng stock at a ocked n prce f the stock
prce goes hgh enough, or to generate ncome. Each opton contract
equas 100 shares of stock. For exampe, an AAA MAR 65 ca, woud gve
the owner the rght to buy 100 shares of AAA at $65 (strke prce) per
share between now and the thrd Frday n March (expraton date).
"'t Otion
A put opton gves the owner the rght, but not the obgaton, to se the
underyng stock at a gven prce (the strke prce ) by a gven tme (the
expraton date). The owner s specuatng that the opton w go up n
vaue and the underyng stock w go down n vaue. The purpose can be
to ether specuate wth the opton (hope t goes up and se for a proft) or
trade the underyng stock at a ocked n prce f the stock prce goes down
enough. For exampe, an AAA MAR 65 put woud gve the owner the rght
to se 100 shares of AAA at $65 (strke prce) per share between now and
the thrd Frday n March (expraton date).
*ed)in)
An nvestment strategy of owerng rsk by buyng securtes that have
offsettng rsk characterstcs. A perfect hedge emnates rsk entrey.
Hedgng strateges ower return snce there s a cost nvoved n hedgng.
For exampe, a portfoo manager coud short a futures contract whch w
perfecty offset any decrease n the vaue of the portfoo. Optons and
short seng stock can aso be used for hedgng. Hedge funds are
nvestment poos that are free to use any hedgng technques they desre
and they often make arge bets n a reatvey sma number of dfferent
hodngs.
+ntraday Tradin)
Intraday share tradng refers to the buyng and seng (or vse versa) of
the same scrpt n the same tradng sesson ( on the same day).
"ortfolio !ana)ement:
Where assets are combned nto a portfoo that fts the nvestor's
preferences (eg, eve of rsk) and needs (eg, reguar dvdends).
The am of Portfoo Management s to acheve the maxmum return
from a portfoo whch has been deegated to be managed by an
ndvdua manager or fnanca nsttuton. The manager has to baance
the parameters whch defne a good nvestment e securty, qudty and
return. The goa s to obtan the hghest return for the cent of the
managed portfoo.
,l'e Chi Comanies:
A bue chp stock s the stock of a we-estabshed company havng
stabe earnngs and no extensve abtes. Most bue chp stocks pay
reguar dvdends, even when busness s farng worse than usua. They
are vaued by nvestors seekng reatve safety and stabty, though
prces per share are usuay hgh.
,ond
A ong-term debt nstrument on whch the ssuer pays nterest
perodcay, known as Coupon. Bonds are secured by COLLATERAL n
the form of mmovabe property. Whe generay, bonds have a defnte
MATURITY, Perpetua Bonds are securtes wthout any maturty. In the
U.S., the term DEBENTURES refers to ong-term debt nstruments whch
are not secured by specfc coatera, so as to dstngush them from
bonds.
-AS#AQ
An acronym for Natona Assocaton of Securty Deaers Automated
Ouotatons System, whch s a natonwde network of computers and
other eectronc equpment that connects deaers n the over-the-counter
market across the U.S. The system provdes the atest BID and ASKING
PRICES quoted for any securty by dfferent deaers. Ths enabes an
nvestor to have hs or her transacton done at the best prce. Due to
NASDAO, the over-the-counter market n the U.S. s ke a vast but
convenent tradng foor on whch severa thousand stocks are traded.
-ational Stock %.chan)e /-S%)
It s a natonwde screen-based tradng network usng computers, satete
nk and eectronc meda that factate transactons n securtes by
nvestors across Inda. The dea of ths mode exchange (traced to the
Pherwan Commttee recommendatons) was an answer to the
defcences of the oder stock exchanges as refected n settement
deays, prce rggng and a ack of transparency.
0olatility
The measure of the tendency of prces to fuctuate wdey. Prces of sma
companes tend to be more voate than those of arge corporatons. Beta
s a measure of voatty.
1i&'idity
The abty to turn an asset nto cash. A hghy qud asset s easy to se
because an actve market exsts that sets prces whch are contnuousy
ad|usted for suppy and demand. An exampe s a sted stock or mutua
fund. A ess qud asset s rea estate or a coectbe
1ot
A group of dentca UNITS (for securtes) or neary dentca unts (for
coectbes) of an nvestment that are traded at the same tme and prce.
Open ots are the contents of open nvestments and can be ong (buys) or
short (short se). Cosed ots are the contents of cosed nvestments and
can be ong (se) or short (buy to cover).
-et Asset 0al'e /-A0)
The per share prce of a mutua fund. For a no-oad fund, NAV s the prce
receved by both buyers and seers. For front oaded mutua funds, NAV s
equvaent of the bd prce (what sharehoders can get for seng a share),
whe the offerng prce s the prce buyers must pay per share (and
ncudes front oad). The NAV s usuay cacuated at the end of each
tradng day by takng the cosng prces of a securtes owned pus cash
and equvaents and subtractng a abtes then dvdng by the number
of shares outstandng, whch for open-end funds, fuctuates dependng on
day number of redemptons and purchases. Many new funds are ssued at
a NAV of $10. After a dstrbuton, the NAV fas by the amount equa to the
dstrbuton.
#eository
A system of computerzed book-entry of securtes. Ths arrangement
enabes a transfer of shares through a mere book-entry rather than the
physca movement of certfcates. Ths s because the scrps are
dematerazed or aternatvey, mmobzed under the system.
,ear
A person who expects share prces n genera to decne and who s key
to nduge n SHORT SALES.
,ear !arket
A ong perod of decnng securty prces. Wdespread expectatons of a
fa n corporate profts or a sowdown n genera economc actvty can
brng about a bear market.
,'ll
A person who expects share prces n genera to move up and who s key
to take a ong poston n the stock market.
Transfer a)ent: The person or frm that cances the shares n the name
of the seer and
The comlete lifecycle of a (2S e&'ity trade :
Order Capture, ts executon n the market, affrmaton/confrmaton,
foregn exchange, cearng, settement, and reportng.
!'t'al F'nd
Fund operated by an nvestment company that rases money from
sharehoders and nvests t n stocks, bonds, optons, commodtes or
money market securtes. The sum of the coected amount s caed
Corpus.
3etained %arnin)s
Net profts kept to accumuate n a busness after dvdends are pad.
C'stodian
A fnanca nsttuton that has the ega responsbty for a customer's
securtes. Ths mpes management as we as safekeepng.
,on's Shares
The ssue of shares to the sharehoders of a company, by captazng a
part of the companys reserves. The decson to ssue bonus shares, or
stock DIVIDEND as n the U.S., may be n response to the need to sgna an
affrmaton to the expectatons of sharehoders that the prospects of the
company are brght; or t may be wth the motve of brngng down the
share prce n absoute terms, n order to ensure contnung nvestor
nterest. Foowng a bonus ssue, though the number of tota shares
ncreases, the proportona ownershp of sharehoders does not change.
The magntude of a bonus ssue s determned by takng nto account
certan rues, ad down for the purpose. For exampe, the ssue can be
made out of free reserves created by genune profts or by share PREMIUM
coected n cash ony. Aso, the resdua reserves, after the proposed
captazaton, must be at east 40 percent of the ncreased PAID-UP
CAPITAL. These and other gudenes must be satsfed by a company that
s consderng a bonus ssue. )See aso MARKET CAPITALIZATION.)
S'brime
The term used for endng to borrowers at a hgher rate than the prme
rate as they have a hgher rsk of defaut. Subprme borrowers typcay
have ow credt scores due to pror bankruptcy, mssed oan payments,
home repossesson etc.
Settlement
The process whereby obgatons arsng under a dervatve transacton are
dscharged through payment or devery or both.