SHARE MARKET KEY TERMS UPSC

Share market key terms:

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Share markets

Important Economic Terms for UPSC Exam

Ask Price

Ask price is a specific price at which you are looking to sell a share.

Angel investor

Is a wealthy investor, who invests in a new business startup with high promise, he normally involves in ownership and functioning.

Mergers and acquisitions –

Annual Report

An annual report is a yearly report that every company prepares to impress the shareholders of their company. The annual report consists of lots of information about a company, from cash flow to management strategy.

Several people read the annual report to look at the company’s solvency and judge their financial position.

Arbitrage

Arbitrage means purchasing something like foreign money from one place and selling it to another place where the price of the foreign money is higher than buying place.

For example: if stock is trading out $20 from one Market and $21 on other markets, the trader must buy shares at $20 from one Market and sell them for $21 on the different Market, getting the difference amount between both the markets price.

Averaging Down

Averaging down means the investor buys more stock when the price of a particular stock goes down. This decreases the average purchase price of your specific stock.

Several investors use this strategy if they feel that consensus about a specific company is wrong, so they expect the stock price to jump back and earn profit.

Bear Market

It is a market where investors talk about the stock market performing in a downward trend, or it is a certain period where the prices of multiple stocks are falling.

Broker

A broker is a person who buys and sells investment on your behalf and, in exchange, takes a certain amount of money called commission or fee.

Bull Market

It is a market condition,  where the stock market is performing in an upward trend, or it is a certain period where the prices of multiple shares are increasing.

Bid Price

A bid price is nothing but the amount that you desire to pay for a particular share.

Bear market

A bear market is one that is falling or trending lower. This can happen during times of recession or public crisis and can last anywhere from weeks to years. If you think the market is going to drop, you’d be considered a “bear.” This description can also be applied to individual stocks you believe will fall, in which case you’d be “bearish” on the stock.

Bond

A bond is similar to a loan with some key differences. In the case of a bond, the buyer is the lender, and the seller is the borrower. Generally speaking, the bond issuer or seller is a government body or a corporation. When they issue the bond, they promise to repay a principal amount, which is the amount of money they are borrowing, in the future on a maturity date. Additionally, they will pay interest periodically to the bond buyer based on a rate called the coupon rate.

• • Cumulative Preference Shares:

A type of preference shares on which dividend accumulates if remains unpaid. All arrears of preference dividend have to be paid out before paying dividend on equity shares.

• • Cumulative Convertible Preference Shares:

A type of preference shares where the dividend payable on the same accumulates, if not paid. After a specified date, these shares will be converted into equity capital of the company.

• • Participating Preference Share:

The right of certain preference shareholders to participate in profits after a specified fixed dividend contracted for is paid. Participation right is linked with the quantum of dividend paid on the equity shares over and above a particular specified level.

• • Security Receipts:

Security receipt means a receipt or other security, issued by a securitisation company or reconstruction company to any qualified institutional buyer pursuant to a scheme, evidencing the purchase or acquisition by the holder thereof, of an undivided right, title or interest in the financial asset involved in securitisation.

• • Government securities (G-Secs):

These are sovereign (credit risk-free) coupon bearing instruments which are issued by the Reserve Bank of India on behalf of Government of India, in lieu of the Central Government's market borrowing programme. These securities have a fixed coupon that is paid on specific dates on half-yearly basis. These securities are available in wide range of maturity dates, from short dated (less than one year) to long dated (up to twenty years).

• • Debentures:

Bonds issued by a company bearing a fixed rate of interest usually payable half yearly on specific dates and principal amount repayable on particular date on redemption of the debentures. Debentures are normally secured / charged against the asset of the company in favour of debenture holder.

• • Bond:

A negotiable certificate evidencing indebtedness. It is normally unsecured. A debt security is generally issued by a company, municipality or government agency. A bond investor lends money to the issuer and in exchange, the issuer promises to repay the loan amount on a specified maturity date. The issuer usually pays the bond holder periodic interest payments over the life of the loan. The various types of Bonds are as follows-

Zero Coupon Bond:

Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.

  Convertible Bond:

A bond giving the investor the option to convert the bond into equity at a fixed conversion price.

• • Commercial Paper:

A short term promise to repay a fixed amount that is placed on the market either directly or through a specialized intermediary. It is usually issued by companies with a high credit standing in the form of a promissory note redeemable at par to the holder on maturity and therefore, doesn’t require any guarantee. Commercial paper is a money market instrument issued normally for tenure of 90 days.

• • Treasury Bills:

Short-term (up to 91 days) bearer discount security issued by the Government as a means of financing its cash requirements.

Bonus share   Read rights share

A company rather than giving dividend  may offer shareholders bonus shares. Suppose a share is valued at Rs. 100/share, if company gives a bonus in the ratio of 5:1, it means a shareholder gets 1 share for every 5 shares held or 20% returns, dividend is complicated paperwork which can be avoided this way.

• Rights Issue / Rights Shares: The issue of new securities to existing shareholders at a ratio to those already held.

Bull market

A bull market is one that is rising or trending higher. If you think the market is going to rise, you’d be considered a “bull.” If you believe an individual stock will go up, you’d be “bullish” on the stock.

Buy back

Companies sometimes buy back their own shares by using the profits they generate, this has two objects, either to reduce number of shareholders and tradable shares thereby reducing volatility or a step towards delisting in future.

Capital Market:

Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets.

Money Market: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc.

Capital gain or loss

A capital gain is a profit or return on an investment. This is important for tax purposes.

Corporatisation and Demutualisation

Corporatisation is the process of converting the organizational structure of the stock exchange from a non-corporate structure to a corporate structure

Demutualisation refers to the transition process of an exchange from a “mutually-owned” association to a company “owned by shareholders”. In other words, transforming the legal structure of an exchange from a mutual form to a business corporation form is referred to as demutualisation. The above, in effect means that after demutualisation, the ownership, the management and the trading rights at the exchange are segregated from one another.

Credit rating agencies

Are companies that keep track of credit situation of the companies & provide this insight to new investors at a price.

Dividend

A dividend means when the company earns profit, a particular portion of their earnings is distributed to shareholders or the people who own the company stock on a quarterly or annual basis. Not every company pays dividends, and if you’re after penny stocks, you’ll likely not get any dividends.

Direct Market Access (DMA)

Direct Market Access (DMA) is a facility which allows brokers to offer clients direct access to the exchange trading system through the broker’s infrastructure without manual intervention by the broker. Some of the advantages offered by DMA are direct control of clients over orders, faster execution of client orders, reduced risk of errors associated with manual order entry, greater transparency, increased liquidity, lower impact costs for large orders, better audit trails and better use of hedging and arbitrage opportunities through the use of decision support tools / algorithms for trading. Presently, DMA facility is available for institutional investors.

Delisting

When a listed company decides that it has no more possibility of growth & investment, this leads to the process of making it a private limited company, where an open offer is put forward to remaining shareholders once a company has acquired 90% from the market.

Dividend

Some companies pay out a portion of their income to shareholders, which is called a dividend. Depending on the company, dividends may be a one-time payment, may be sent periodically (i.e., every month, quarter, half-year, or year), or may not be paid out at all.

EBIT/EBITDA

“Earnings Before Interest & Taxes” (EBIT) and “Earnings Before Interest, Taxes, Depreciation & Amortization” (EBITDA) are two commonly-used metrics that represent a company’s profits excluding certain costs. The metrics are believed to represent the company’s core earnings.

Exchange-traded funds (ETFs)

As an investor, you can buy and sell shares of ETFs just as you do with stocks. But buying a share of an ETF gives you some ownership to a fund of different assets, while buying a share of stocks gives you some ownership to individual companies.

Earning guidance

In share markets in developed countries, good transparency norms, mandate listed companies to put forward a future earning guidance to the market so that they can take an informed decision.

Hedge fund

A hedge fund, like a mutual fund, is an investment vehicle that uses pooled funds to generate returns. The difference between mutual funds and hedge funds is that hedge fund portfolio managers are part of a firm (limited partnership or LLC) and raise money from investors, which they then manage and invest across different assets. Unlike mutual funds, not everyone can invest in hedge funds; to be considered, you generally need to earn a minimum annual paycheck of $200,000+.

Hostile takeover

When a company shares are bought to acquire the control of a company by acquiring a majority stake and replacing the existing shareholders.

Index

An index measures the performance of a group of assets based on common behaviour, such as stocks, bonds, and more. Some of the most well-known indexes include the Nasdaq-100, Nasdaq composite, S&P 500, and Dow Jones Industrial Average.

Index fund

An index fund is a mutual fund that is made up of assets in a way that mirrors a certain index. For example, if you are invested in a Nasdaq-100 index fund, and the Nasdaq-100 goes up, so will the value of your index fund. Since these types of funds are passively managed, the fees will be lower than investing in a typical mutual fund.

IPO roadshow

When company goes for an IPO, it creates programmes to create customer awareness, also known as roadshow.

Insider trading

When shares are traded by people with illegal inside knowledge of company affairs, which should otherwise be private, this trading is illegal and known as insider trading.

Lead manager

When companies go on to become public companies from being private, it involves an IPO, creating offer document, listing on share markets, etc. this whole work is done by merchant banking companies, who are referred to as lead managers.

Money Market:

Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc.

Capital Market:

Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets.

Independent directors

Are directors appointed by government to represent retail shareholders on company board.

Quote

The stock’s latest trading prices contain information that is given in a quote. Sometimes, the quote is delayed by 20 minutes unless you’re an actual stockbroker working in an existing trading platform.

Share Market

A share market is a market in which shares of a particular company are purchased and sold. The stock market is a definite example of a share market.

Order

Order means the purpose of buying and selling shares in a given range of price. For example, you have placed an order to buy 200 shares from company A, at a maximum price of Rs. 50 per share.

Trading Volume

Trading volume means the number of shares that are traded on a particular day for all stocks or one stock.

Market Capitalisation

It simply means the value of a company according to the stock market. That is the current value of all the shares of a company put together.

Intra-Day Trading

Intraday trading means buying and selling your desired stocks on the same day so that before trading hours get over, all your trading positions will be closed within the same day.

Market Order

A market order is an order to buy and sell shares at the market price. Several investors don’t go with this Order because the trade price in the market order remains volatile.

Day Order

A day order is an order that remains good till the end of the trading day. If the Order does not perform by the time the market closes, the Order will be canceled.

Limit Order

A limit order is to buy shares below a fixed price and sell shares above a fixed price. It is advisable to use a limit order to trade shares.

Portfolio

The portfolio is a collection of all the investments that an investor holds at a particular time.

Liquidity

Liquidity means how soon stocks can be sold. Shares that get sold quickly, consist of high trade volumes and are called highly liquid.

IPO

IPO means a private company is turning into a public company by issuing its shares to the public for the first time. In the case of an IPO, the investor can buy the shares directly from the company.

Secondary Sharing

It is another offering used to sell more stocks and gain more money from the public.

Going Long

Betting on the price of a stock that will increase so that you can buy at a low price and sell at a high price.

Margin

When you open a brokerage account to invest, you will have to choose whether you want a cash or margin account. Margin is basically using borrowed money to invest. The credit will come from the broker, and your entire account is considered collateral. The hope is that you will be able to make a higher return with the borrowed money than the interest rate charged by the broker for the margin loan, so the investor will earn a personal profit.

Margin Trading

Margin Trading is trading with borrowed funds/securities. It is essentially a leveraging mechanism which enables investors to take exposure in the market over and above what is possible with their own resources. SEBI has been prescribing eligibility conditions and procedural details for allowing the Margin Trading Facility from time to time.

Merchant bankers

Are banks or financial institutions or big brokers who facilitate an IPO, also referred to as merchant bankers.

Mutual fund

A mutual fund is a pooled portfolio managed by a professional portfolio manager. This manager uses the pooled fund to buy a diversified portfolio of securities. The pooled funds come from individual investors who purchase shares of the mutual fund. Mutual funds are actively managed, leading to higher fees than if you were to invest on your own.

Nifty

The Nifty 50 Index, called the National Stock Exchange of India, is the primary and brad based stock market index for the equity market of India.

The Nifty 50 consists of 50 Indian company stocks in 12 different sectors, and it is one out of two stock indices that are mainly used in the stock market.

 

Price-to-earnings (P/E) ratio

A P/E ratio is a valuation metric that determines the value of a company relative to its earnings, often expressed on a per share basis. For example, if a company’s stock is trading at $100 per share, and is expected to earn $4 per share, its P/E ratio would be 25. Lower the P/E ratio better the performance.

Rights share

A company might offer shares at a lower price than the existing value in market to raise capital known as rights share in a certain ratio, referred to as rights share.

• Bonus Shares: Shares issued by the companies to their shareholders free of cost by capitalization of accumulated reserves from the profits earned in the earlier years.

Rolling Settlement, trades executed during the day are settled based on the net obligations for the day.

• Presently the trades pertaining to the rolling settlement are settled on a T+2 day basis where T stands for the trade day. Hence, trades executed on a Monday are typically settled on the following Wednesday (considering 2 working days from the trade day)

Primary market

Is when shares are offered by company for the first time. In the primary market, securities are offered to public for subscription for the purpose of raising capital or fund.

Share

Shares, also known as stocks or shares of stock, are a portion of ownership of a company’s equity. The value of a share is based on how the company divided its equity into units. Shares entitle the share owner to a portion of the company’s profits (or gain in stock price). This also applies to a drop in the stock price, as the value of the share will go down with it.

Secondary market

All sales after IPO are termed  secondary market. Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.

For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions.

Underwriters

When an IPO is initiated, the amount of money that a company wants to raise is declared and approved by SEBI, if a company fails to raise that capital in the stipulated period then all money is required to be returned to whoever has paid to subscribe, this involves substantial loss, to offset this possibility, underwriters offer to buy the offered shares equivalent to the shortfall to avoid the failure of the IPO. Underwriters are  financial institutions or merchant bankers.

Offer document

When a company goes for an IPO it gives out all information through an offer document.

Open offer

According to the SEBI (Substantial Acquisition of Shares and Takeovers) Rules, an open offer is an offer made by the acquirer to the shareholders of the target company inviting them to tender their shares in the target company at a particular price. The primary purpose of an open offer is to provide an exit option to the shareholders of the target company on account of the change in control or substantial acquisition of shares, occurring in the target company.

At premium

Means the value of a share is more than the nominal value of a share.

At  par

Means the value of a share is Equivalent to the nominal value of a share.

Private placement

Sometimes companies or majority shareholders rather than raising capital from market through open auction or sale, raise capital by finding a buyer in private or away from public eye, these placements involve large chunk of shares.

Promoters

Are original owners, who started the company since inception.

Net asset value(NAV)

Share market prices go up and down not always based on real statistics but can be manipulated by extreme volatility, companies put forward a Net asset value(NAV) to give shareholders an exact view about how much their investment is really valued. This stat is mostly used by mutual funds.

Venture fund

Investments in Hi-tech, high promise companies by rich investors is called venture fund, chances of success are less, but investment to return ratio is really high.

Angel investor

Is a wealthy investor, who invests in a new business startup with high promise, he normally involves in ownership and functioning.

Mergers and acquisitions –

Companies are merged or are acquired one by the other to get benefits of the scale.

Upper & lower circuit

Upper circuit and  lower circuit mechanisms are used to regulate extreme price movements of stocks or securities. These circuit filters, also known as price bands, are put in place to prevent stocks from being overbought or oversold, which could result in volatile market conditions.

• An upper circuit is the maximum percentage increase in the price of a stock in a single trading session.
• When a stock hits its upper circuit, trading in that particular stock is temporarily suspended.
• This is to prevent investors from continuously buying the stock at inflated prices, which could cause a market bubble.
• A lower circuit is the maximum percentage decrease in the price of a stock in a single trading session. When a stock hits its lower circuit, trading in that particular stock is also temporarily suspended. This is to prevent investors from continuously selling the stock at deflated prices, which could cause a market crash.
• It is important to note that upper and lower circuits are calculated based on the previous closing price of the stock.

Short selling

When you short a stock, you borrow shares of stock and sell them at their current price with the promise to return the shares to the lender in the future. The hope is that the stock price will drop, at which point you can buy the shares of stock to return to your lender, making a profit on the difference between where you sold and bought the shares. Instead, if the stock price goes up, you will lose money when returning the shares to the lender.

Volatility

Volatility is the degree to which a traded asset varies or fluctuates in price over time.