Stocks and its terms
Stocks
Stocks is an equity share of the company. If you buy a share of ITC or Tata Motors, then you are the owner of that share of that company.
Primary Market
A newly created stock is sold to the public, it is done so via the primary market. In the primary market, the creator of the shares sells the shares and gets the money. It is called as Initial Public Offer (IPO) where creator sell the shares to the public and gets the money, he can use that money for his own purpose, company expansion, company loan payment, R&D, invest in other technology, etc.
Secondary Market
Secondary markets are where investors buy and sell stocks and other securities from each other. This is often what we all call the stock market/exchange. In the secondary market, anyone can buy and sell any shares as long as there are willing buyers and sellers.
Stock Exchange
A stock exchange is a location where investors can buy or sell shares of publicly listed companies. It is like a marketplace for stocks. You can buy stocks from one exchange and sell them on another exchange. It is somewhat like a shopping mall. You can buy a shoe of a particular brand from multiple shopping malls. It doesn’t affect the quality of the shoe you buy. Likewise, shares bought in one exchange are the same as those bought on another exchange. In India, the two main exchanges are the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). In the US, the biggest exchange is the New York Stock Exchange (NYSE).
Initial Public Offer (IPO)
It is refer to offering the shares of a private company to the public in a new stock issue. A private company needs money to its business expansion and get a money from public through sell its some percentage of shares instead of get a loan from bank. In that case, private company register Public limited company with Registrars of Companies (ROC) (by Ministry of Corporate Affairs) and register documents for IPO listing and get approval with SEBI.
Red Herring Prospectus (RHP)
It is the initial filing by a company wishing to go for an IPO. It contains information about the company’s business operations, promotors, financials, where it stands in the industry, why it wants to go for an IPO, and more relevant information pertaining to the company. It gives investors a peak into what the company is all about. Every IPO investor must read the RHP before deciding to invest in an IPO.
Net Worth
Net worth is commonly mentioned as a metric to gauge how rich a person is. Net worth is the sum of all financial and non-financial assets minus the liabilities of a person or an organization. Everything that can be valued is a part of this calculation: real estate, metals, factory, land, shares, bonds, patents, etc. Liabilities would include loans and payments that the person or organization has to pay back.
Bear Market
A ‘bear market’ is a condition during which the stock markets fall by more than 20% from a recent high.
Bull Market
A 'bull market' happens when the markets rise by more than 20%.
These terms are derived from the way the animals attack their opponents. While a bull attacks by thrusting its horns upwards, a bear strikes down with its claws. Bull and bear market cycles usually last a couple of years and include many daily ups and downs.
Balance Sheet
The balance sheet is a financial statement of a company that gives us a snapshot of the company's financial position. A balance sheet will have information on the assets a company owns and liabilities it owes at a point in time. Assets are on the left side of the balance sheet and liabilities are mentioned on the right side. For the balance sheet to tally, assets should be equal to liabilities + equity.
Bulk Deals
A bulk deal is a trade where the total quantity of shares bought or sold is more than 0.5% of the number of shares of a listed company. Bulk deals can be transacted through the normal trading window throughout the trading hours in a day.
Block Deals
Block deals are transactions of a minimum of 5 lakh shares or a minimum value of Rs 5 crores between the two parties. The two parties agree to buy or sell shares at an agreed price among themselves. The deal takes place through a separate trading window and they take place from 9.15 am to 9.50 am. Every trade has to result in delivery.
SGX Nifty
SGX Nifty is a derivative product of Nifty 50 that is traded on the Singapore Stock Exchange (SGX). It is an actively traded futures contract of Nifty 50. SGX Nifty is available between 6:30 am and 11:30 pm Indian time. It often provides an indication of the direction that Indian markets take in the first few hours of trading. Investors who are not able to trade in the Indian Nifty and want exposure to the Indian markets, invest in SGX Nifty. Indians are not allowed to trade in SGX Nifty contracts or any other derivatives in other countries.
Foreign Portfolio Investment (FPI)
FPI is a way to invest in foreign countries. It refers to the purchase of financial assets and securities by investors in countries other than their own. Most individual investors who want to invest outside their country opt for the FPI route.
Purchasing Managers' Index (PMI)
PMI is an indicator of business activity and is calculated separately for the manufacturing and the services sectors. It tracks variables such as sales, employment, prices, and inventories.
Annual General Meeting
An Annual General Meeting is held by companies after the financial year ends. AGMs are a means for the shareholders and the management of a company to interact and decide on important matters, such as yearly results, the appointment of board members, etc. The Companies Act, 2013 makes it compulsory to hold an annual general meeting and also lays down the procedure to be followed.
Stimulus
Stimulus refers to monetary or fiscal measures that are taken to boost economic activity. When countries go into recession, a stimulus pack is introduced many times to jump-start the economy. The most recent was the stimulus introduced during the recession caused by the pandemic. A stimulus may not always be for an entire country. It can also be for a particular sector or industry. You heard news "stimulus package announced by financial minister" during the COVID-19 crisis in stock market.
Foreign Direct Investment
FDI refers to investments made by foreign companies to start businesses inside a country. The key component of this is that the controlling ownership of such a company remains with the foreign company. In India, the government allows FDI in varying degrees in different sectors. For example, recently, the government allowed FDI up to 74% in defence sector companies. Sectors like e-commerce, auto, manufacturing, etc have 100% FDI allowed in them.
Risk-Adjusted Returns
Risk-adjusted returns are a way to measure the returns you are getting as opposed to the risk you are taking. It is commonly discussed in investing that equity investing is riskier than investing in FD. It is also known that equities have historically given better returns than FD. But if we measure returns based on the potential risk, which is giving higher returns? This tells us a lot more about good and bad investments. Often, there are investments that promise slightly higher returns while increasing the risk by a much greater degree. In such cases, risk-adjusted returns help investors choose how much to invest (or not invest).
Aftermarket orders (AMO)
In simple terms, stock orders that are placed any time after the market is closed are called after-market orders. Stock markets orders need to be placed while the markets are open (9:30 am to 3:30 pm). AMO orders allow busy people to place orders outside of trading hours. In case of after-market orders, what action you choose to take (buy or sell), will be executed whenever the markets open next.
Insider Trading
Insider trading refers to the practice of trading stocks of companies in which a person might have access to information (i.e. price, positive and negative news) that is not available publicly. In such a case, the investor gains an upper hand when compared to other investors. In older days, insider trading was considered a competitive advantage. These days, in most markets like India and the USA, it is considered illegal. Insider Trading is against SEBI 1992 Act.
Union Budget
It is also called the Annual Financial Statement. It is the annual budget of India. It is usually presented in the first week of February. It is an account of the finances of the Government of India. Major economic policies are announced in the budget that includes taxation, incentives, spending in different sectors like education, health, defense, and so on.
Based on Budget announcement, stock market may react positive or negative.
Gross Domestic Product (GDP)
The Gross domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period of time.
Formula: GDP=C+I+G+(X−M)
GDP = private consumption + gross investment + government investment + government spending + (exports – imports)
Real GDP growth is the value of all goods produced in a given year.
Nominal GDP is value of all the goods taking price changes into account
Haircut
Haircut in finance refers to a reduction applied to the value of an asset. This happens when the lender (like a bank) has to settle for a lower value than it was supposed to get back. For example, let’s say a bank gives a loan of Rs 1 crore to a borrower. At the time of returning, the borrower is not capable of paying back the entire amount. The borrower can either pay back Rs 50 lakh or default on the loan itself. If the bank accepts the Rs 50 lakh offer from the borrower, it is said that the bank took a 50% haircut on the loan.
This is negative news of that Bank and also its stock price is low.
Tangible Assets
Tangible assets are usually referred to assets that are physical in nature and the value of which can be easily determined. For example, cars, buildings, furniture, machinery, are all examples of tangible assets. On the other hand, the value of intangible assets is theoretical in nature and usually, the value of which is harder to quantify. Patents, brand value, licenses, etc are intangible assets.
Emerging Market
Emerging market is often used to describe an economy/country that is developing fast but is not developed already. Countries like India, Brazil, Vietnam, and the likes are considered emerging markets.
Foreign investors expect emerging markets to give higher returns as they are growing at a higher pace than developed countries. The term emerging markets are not often used by Indian investors investing in India. However, the term is often used by foreign investors investing in India. Among emerging markets like South Korea, Brazil, Thailand, Vietnam, and the likes, the past year has been very good for India as it has attracted a lot of foreign money in the form of investment.
Exposure
Exposure is a term used in the finance world to indicate an asset you have invested in. For example, if you have invested in automobile stocks, you can say your investment portfolio has exposure to the automobile sector. Likewise, if you own a flat in Mumbai, you can say you have exposure to the Mumbai real estate market.
ROI - Return on Investment
Return on Investment (ROI) is a popular profitability metric used to evaluate how well an investment has performed.
Formula
ROI=(Cost of Investment-Current Value of Investment)/Cost of Investment
ROI is used extremely broadly and fits in many different situations.
In essence, it refers to what you get back for your investments. Note, this investment does not only refer to money being invested. It can also be an investment of time, effort, etc.
- Businesses often use ROI to measure how much money they made on the amount of money they put into their business.
- A student can also measure the value of a certain course in terms of ROI.
- As an investor, your ROI would be the amount of money you make from the money you directly invested.
Credit Limit
A credit limit is imposed by lenders (very often, banks) as the upper limit or maximum amount a borrower can borrow. This is aimed at preventing over-borrowing by the borrower and it also helps lenders minimize their risk. Credit cards have credit limits that are often decided based on a person’s income level and credit score.
Daily Margin Statement
A daily margin statement is sent to investors at the end of each trading day. It informs the investor about the free margins they have available to take new positions without facing any penalties. For every exchange, there is a separate margin statement. If you trade on different exchanges using the same platform, the platform might send you a combined margin statement at the end of the day.
Unrealized Gains
It refers to profit that you can make but haven’t actually made. Let’s say you bought a stock and its price has climbed. But, you haven’t sold it yet. In this case, the increase in the share price is your unrealized gain. It is a gain that is not real yet and can vanish if the stock price falls before you sell it. With stocks, the unrealized gain keeps going up and down all the time as the stock price changes from day to day. In fact, it might even go negative. Seeing the unrealized gains change from time to time is a normal part of an investor’s journey.
Treasury Bonds
Treasury bonds are bonds (loans) given out by the US government which are for a period greater than 20 years. The bond owners receive periodic interest payments for the duration that they hold the bonds for. Treasury bonds play a big role in the functioning of the global economy. The US government is considered the safest/least risky borrower in the world.
Liability
In finance, liability refers to money owed. Say you took a loan. Then, you are liable to pay back the amount and the interest on it in a timely manner. Your list of liabilities can include things like home loans, car loans, credit card bills, other EMIs, etc. Unpaid bills are also a part of your liabilities.
Collateral
When you take out a loan, you need to provide collateral. In case you fail to service your loan, the collateral can become the property of the bank. The bank will then try to sell the property and recover the money you have failed to pay. When you take a home loan, the home being purchased itself is the collateral. In the case of car loans, the car being purchased is the collateral. In certain education loans, the borrower may need to give something else as collateral like a property. Some loans have no collateral. These loans are usually of a very low value or carry a very high-interest rate or a mix of both.
Digital gold
Digital gold is a way of purchasing gold online. You can buy and sell gold at the live market price without actually owning physical gold. Digital gold does not involve any making charges as you are essentially owning gold electronically and not buying jewelry from a shop. It is often considered a convenient and cost-effective way to stay invested in gold.
Budget
Budget is a wide term mostly used to describe a plan of income and expenses. For example, the government declares its budget for the country every year. Likewise, a budget can be for anything including your personal budget, a company’s budget, or even a budget for a shorter period, an event like a budget for a holiday, for a wedding ceremony, and so on. The act of making a budget is often called budgeting.
Credit Score
A credit score is a numeric representation of an individual's creditworthiness. The creditworthiness of a person tells us if he/she will be able to clear off his or her loans. Defaulting on credit card bills and loan payments downgrades your credit score whereas being on time with all your credit payments keeps your credit score high. Banks use a credit score to decide if you qualify for a loan and the interest rate which should be charged for you. Therefore, if you have a low credit score, there are high chances you will be asked to pay a higher interest rate on a loan as compared to someone who has a higher credit score.
Anchor Investor
Anchor investors are institutional investors who are first invited to invest in an IPO. They usually have more information about a company and therefore can take a more informed decision about the attractiveness of a stock. They also serve the purpose of making a stock appear attractive to retail investors. Anchor investors must invest at least Rs 10 crore in any given stock. They also cannot sell the stock immediately upon its listing - a 30-day wait is a must for them.
Burn rate
This term is most often used in the startup world though it is relevant in many other places also. It refers to the amount of money being spent. Your personal burn rate would refer to the amount of money you spend on a regular basis. It is used to estimate the duration for which a particular amount of money will last. Your burn rate should be lower than your income for your wealth to build.
Dalal Street
Dalal street is a street in Mumbai that houses the Bombay Stock Exchange (BSE). BSE is the largest stock exchange in India. 'Dalal' translates to 'broker'. It is the centre of many important financial activities in India. The Wall Street in New York is the equivalent of Dalal Street.
Public Limited Company
A public limited company is a company that is listed on a recognized stock exchange or the shares are traded publicly.
Private Limited Company
Private limited companies are held privately by the members only. Their shares are neither listed on an exchange nor traded.
Net Interest Income
Net interest income is the difference between the interest income a bank earns from its lending activities and the interest it pays to its depositors.
Wholesale Price Index
It measures the changes in the prices of goods sold and traded in bulk by wholesale businesses to other businesses. WPI keeps track of the wholesale price of goods
Consumer Price Index
It measures changes in the price level of a weighted average market basket of consumer goods and services purchased by households. It tracks the prices of goods and services purchased by consumers.
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