Basic terms of 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.
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 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.
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 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.
A ‘bear market’ is a condition during which the stock markets fall by more than 20% from a recent high.
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.
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.
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 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 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 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 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 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.
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 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=(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.
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.
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.
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.
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.
CSR – Corporate Social Responsibility
CSR is an opportunity for corporate companies to take part in social matters related to the larger society they’re a part of. Many times, this manifests itself in the form of donations, charity work, environment-related work, volunteering work, etc. In India, companies having a turnover greater than a certain limit are mandatorily required to spend 2% of their profits in CSR activities.