Glossary On Financial Terms

Q) What is the difference between stocks and shares?

Ans: Stock is a general term used to describe the shares of any

company and "shares" refers to a specific stock of a particular
company. So, if investors say they own stocks, they are generally
referring to their overall ownership in one or more companies. If
investors say they own shares - the question then becomes - shares
in what company?
Stocks : A type of security that signifies ownership in a
corporation and represents a claim on part of the corporation's
assets and earnings.
Shares : A unit of ownership interest in a corporation or
financial asset. While owning shares in a business does not mean
that the shareholder has direct control over the business's day-to-
day operations, being a shareholder does entitle the possessor to an
equal distribution in any profits, if any are declared in the form of
dividends. The two main types of shares are common shares and
preferred shares.

Capital Markets : The capital market (securities markets) is the

market for securities, where companies and the government can raise
long-term funds. The capital market includes the stock market and
the bond market. It is a place where investors come together to buy
and sell shares.

Primary Markets: The primary market is that part of the capital

markets that deals with the issuance of new securities. Companies,
governments or public sector institutions can obtain funding through
the sale of a new stock or bond issue. This is typically done through a
syndicate of securities dealers. The process of selling new issues to
investors is called underwriting. In the case of a new stock issue, this
sale is called an initial public offering (IPO). Dealers earn a
commission that is built into the price of the security offering, though
it can be found in the prospectus.

Secondary Market: The secondary market is the financial market

for trading of securities that have already been issued in an initial
private or public offering.

Dividend
The periodic, usually quarterly, payment made by a corporation to
its shareholders, generally expressed as dividend per share.
Dividends represent earnings that are not reinvested by the
 corporation. Some stocks pay no dividends and others, such as
utility companies pay substantial ones that represent a large portion
of the total return a shareholder will get from his investment.
Dividends are a type of distribution and are usually taxable in year
received.

Equity is, normally, ownership or percentage of ownership in a

company.

Equity Share is a) a share or class of shares whether or not the

share carries voting rights, b) any warrants, options or rights
entitling their holders to purchase or acquire the shares referred to
under (a), or c. other prescribed securities.

Preference Shares usually, non-voting capital stock that pays

dividends at a specified rate and has preference over common stock
in the payment of dividends and the liquidation of assets.

Debenture
A bond issued by a corporation which is secured by the general credit
or promise to pay of the issuer. It is not backed by collateral such as
tangible assets.
Example: 1. A certificate or voucher acknowledging a debt.
2. An unsecured bond issued by a civil or governmental
corporation or agency and backed only by the credit
standing of the issuer.

Derivatives:
Financial instruments, such as futures and options, which derive
their value from underlying securities including bonds, bills,
currencies, and equities. Equity derivatives are financial derivative
products whose value is dependent on the value of an underlying
share or group of shares.

Underlying Security
The security that must be delivered when another security is
exercised. For example, if a call option is exercised, then the
underlying stock is delivered to the call owner. Warrants, rights,
options, and convertible securities all have underlying securities. For
futures options, futures are the underlying security.
Futures
Investment contracts which specify the quantity and price of a
commodity to be purchased or sold at a later date. On contract date,
the buyer must take physical possession or make delivery of the
commodity, which can only be avoided by closing out the contract(s)
before that date. Futures can be used for speculation or hedging.

Option
A contract that gives the owner the right, if exercised, to buy or sell a
security or basket of securities (index) at a specific price within a
specific time limit. Usually, they are traded as securities themselves,
with buyers and sellers trying to profit from price changes. They are
generally available for 1 to 9 months, with some longer term options
(called LEAPS) also available for selected securities. Stock option
contracts are generally for the right to buy or sell 100 shares of the
underlying stock (100 is the multiplier). Trading in options should only
be undertaken by sophisticated investors.

Call Option
A call option gives the owner the right, but not the obligation, to buy
the underlying stock at a given price (the strike price) by a given time
(the expiration date). The owner of the call is speculating that the
underlying stock will go up in value, hence, increasing the value of the
option. The purpose can be to speculate with the option (hope it goes
up and sell for a profit), to invest in the underlying stock at a locked in
price if the stock price goes high enough, or to generate income. Each
option contract equals 100 shares of stock. For example, an AAA MAR
65 call, would give the owner the right to buy 100 shares of AAA at $65
(strike price) per share between now and the third Friday in March
(expiration date).

Put Option
A put option gives the owner the right, but not the obligation, to sell
the underlying stock at a given price (the strike price ) by a given time
(the expiration date). The owner is speculating that the option will go
up in value and the underlying stock will go down in value. The
purpose can be to either speculate with the option (hope it goes up
and sell for a profit) or trade the underlying stock at a locked in price if
the stock price goes down enough. For example, an AAA MAR 65 put
would give the owner the right to sell 100 shares of AAA at $65 (strike
price) per share between now and the third Friday in March (expiration
date).

Hedging
An investment strategy of lowering risk by buying securities that have
offsetting risk characteristics. A perfect hedge eliminates risk entirely.
Hedging strategies lower return since there is a cost involved in
hedging. For example, a portfolio manager could short a futures
contract which will perfectly offset any decrease in the value of the
portfolio. Options and short selling stock can also be used for hedging.
Hedge funds are investment pools that are free to use any hedging
techniques they desire and they often make large bets in a relatively
small number of different holdings.

Intraday Trading
Intraday share trading refers to the buying and selling (or vise versa)
of the same script in the same trading session ( on the same day).

Portfolio Management:
Where assets are combined into a portfolio that fits the investor's
preferences (eg, level of risk) and needs (eg, regular dividends).
The aim of Portfolio Management is to achieve the maximum return
from a portfolio which has been delegated to be managed by an
individual manager or financial institution. The manager has to
balance the parameters which define a good investment ie security,
liquidity and return. The goal is to obtain the highest return for the
client of the managed portfolio.

Blue Chip Companies:

A blue chip stock is the stock of a well-established company having
stable earnings and no extensive liabilities. Most blue chip stocks
pay regular dividends, even when business is faring worse than
usual. They are valued by investors seeking relative safety and
stability, though prices per share are usually high.

Bond A long-term debt instrument on which the issuer pays interest

periodically, known as Coupon. Bonds are secured by COLLATERAL in
the form of immovable property. While generally, bonds have a
definite MATURITY, Perpetual Bonds are securities without any
maturity. In the U.S., the term DEBENTURES refers to long-term debt
instruments which are not secured by specific collateral, so as to
distinguish them from bonds.

NASDAQ An acronym for National Association of Security Dealers

Automated Quotations System, which is a nationwide network of
computers and other electronic equipment that connects dealers in
the over-the-counter market across the U.S. The system provides the
latest BID and ASKING PRICES quoted for any security by different
dealers. This enables an investor to have his or her transaction done
 at the best price. Due to NASDAQ, the over-the-counter market in the
U.S. is like a vast but convenient trading floor on which several
thousand stocks are traded.

National Stock Exchange (NSE) It is a nationwide screen-based

trading network using computers, satellite link and electronic media
that facilitate transactions in securities by investors across India. The
idea of this model exchange (traced to the Pherwani Committee
recommendations) was an answer to the deficiencies of the older
stock exchanges as reflected in settlement delays, price rigging and a
lack of transparency.

Volatility
The measure of the tendency of prices to fluctuate widely. Prices of
small companies tend to be more volatile than those of large
corporations. Beta is a measure of volatility.

Liquidity
The ability to turn an asset into cash. A highly liquid asset is easy to
sell because an active market exists that sets prices which are
continuously adjusted for supply and demand. An example is a listed
stock or mutual fund. A less liquid asset is real estate or a collectible

Lot
A group of identical UNITS (for securities) or nearly identical units (for
collectibles) of an investment that are traded at the same time and
price. Open lots are the contents of open investments and can be long
(buys) or short (short sell). Closed lots are the contents of closed
investments and can be long (sell) or short (buy to cover).

Net Asset Value (NAV)

The per share price of a mutual fund. For a no-load fund, NAV is the
price received by both buyers and sellers. For front loaded mutual
funds, NAV is equivalent of the bid price (what shareholders can get for
selling a share), while the offering price is the price buyers must pay
per share (and includes front load). The NAV is usually calculated at the
end of each trading day by taking the closing prices of all securities
owned plus cash and equivalents and subtracting all liabilities then
dividing by the number of shares outstanding, which for open-end
funds, fluctuates depending on daily number of redemptions and
purchases. Many new funds are issued at a NAV of $10. After a
distribution, the NAV falls by the amount equal to the distribution.

Depository A system of computerized book-entry of securities. This

arrangement enables a transfer of shares through a mere book-entry
rather than the physical movement of certificates. This is because the
scrips are dematerialized or alternatively, immobilized under the
system.

Bear A person who expects share prices in general to decline and who
is likely to indulge in SHORT SALES.

Bear Market A long period of declining security prices. Widespread

expectations of a fall in corporate profits or a slowdown in general
economic activity can bring about a bear market.

Bull A person who expects share prices in general to move up and who
is likely to take a long position in the stock market.

Transfer agent: The person or firm that cancels the shares in the
name of the seller and

The complete lifecycle of a U.S equity trade : Order Capture, its

execution in the market, affirmation/confirmation, foreign exchange,
clearing, settlement, and reporting.

Mutual Fund
Fund operated by an investment company that raises money from
shareholders and invests it in stocks, bonds, options, commodities or
money market securities. The sum of the collected amount is called
Corpus.

Retained Earnings
Net profits kept to accumulate in a business after dividends are paid.

Custodian
A financial institution that has the legal responsibility for a customer's
securities. This implies management as well as safekeeping.
Bonus Shares The issue of shares to the shareholders of a company,
by capitalizing a part of the companys reserves. The decision to issue
bonus shares, or stock DIVIDEND as in the U.S., may be in response to
the need to signal an affirmation to the expectations of shareholders
that the prospects of the company are bright; or it may be with the
motive of bringing down the share price in absolute terms, in order to
ensure continuing investor interest. Following a bonus issue, though
the number of total shares increases, the proportional ownership of
shareholders does not change. The magnitude of a bonus issue is
determined by taking into account certain rules, laid down for the
purpose. For example, the issue can be made out of free reserves
created by genuine profits or by share PREMIUM collected in cash only.
Also, the residual reserves, after the proposed capitalization, must be
at least 40 percent of the increased PAID-UP CAPITAL. These and other
guidelines must be satisfied by a company that is considering a bonus
issue. )See also MARKET CAPITALIZATION.)

Subprime
The term used for lending to borrowers at a higher rate than the prime
rate as they have a higher risk of default. Subprime borrowers typically
have low credit scores due to prior bankruptcy, missed loan payments,
home repossession etc.

Settlement
The process whereby obligations arising under a derivative transaction
are discharged through payment or delivery or both.