Aug 14, 2014,19.31 IST
Common Stock Market Terms and Concepts
What are primary and secondary markets?
There are two types of stock markets in India: primary and secondary market. Primary market is where a company issues its shares for the first time, when it wishes to raise capital or expand its business operations. This is done through initial public offering (IPO).
In secondary market, people buy the shares of the company already listedon the stock exchange. To carry out an online transaction in the stock market, you need a demat account.
What do bullish and bearish markets mean?
The terms bear and bull describe upward and downward market trends. Bearish market refers to decline in market while bullish market refers to rise in the share market. Investors generally follow a buy low and sell high strategy.
Book closure is the period during which the transfer in the share of the company will not be considered and it will be recorded only after the end of the closure period. It also means closure of register of members for the purpose to finalise the list of members entitled to receive dividend or rights or bonus shares.
This is the date issued by the company for the purpose of determining shareholders who are entitled to receive the dividend. If a company XYZ announces 20th December, 2013, as record date and I am holding the stock in my demat account on this date, then I am entitled to receive the dividend from the company XYZ.
A bonus share is a free share of stock given to current shareholders in a company, based upon the number of shares that the shareholder already owns. After the bonus, the number of shares held by each shareholder increases but the value of the total shareholding remains the same.
A company may capitalise its profits or reserves which otherwise are available for distribution as dividends among the shareholders by issuing them bonus shares.
Companies issue bonus shares to encourage retail participation and increase their equity base. Earlier in the market, lots of stocks used to be 50 shares or 100 shares etc and if the price of a share was very high, it was difficult for small investors to buy the shares as the amount would be very large. Now this is not such a big issue since in the market lots of shares trading in demat form has been reduced to 1.
A rights issue is when a company issues its existing shareholders a right to buy additional shares in the company in proportion to their holding. The shareholders have the option whether or not to subscribe to the rights issue.
If a company wants to raise money from the market, they may go in for a rights issue. Usually rights shares are offered at a discount to the current market price to encourage the shareholders to subscribe to the issue and also as a way of rewarding them.
When the rights issue is open and if a shareholder does not want to invest more money in the company they have the option to sell or renounce their rights. Since rights shares are normally issued at a discount, the rights forms command a premium in the market.
A stock split is a corporate action where the company sub-divides the face value of the stock into a smaller denomination. The market capitalisation of the company however remains the same.
A company has a face value of Rs 10 and number of shares are 1000. If the company announces a split in the ratio of 5:1 then the new face value will be Rs 2 and the number of shares will be 5000. If the market price is Rs 10, the market capitalisation in both the cases will remain the same at Rs 10000.
Why companies go for stock split?
Companies go for stock split primarily when the stock price goes higher and higher, thereby making it unaffordable for small investors to buy. Stock split brings the share price down making it attractive for small retail investors to participate in trading. It also increases number of outstanding shares which will boost liquidity of the stock making it a liquid stock.
What are blue chip stocks?
These are stocks of well-established and large companies operating for many years. They generally pay stable dividends to shareholders and most investors have a positive outlook on stocks of these companies. Blue chip is a kind of nickname given to stocks which are mostly safer.
What is securities transaction tax?
Securities transaction tax (STT) is levied on every single transaction that you do on the stock exchange. It gets added to the price of stock at the time of transaction so there is no way to avoid it.
In a 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 trading day. Hence, trades executed on a Monday are typically settled on the following Wednesday (considering two working days from the trading day).
Arbitrage is the simultaneous purchase and sale of an asset in order to profit from difference in price. The person who undertakes such a trade is called as arbitrageur. When you buy and sell the same security at the same time in different markets to take advantage of a price difference between the two separate markets it is known as market arbitrage.
Short covering refers to buying back of a security in order to close your open short position. Assume you had created a short position in Reliance by selling 100 shares at Rs 800.
Currently, the stock is trading at Rs 700. The trade is profitable for a trader and he will cover his position by buying back 100 shares at Rs 700 and make a profit of Rs 10000.
In a scenario where the sentiment is very bearish in the market and majority of the market participants have created short positions and suddenly positive news beaks out in the market then it will trigger a short covering rally.
What is insider trading?
Insider trading is buying and selling of securities by a person who has access to information of company which is not public. It is an illegal activity and unfair with other investors. One of the indicators of insider trading is spike in stock price before any major announcement by the company.
A deal in which a minimum quantity of 5 lakh shares or minimum value of transacted shares is Rs 5 crore through a single transaction window of the stock exchange is called a block deal. The single transaction window provided by NSE and BSE is open only for 35 minutes.
A Bulk Deal is a deal where total quantity of shares bought/sold is more than 0.5% of the number of equity shares of the company listed on the stock exchange. Trading member shall disclose to the stock exchange the name of the scrip, name of the client, quantity of shares bought/sold and the traded price. Bulk deals can happen throughout the trading session.
Bulk deals are market driven compared to block deals which involve two parties.
Simply put, beta stocks rise more (outperform) than the index in a rising market but fall greater (underperform) than the index in a falling market. Theoretically, beta is a measure of volatility of a stock in comparison to the market as a whole.
Free float market-cap method
Free float method is a method by which the market-cap is calculated of a company by taking into account the number of shares readily available in the market. This method does not include shares held by promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. It will take shares held by public into account for market-cap calculation. The free float method reflects the market trend more rationally compared to full market-cap method.
Beta is key parameter in the capital asset pricing model. The model calculates the expected return of a stock based on its beta and expected returns from the market.
A beta of 1 indicates that the stock price will move in line with the market or index. A beta of less than 1 indicates that the stock price will be less volatile than the index. A beta of greater than 1 indicates that the stock price will be more volatile than the market.
If Reliance has a beta of 1.7, it means if the Sensex moves up 100%, the stock price will move up by 170%.
Year To Date is referred to the period starting from January 1 of the current year to present day. In simple terms, it tells the returns given by an underlying asset so far this year. Reliance has given 40% return YTD.
FIIs and DIIs
Foreign institutional investors (FIIs) are the overseas companies who invest in India. They need to register with SEBI in order to invest in the country.
Domestic institutional investors (DIIs) are the investors who invest in stocks and other financial assets of the country they are based in. Mutual funds and insurance companies are examples of DIIs.
DVR shares are similar to ordinary shares, but it has fewer voting rights. The aim of limiting voting rights by the issuing company is to prevent hostile takeovers as DVR shares separate economic interests and voting rights. DVR shares issue is priced lower compared to its equity shares and offers higher dividends to compensate for the less voting rights. These shares also fancy strategic investors who don’t want to take management control in their hands but at the same time can make big investment in the company. DVR shares are offered to both retail and institutional investors.
International Securities Identification Number is a 12-digit code that uniquely identifies a specific securities issue. In India, the ISIN number is issued by NSDL (National Securities Depositories Limited).
The first two characters indicate Country Code. For India it is IN. Third letter indicates type of security which can be E, A, F, B or 9 (E – Company, A – Central Government Security, B- State Government Security, F- Mutual Fund Unit and 9 represents Equity shares having different rights than those represented by INE number.)
American depository receipts
ADRs are receipts representing ownership in shares of foreign companies that trade in US financial markets. It is a common and easy way for the US investors to buy equity in non-US companies without having to worry about the details of cross-border transactions. ADRs are an easy and cost effective way to buy shares in a foreign company. Administration costs are lower and an investor does not have to incur foreign taxes on each transaction.
Foreign Currency Convertible Bonds are type of convertible bonds issued by a company to raise money in the form of a foreign currency. These types of bonds have a combination of equity and debt instruments. It will pay investors the coupon rate and principal payments at regular intervals just like any other bond. Also, it allows investors to convert these bonds into equities when the price of the stock reaches a certain price level. Since the investor has an option to convert bonds into equities, the coupon attached to these bonds is on the lower side.
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