58731143 financial terms

8/4/2019 58731143 Financial Terms

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accumulated if not paid in a year and the Preference share is convertible into equity shares as perthe terms of the issue of Preference shares.4 Debenture

A debenture represents the smallest unit of public lending to a company. A debenture holderreceives a fixed stream of interest, unlike the uncertain stream of dividends that a shareholderreceives. Payment of interest is a legal obligation on the part of the company. Also, usually a

debenture is required to be secured against the assets of a company.5 Convertible debenture

A debenture which is convertible either optionally or compulsorily into equity shares at a later date(at the time of redemption or the period as specified in the conditions of the debentures) is calledconvertible debenture. The price (face value plus premium if any) is determined as per theconditions mentioned in the debentures.

Statutes & Regulatory Authorities1 Security Contract Regulation Act (SCRA)

It is a Law passed by Indian Government with a view to prevent undesirable transactions insecurities by regulating the business of dealing therein, by providing for certain other mattersconnected therewith. This act is called the Securities Contracts Regulation Act, 1956. It extends tothe whole of India.

2 Securities and Exchange Board of India (SEBI)

SEBI was constituted in the year 1992 under the overall administrative control of Government ofIndia (Ministry of Finance) for the regulation and orderly functioning of the stock exchanges and thesecurities industry to fully protect the rights of the investors, to prevent trading malpractice's andpromote healthy growth of capital markets. It was given a statutory status in 1992 under the SEBIAct.3 Registrar of companies

The Registrar of Companies is an authority under the Companies Act where all the companies haveto register their Memorandum of association, Articles of Association and all reports such as annualrepots, any mergers, etc.4 Company Law Board (CLB)

CLB is a statutory body appointed under the Companies Act. It administers various powers granted

to it under the Companies Act for smooth functioning of the companies in the country.5 Stock Exchange

Stock Exchange is the place where buyers and sellers of stocks meet. The prices of the shares aredecided by demand and supply of the shares. The buyers and sellers are represented by thebrokers. Hence, the stock exchange is an association of individual members called member brokers(or simply members or brokers), formed for the express purpose of regulating and facilitating thebuying and selling of securities by the public and institutions at large. A stock exchange in Indiaoperates with due recognition from the government under the Securities and Contracts(Regulations) Act, 1956. The member brokers are essentially the middlemen, who carry out thedesired transactions in securities on behalf of the public (for a commission) or on their own behalf.Some exchanges are formed and managed by limited companies whose shareholders may bemembers of the exchange and thereby have license to offer brokerage services to members ofpublic. Some exchanges which are formed by limited companies may have brokers who are notnecessarily shareholders of the exchange company also6 Broker

A company or an individual who is a member of the stock exchange and acts as a middlemanbetween the buyer and seller of securities in that market. Broker charges fees for his services.Currently the brokers have to be registered with Securities and Exchange Board of India in order tocarry out his activities.

Taxation1 Capital Gain


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present.

6 Overseas Corporate Body (OCB)

Overseas corporate body is a legal entity incorporated outside India, where an NRI holds 60% ormore of its share capital or beneficial interest.

7 Offshore Fund

A fund promoted by a domestic asset management company abroad is called offshore fund.Offshore funds are usually promoted for investing in one or few specific countries. These are calledcountry funds.

Types of Traders

1 Bull

In market there are traders/investors who take position i.e. Buy position by buying the shares inanticipation that price of the particular share will rise in the future. After the share prices rise, theywould sell them off for a profit. These traders/investors are known as bulls.

2 Bears

In market there are traders/investors who take position i.e. Sell position by selling the shares inanticipation that price of the particular share will fall in the future. These traders will buy back theshares when the prices actually do fall to make a profit. These traders/investors are known asbears.

3 Stag

Stag is an investor who buys the shares in the primary market from public issue in anticipation ofrise in prices on the listing of the shares on stock exchange. They try to encash the profit betweenthe issue price and the listing price of the share.

TERMINOLOGY / JARGONS

Mutual Fund Terms

1 Open Ended Scheme

Open-Ended Schemes do not have a fixed maturity and are highly liquid schemes. All redemptionsand fresh investments in this scheme is done directly with the Mutual Fund at net asset value("NAV") related prices.

2 Close Ended Schemes

Close-Ended Schemes have fixed maturity period and investment in these schemes is done at thetime of the initial issue and thereafter you can buy or sell the units of the scheme on the stockexchanges where they are listed. Some close-ended schemes give you an additional option of sellingyour units directly to the Mutual Fund through periodic repurchase at NAV related prices.

3 Net Asset Value (NAV)


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Net Asset Value is the common expression among Mutual Funds and denotesNet Asset Value (N A V). NAV per Unit is equal toNAV = Market value of the assets of the scheme - Liabilities/ Units Outstanding

4 Asset Management Company (AMC)

The AMC is the corporate entity, which markets and manages a mutual fund scheme and in returnreceives a management fee paid from the fund corpus. SEBI specifies that an AMC must be aseparate entity from the trust, which owns the mutual fund.

5 Front end/entry load and Back end / exit load

These terms are common in Open ended mutual fund schemes. Mutual Funds incur variousexpenses during an issue, which are charged to the scheme. Funds may charge these expenseseither fully or partly to the schemes. Such a charge is called a Sales load, Entry load or Front endload. The maximum sales load that can be charged to a scheme at the time of an initial public offeris 6 % of the unit capital raised. Similarly when an investor choose to withdraw from a fund, thevalue of deductions effected from NAV is called Back end load or Exit load. Back End loads areimposed since premature withdrawals carry a transaction cost to the AMC. SEBI has prescribed that

total of Front end and Back end loads should not exceed 6% of the NAV of the corpus.

Primary Market Terms

1Primary Market

Primary market refers to issue of new shares, Debentures, Shares with attached options likewarrants by new as well as existing companies. These shares will be listed on specified stockexchanges after the completion of allotment and compliance with other prescribed formalities.

2 Public Issue

When an existing company offers its shares in the primary market it is called public issue. Often IPOand Public issue are used interchangeably.

3 New issue or IPO (Initial Public Offering )

When the company offers its shares to the investors for the first time its called initial public offering.At the time of IPO the companies' shares are not listed on any stock exchange.

4 Underwriter

Underwriter to issue of capital is the one that agrees to take up securities, which are not fullysubscribed by shareholders in case of a Rights issue or by members of public in case of a publicissue. He makes a commitment to get the issue subscribed either by others or by him. Theunderwriter is like an insurance company to the issuer company. The underwriter chargesunderwriting fees to the issuer company for his services. He is paid underwriting charges even if theissue is fully subscribed.

5 Share Certificate Nos


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The companies issue physical stock to the shareholder. The certificate carries a number, whichremains in the records of the companies. This is called certificate number. The certificate number isdifferent from distinctive numbers of shares. One share certificate would carry distinctive number ofone or more number of shares.

6 Distinctive Numbers)

Distinctive numbers are the numbers given by the company to the shareholder for the shares heldby them. The companies use this for their records.

7 Prospectus

A prospectus is a document that must accompany the application forms of all public issues ofsecurities, whether ordinary shares, or debentures. Typically, a prospectus contains the terms andconditions of the issue, along with the specific feature of the security, the purpose for which theissue is made, the company's track record, the risk inherent in the project for which the capital isbeing raised and so on.

8 Face value

Face Value (Par Value) implies the value at which a share is originally recorded in the balance sheetas capital. In India face value is normally Rs 10 or Rs. 100. But now as per relaxation by SEBI,companies are coming out with issues with different face values e.g. HCL Technologies (Rs. 4). Zeehas split the face value of shares from Rs. 10 to Rs 1.

9 Partly Paid Share

When a company gives the option to investor to apply for the shares on part payment of the facevalue then till the remaining amount is paid the share is called partly paid share

10 Dividend

A company from its post tax profit distribute some proportion to shareholders. This income for theshareholders is called dividend. Currently dividend income is tax free in the hands of investors, butthe company is required to pay dividend tax directly to the Government

Corporate Terms

1 Company

Company is an incorporated association of many persons, which is an artificial person in law, havinga common seal and a perpetual succession. Thus on incorporation, a company becomes a separatelegal entity different from the persons forming it. The liabilities of the members of a companyextend only to the unpaid value of the shares held by them. This is called a limited liabilitycompany. It is possible to form a Company whose liability is limited by guarantee or even acompany with unlimited liability of the shareholders.

2 Distinction between Private limited company and Public limited company


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A private limited company is closely held company. It can have minimum 2 and maximum 50members. There is a restriction on transfer of shares without consent of others. The shares ofprivate limited company are not listed. There are restrictions on inviting Capital from Members ofpublic for a private limited company. A public limited company can have more than 50 members.The company can invite public subscription for its shares or debentures. The company must haveminimum 7 members and 3 directors.

3 Board of Directors

A director includes any person occupying the position of a director by whatever name (Section 13 ofthe Companies Act' 88 ). Only an individual can be a director (Section 253). The directors of thecompany are collectively referred to as the Board of Directors. An individual director or any group ofdirectors can exercise their power only after the delegation by the board. The directors have thedirection, superintendence and control of the affairs of the company. The day-to-day managementof the affairs of the company is delegated to the managerial personnel by the board.

4 Registrar and Share Transfer Agent (R & T Agent)

An R & T agent is an agency appointed by a Public Limited company to carry out the service oftransfer of shares from one member to another, register such transfers in its book of members,distribute dividend warrants to shareholders, etc.

5Common seal

The company on the share certificate for authentication puts a stamp on the share certificate knownas company seal. The Company seal is also affixed on important agreements and contracts by theCompany

6 Company Secretary

Company Secretary is the member of association of Institute of Company Secretaries of India who

engages himself in the practice of the profession of the Company Secretaries or offers to perform orperform services in relation to the promotion, forming, incorporation, amalgamation, reconstruction,reorganization or winding up of companies.

7 Subsidiary companys

A Company is a subsidiary of the other if, but only if, - that other controls the composition of itsboard of directors or - where the first mentioned company is an existing company in respect ofwhich the holders of preference shares issued before the commencement of this act have the samevoting rights in all respects as the holders of equity shares, exercises or controls more than half ofthe total voting power of such company; - where the first mentioned company is any othercompany, holds more than half in nominal value of its equity share capital or - the first mentionedcompany is a subsidiary of any company, which are that others subsidiary.

8 Managing agent

When a company appoints some other company to manage and run the operations on commissionbasis the company is called managing agent.

9 Are all public limited companies necessarily listed?


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Most Public limited companies can get themselves listed, but it's not necessary that all Publiccompanies are listed.

10 Meaning of a Company listed on the Stock Exchange

A Company, which comes out with a public issue, has to offer investors the option to trade theirshares i.e. an exit route where they can sell their shares. For this, company has to apply to thestock exchange to get approval for their shares to be traded on the same. If the stock exchangeapproves the company's application then company's shares get listed on the exchange for trading.Usually the Stock Exchanges and the company enter into an agreement, which is called "The ListingAgreement". The listing agreement stipulates obligations of the listed company to the Members ofpublic as well as shareholders on dissemination of information regarding the working of thecompany.

11 Multiple listing

A Company gets its shares listed on more than one exchange for better access of the investors. Thisis called multiple listing.

12 Resolution

Any decision of the company has to be taken by consent of members or board of directors. This iscalled resolution.

13 General Body meeting

A General Body Meeting is a meeting of the members, as on a record date of the Company. Everycompany limited by shares, and every company limited by guarantee and having a share capital,shall, within a period of not less than one month nor more than six months from the date at which

the company is entitled to commence business, hold a general meeting of the members of thecompany which is General Body meeting.

14 Annual General Meeting (AGM)

The AGM is a meeting called annually of the members to transact routine business such asapproving of accounts, electing directors etc. It also transacts special business such as enhancingborrowing limits, sale/purchase of undertaking of the Company, etc. Every company shall in eachyear hold in addition to any other meetings a general meeting as its annual general meeting andshall specify the meetings as such in the notice calling it; and not more than fifteen months shallelapse between the date of one annual general meeting of a company and that of next.

15 Extraordinary general body meeting

All general body meetings other than annual general body meeting are called Extraordinary GeneralBody Meeting (EGM). The EGM is called usually to transact urgent business, which cannot wait tillthe AGM. There are provisions in the Company's Act whereby the members can also requisition suchmeetings

16 Proxy


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Any member of a company entitled to attend and vote at meeting of the company is entitled toappoint another person (whether a member or not) as his proxy to attend and vote instead ofhimself; but a proxy so appointed does not have any right to speak at the meeting. Usually theCorporate members send in their representatives as proxies.

Basic Secondary Market Terms

1 Secondary Market

Secondary market is the market where you can buy or sell shares, which are listed on Stockexchanges.

2 Brokerage and the maximum Brokerage charged by a Broker

Brokerage is the commision charged by the broker for purchase/sale transaction through him. Themaximum brokerage chargeable, as stipulated by SEBI, is at present 2.5% of the trade value.

3 Additional charges other than brokerage that can be levied on the investors

Apart from the brokerage the trading member can charge : Transaction charges payable to Stock exchange for facilitating smooth trading. Stamp duty payable to various State governments. Investor Protection Fund. Contingency Fund. Insurance Fund Excise Duty payable to Revenue authorities in the form ofService Tax. Penalties arising on behalf of clients (investors) for non compliance of the relevant requirements.

4 Specified or 'A' group, 'B1' , 'B2', ' F ' and 'Z' Group shares

At (BSE) Bombay Stock Exchange the shares are classified in different categories. 'A' Group is acategory where there is a facility for carry forward (Badla) for a period not exceeding 90 days. Itcontains the shares of the companies which have fairly good growth record in terms of dividend and

capital appreciation. The scrips in this group are classified on the basis of equity capital , marketcapitalisation, number of years of listing on the exchange, public share holding, floating stock,trading volume etc. 'B1' Group is a subset of the other listed shares that enjoy higher marketcapitalization and liquidity than the rest. 'B2' Group of shares comprises the shares not covered inthe above two categories. 'F' Group represents the debt market ( fixed income securities ) segment.'Z' Group category comprises of shares of the companies which does not comply with the rules andregulations of the Stock Exchange.

5 Security code

For the trading purpose on BOLT (BSE online terminal) all the scrips have been assigned numericcodes which have to be keyed in at the time of transaction. This is called security code.

6 Scrip symbol

For NSE trading scrips are represented by their symbols depending upon their names. These areknown as scrip symbols.

7 Market lots


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When the company issues shares to the public, the face value is decided and the minimum numberof shares to be transacted per single transaction is decided. This minimum number of shares per lotis known as market lot. This is done to facilitate easy trading of shares on the stock exchange.Hence for all physical shares traded on the stock exchange, the deliveries are to be made in marketlots only by the seller unless specifically agreed to otherwise. Before dematerialization minimum lotused to be 50 or 100 shares for Rs. 10 and 5 or 10 shares for Rs. 100 face value. Afterdematerialization, minimum lot has become one for all shares which are traded in dematerialized

form.

8 Contract Note

Contract note is a confirmation of trade(s) done on a particular day for and on behalf of a client. Acontract note is issued by the broker in the prescribed format and manner, establishing a legallyenforceable relationship between the member and client in respect to the trades stated in thatcontract note. Contract notes are made in duplicate, and the member and client both keep one copyeach.

9 Points to be checked by an investor to check the validity of a contract note

Name and address of the Trading member, SEBI registration number, details of trade like order no.,trade no., trade time, security name, quantity, rate, brokerage, settlement no., details of otherlevies, signature of authorized signatory and the arbitration clause stating that the trade is subjectto the jurisdiction of Mumbai must be present on the face of the contract note.

10 Documents an Investor should receive from the broker and when

The Transactions executed by the broker for the clients can be confirmed by the following methods. Orally by the word of mouth on telephone or personal meeting. By faxing the details or the Contract Note. On line ,if the trading is via internet. The confirmation given will be followed by Contract Note evidencing the transactions executed

within 24 hours of the trade being executed.

11 Book-Closure and Record dates

An important aspect of investing in securities is to understand the purpose and implications of bookclosure or record date. Since the security holders of a company keep changing practically every day,when a company has to distribute benefits in the form of interest, dividends, bonus shares or rightsissues, the company has to ascertain as to who should receive the benefits. For this purpose, foreach benefit to be distributed to the shareholders, a company announces in advance, a record/bookclosure date. The benefits are then distributed to those security holders whose names appear on theregister of the company on that date. To receive this benefit from the company, an investor whohas bought the security on a cum-benefit basis must make sure that the security is sent forregistration of his name before the book closure date.

12 Portfolio

The set of all securities held by an investor is called his portfolio. The portfolio may contain just onesecurity. However, since in general no one puts all the eggs in one basket, it will contain severalsecurities. Such a portfolio is known as a diversified portfolio.


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13 Private Placement

When a company offers its shares to group of investors by passing the right/public issue, toselected group of investors, then it is called a private placement of shares. There are SEBIguidelines, which regulate such issues by a listed company.

14 Preferential Issue

When a company offers its shares to selected investors who may be promoters of the company,associates, shareholders of the Group Company, etc. then the issue is called a preferential issue.There are SEBI guidelines, which regulate such issues by a listed company.

15 Rights Issue

Whenever an existing company makes a fresh issue of equity capital or convertible debentures, theexisting shareholders or convertible debenture holders have the first right to subscribe to the issuein proportion to their existing holdings. Only what is not subscribed to by the existing shareholderscan be issued to the public. Thus, an issue offered to the existing shareholders as their right isknown as Rights Issue, as opposed to an issue open to the public at large, in which case we call it a

public issue.

16 Bonus Issue

When we invest in shares we expect more than just the dividends from the earnings of the companyafter paying off the dues of all other stakeholders. The company after distributing the dividendskeeps remaining earnings as reserves. The reserves plus equity capital is called Networth. Whencompany's reserves are satisfactory, the management by book entry, issues shares from reservesto shareholders and credits the equity capital by the same amount. This are called bonus shares.This increases the liquidity of the company's shares as number of shares increase. The market priceof the company's shares usually comes down as per the ratio in which the shares are issued.Shareholders are benefited as they get more shares but the returns in real terms accrue only if thecompany is able to maintain the same growth.

17 Rights Issue

When investor applies for the registration of shares in his/her name, he/she can apply jointly. Thatmeans there will be two/three applicants for the same shares. First holder is entitled to all rights.But at the time of selling, the approval of all the joint holders is necessary.

18 Calls

Calls are the sums payable on a partly paid share. The Company after having issued partly paidshares would call upon the shareholders to pay the balance calls as and when they require.

19 Order books

There may be several buy orders and several sell orders at various prices with different quantities.These orders for buy-sell trades for any share giving the prices and quantities of shares arearranged in descending orders. This listing of all the orders is called order book.

20 Touchlines


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This term is often used when trading on the BOLT( BSE On Line Trading)system. Touchline is theprices at which buy and sell order can be executed. Hence the best buy and sell price for a scripform the touchline.

21 Delivery V/s Payment (DVP)

Delivery v/s payment means exchanging simultaneously for money. Often there is a time lagbetween pay in and pay out. The time lag may be of a couple of hours or even. In the absence ofDVD, the buyers have to pay in money and the sellers have to deliver shares ahead of time and waitfor the payout to take place. The time gap between delivery and payment increases the market risk.

22 ISIN Number

ISIN (International Securities Identification Number) is an identification number given to thesecurity of an issuer company by the International securities organisation in consultation with SEBI.These numbers are unique and facilitate international trade.

Margin

1 Definition

After a buy/sell trade takes place, the prices of the stock may move up or down. This movement inprice may result in profit/loss to the investor. To guard against the possibility of the loss not beingpaid by the investor, the margins are collected by the brokers from the investors. On successfulcompletion of the transaction, the margin is refunded. When a trade takes place, on the stockexchange, the stock exchange or the clearing house guarantees honoring of the trade betweenmembers/brokers. To secure the trade, the stock exchange asks from the members/brokers someproportion of total transaction value as a safety deposit, in case the broker/member defaults inhonoring the commitment to the exchange. This is known as margin. The stock exchange leviesdifferent margins as per the situation requirements.

Different types of margins are Gross Exposure Margin Daily margin Carry Forward Margin Special Margin Mark to Market Margin Volatility Margin Concentration Margin Adhoc Margin

a) Daily margin

A client and a broker is required to deposit/make available margin for open positions either on thebuy side or on the sell side at the end of the day. This is known as daily margin. It is intended totake care of eventualities that might occur between 2 trading days.

b) Carry forward margin

On exchanges which provides for trading on carry forward basis from one settlement to another asper the SEBI guidelines an additional margin needs to be paid on positions which are carried over.The daily margin is refunded at the end of the settlement while the carry forward margin iscollected.


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c) Special Margin

In order to curtail heavy, unhealthy transaction positions in particular scrip (normally illiquid, smallcap stocks) Exchange specifies special margin to be paid for both the buy side and the sell side ofthe transaction. This is specified in absolute amount to be paid generally in cash form.

d) Mark to Market margin

When a trader takes a buy/sell position and the market price moves against the trade i.e. for a buytrade price declines and for sell trades price moves up, the trader has to pay the difference betweenthe trade price and the closing price as a margin. This margin is known as mark to market margin.This is usually done at the close of the business day

E.g. A trader buys 100 shares of Reliance at Rs. 250 and the price closes at Rs. 245 he has to paythe difference of Rs. (250-245) i.e. RS. 5 per share totaling RS. 500 as mark to market margin.

E.g. A trader sells 100 shares of Gujarat Ambuja at Rs. 250/- per share, and the price of GujaratAmbuja closes at Rs 260/- then the difference of Rs 10 per share on 100 share totaling Rs 1000 willbe mark to market margin. At the broker level the mark to market profits are not adjusted againstmark to market losses.

e) Volatility Margin

In order to control the volatility or very wide fluctuations in the scrip price, SEBI imposes from timeto time a margin, which is called as Volatility Margin. The objective of this margin is to ensure thatin case there is a very wide fluctuation in the price of the scrip, both the buyers and seller honourtheir commitments to each other and the integrity of the market is not endangered. Generally themethod adopted to calculate the volatility is by working out the difference between the highest priceand the lowest price over a 45 day transaction cycle and comparing it with the lowest price. Themargin is accepted in cash or in form of demat shares.

f) Ad-hoc Margin

As prescribed by SEBI Ad-hoc margins are imposed on brokers carrying very large position over allor in certain illiquid small value stocks.

g) Gross Exposure Margin

The end of the day net outstanding scripwise position results in open exposure betweenclient/broker and broker/exchange. The total of net open positions is know as gross exposure. Theexchange insists on the broker making certain security available to it in the form of cash/bankguarantee/shares, etc. to take care of gross exposure. This is known as Gross exposure margin.Generally, it needs to be paid in advance of the trade.

Why are Margins levied on

1 Buyers

If the buyer fails to honor his commitment of taking delivery by paying cash or by squaring off thetrade, the stock exchange can use the margin taken from the trader to settle his trade so that thesettlement procedure for whole market does not get disrupted. It is a cushion available for meetinglikely losses in case the buyer does not honor his commitment to the market.


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2 Sellers

If the seller fails to honor his commitment of giving delivery or by settling the trade at a loss andpaying cash due to loss in a trade, the stock exchange can use the margin taken from the trader tosettle his trade so that the settlement procedure for the whole market does not get disrupted.Again, it is a cushion available for meeting likely losses in case the seller does not honor his

commitment to the market.2 T+1 or T+2nT+1 is the settlement of trade after 1 day of the date of trading.T+2 is the settlement of trade after 2 days of the date of trading.3 Rolling Settlement

In a rolling settlement the trade has to be settled on the T+ Nth day. Every day's trades are nettedon a daily basis. Squaring off can be done on the same day otherwise the trades have to be settledby paying cash or giving security. In India currently T+5 is operational. This is different from weeklysettlement wherein the trades are netted off on a weekly basis and settled subsequently.

4 Definition

It is a trading mechanism, which allows us to buy shares, even if we do not have the requisiteamount of money, or sell shares if you don't have the deliveries. It is also known as carry forwardtrading. Badla charges are known as contango charges. As per the current SEBI regulation one cantake either buy or sell position in specified shares in the Bombay Stock Exchange and carry itforward till 90 days or else the person has to settle the trade by taking delivery by paying cash orgiving delivery if he has sold the shares. In any of trades the investor/trader has to pay margins asper the stock exchange specification.

Indices

1 Index

An index is a simple barometer of the underlying scrips in the market. It is statistical average,simple or weighted average, of a few leading shares in the market. The number so arrived at iscalled an index. BSE 30 or SENSEX is such an average of thirty leading shares traded in the BSE.Some indices may track a large number of shares average whereas some may track particularindustries. This is called a sector specific index.

2 Significance of Index movements

If the share price index today is 5000, with the average share price in 1984-85 taken as 100,itmeans that on an average, share prices in the market have gone up by about 50 times since 1984-85. The year for which the average price is assumed to be 100 (in this case, 1984-85) is known asthe base year. The base year keeps on changing with time, when this happens the indices beforeand after the introduction of the new base year can not be compared directly. Ups and downs of anindex reflect the changing expectations of the stock market about future earnings of India'scorporate sector. When the index goes up, it is because the stock market thinks that theprospective earnings will be better than previously thought. When prospects of earnings in thefuture become pessimistic, the index drops. The ideal index gives us instant-to-instant readingsabout how the stock market perceives the future of India's corporate sector. Every stock pricemoves for three possible reasons: - news about the company (e.g. a product launch, or the closureof a factory) - news about the industry - news about the economy as a whole including political andsentimental factors. Each stock contains a mixture of these three elements - stock, industry andeconomy news. When we take an average of returns on several stocks, the individual stock newstends to cancel out. On any one day, there would be good stock-specific news for a few companiesand bad stock-specific news for others. In a good index, these will cancel out, and the only thing left


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will be news that is common to all stocks. That is what the index will capture. The current method ofaveraging is to take a weighted average, and give each stock a weight proportional to its marketcapitalization.

3 ICE Stocks or ICE Index

The stocks falling in Information Technology, Telecommunication and Entertainment industries arereferred to as ICE Stocks. The Index based on above stocks is called ICE Index.

4 S&P CNX 500 Equity Index

The S&P CNX 500 Equity Index comprises 500 stocks and is market capitalisation weighted. Stocksare selected based on their market capitalisation, industry representation, trading interest andfinancial performance. However, the overriding need has been to ensure that the industryweightings in the index dynamically reflect the industry weightings in the market. The S&PCNX~500 Equity Index currently contains 79 industry groups representing over 73% of total marketcapitalisation and over 98% of total turnover making it an optimal market benchmark.

5 CNX MidCap 200 Index

For the trading purpose on BOLT (BSE online terminal) all the scrips have been assigned numericcodes which have to be keyed in at the time of transaction. This is called security code.

6 S&P CNX Nifty and CNX Nifty Junior

The CNX MidCap 200 Index comprises 200 companies. The MidCap Universe for this index has beendefined as companies having an average market capitalisation (over the preceding 12 months)between Rs.1.5 billion (US$ 35 million) and Rs. 15 billion (US$ 353 million). The distribution ofindustries in the index represents the industry distribution in the MidCap Universe. The indexrepresents 71% of the total midcap market capitalisation and 72% of its trading value making it anoptimal index for stock market performance of the MidCap segment.

7 NATEX or National Index

Natex is developed by BSE, which is more broad based index than the sensex. Natex reflects theprice movements of 100 actively traded shares of five major exchanges viz. Bombay, Calcutta,Delhi, Ahmedabad and Madras.Their base year is 1983. Whether the stock market is depressed orbuoyant is reflected by either the downward or upward movement respectively of this indices.

8 NASDAQ

'Nasdaq' is an acronym of the National Association of Securities Dealers. It represents the indices ofTechnology stocks listed on New York Stock Exchange.

Demat

1 Meaning of Dematerialized stocks

The dematerialization of physical stock is done on the request of the investor and the depositorieshold it. Since the shares now appear only as an electronic record in the books of the depository, it iscalled dematerialized stock.

2 Meaning of Physical stock

The company issues a share certificate to the shareholder as a proof of his holding in the company.


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This is known as physical stock since the certificate exists physically.

3 Depository

A depository is the place where shares are "deposited" or withdrawn from. The depository may holdthe share on behalf of the clients in physical form or dematerialized form. All deposits and

withdrawals of shares are accounted by the depository similar to a bank account operation. Thismethod does away with all the risks and hassles normally associated with paperwork. Consequently,the cost of transacting in a depository environment is considerably lower as compared totransacting in physical form.

4 Depository Participant

A depository participant (DP) is an agent of the depository and is authorized to offer depositoryservices to investors. According to SEBI guidelines, financial institutions, banks, custodians,stockbrokers, can become depository participants in a depository.

5 NSDL and CDSL

NSDL stands for National Securities Depository Limited. It is promoted by IDBI, UTI and National

Stock Exchange. CDSL stands for Central Depository Services Limited. It is promoted by BombayStock Exchange (BSE), Bank of Baroda, HDFC Bank, State Bank of India and Bank of India.

6 Rematerialisation of Shares

It is the process through which shares held in electronic form in a depository are converted intophysical form.

Types of Traders

1 Market Maker /Jobber

Market maker is the one who gives two way quotes for a security at any point of time. He can do

this if he has financial strength and the shares to deliver. He is the liquidity provider in the scrip. Amarket maker would offer to do transaction on either side as chosen by the counter party at theprices indicated by the market maker for the quantities offered. The market maker assumes theprice risk, the liquidity risk and the time risk. Price risk means that he may not be able to cover hisposition at the same or better price than the price at which he did the original transaction. Liquidityrisk means that he may not be able to liquidate his purchase position and may have to takedeliveries and vice versa. Time risk means that the market maker may have to hold the inventoryfor an unknown period of time and lose the interest on his investments. E.g. Market maker will givequotes for Satyam as Buy 100 shares at Rs. 5000 and Sell 100 shares at Rs. 5010. To cover for therisk involved, he keeps difference between buy and sell quote.

2 Tarvaniwala

When a jobber gives two way qoutes and does the transaction, the difference he gets betweenthese two way spread is called Tarvani and the trader is called Ttarvanivala.

3 Arbitrage

A simultaneous buy and sale of an asset to get the benefit of price difference is called arbitrage.Arbitrage is of different types: price differences between two exchanges, between spot and futuresmarket etc.


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E.g. If on the BSE price of SBI is Rs.250 and on NSE is Rs.253 one can buy the shares on BSE if hehas the money and sell simultaneously on NSE if he has the shares with him for delivery and makerisk free profit of Rs.3 per share.

4 Arbitrageur

The persons who do arbitrage as a business are called arbitrageurs.Auction

1 Auction of Stocks

Auction is a mechanism which is used when a member broker selling shares defaults on the deliveryie. if he has delivered short ( shares fewer than what they have sold) or their deliveries are bad or ifthey have not rectified the company's objections reported against them. The exchange resorts toAuction to fulfil its obligation towards the broker buying the shares.

2 Modus Operandi of Auction

Investors can ask their broker member to sell their securities in the Auction. However they shouldensure that. Shares are readily available for delivery (pay-in day of securities for auction is held within 1 or 2days of auction) and

Shares delivered are good delivery (no opportunity provided for rectification of bad delivery)

Securities not delivered on auction pay-in day or bad delivery of securities delivered in auction aredirectly squared off at a price specified by the Exchange/Clearing Corporation.

3 Close out

If the shares could not be bought in the auction i.e. if shares are not offered for sale in the auction,the transactions are squared up as per SEBI guidelines. As per the guidelines in force, thetransaction is squared up at the highest price from the relevant trading period till the close-out dayor at 20% above the last available trading price whichever is higher.

Nature of Shares

1 Blue Chip Shares

Shares of large, financially strong and well established companies which have stood up against allkinds of market conditions and which have good profitability and dividend track records are referredto as blue chip Shares.

2 Growth Shares

These are shares of companies, which have out-performed others in the Industry, Shares of suchcompanies grow at a rate faster than others in terms of sales and profitability. E.g. Infosys, Wipro,Satyam and NIIT are current examples of growth stocks in the Indian IT industry.


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3 Value Stocks

Value stocks are those stocks that currently have a low market sentiment and are underpricedrelative to their intrinsic worth.

4 Defensive Shares

These Shares are generally neutral to business cycles. These shares have low fluctuations in theirprices and are fairly stable.

5 Cyclical Shares

These shares are in commodity companies and their prices depend on cyclical fluctuations of theeconomy. If the economy is doing well, they appreciate otherwise, their prices would fall.

6 Turn Around Shares

The shares, which belong to the companies that, have large accumulated losses but which showsigns of recovery or making profits.

STOCK MARKET MANUPILATIONS

Price Manipulative Terms

1 Inside information

Nonpublic knowledge about a corporation possessed by corporate officers, directors, majorstockholders, or others who hold private inside information allowing them to benefit from buying orselling the stock.

2 Insider trading

When persons aware of private price sensitive information about a company take trading decisions

based on that information, it is known as insider trading. In most countries including India tradingon publicly unknown price sensitive information is illegal and punishable under the law.

3 Price rigging

When a person or person acting in concert with each other collude to artificially increase or decreasethe prices of a security, that process is called price rigging.

4 Front running

When a person buys ahead of certain information becoming public knowledge on his own behalf orsomeone else it is called front running. So when a trader anticipates buying from institutions(domestic, FII, Mutual Funds) in near future they buy the shares to sell them on later date. This iscalled front running operation done by trader.

5 Circular Trading

When some informed investors indulge in trading between themselves in order to manipulate priceand/or volume traded in the scrip is called circular trading. E.g. A buys 100 shares of SBI from B. Bsells this shares at higher/lower (negotiated between them) to C. C sells them once again to A atsome higher/lower price. In this trading, actual funds and shares have not changed owners, but inthe process price and volumes get manipulated. This is circular trading.Research Terms


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1 Fundamental Analysis

Investing in Equity shares requires you to know about the company you are investing into, in somelevel of depth. Eg.You need to examine the company's line of business, its management capability,its financial performance, its market share, technological prowess and various factors. Such adetailed study of corporate performance is called 'Fundamental Analysis'.

2 Technical Analysis

Some experts believe that tracking past prices of equity shares will provide adequate guidance as toits future path. These experts configure complex charts and mathematical averages of the pricemovements to accurately predict its future. This analysis is called 'Technical Analysis'.3 Rally

Material rise in the price of a share, or a material rise in the share market index, after a period ofstagnancy or a declining trend.4 Relative Strength

Price wise performance of a share as compared with other shares or the share price index.5 Dead-Cat Bounce

A deceptive, temporary recovery in share prices.

6 Valuation

Valuation is an exercise to find the intrinsic value of an asset. This helps the investor in makingdecisions about when to buy the asset or to sell.7 Networth

Networth is the sum of paid up equity capital and reserves (the amount of retained earnings for thepast years after paying all stakeholders and distribution of dividend).8 Book value

Book value of a share is networth divided by number of shares outstanding9 Profit before tax (PBT)

The residual amount left with the company from the earnings after paying all the dues of

stakeholders i.e. employees, government agencies (excise, sales tax, etc), operating expenditure,debt obligation, etc is called profit before tax.10 Earning per share (EPS)

Earning per share is the ratio of net profit to the number of paid up equity shares.11 What is Cash Earning per share (CEPS)

Cash earning per share ratio is the ratio of sum of profit after tax and depreciation to number ofoutstanding equity shares.12 Price Earning (P/E) ratio

Price earning ratio is the ratio of market price of the security to the earning per share (EPS) of thecompany. This indicates usually, the market perception of the potential of the scrip.13 Payout Ratio

Payout Ratio is how much percentage of Earnings is distributed as dividend.It is defined as

Payout Ratio = Dividend per share (DPS) / (EPS) x 100 Earnings Per

If the payout ratio Share is 40%, it means that 40% of the company's profits after tax have beendistributed as dividend and 60% transferred to reserves. A very high dividend payout may not behealthy, if the IRR (Internal Rate Of Return) is higher than the return an investor will get if heinvests the amount of dividend distributed outside14 Fully Diluted earnings


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When a company issues bonus shares or rights shares or comes out with an IPO, the share capitalof the company goes up. In such case, the earnings of the companies are to be considered on theenhanced equity capital. When this is done it is called fully diluted earnings.15 Top Down or Bottoms Up Approach

These terms are used while doing fundamental analysis of Stocks. Top down refers to first find

about the economy, the industry in which the company is operating and then move on to analyzethe company's performance. Bottoms up approach on the other hand assumes that the impact ofeconomy and the industry is reflected in the fundamentals of the company ,which if studiedcarefully , will reveal the potential for appreciation in the scrip.16 Debt Trap

When highly leveraged company does not perform satisfactorily it falls into debt trap. Servicing oflarge debt may not leave the company with any profit or operating cash, which in turn will lead tofurther borrowing. Unless there is a dramatic turnaround in the company's profits, the trap closeson it, forcing liquidation. Countries which borrow heavily, often fall into the trap, and may have toaccept humiliating conditions proposed by lender countries for furtherMiscellaneous1 Dividend, Cum-dividend and Ex-Dividend

When an Investor buys a shares with cum-dividend (or cum Bonus or cum rights or other benefits),

he is entitled for the dividend , bonus shares or rights for which the books are to be closed. Whenan investor buys the share ex-dividend (ex bonus or ex rights or other benefits), he is not entitledto these benefits but the previous owner would be entitled to them.2 Stock Lending

It is a mechanism through which seller going short can borrow stocks to meet his obligations. Itprovides for the lending of securities for a price to short sellers. The lender of the scrip earnsadditional returns by lending his stocks for a specified period to those who need them to dischargetheir delivery obligations.3 Company Objection

When Investors send share certificates along with the transfer deeds to the company forregistration, the registration is some time rejected if the signature differs, shares are fake, forged orstolen , or if there is a court injunction preventing the transfer of the shares etc.

4 Deep Discount BondA Deep Discount Bond is long term bond where the initial amount invested keeps growing based onthe interest accumulated on the principal amount. For E.g. Bonds where an investment of Rs. 2800today could yield Rs.100,000 after 30 years.5 Global Depository Receipt (GDR)

Global Depository Receipt (GDR) are receipts denominated in US Dollar giving the owner the right toconvert the underlying shares by surrendering them to the depository holding the underlyingshares. Depositories are normally big international banks, which receive dividends, reports, etc. Theunderlying shares are called depository shares.

GDRs are listed on stock exchanges such as London, Luxembourg, etc. In GDRs only qualifiedinstitutional investors can participate which restricts retail entry decreasing the depth of the market.

E.g. GDRs of Reliance, ITC etc are listed on London exchange.6 American Depository Receipt (ADR)

American Depository Receipts (ADR) are depository receipts issued in US. For this, the companiesissuing receipts has to file the prospectus with US regulator Securities and Exchange Commissionfor their approval and follow their strict accounting and disclosure procedures. ADRs increase retailparticipation. ADRs are listed in stock exchanges in the US. usually NASDAQ or New York StockExchange.7 Transfer of Shares


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Transfer refers to transfer of ownership of shares from one person to another through a sale or giftwhen accompanied by a transfer deed.8 Transmission of Shares

Transmission refers to transfer of ownership of shares by operation of law in case of death orinsolvency from the owner to his legal heirs or creditors.9 An Angel investor

Companies or persons providing venture capital for the new start ups, as they are not able to accessthe capital markets at that point of time. Often angel investors also help the Promoters by way ofsourcing/assisting in finding managerial personnel, strategizing etc.Pricewise performance of ashare as compared with other shares or the share price index.10 Arbitrator

When there is a dispute between two or more parties, it is resolved by unbiased persons -arbitrators - who are familiar with the areas of controversy. This also cuts down on time to resolvethe disputes. All stock market contracts are subject to arbitration.11 Circuit Filter

To check the excessive volatility of shares, SEBI has come with a set of rules to determine the fixedprice bands for different securities within which they can move within a day. As per SEBI directive,all securities traded at or above Rs.10/- and below Rs.20/- have a daily price band of 25%, traded

below Rs. 10/- have a daily price band of 50%, traded at or above Rs. 20/- have a daily priceband of 8%.

However recently the price band is extended to 12% for 200 active scrips. After the 8% price bandis hit and it doesn't recover from that level for next 30 minutes, the circuit is further released for4% more. The previous day's closing price is taken as the base price for calculating the price. As theclosing price on BSE and NSE can be significantly different, this means that the circuit limit for ashares on BSE and NSE can be different.12 Investors Protection Fund (IPF)

Investor's Protection Fund was set up by The Stock Exchange in July , 1986 to meet the claims ofinvestors against defaulter members.13 Trade Guarantee Fund ( T G F )

The Stock Exchange has constituted a Trade Guarantee Fund to guarantee settlement of bonafide

transactions of members of the exchange inter-se which form part of the Stock Exchangesettlement system, so as to ensure timely completion of settlement of contracts and thereby protectthe interest of investors and the members of the exchange.14 BIFR

BIFR is Board of Industrial Finance and Reconstruction. The government had set up this board torehabilitate the sick companies if possible or to liquidate them. When the networth of a company iseroded, the company is referred to the BIFR.15 Venture Capital

Venture capital is basically equity finance in relatively new companies when it is too early to go tothe capital market to raise funds. However, such investment is not exclusively equity investment. Itcan also be made in the term of loan finance/convertible debt to ensure a running yield on theportfolio of venture capitalist. Venture capital financing involves high risk-return spectrum. Some ofthe ventures yield very high return compensating the loss from unsuccessful investments. In brief,Venture capitalists acts as a financial intermediary between investors looking for high returns andentrepreneurs who need institutional capital as they are not yet ready /able to go to the public.

Mergers & Acquisitions1 Merger

Merger involves dissolving of two firms and creating one new entity or continuing of one of the oldentity names.


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Mergers represent a very important form of corporate restructuring. Mergers, as used in financialliterature, subsume both absorption and consolidation. Example of absorption : Hindustan Lever andPonds merged but the resultant entity remained Hindustan Lever.

A consolidation involves a combination of two or more firms as a result of which a new firm comesinto being and the existing firms are dissolved. E.g. Hindustan Ciba Geigy and Sandoz merged toform Novartis

2 Takeover

A takeover involves the acquisition of a certain or entire block of equity capital of a company, whichenables the acquirer to exercise control over the affairs of the company. SEBI has specified atakeover code, which the acquiring company has to follow so that investor interests are protected.3 SWAP RATIO

When two or more companies merge or demerge, a consideration is payable to shareholders ofmerged entity. For example, company A is merging into Company B, then company B has to payconsideration to shareholders of company A. This may be in cash or by shares of the company B.When the shares are being issued to shareholders of company A, a reasonable ratio is worked outby valuation experts. This ratio is called swap ratio. Consider following examples: 1. A and B company merge to make company C and shares of company C are given toshareholders of A and B based on individual ratio worked out for each company. E.g. Hindustan Ciba and Sandoz merged to form the new entity Novartis. The ratio in which the

shares of Novartis were issued to Hindustan Ciba and Sandoz is called SWAP RATIO.

2. Company A merges into B and shares of B are given to shareholders of A on a fixed ratio. E.g. Times Bank has merged into HDFC Bank. The Swap Ratio decided was 5.75 : 1. ie. for every5.75 shares held in Times Bank by it's shareholder 1 Equity share of HDFC Bank was alloted.

3. A merges into B and shareholders of A are given shares of C, held as investments by B in afixed ratio.

4. Company A divests its one division into separate company and existing shareholders are givenshares in the new company. E.g. Recently Sterlite Industries has decided to split into 3 units viz. Copper , aluminium andtelecom cables.4 Employee Stock Option Plan (ESOP)

The companies in order to reward and retain its employees offer them option to buy the shares ofthe company. This is known as Employee Stock Option Plan (ESOP). Usually the options areexercisable at a price lower then the market price. They are regulated by SEBI and have TaxImplications as prescribed by the act from time to time.5 Dawn Raid

In takeover attempt an individual or a company instructs brokers to buy all available shares of thetarget company at current market prices as soon as stock exchanges open for business on aparticular date. With that as a base the bidder makes an attractive offer to the other shareholders inorder to make a full takeover bid.Derivatives, Options & Futures

1 Derivatives

Derivatives are hedging instruments to be used against price risk. Securities providing payoffs thatdepend on or are contingent on the values of other assets such as a commodity price, bond andstock price, or market index values. The underlying instrument in any derivative instrument is thephysical asset or a security.2 Futures

Futures contract is a firm legal commitment between a buyer and a seller in which they agree toexchange something at a specified price at the end of a designated period. The buyer agrees to takedelivery of something and pay the agreed price and the seller agrees to make delivery for theagreed consideration.3 Index


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An Index is a representative of a set, and is generally the indicator of status of the set. In a stockmarket context, Index is an indicator of the broad market. For instance, by tracking the changes ofthe BSE Sensex, NSE Nifty one can effectively gauge market moods in India. Any Index is anaverage of its constituents. For example, the BSE Sensex is a weighted average of prices of 30select stocks, where the weight is the market capitalization of individual stocks. Marketcapitalization is the product of stock price and number of shares issued by the company.

4 Index futures

Index futures are future contracts where the underlying asset is the Index. This is of great helpwhen one wants to take a position on market movements. Suppose one feels that the market isbullish and the Sensex would cross 5,000 points. Instead of buying shares that constitute the Indexone can buy the market by taking a position on the Index future.5 Difference between the Forward and Future Contracts

Forward contracts are Over the counter (OTC) contracts whose terms are agreed upon by thecounter parties. Whereas Futures are traded on exchanges where the terms are standardized by theexchange.6 Options

An option is the right, but not the obligation, in the hands of the holder, to buy or sell an asset at aparticular price on or before a particular date. This is different from futures wherein there is an

obligation on both the buyer and seller to perform the contract.7 Call and Put Options

A call option gives the holder the right to buy while a put gives him the right to sell the underlyingsecurity / asset.Risk & Return1 Systematic risk

Risk in holding securities is generally associated with the possibility that realized returns will be lessthan the returns that were expected. The source of such disappointment is the failure of dividends(interest) and/or the appreciation in security price to materialize as expected.Forces that contribute to variations in returns-price or dividend (interest) - constitute the elementsof risk. Some influences are external to the firm and cannot be controlled, and affect large numberof securities. Other influences are internal to the firm and are controllable to the large degree.

In Investments, those forces that are uncontrollable, external, and broad in their effect are called assources of systematic risk.

Systematic risk refers to that portion of total variability in return caused by factors affecting theprice of all securities. Economic, political, and sociological changes are sources of systematic risk.Their effect is to cause prices of nearly all-individual common stocks and/or all individual bonds tomove together in the same manner.For E.g. if the economy is moving towards recession and corporate profits shift downward, stockprices may decline across the board and nearly all the stocks listed on the BSE move in the samedirection as the BSE Index. This happens due the systematic risk in the market.2 Unsystematic risk

Unsystematic risk is the portion of total risk that is unique to a firm or industry. Factors such asmanagement capability, consumer preferences, and labor strikes cause systematic variability ofreturns in a firm. Unsystematic factors are largely independent of factors affecting securitiesmarkets in general. Because these factors affect one firm, they must be examined for each firm.3 Bench marking of returns

For the returns on the stocks we have in our portfolio, some comparison must be there to find outwhether our choice of stocks are giving optimum returns or not. For this purpose we compare themagainst some benchmark such as BSE Sensex or CNX Nifty, etc. This is called benchmarking ofreturns.4 BETA

Beta measures non-divesifiable risk. Beta shows how the price of a security responds to market


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forces. In effect, the more responsive the price of a security is to changes in the market, the higherwill be its beta. Beta is calculated by relating the returns on a security with the returns for themarket. Market return is measured by the average return of a large sample of stocks, such as theBSE SENSEX or S&P CNX Nifty. The beta for the overall market is equal to 1 and other betas areviewed in relation to this value.

Betas can be positive or negative. However, nearly all betas are positive and most betas lie

somewhere between .4 and 1.9.

Investors will find beta helpful in assessing systematic risk and understanding the impact marketmovements can have on the returns expected from a share or stock. For e.g., if the market isexpected to provide a 10 percent rate of return over the next year, a stock having a beta of havinga beta of 1.80 would be expected to experience an increase in return of approximately 18 percent(1.8*10%) over the same period. This particular stock is much more volatile than the market as awhole.5 Stock Co-relations

When the security price moves in some trend which some short of relationship can be established tothe trend of some other security or index then the two are said to co-relate. The relation is calledcorrelation. The correlation can be positive or negative.

Positive co-relation implies if one of the two moves up, the other will also move up and vice versa.

Negative co-relation implies if one of the two moves up the other will move down and vice versa.

Technical Definition- A standardized statistical measure of the dependence of two random variables,defined as the covariance divided by the standard deviations of two variables.6 Hedging

Hedging is a mechanism to reduce investment risk using call options, put options, short selling, orfutures contracts. A hedge can help lock in existing profits. Its purpose is to reduce the volatility ofa portfolio, by reducing the risk of loss. Suppose you have a portfolio and there is a likelihood of awar, in such an event the value of your portfolio would diminish. You would not like to sell off yourentire portfolio because of tax issues or liquidity problems. The best hedge would be to sell Indexfutures. The loss on your portfolio would be covered by the gains on sell position in Index futures.