Investing 101

Meaning of Various Stock Market Jargons.

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If you are new in the stock market world , I understand your difficulties. It is easy to get confused and intimidated by the complex Stock Market Jargons. But there is no need to worry , here is a complete list of such Jargons with easy to understand meaning:

Dalal Street – This is Dalal Street:

 

Dalal Street is the address of the Bombay Stock Exchange (in the Phiroze Jeejeebhoy Towers) and several related financial firms and institutions. When Bombay Stock Exchange was moved to this new location at the intersection of Bombay Samāchār Marg and Hammam Street, the street next to the building was renamed as Dalal Street.

Dalal Street is usually used as a metonym for the Indian Financial Markets. Headlines like these are common in newspapers :

Will Nestle India do an HUL show on Dalal Street? – The Economic Times

GST: Dalal Street cheers smooth road to new tax regime

Dalal Street week ahead: Realty counter looks tired; IT and metals may see action – The Economic Times

Equity – Represents the share or a part of a company. If a company has 100 shares and you own 50 shares , you are a 50% owner of that company. Same logic applies in the Stock market where companies have 1000s of crores of shares.

Bonds/Debentures – A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer. Example: A 1000₹ , 10% , 25 year bond will pay 100₹ each year as interest for 25 years and on maturity after 25 years pay back the 1000₹ back to the investor.

Face Value – A business must retain this legal capital in its business and may not pay it out as dividends to shareholders. Face value, or par value, has no relation to the market value of stock. The face value is important with regard to corporate action (Corporate Actions – Meaning , types and effects article link). Usually when dividends and stock split are announced they are issued keeping the face value in perspective. For example the FV of Infosys is 10, and if they announce a stock split of 1 for 1 , it means the face value will be now 5 instead of 10 , and the current market price will also adjust accordingly.

Current Market Price – This is the price of the security at which it is trading.

Dividend – A sum of money paid  by a company to its shareholders out of its profits or reserves.

Dividend Yield – The Dividend amount divided by the Current Market Price of the share. For Instance if dividend amount is 2₹ and the current market price of share is 100₹ , then the Dividend Yield is 2%.

Dividend Percentage – The dividend amount divided by the Face value of the share. For Instance if dividend amount is 2₹ and the Face Value of share is 10₹ , then the Dividend Percentage is 20%.

Payout Ratio – This ratio tells us how much the company is distributing as dividends from its total earnings per share. For instance EPS is 10₹ and the dividend paid is 1₹ , then the payout ratio is 10% (dividend per share / earnings per share)

DVR –  Differential voting rights shares are like ordinary equity shares but with differential voting rights. Shares can have higher or lower voting rights as compared to the ordinary equity shares. However, Indian regulations do not permit companies to issue equity shares with higher voting rights. Hence, Indian DVR shares provide for lower voting rights as compared to ordinary equity shares.Companies issue DVRs for several reasons such as prevention of a hostile takeover, bringing in a passive strategic investor or dilution of voting rights. DVR investors are generally compensated with a higher dividend rate. This makes the DVRs attractive for retail investors who do not want control in the company, but are looking at the long-term growth prospects.DVR shares are listed on the stock exchanges and are traded in the same manner as ordinary equity shares, but they mostly trade at a discount, sometimes as high as 50%, due to fewer voting rights. (Example includes Tata Motors and Jain Irrigation among others) DVR shares carry voting rights which are one-tenth of the ordinary equity shares. The DVR shareholders are entitled to an additional 5% dividend, over and above the ordinary equity shareholders. Tata Motors DVR were trading at 165 or 49% discount to the ordinary shares, which are at trading at Rs 335 (prices of mid-September 2013)

Market Capitalization – This is simply the no. of shares into the current market price. This just tells the total value of all the shares in the market. Example below states MCap to be 966.59 crores.

Earnings per Share – A public limited company has crores of outstanding shares (shares that are freely traded). Suppose a listed company called XYZ has earned a net profit of 100₹ and there are 100 total shares. Since every shareholder owns a part of company , the profits too will be shared by the shareholders. 100 total shares and 100₹of profit – which means 1₹ of earning per share. EPS is the earnings/profit on one share. In the below example , EPS is 45.88₹.

 

Price to Earnings – This ratio tells us how much people are paying for a share with respect to its Earnings per share. In the above case , EPS is 45.88 which means people are paying 45.88₹ for 1₹ of earnings ! Ideally a PE ratio of 15-20 is said to be affordable. PE states whether the share is affordable or expensive. But again this has to be looked at with other financial metrics to judge completely.

Book Value – Book value is also the net asset value of a company, calculated as total assets minus intangible assets (patents, goodwill) and liabilities. (i) It serves as the total value of the company’s assets that shareholders would theoretically receive if a company were liquidated. (ii) When compared to the company’s market value, book value can indicate whether a stock is under- or overpriced. Example: ABC company has 10 shares and 100₹ of assets , 10₹ of debt. So the book value here will be assets-debt divided by number of shares. Therefore the book value is 9₹ (100-10=90 , 90/10=9₹ per share)

Price to Book Value – This just tells at what multiple the stock is trading currently when compared to its book value or net asset value. This is also a measure to see if a stock is overpriced or underpriced. Example: ABC book value is 9₹ and current market price is 4.5₹ , thus price to book value is 0.5 which means the stock is underpriced.

Debt to Equity – This ratio tells us how much debt a company has. This is calculated by subtracting assets from owners equity (to find debt) and dividing the result by owners equity. In the below case debt to equity is 0.6 (1000-400 = 600 , 600/1000 = 0.6)

Promoters – Promoter means the original founder , owner or investor of a listed company in this context. As the name suggests he promotes the company through his words or actions. (Not through Marketing). For Instance if i own a company along with 2 of my friends , we 3 friends are the promoters of that company.

Promoter Holding – This is just a number of how much company or how many shares do the promoters of a certain company own. For example:

Pledged Shares – When they need money, very often, promoters of listed companies pledge all or some of their shares with lenders. It means that these shares are offered as collateral to banks in exchange for loans. This is a red flag depending upon the percentage of the pledged shares (suppose it is 100% of their shares). If they fail to repay debt then the company will change ownership because Bank will sell shares and whoever buys majority of these shares will then control the company and this is bad for you as an investor because uncertainty will arise because of such factors.

52 Week Low/High – This metric just tells us the highest price and the lowest price of the stock in the 52 weeks. 52 weeks is nothing but just 1 year.

All time high/low – This is similar to the 52 week high and low, with the only difference being the all time high price is the highest price the stock has ever traded from the time it has been listed. Similarly, the all time low price is the lowest price at which the stock has ever traded from the time it has been listed.

Bull Market (Being Bullish) – If you believe that the stock prices are likely to go up then you are said to be bullish on the stock price. From a broader perspective, if the stock market index is going up during a particular time period, then it is referred to as the bull market.

 Bear Market (Being Bearish) – If you believe that the stock prices are likely to go down then you are said to be bearish on the stock price. From a broader perspective, if the stock market index is going down during a particular time period, then it is referred to as the bear market.

Recession(Mandi) – A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Going Long – Going long means you buy a share because you think it will go up.

Going Short – Going short means you sell a share because you think it will go down.

IPO(Initial Public Offering) – When a company offers its shares to the public for the first time it is called an Initial Public Offering.

FPO(Follow on Public Offer) – An issuing of shares to investors by a public company that is already listed on an exchange. An FPO is essentially a stock issue of supplementary shares made by a company that is already publicly listed and has gone through the IPO process.

Oversubscription – Suppose there is an IPO and the retail investor quota is just 1 lakh shares , but bids have come for 2 lakh shares. In that case we would say that the Retail investor quota was subscribed 2x or 2 times.

Undersubscription – Suppose there is an IPO and the retail investor quota is just 1 lakh shares , but bids have come for 90 thousand shares. In that case we would say that the Retail investor quota was under-subscribed by 10%.

Anchor Investors – Anchor investors or cornerstone investors (as they are called globally) are marquee institutional investors like sovereign wealth funds, mutual funds and pension funds that are invited to subscribe for shares ahead of the IPO to boost the popularity of the issue and provide confidence to potential IPO investors. The benefit for institutional investors applying in anchor quota is that they get guaranteed allotment. Allotment to investors applying in an IPO depends on the number of times the issue gets subscribed. Anchor investors, however, cannot sell their shares for a period of 30 days from the date of allotment as against IPO investors who are allowed to sell on listing day.

QIP (Qualified Institutional Placement) –  Qualified Institutional Placement , allows an Indian-listed company to raise capital from its domestic markets without the need to submit any pre-issue filings to market regulators. In a QIP only institutions or qualified institutional buyers (QIBs) can participate. QIP is less time consuming as the company doesn’t have to file a pre-issue document with the capital markets regulator, and only a placement document with the stock exchanges, which only has details of the issue. QIP price will not be less than the average of the weekly high and low of the closing prices of the equity shares during the two weeks preceding the “relevant” date.

OFS – PE , promoters , venture capitalists or HNIs who invested in company early are converting their non-traded company shares into tradeable shares by selling it to public via an IPO. In short, privately held shares are now being made public via IPO.

Allotment – When you are alloted shares in an IPO , FPO or NFO it is called as Allotment.

Mutual Fund – A pool of funds (pooled by thousands or lakhs of investors) which is then invested in a particular asset class (Gold , Equities , Bonds , Commodities). A mutual fund is a professionally-managed investment scheme, usually run by an asset management company that brings together a group of people.

For the below definitions lets look at this diagram first:

ABC company whose financial structure is like this:

Its recent Profit & Loss Statement:

Return on Assets – Operating profit divided by Total assets. So here it is 1,000,000/10,000,000 so here RoA is 10%. It is an indicator of how profitable a company is relative to its total assets. This indicator gives an idea as to how efficient management is at using its assets to generate earnings

Return on Equity / Return on Net worth – Net income divided by Total Equity. So here it is 350,000/5,00,000 so here RoE is 7%. It is a measure of profitability that calculates how many rupees of profit a company generates with each rupee  of shareholders’ equity.

Sell Side Analysts – Analysts who are sellers of a particular Financial Instrument.

Buy Side Analysts – Analysts who are buyers of a particular Financial Instrument. For example a Trader at a Hedge Fund.

Rule of 72 for Compounding – The period of time it takes for your investment to double if you have a fixed rate of compound interest (highly unlikely one would know that). For instance if you have 6% annual compound interest on a equity  investment , it will take you 12 years to double your amount on that equity investment. (72 divided by rate of compound interest , 72/6 = 12)

I hope you found this article helpful,

Thanks,

-ASLNK

 

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2 Comments

  1. Very useful info especially for a retail investor… . Do share more of such general insight , Thank-you.

    1. Thanks for your kind words Sweedel. And Yes, I will definitely post more articles of such kind.

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