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.

DividendThe 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 SecurityThe 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.

FuturesInvestment 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.

OptionA 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 OptionA 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 OptionA 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).

HedgingAn 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 TradingIntraday 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.

VolatilityThe 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.

LiquidityThe 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

LotA 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.

CustodianA 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 company’s 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.)

SubprimeThe 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. What is a settlement cycle?

The accounting period for the securities traded on the Exchange. On the NSE, the cycle

begins on Wednesday and ends on the following Tuesday, and on the BSE the cycle

commences on Monday and ends on Friday. At the end of this period, the obligations of

each broker are calculated and the brokers settle their respective obligations as per the

rules, bye-laws and regulations of the Clearing Corporation.

If a transaction is entered on the first day of the settlement, the same will be settled on the

eighth working day excluding the day of transaction. However, if the same is done on the last

day of the settlement, it will be settled on the fourth working day excluding the day of

transaction.

What is a Split?

A Split is book entry wherein the face value of the share is altered to create a greater number

of shares outstanding without calling for fresh capital or altering the share capital account.

For example, if a company announces a two-way split, it means that a share of the face

value of Rs 10 is split into two shares of face value of Rs 5 each and a person holding one

share now holds two shares.

How does the SHARE MARKETS works?

Share market is a place where companies list their shares available to common public for buying & selling. these shares are now mostly held in demat form, i.e. electronic and not physical.

share - a share entitles you to own a certain % of the company. if the company has total 100 shares listed and you buy 1, then you are 1% owner of the company and are entitled to participate in AGM, vote for general resolutions or receive dividends (money) if the company declares some.

at the end of the day, all shares in company are summed up - total buy and total sell. this should tally by the end of 2 days (T+2). this means that if you sell 1 share today, you need to transfer 1 share from your account so that it can be given to someone else who has bought 1 share. this entire process should be complete within 2 days.

complications start from here and if i write more, you will start getting confused. you can read up 100s of articles on stock markets on the net. you can post further questions if they are more specific.

Cash Flow Statement

The terms "Cash Flow Statement" and "Statement of Cash Flows" are interchangeable.

The Cash Flow Statement is relatively easy to prepare. It is better to use logic and "common sense" to understand what is happening and how information should be presented in this statement. 

The Income Statement and Balance Sheet are both prepared using Accrual Accounting. This involves making a combination of adjustments to the books, including accruals, deferrals, apportioning costs such as depreciation, and charging Income with future expenditure such as warranty claims and post-retirement benefits. Every time we make an adjustment in the books and records, the resulting financial statements comply with

The Cash Flow Statement is fairly simple.There are only 3 sections, which report Increases and Decreases in Cash. The sections are always presented in the following order.

Operating Cash Flows -  Inflows - Money received from customers for sales of products or services. Outflows - Money paid to suppliers, employees, etc. for normal business expenses.

Investing Cash Flows -  Inflows - Money received from selling assets, including land, buildings equipment, stocks, bonds. Money received from loans made to others, such as Notes Receivable. Outflows - Money paid to purchase assets; and money paid out to make loans to others.

Financing Cash Flows -  Inflows - Money received from stockholders purchasing company stock, from bondholders for bonds payable, and money borrowed from banks and other creditors. Outflows - Money paid to stockholders for dividends, to bondholders, banks and other creditors.

The Statement of Cash Flows also reconciles the Cash balance from the beginning to end of the year. The beginning and ending Cash balances can be found on the Balance Sheet. 

Despite these statistics, most accounting textbooks teach the Direct Method.You should also note that when the Direct Method is used, the statement must also include a supplemental calculation of Operating Cash Flows using the Indirect Method. Accountants should be able to do both methods.

Preparing the Statement of Cash Flows I generally include the cash flow worksheet as part of my 13-column trial balance worksheet. I use the space in the far right side of the trial balance worksheet to analyze cash flows for all accounts. Calculate the difference between the beginning and ending balances for all accounts, and determine if the change reflects an increase or decrease in cash flow. Mark each account with and O for Operating cash flows, I for Investing cash flows and F for Financing cash flows. 

Next lay out the general format of the statement on a piece of paper or spreadsheet. I generally identify the Investing and Financing activites first, and put them in the appropriate place. There should only be a few items that fall in these categories. Most of the accounts will be Operating activities. These include all Income and Expense accounts - the majority of accounts on the trial balance.

   

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