The year 2013 has brought promising returns to individuals who invested in the Colombo Stock Exchange (CSE). The impressive growth in the market might encourage further investment. Hence, it is vital for potential and existing investors to be financially literate when investing in a growing market. Accordingly, today’s article will focus on technical jargon one would come across when dealing with the stock market.
All Share Price Index (ASPI):
The ASPI is a market capitalization weighted index where the weight of any company is taken as the number of ordinary shares listed in the market. This weighting system allows the price movements of larger companies to have a greater impact on the index. Such a weighting system was adopted on the assumption that the general economic situation has a greater influence on larger companies than on smaller ones.
Annual report: It is a publication that includes financial statements and a report on operations issued by a company to its shareholders at the company’s fiscal year-end.
Bear market: A market condition in which the prices of securities are falling and widespread pessimism causes the negative sentiment to be self-sustaining. Beta: A measurement of the relationship between the price of a stock and the movement of the whole market. Bid size: The aggregate size in board lots of the most recent bid to buy a particular security. Bid: The highest price a buyer is willing to pay for a stock. When combined with the ask price information, it forms the basis of a stock quote. Blue-chip stocks: There is no standard definition. In general the term is used for companies that are financially strong, large in size, technologically advanced and maintain integrity in business dealings. Bonds: Promissory notes issued by a corporation or government to its lenders, usually with a specified amount of interest for a specified length of time. Boom market: It is a market in which buying demand greatly exceeds selling pressure. Broker or brokerage firm: A securities firm or a registered investment advisor affiliated with a firm. Brokers are the link between investors and the stock market. Brought note/sold note: The note sent by the stockbroker firm to the client confirming the purchase or sale of securities. Bull market: A financial market in which prices are rising or are expected to rise. The term ‘bull market’ is most often used to refer to the stock market. Capital gain: An increase in the value of a capital asset (investment) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short term or long term. A capital loss is incurred when there is a decrease in the capital asset value compared to an asset’s purchase price.
Central Depositary System (CDS): It is a private limited company owned by the CSE. It is created to execute documentation and process the transaction of securities. Certificate: The physical document that shows ownership of a bond, stock or other security. Close price: The price of the last board lot trade executed at the close of trading. Contract note: A legally binding confirmation sent by the CDS to the investor stating the purchase or sale of securities through a licenced stockbroker firm. Crossing: A trade that occurs when two accounts within the same participating organisation/member wish to buy and sell the same security at an agreed price and volume. Day order: An order that is valid only for the day it is entered.
Discretionary account: A securities account created when a client gives a partner, director or qualified portfolio manager of a participating organisation specific written authorization to select securities and execute trades on the client’s behalf.
Dividends: A distribution of a portion of a company’s earnings (decided by the board of directors) to a class of its shareholders. The dividend is most often quoted in terms of the rupee amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.
Financial markets: Broad term describing any marketplace where buyers and sellers participate in the trade of long-term financial obligations (equities, bonds, currencies and derivatives). Financial markets can be found in nearly every nation in the world. Some are very small, with only a few participants, while others – like the New York Stock Exchange (NYSE) trade trillions of dollars daily.
Fundamental analysis: A method of evaluating a security by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors.
Initial Public Offering (IPO): The first sale of stocks by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand. It can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue, the best offering price and the time to bring it to the market.
Liquidity: This refers to how easily securities can be bought or sold in the market. A security is liquid when there are enough units outstanding for large transactions to occur without a substantial change in price. Liquidity is one of the most important characteristics of a good market. Liquidity also refers to how easily investors can convert their securities into cash.
Margin account: A client’s account that uses credit from the investment dealer to buy a security. A client needs to deposit a margin amount with the balance advanced by the investment dealer against collateral such as investments. The difference between the amount of the loan and the price of the securities is called the margin. The investment dealer can make a margin call, which means the client must deposit more money or securities if the value of the account falls below a certain level. If the client does not meet the margin call, the dealer can sell the securities in the margin account at a possible loss to cover the balance owed. The investment dealer also charges the client interest on the money borrowed to buy the securities.
Market capitalization: Market capitalization is calculated by multiplying a company’s ordinary shares outstanding by the current market price of one share. If a company has 35 million shares outstanding, each with a market value of Rs.100, the company’s market capitalization is Rs.3.5 billion (35,000,000 x Rs.100 per share).
Money market: Part of the capital market established to buy and sell short-term financial obligations.
New listing: A security issue that is newly added to the list of tradable security issues of an exchange. It is accompanied with a new listing date.
Ordinary shares: There are shares that are not preferred shares and do not have any predetermined dividend amounts. An ordinary share represents equity ownership in a company and entitles the owner to a vote in matters put before shareholders in proportion to their percentage ownership in the company.
Penny stock: Highly speculative stocks. They are volatile and the price does not reflect the intrinsic value of the stock.
Preference shares: A company stock with dividends that are paid to shareholders before common stock (ordinary shares) dividends are paid out. In the event of a company bankruptcy, preferred stock shareholders have a right to be paid company assets first. Preference shares typically pay a fixed dividend, whereas common stocks do not. And unlike common shareholders, preference share shareholders usually do not have voting rights.
Price-earnings (P/E) ratio: A common stock’s last closing market price per share divided by the latest reported 12-month earnings per share. This ratio shows you how many times the actual or anticipated annual earnings a stock is trading at.
Primary market: The primary market is the part of the capital market that deals with issuing of new securities.
Private placement: The private offering of a security to a small group of buyers. Resale of the security is limited.
Prospectus: A legal document describing securities being offered for sale to the public. Prospectus documents usually disclose pertinent information concerning the company’s operations, securities, management and purpose of the offering.
Rights issue: An issue of rights to a company’s existing shareholders that entitles them to buy additional shares directly from the company in proportion to their existing holding, within a fixed time period. In a rights offering, the subscription price at which each share may be purchased is generally at a discount to the current market price. Rights are often transferable, allowing the holder to sell them in the open market.
S&P Sri Lanka 20 Index: The S&P Sri Lanka 20 covers the largest and most liquid stocks from the Sri Lankan equity market and is designed to be the basis for tradable products. The index is based on S&P Indices’ global Index methodology, which provides consistency, transparency and liquidity.
Secondary market: A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves.
Securities: Transferable certificates of ownership of investment products such as notes, bonds, stocks, futures contracts and options.
Shares outstanding: The shares outstanding number represents the total number of shares that have been issued by the company and that are currently owned by shareholders. Since each share is worth exactly equal to the stock price and the shares outstanding number gives the number of shares in existence, multiplying the current stock price by shares outstanding gives the total market value of the whole company.
Spread: The difference between the bid and the ask prices of a stock.
Stock exchange: A stock exchange is a form of exchange which provides services for stockbrokers and traders to trade stocks, bonds and other securities. The stock exchange in Sri Lanka is called the Colombo Stock Exchange.
Stock split: A corporate action in which a company divides its existing shares into multiple shares. Although the number of shares outstanding increases by a specific multiple, the total rupee value of the shares remains the same compared to pre-split amounts, because the split did not add any real value. The most common split ratios are 2-for-1 or 3-for-1, which means that the stockholder will have two or three shares for every share held earlier.
Stock: A holder of stock (a shareholder) has a claim to a part of the corporation’s assets and earnings. In other words, a shareholder is an owner of a company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have claim to 10 percent of the company’s assets.
Technical analysis: A method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
Trading halt: A trading halt is imposed by the exchange, usually due to the dissemination of news that might impact a stock’s price.
Unit trust: A unit trust is a pool of funds collected from a number of investors who share a common financial goal. Funds collected from the investors are invested in various financial assets such as shares, Treasury bills, Treasury bonds, debentures and other securities. The income earned from these investments and the capital appreciation is shared by its unit holders in proportion to the number of units owned by them.
Voting shares: Shares that give the stockholder the right to vote on matters of corporate policymaking as well as who will compose the members of the board of directors.
Warrants: A derivative security that gives the holder the right to purchase securities (usually equity) from the issuer at a specific price within a certain time frame.