Acronyms & Jargons of Stock market

Courtesy : Getmoneyrich

Stocks shares & Equities

Equities

It is a ownership in any assets after all debts (associated with that assets) are paid off

FII - Foreign Institutional Investors

DII - Domestic Institutional Investors

SHP- Share Holding patterns

HNI

High net worth individual. These are the person who invests high in the stock market.

Moat (Economic Moat)

The competitive advantage that one company has over other companies in the same industry. This term was coined by renowned investor Warren Buffett.

Debentures

A type of debt instrument that is not secured by physical assets or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital. Like other types of bonds, debentures are documented in an indenture.

An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill). T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these type of debts.

Non-Convertible Debentures

What is an NCD?

NCD is a fixed-income investment that has a fixed tenure and interest rate. It is issued by a company as a means of raising capital. As the name suggests, they cannot be converted into equity shares like convertible debentures.

Why are companies issuing NCDs?

The value of NCDs that have hit the market since the start of 2016 has already crossed Rs. 5000 crore. Another Rs. 500 crore is in the pipeline. With loan rates falling slowly and equity markets remaining volatile, companies are taking the NCD route to raise money. No wonder, mobilisation through NCDs has gone up significantly in the past few years.

What are their features?

NCDs are offered through an open issue and you need to purchase them within the offer period. However, you can purchase them from stock markets after they are listed. To enhance liquidity, they are most often listed on stock exchanges. Also, NCDs are rated by credit rating agencies. Obviously, the highly rated ones are preferred over others. Also, the highly rated NCDs will provide lower interest when compared to the low rated ones. These ratings are usually revised from time to time based on the financial standing of the firm.

Most NCDs offer both the interest payout and growth or cumulative options and you could choose one based on your financial needs. Generally, NCDs provide better returns than traditional debt products like bank Fixed Deposits (FD) and Government bonds. With current NCD rates at 9%-11% and FD rates at 7%-8% per cent, the post-tax rates for the former will be 6%-7% and for the latter it would be lower at 5%-6% (if you are in the highest tax bracket). NCDs are ideal for those in the 10 and 20 per cent tax brackets as NCDs are taxed as per your tax slab and the lower your tax bracket, higher would be the returns.

But it is important to compare NCDs with deposits, both bank and corporate, to understand whether it is worth investing in them.

Fixed Deposits vs. NCDs

A number of investors are ignorant of the fact that corporate deposits are very different from NCDs. Corporate deposits are unsecured, that is, they are not secured against the assets of the company, whereas NCDs can be secured or unsecured. While NCDs are traded on stock exchanges; there is no easy exit route for corporate deposits. Most companies state, in their deposit application form, that repayment of the Fixed Deposit, if withdrawn prematurely, is at the discretion of the company. Sometimes you might not receive the money even on maturity. Take the case of Asha, who invested in a company FD. Her FD matured in December last year but she is yet to receive the money. So, getting your money back can be quite tough if no proper procedure is laid down by the deposit taking company. While there is no Tax Deducted at Source (TDS) for listed NCDs, interest on corporate deposits would be subject to TDS if the interest exceeds Rs. 10,000. So, NCDs might be a better option when compared to corporate deposits. But are they better than bank FDs?

You must already know that bank FDs are covered under the Deposit Insurance and Credit Guarantee Corporation’s scheme. This is for all your deposits with a particular bank for an amount up to Rs.1,00,000. There is no such guarantee for NCDs. Also, FDs are more liquid than NCDs as you can withdraw your money at any time. Some banks don’t even charge a penalty for premature withdrawal. NCDs have several disadvantages like lower liquidity and higher risks and therefore caution should be exercised before investing in them.

Additional Reading: How Safe Are Your Fixed Deposits?

Liquidity – As we told you, NCDs are listed on the stock exchanges and you can choose to exit through this route. However, note that the trading volumes are pretty low even for sought after NCDs. Consider this: The daily volume for popular names can be as low as 1 and the highest daily volume usually does not exceed 1000. Compare this to shares that are traded in lakhs and you will understand why selling your NCD is not going to be easy. You should find takers for them, right? The situation could be worse wherein the NCD is not traded at all. So, understand that exiting NCDs is not going to be easy.

Higher risks – The main risks that are associated with NCDs, especially those issued by Non- Banking Finance Companies (NBFC), are business risks and credit risks. Business risks are those risks associated with running the business. These might go up with a slowdown in the economy and tighter funding options. NBFCs are the most affected because banks are wary of lending to such companies during growth slowdowns. A growth slowdown will also mean that the margins of businesses will get affected. When revenues get hit, the interest payment on your NCD might also get hit. This would also lead to higher credit risks. Credit risk is the risk associated with the borrowings of the firm. During slowdowns there are risks of downgrades by credit rating agencies. As you know, NCDs are rated by rating agencies and if the company doesn’t do well, these ratings will face a downward revision. So, it is important to thoroughly analyse the company that is issuing the NCD. Here are the factors that one should look at:

Capital Adequacy Ratio (CAR) – This ratio is used to measure the capital of a company, especially that of a bank or NBFC. This is calculated as a percentage of the firm’s risk weighted assets. Capital adequacy ratio, as the name suggest, helps evaluate whether the company has a cushion or adequate funds for future losses. A CAR of more than 15% is necessary. It is also important that you check whether the company has maintained this ratio over the years.

Bad Debts – Always check the company’s asset quality before you invest in its NCDs. NBFCs are especially vulnerable to non-performing assets or bad debts. This is because they do a lot of unsecured lending. It is best to avoid firms that practice unsecured lending of over 50%. Also, make sure that the firm has made provisions for its NPA. A provisioning of over at least 50%-60% is necessary for NPAs. And remember that a decline in asset quality should be taken as a warning sign and investing in NCDs of such firms should be avoided.

Interest Coverage Ratio – As you might know, this ratio is used to ascertain whether the company is in a good position to pay off the interest on its debt. One needs to use the earnings and the interest expense of the firm to calculate this ratio. If the ratio is 2.5 or more, it indicates that the company is in a reasonable position to deal with any possible defaults in the future.

Credit Rating – You must check the credit rating of the NCD issue before you invest in it. It is best to look at only those NCDs that have a rating of at least AA. Credit rating will tell you whether the company is in a positon to honour its debt commitments such as interest and principal repayment. Credit rating agencies estimate the company’s capacity to generate cash from its operations while checking if the inflows are sustainable over the tenure of the NCD issue. Healthy cash flow will mean that the company is in a good positon to meet its debt obligations. The financial standing of the firm will be taken into account before a rating is awarded to the NCD issue.

The question is what are the most important factors used to arrive at the rating? The most crucial bit of information is the degree of risk exposure the firm has. This will include financial as well as business risks. Credit rating agencies conduct calls with the company’s management to understand the business as well as learn about the future growth prospects of the firm. If financial and business risks are high, the rating for the NCD will be low. As an investor, you should understand that investing in a low rated NCD will mean high risks for you. However, note that the process will be different for short-term and long-term ratings. Cash flow will become more important if the credit rating agency has to give a short-term rating. For longer term ratings, the management quality and the performance of the firm among peers will be taken into account. You can see that the credit ratings will be different for different investments issued by the same firm. Consider your risk appetite and choose the NCD that has ratings that suit your appetite. Note that the risks of default increase significantly for those NCDs that are rated below AA.

Make the most of your investments

Here are ways in which you can get the best out of your NCD investment.

Every business raises money through NCDs for a particular purpose. Ideally, the money raised should be used for the core business operations of the firm. If the terms are not clear, it is best to avoid investing in such NCDs.
As mentioned earlier, there are secured NCDs and there are unsecured NCDs. It is beneficial to invest in the former. Secured NCD issues are secured against the assets of the firm. This means that you will be given preference if the firm goes into liquidation or in simple terms, shuts down.
NCDs are not liquid. So, it is best to look at investing small sums that you may not require until the maturity of the investment. You can invest across companies and tenures so that your risk is well spread.
Avoid investing in NCDs from a single industry such as NBFCs that give gold loans. This way, you expose yourself to industry risk. If the industry is underperforming, it is possible that the companies that issued the NCDs might default all at the same time.
If you are looking for high returns, you can consider buying NCDs from the secondary market. NCDs could trade at a discount in the secondary market, that is, the equity market. When a company is ready to issue an NCD, its old NCDs that have a lower coupon rate will start trading at a discount in the market. The best way to invest in NCDs in the secondary market is by looking at their yields. This will factor in the tenure and the price of the NCD. If you invest looking at the interest rate, you might actually lose out. It is possible that the interest rate is high but the yield of the NCD is low. So, always look at the yield, which tells you your actual returns, before investing in a NCD.
If you want to sell your NCD in the market, the best time will be when the NCD’s interest payment becomes due. An NCD will usually trade at a premium before an interest payment becomes due and this will mean more profits for you. You will find that more NCDs are trading at a premium now. This is because interest rates are falling. When interest rate in the country falls, the earlier NCDs issued with higher interest rates will be sought after. So, these NCDs will quote high prices in the market. Note that such premiums could be anywhere between 5% and 20% or higher.
What should you do when the rating of your NCD is downgraded? Should you sell it immediately? First check if the NCD still meets your risk appetite. Seek information on the company and check if there has been any negative news that has led to the downgrade. Assess if this negative news will have a long-term impact. If you find it tough to take a call, take the help of a financial expert.

By now you must have understood that NCDs are meant only for those with a high risk appetite. If you are someone who keeps worrying about your principal, this might not be the investment for you. You can choose Fixed Deposits from banks that are safe and give stable returns. Exiting from them is also very easy. Unlike NCDs, you can choose the tenure that suits you. Need we say more?

Options

Derivative

A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, index or security. Common underlying instruments include: bonds, commodities, currencies, interest rates, market indexes and stocks.

Futures contracts, forward contracts, options, swaps and warrants are common derivatives. A futures contract, for example, is a derivative because its value is affected by the performance of the underlying contract. Similarly, a stock option is a derivative because its value is "derived" from that of the underlying stock.

Credit Swap ratio

A credit default swap is a particular type of swap designed to transfer the credit exposure of fixed income products between two or more parties. In a credit default swap, the buyer of the swap makes payments to the swap’s seller up until the maturity date of a contract. In return, the seller agrees that, in the event that the debt issuer defaults or experiences another credit event, the seller will pay the buyer the security’s premium as well all interest payments that would have been paid between that time and the security’s maturity date.

A credit default swap is the most common form of credit derivative and may involve municipal bonds, emerging market bonds, mortgage-backed securities or corporate bonds.

A credit default swap is also often referred to as a credit derivative contract.

Warrant

A warrant is similar to a call option in that it entitles the owner to purchase shares of a company at a fixed price, called the strike price, at some point in the future.

Warrants represent a somewhat risky investment. Since the strike price is almost always higher than the current share price, warrants can expire worthless if the share price never meets or exceeds the strike price. When a call option is exercised, the option holder exchanges a single contract for 100 already-existing shares. When a warrant is converted into stock, new shares must be issued, diluting existing shareholders. As a result, the issuance of warrants are often viewed negatively by existing shareholders. If the share price reaches the strike price of the warrants, their ownership interest will be diluted. If not, their assets will probably not appreciate significantly over the term of the warrants.

in addition to acting like a call option, some warrants function more like puts. These resemble convertible stocks or bonds in that they are redeemable at a fixed price. If the share price rises above the strike price, the warrants are less valuable than the underlying stock. If the stock price falls below the strike price, however, the owner of a put warrant can still exchange them for the higher value.

IPO

Contingent Liability

The possibility of an obligation to pay certain sums dependent on future events. Defined obligations by a company that must be met, but the probability of payment is minimal. A good example of a contingent liability would be an outstanding lawsuit.

Open Interest

Open interest is the total number of outstanding futures and options (F&O ) contracts at any point in time. In other words, these are open or yet to be settled contracts. For instance, if trader X buys 2 futures contract from trader Y(who is the seller), then open interest rises by 2.If another trader A buys 2 futures contracts from trader B, then the open interest rises to 4. Now, if trader X unwinds his position and the counter party is either Y or B, then the open interest in the system will reduce by that quantity.But if X unwinds his position, and the counter party is a new entrant, say C, then the open interest will remain unchanged. This is because while X has squared off his position, C’s position is still open.

The level of outstanding positions in the derivatives segment is one of the parameters widely tracked by the market.You can see it here: http://www.bseindia.com/deri/HotLinks/mwpl.aspx?L=2&id=hd0&Lid=5 .While open interest shows the total number of outstanding contracts, the data is not much of use, if looked at on a standalone basis. In the futures segment, open interest data needs to be read along with price changes in the futures contract.A rise in open interest in a futures contract along with its price indicates bullishness, which means investors are creating long positions. Investors may benchmark the price changes in the futures contract to the underlying (the cash market).For instance if, on one day, Nifty futures closes at 4000 and S&P Nifty at 4025, then it is said Nifty futures are trading at a 25-point discount to the cash market index. Let’s assume that open interest in the Nifty futures contract on the first day was 1 crore units. Now, on the next day, if Nifty futures closes at 4050, S&P Nifty at 4060 (discount reduces to 10 points) and open interest rises to 1.25 crore, then it means, investors have created long positions.In another scenario, if open interest in the contract rises, but price falls, then it indicates that investors are cautious or bearish. In short, investors are creating short positions. Now, in case open interest in the futures contract falls, but its price moves up, it indicates a bullish trend. This situation is a result of covering of short positions. In another scenario where there is a fall in open interest and price too, analysts read it as a bearish signal, as investors are liquidating their long positions .

The previous examples can be extended to options too. Further in the options segment, a change in open interest in put or call options enables traders calculate the put call ratio (PCR) — a popular sentiment indicators of options traders worldwide, which is the number of puts divided by the number of calls. Times where the number of traded call options outpaces the number of traded put options would signal a bullish sentiment, and vice versa.

Open interest is different from volumes, which is the total number of contracts that have been traded in a trading session. Higher the number of trades in a session, more will the volumes swell, unlike open interest, which drops if a contract is liquidated. Usually, traders use volumes data along with open interest data and prices to derive a more concrete view on the market.

Many experienced traders perceive an abnormally high open interest in a rising market as a warning that there could be a reversal in the bullish trend. This is because several of the weaker traders in the market, who had jumped on to the bandwagon when the market was rising , could square up positions at the slightest signs of correction, thereby sparking a self-feeding fall

Preferred stock

A preferred stock is a class of ownership in a corporation that has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights.

Preferred stock combines features of debt, in that it pays fixed dividends, and equity, in that it has the potential to appreciate in price. The details of each preferred stock depend on the issue.

Preferred shareholders have priority over common stockholders when it comes to dividends, which generally yield more than common stock and can be paid monthly or quarterly. These dividends can be fixed or set in terms of a benchmark interest rate like the LIBOR. Adjustable-rate shares specify certain factors that influence the dividend yield, and participating shares can pay additional dividends that are reckoned in terms of common stock dividends or the company's profits.

Authorized Stock

The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation. This figure is usually listed in the capital accounts section of the balance sheet.

Also known as "authorized shares" or "authorized capital stock."

This number can be changed only by a vote of all the shareholders. Management will typically keep the number of authorized shares higher than those actually issued. This allows the company to sell more shares if it needs to raise additional funds.

Outstanding Shares

Stock currently held by investors, including restricted shares owned by the company's officers and insiders, as well as those held by the public. Shares that have been repurchased by the company are not considered outstanding stock.

Also referred to as "issued and outstanding" if all repurchased shares have been retired. This number is shown on a company's balance sheet under the heading "Capital Stock" and is more important than the authorized shares or float. It is used to calculate many metrics, including market capitalization and earnings per share (EPS).

Restricted Shares

Restricted stock is only available to company insiders, like employees and executives. It is not freely traded among the public and is subject to special Securities and Exchange Commission restrictions.

Floating Shares

The total number of shares publicly owned and available for trading. The float is calculated by subtracting restricted shares from outstanding shares.

For example, a company may have 10 million outstanding shares, but only seven million are trading on the stock market. Therefore, this company's float would be seven million.

Stocks with smaller floats tend to be more volatile than those with larger floats.

Free Float Capital

Free-float methodology market capitalization is calculated by taking the equity's price and multiplying it by the number of shares readily available in the market. Instead of using all of the shares outstanding like the full-market capitalization method, the free-float method excludes locked-in shares such as those held by promoters and governments.

Annual Report

An annual publication that public corporations must provide to shareholders to describe their operations and financial conditions

Typically, an annual report will contain the following sections:

-Financial Highlights

-Letter to the Shareholders

-Narrative Text, Graphics and Photos

-Management's Discussion and Analysis

-Financial Statements

-Notes to Financial Statements

-Auditor's Report

-Summary Financial Data

-Corporate Information

A mutual fund annual report, along with a fund's prospectus and statement of additional information, is a source of multi-year fund data and performance, which is made available to fund shareholders as well as to prospective fund investors. Unfortunately, most of the information is quantitative rather than qualitative, which addresses the mandatory accounting disclosures required of mutual funds.

http://learn.advfn.com/index.php?title=Stock_Market_Definitions

Warren Buffett always says that one cannot select the best stocks till you know about it. Suppose you are buying a IT stocks regarding which you have no knowledge (either its nature of business, fundamentals or products) then it is like shooting in dark and hoping to hit a bulls eye. This type of investing is dangerous and shall not be practiced at all. The best investing style is to invest in stocks that you know. In Investing the more information about the company will trigger a better decision regarding stock purchasing. Warren Buffett calls this as investing within your ‘circle of competence’. Invest in stock of companies that you know.

In this article we will see how we can use different methods to do stock valuation.

Bottom up and Top Down Investing Approach

Bottom up Approach

An investment approach that de-emphasizes the significance of economic and market cycles. This approach focuses on the analysis of individual stocks. In bottom-up investing, therefore, the investor focuses his or her attention on a specific company rather than on the industry in which that company operates or on the economy as a whole.

Top Down Approach

Top-down investing involves analyzing the "big picture". Investors using this approach look at the economy and try to forecast which industry will generate the best returns. These investors then look for individual companies within the chosen industry and add the stock to their portfolios. For example, suppose you believe there will be a drop in interest rates. Using the top-down approach, you might determine that the home-building industry would benefit the most from the macroeconomic changes and then limit your search to the top companies in that industry.

http://www.investopedia.com/articles/stocks/06/topdownapproach.asp

Others

Tailwinds & headwinds

The term "tailwinds" describes some condition or situation that will help move growth higher. For example, falling gas prices will help a delivery company be more profitable. Lower gas prices is said to be a tailwind for the freight services industry.

"Headwinds" are just the opposite. Its a situation what will make growth more difficult. For example, if the price of beef goes much higher, McDonald's is facing headwinds.

It's a nautical term. If the wind is at your back (tailwind), that will help you move forward more quickly. If you are moving into a headwind, that will only make progress more difficult.

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