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.
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