Financial Glossary

Advance / Decline

Advance / Decline Ratio or the A/D ratio is the ratio of number of stocks that advanced during the day to number of stocks that declined during the day. On a given day in the Nifty 50 companies, if the price of 30 stocks were up, 18 stocks were down and 2 stocks were flat; then the A/D ratio will be 30:18. It is a useful measure to gauge if the rally or correction in markets is broad-based or not.

Algorithm Trading

Algorithm Trading or Algo Trading (as is popularly called) is the use of high end computer programs and rapid processing machines to create smart trades. The most common algos are for slice trades or best price trades through the day. However, algos can also be used for advanced order placements for capturing arbitrage spreads, options trading, delta trading, theta trading etc.

All-or-None order

The All or none (AON) order is a specific type of order where the system will execute the order it its entirety or it will not execute the order. If the AON order cannot be executed immediately, then the system automatically cancels the order. For example, if you place an AON order to buy 500 shares of Jet Airways, and if the required number of shares are not available at that price, then the order is cancelled.

American Depositary Receipt (ADR)

American Depository Receipt (ADR) is a negotiable receipt issued by a US bank. ADR is almost like a GDR with the difference being that the compliance requirements and account standards are more stringent. Infosys was one of the pioneers in the issue of ADRs. ADRs are normally traded on the NYSE and denominated in US dollars. It enables foreigners to invest in Indian stocks.

American-Style Options

Broadly, there are two types of options; European and American. An American option can be exercised at any point of time before or on the expiry date. In India the stock options were all American options while index options were European options till 2011. However, subsequent to 2011, all options have shifted to being European options. American options run the risk of options exercise for the option seller and make it risky.

Analyst

An analyst refers to a firm / company / an individual who is engaged either on his own behalf or on behalf of any other firm or organization that is regularly publishing securities recommendations based on research either through print media and /or electronic media. Analysts could be focused on fundamentals or on technical. Typically, fundamentally analysts will focus on company financial projections while technical analysts are focused on charts and patterns to give a stock view.

Annual Report

An annual report is the annual summary of the financial performance for a financial year (which in the Indian context is from April 01st to March 31st. The annual report consists of the income statement, balance sheet and cash flow statements of the company. Annual report also includes the management discussion and analysis (MDA), auditor's report as well as notes to accounts. The annual report is published by companies each year.

Ask Price

Ask price is the price at which the potential seller of a stock is willing to sell the stock. The highest price at which the seller is willing to sell the stock is called the best ask price. The ask price is the price at which the buyer can buy in the market as that is the price at which the said shares are available. One can check the check the ask price of any stock by clicking on the trading screen. Such ask prices are subject to frequent change.

Ask Size

Just as ask price represents the price at which the seller of a stock is willing to sell, the ask size refers to the quantity that they are willing to sell. The ask size tells the buyer how much quantity is available at a particular price to buy so that the order quantity and size can be modified accordingly. Any buy order is executed in the market based on the best ask price and combined with the best ask size.

Average P/E ratio

The P/E ratio is the ratio of the price of the stock to the full year EPS. If the price of the stock is Rs.150 and the full year EPS is Rs.15, then the P/E ratio of the stock is Rs.10. The P/E ratio is normally an important metrics of valuation and shows how much the market is willing to pay for every rupee earned by the company. Average P/E ratio is calculated over a period of time to smoothen out time-specific price fluctuations.

Backtesting

Any financial model operates under uncertainty since the future is unknown. The best insurance is to back test the model based on past data and see whether the assumptions are valid or not. Back testing is not a fool proof method but it givers an empirical evidence of whether the assumptions made by you in the model are verifiable or not. Back testing reduces the risk in running the model in real time data.

Balance Sheet

Balance sheet is a part of the annual report of a company. It records the assets and liabilities of a business. In short, the balance sheet records what the company owns and what the company owes. The liabilities side of the balance sheet consists of equity capital, long term debt capital, free reserves and short term debt. The assets side consists of fixed assets, current assets, investments and intangible assets.

Bear Market

Bear markets are associated with falling market conditions. There is no fool proof definition of bear markets but the closest definition of a bear market is a correction in the broad index of 20% or more. In bear markets, the prices of stocks see a fall for a sustained period of time. Normally, bear markets are either caused by a slowdown in the economy, slowdown in the earnings growth of companies or purely due to overvaluation of stocks.

Bid Ask Spread

The bid ask spread is the difference between the bid price and the ask price. The bid price is the buy price and the ask price is the sell price. Sellers sell at the bid price and buyers by at the ask price. The bid-ask spread is normally the spread between the best bid price and the best ask price. This spread is very important to judge the liquidity and safety of a stock. Normally, lower the bid ask spread, the more liquid is the stock for trading.

Black Scholes

Black Scholes were two economists who fine tuned the capital market theory and were instrumental in the valuation of options in 1973. Fischer Black and Myron Scholes, along with Robert Merton had been instrumental in founding the now famous Black Scholes model which is popular for option pricing. Both Black and Scholes were Nobel Laureates and have made one of the biggest contributions to capital market theory.

Black-Scholes Model

The Black Scholes model is the global benchmark for option pricing. It can be used to gauge whether call options and put options are underpriced or overpriced so that traders can take a buy or sell decision accordingly. The Black Scholes model is based on the assumption that while prices generally follow a normal distribution, the chances of extreme price movements are also quite high and uses a log normal approach to option valuation.

Block & Bulk Trades

Block trades are different from bulk trades. Block trades on the exchange refer to a single transaction of a minimum size of 5 lakh shares or Rs.5 crore in value and must be completed in a single transaction. The block deals happen through a separate window. Bulk deals have to be reported to the exchange each day if the total quantity of shares bought or sold during the day exceeds 0.50% of the total number of shares outstanding. Block deals and bulk deals are tracked by traders to get in indication of the concentration of the market.

Blue Chip Stocks

Blue chip stocks are the stocks that are from pedigreed business houses and have been in existence for many years. Since these stocks have showed signs of consistent long term value creation, they are considered to be safe places to park money for investors. In India, some examples of blue chip stocks will include Reliance, Infosys, TCS, Maruti, Hindustan Unilever etc. Normally, these blue chips are part of the Nifty or the Sensex.

Broker or Brokerage Firm

The broker or brokerage firm is an intermediary to facilitate your buy and sell transactions in the market. Any individual investor cannot directly execute trades in the stock exchange (BSE or NSE) but has to necessarily go through a SEBI registered broker only. Even online trades have to be done through the broker platform only. The broker, apart from execution, also provides research, trading calls and advisory services to clients.

Bull & Bear Trap

As the name suggests, the bull trap is a false signal to trap the bulls. For example, the chart may give a signal that the stock or the index is turning around while it may actually be a false signal only. Thinking that the stock prices, many buyers jump into the stock only to find that that they are caught in a stock that declines afar a false rally. The reverse trap where bears get trapped into selling a rallying counter is a bear trap.

Bull Market

Bull market is a rising market. While there is not hard and fast definition of a bull market, the general practice is to define a rally of 20% and above as a bull market. Bull markets can continue for a few months or even for a few years. For example, the 1992 bull market and the 1999 bull markets lasted only for a few months but the 2003-2007 bull market lasted for close to 5 years during which the Sensex moved from 2,600 levels to 21,000

Buybacks

Buybacks have become very common these days especially among software and IT companies. In a buy back, a company sitting on surplus cash buys back its own shares and extinguishing these shares. Since the number of shares is reduced, the EPS of the company goes and therefore it is positive for shareholder value. However, In India buybacks are not allowed for treasury operations but only to extinguish shares. Many large companies see buybacks as a more tax efficient method of rewarding shareholders compared to paying dividends.

Capital Gain or Loss

When a capital asset like land, property, bonds, equity shares etc are sold they result in a profit or loss depending on whether the selling price is more than the buying price or less than the buying price. Capital gains are taxed as income and capital losses can be set off against capital gains (or even carried forward to futures) to reduce your tax liability on capital gains. Capital gains can be long term or short term. For equities, any holding of more than 1 year is long term and less than that is short term.

Carry Trade

Carry trade is the practice of borrowing at a low cost and investing in high yield assets. Carry trades are most common in the foreign currency markets. Traders normally prefer to borrow in the Japanese Yen where the interest rates are very low. Then such monies are invested in high yield bonds in countries like India and Indonesia. While the strategy looks simple, it does carry an exchange risk if the rupee / yen movement is unfavourable. Carry trade is normally done by professional traders using high end algorithms.

Cash Dividend / Distribution

Cash dividends are paid out to shareholders after all the expenses are met and the taxes are also paid. Hence dividends are a post tax appropriation. A company normally expresses dividends as the percentage of the par value or face value of the stock. A stock with par value of Rs.10 paying 40% as dividend is actually paying Rs.4 per share. A better measure of dividends is the dividend yield which divides the dividend per share with the market price per share. Conservative investors prefer to buy high dividend yield shares.

Cash Settlement

Cash settlement is very common in futures and options trading in India; in cash F&O, index F&O, commodities and also in currencies. In cash settlement, there is no delivery of shares taken or given. Any profits or losses on the trade are directly adjusted to your trading account. If you buy Nifty futures for Rs.7.50 lakhs and sell for Rs.7.65 lakhs, then the profit of Rs.15,000 will be directly credited to your trading account.

Commodities

Commodities are interchangeable goods or material that can be bought and sold freely. In the stock markets, commodities are seen as the opposite of brands. Commodities include agricultural commodities like wheat, maize, mentha, cotton etc; industrial commodities like copper, tin, zinc etc; precious metals like gold, silver, palladium and energy products like oil & gas. Normally, commodity stocks get lower P/E valuations in the markets compared to companies with strong brands.

Contrarian

Contrarian is an investor who takes an opposite view to the popular trend in the market. For example, when stocks are falling sharply in the market, contrarians try to find pockets of opportunity in the stock market to buy. Successful investors like Warren Buffett have been contrarian investors and they have always tried to buy in the midst of fear and sell in the midst of greed.

Cum Dividend

Cum dividend means with dividend and needs to be looked at in contrast to ex-dividend. When a stock is cum-dividend, it means that investing in the stock at that point of time will entitle you to receive the dividends that have just been declared. The cum-dividend price is normally higher since it includes the dividend and it later falls to the extent of the dividends paid out when it becomes ex dividend.

Cum Rights

Rights are an option to existing shareholders to subscribe to shares at a fixed price (Normally lower than market price). Cum rights means with rights and needs to be looked at in contrast to ex-rights. When a stock is cum-rights, it means that investing in the stock at that point of time will entitle you to receive the rights shares in the said ratio that has just been declared. The cum rights price is normally higher since it includes the rights and it later falls to the extent of the dilution in equity value due to the rights when it becomes ex rights.

Cum-Dividend/Distribution Date

The cum-dividend date is linked to the concept of cum dividend shares. How do you determine which shareholders should get the dividend since the shareholding patter keeps changing. For that the company announces the ex-dividend date. The last trading day before the ex-dividend day will be the last cum-dividend date. If you want to receive the dividend then you need to buy the shares before the last cum-dividend date.

Day High

During the day, the stock price of any stock or index fluctuates quite a bit. The high price of the day refers to the highest point that the stock price touched during the day. We also have weekly highs, monthly highs, 52-week highs as well as all-time highs. The intraday highs are normally an important data point for traders in the market as it is indicative of the price level at which the stock faces resistance and traders can structure their selling price and their stop losses accordingly. A stock that is consistently making new highs is a sign of strength.

Day Low

During the day, the stock price of any stock or index fluctuates quite a bit. The low price of the day refers to the lowest point that the stock price touched during the day. We also have weekly low, monthly lows, 52-week lows, as well as all-time lows. The intraday lows are normally an important data point for traders in the market as it is indicative of the price level at which the stock gets support and traders can structure their buying price and their stop losses accordingly. A stock that is consistently making new lows is a sign of weakness.

Day Order

A day order is valid for the full trading day starting from around 9.10 and going all the way through 3.30 pm. The order will remain in the system till the end of the trading session or till the time the order gets executed or cancelled by the trader. Day orders are used to try and get the possible price in the market in case of volatile stocks. If Day Orders are neither executed nor cancelled till 3.30 then at close of trade, they are automatically cancelled.

Debenture

A debenture is a type of a debt instrument (fixed income bearing) that is not secured or backed by any physical assets or collateral. Debentures are generally backed by the credit worthiness of the borrower and that is why the credit rating assigned becomes very important. Debentures in India can either be secured or unsecured and are normally non-convertible in nature. Debentures are also popularly referred to in India as NCDs. These NCDs carry a fixed interest payment and fixed tenure and are redeemed at the end of that period.

Debt to Equity (Long Term)

The debt equity ratio is one of the most important ratios top evaluate a company's health. It is the ratio of the total long term debt to the long term equity of the company. Here long term debt includes any debentures, term loans and also fixed interest bearing preference capital. Equity includes the share capital, share premium account and other free reserves created out of profit. Debt / Equity are an important barometer of financial health and soundness of the business.

Debt to Equity (Total)

The total debt equity ratio is another very important ratio to evaluate a company's health and is also called the total leverage ratio. It is the ratio of the total long term debt and short term debt of the company to the long term equity of the company. Here debt includes long term and short term debt. Equity includes the share capital, share premium account and other free reserves created out of profit. Total Debt / Equity are an important barometer of financial health and soundness of the business as well as the risk implicit in the business.

Delist

Delisting is the removal of the security from the stock exchange. Delisting of a stock from the stock exchange can either be voluntary or involuntary (by the operation of law). Involuntary delisting happens when a company ceases operations, declares bankruptcy, gets merged or fails to meet listing requirements. Voluntary listing has been done by companies like Cadburys and Nirma in India as they did not see value addition in keeping their business listed on a stock exchange.

Delivery

In India there are two ways to trade in shares; for intraday purposes and for delivery. When the position is closed out the same day it is an intraday trade and when it is carried forward it results in delivery of shares on T+2 date. Delivery is always taken into the demat account since physical delivery is not permitted any longer in the stock markets. Full payment for the shares has to be made to the broker before you can get delivery.

Demat & Remat

Demat or dematerialization is the process of converting physical shares into electronic shares. Typically, the investor needs to submit physical shares along with the Demat request form (DRF) to convert these physical shares into electronic form. Once the shares are dematerialized and converted into electronic form, they can be held in a designated demat account. The reverse process of reconverting demats shares into physical share certificates is called rematerialization or remat.

Derivatives

Derivatives are contracts that have an asset price movement as underlying. The underlying can be an index, stock, commodity, currency etc. They are called derivatives because their value is derived from the value of the underlying. For example, derivatives on Nifty depend on the price of the Nifty. Derivatives in India are available in various forms like index options, index futures, stock options, stock futures, commodity futures, commodity options, currency futures, currency options, interest rate futures etc.

Direct Market Access (DMA)

Direct Market Access (DMA) is a popular system in financial markets wherein the electronic trading facility gives the investor the facility to directly interact with the order book in the exchange. Large institutional investors normally use the DMA to place large orders in a discreet manner so as not to influence the prices.

Dividend

Dividends are payouts by the company to its shareholders at a percentage of its par value. Dividends are only paid out of net profits after all the outside expenses are met. A 40% dividend declaration on a stock par value of Rs.10 translates into a dividend of Rs.4. When the dividend is divided by the stock price, it gives dividend yield. Dividends are normally declared and paid annually, but nowadays most companies prefer to pay interim dividends.

Dividend Yield

Dividend yield is the rupee dividend paid by the company divided by the stock price. It can also be seen as the total dividend paid out during the year divided by the market cap. Dividend yield indicates the quantum of sustainable returns that an investor at that point can get in the form of dividends. The Nifty has a dividend yield ranging from 0.9 to 1.7. High dividend yield is a sign of under valuation of a stock and low dividend yield is a sign of over valuation of stocks.

Downtrend

A downtrend can be interpreted in various ways. There is a downtrend in interest rates, inflation and also in the stock market indices. Normally, a downtrend in the Nifty or Sensex means a sustained fall in the index. Although there could be intermittent bounces in the stock or the index, the underlying trend is downward so every bounce is used in these cases to build short positions. Most investors don't prefer a downtrend in the market as it leads to wealth depletion for equity investors.

Earnings per Share (EPS)

EPS refers to what each share of the company earns. If a company has net profits for the full year of Rs.25 crore and the outstanding shares of the company are 1 crore shares, then the EPS is Rs.25. EPS is important because it is the most important input when we are calculating the P/E valuations of the company. Normally, a healthy EPS growth is considered as a necessary condition of growth investing.

EBITDA

Earnings before interest, taxes, depreciation and amortization (EBITDA) is a measure of the operate income of the company that is generated by the core operations. EBITDA helps us to evaluate the performance of a company or business without having to factor in the financing decisions of debt versus equity. For most practical purposes, the operating profit is defined as (EBITDA - Depreciation), since depreciation is also a non-cash operating expense used to replenish assets. Capital intensive and long gestation businesses report positive EBITDA but negative EPS.

Enterprise Value

Enterprise value is what you need to pay when you acquire the business of a company. Enterprise value (EV) is defined as the sum of market value of business less the cash available (market value of equity + market value of debt - cash available). This is a useful metrics for acquisition of companies and mergers since when you take over a company entirely, this is your pay-off. Normally, in case of companies that are still loss making, the EV/EBITDA ratio is used as a valuation proxy for the P/E ratio.

Equities

Equities represent partial ownership in a company. When you are invested in equity shares of a company, you are part owner of the company. Equity shares pay dividends and also give the shareholders the right to vote at the AGM and EGM of the companies. The equity capital of the company is divided into units called shares and they are designated a certain par value or face value.

Equity Volume

Equity volumes are the number of shares traded in the stock market in a specified time period. One can look at equity volumes in an hour, in a day or in a week. The most common way of looking at equity volumes is on a daily basis. It is a sign of whether liquidity is available on the stock or not. Normally, for large cap companies, the equity volumes are judged in terms of the number of shares traded and in case of small cap stocks it is judged in terms of the value of shares traded. It is a barometer of liquidity and of market risk.

Ex Right

Ex Rights means without rights. When rights shares are issued by a company, the shareholder is entitled to subscribe to the shares at a lower price. However, there is a cut off data and the name has to appear on the register of shareholders of the registrar on that date to be eligible for rights shares. In case of rights, the shares must be bought before the last cum-date for the rights. From the ex-rights day, the stock price trades adjusted for the rights ratio and those who purchase shares from the ex-rights day are not entitled to rights shares.

Exchange-Traded Fund (ETF)

ETFs are a recent addition to the investment offering in countries like India, although they are present in other countries for a long time. ETFs are a form of passive investing wherein a closed ended fund is predominantly invested in a benchmark like the index or in commodities like gold. Such ETFs reflect the value movements of the underlying. ETFs are very popular for passive investors because they can freely bought and sold in the market and held in the demat account. In India we have ETFs on indices and on Gold.

Ex-D Date

Ex-dividend date is the cut off date for deciding who is eligible to receive the dividends. Only those names that appear in the register of the company on the cut off date will be eligible for dividends. The ex-date for dividends is the date from which the buyer of shares is not entitled to receive the dividends. It is the opposite of the cum-dividend date which entitles the buyer of the shares to receive dividends.

Ex-Dividend

Ex Dividends means without dividends. When dividends are declared by a company, the shareholder is entitled to receive the dividends in proportion to shares held. However, there is a cut off data and the name has to appear on the register of shareholders of the registrar on that date to be eligible for dividends. In case of dividends, the shares must be bought before the last cum-date for the dividend. From the ex-dividend date, the stock price trades adjusted for the dividend and those who purchase shares from the ex-rights day are not entitled to dividend.

Exponential Moving Average (EMA)

EMA is one of the popular definitions used in technical analysis, which uses chart patterns to take a view on stock prices. EMA is a weighted approach to calculating moving averages that gives more weightage to the recent price data than to the past price data. This is in line with the view that recent price data has a greater influence on the current market price than the old data. That is because EMA responds more rapidly to recent price trends. Technical analysts normally compare 50-EMA, 100-EMA and 200-EMA to get clues on price trends.

Face Value

Face value is the par value or the nominal value of the share. Normally, the share capital of the company is subdivided into shares with a fixed par value. For example, share of capital of Rs.1 crore can be subdivided into 10 lakh shares of Rs.10 each. While Rs.10 is the most common face value of a stock, you also have stocks with face value of Rs.5, Rs.2 and Rs.1 in India. The dividends are paid on the certificate (demat account).

Fed

The Fed is short of the US Federal Reserve which is the central monetary authority of the United States. In terms of role, the US Fed is the same as the RBI in India. The US Fed has a meeting every 45 days which gives an outlook of the US economy and the direction of US inflation and interest rates. The world markets closely track these variables as the Fed statement has important implications for the world markets. US Fed sets the tone for monetary policy.

Freeze

Freeze is a temporary cessation of operation. One of the most common freezes that investors do is a freeze on the demat account.. During such periods all transactions are frozen and are used as a safety measure when the investor is travelling abroad for a longer period of time. To prevent misuse of the demat account, it is advisable to freeze the demat account in such cases. However, corporate actions during the freeze period will continue without any interruptions.

Fundamental Analysis

As the name suggests, the fundamental analysis is about evaluating the worth of a company by looking at its fundamentals. Here fundamentals refer to the income statement, balance sheet, cash flow statement, business plans, product specifics, brand value etc. The purpose of fundamental analysis is to find out whether the current market price of the stock is below the intrinsic value or above the intrinsic value and take buy/sell decision accordingly. Fundamental analysis looks at financial and non-financial parameters.

Futures Rollover

In India futures expire on the last Thursday of the month. Hence if you want to take a five month view with futures then you need to roll over the futures to the next month. If you are long (buy) on futures then roll over involves selling the current month futures and buying the next month. In case of short futures, the reverse is true. Today rolling over futures has become a lot simpler since there is a dedicated roll window where the trader can just define the required spread and get rollover executed.

Good Delivery

Good delivery refers to getting the shares into your demat account without any hindrance. In the physical delivery system, there used to be problem of bad delivery due to reasons like fault in the certificates, or transfer deeds or other technical issues. Demat has substantially gotten rid of the bad delivery problem. In case of virtual delivery, any unhindered delivery is good delivery. Hindrances may occur due to disputed shares, lien on shares etc.

Good For the Day

Good for Day (GFD) is a type of conditional stock market order to buy or sell shares. A GFD order is valid till the end of the trading day. The GFD is a conditional order and will only be executed if the price conditions are satisfied. A conditional GFD order will be executed at the stipulated price or better during the day. GFD order can be cancelled or modified at any time before it is executed. If at the end of the trading session, the order is still not executed then the trading system automatically cancels the order.

Good till Cancelled

Good till cancelled order is good till it is cancelled and can be carried forward to a future date. Such orders are not cancelled automatically at the end of the trading session but will remain in the trading system till the order is either actually executed or cancelled by the trader placing the order. Normally such GTC orders are used to capture long term price trends that manifest over a period of time.

Good Till Cancelled

It is an order that remains in the system till he order is actually cancelled or executed in the market. It lasts beyond the trading session.

Good-Till-Cancelled (GTC) Order

Good till cancelled order is good till it is cancelled and can be carried forward to a future date. Such orders are not cancelled automatically at the end of the trading session but will remain in the trading system till the order is either actually executed or cancelled by the trader placing the order. Normally such GTC orders are used to capture long term price trends that manifest over a period of time.

Good-Till-Date (GTD) Order

Good till Date (GTD) order is valid till a specified date unless the order is executed or cancelled before that. Such orders are not cancelled automatically at the end of the trading session but will remain in the trading system till the date specified in the GTD order. Normally such GTD orders are used to capture time specific price trends that manifest over a period of time. For example, when we expect the price to react in a direction in the next 15 days, the GTD order can be structured accordingly.

Growth Stock

A growth stock is a share in a company that is anticipated to grow at a rate significantly above the average for the market. Growth stocks are the stocks that normally give high returns in the stock market. These stocks generally don't pay dividends, as the companies usually want to reinvest any earnings in order to accelerate growth in the short term. Investors then earn money through capital gains when they eventually sell their shares.

No Data!

In The Money (ITM)

In the money refers to an option contract that, if it were exercised today, would have positive value. For example, a call option is said to be in the money when its exercise price is below the current price of the underlying asset. Similarly, a put option is in the money (ITM) if the exercise price of the option is above the current market price. It must be noted that ITM does not consider the amount of premium paid on the option but just the impact of price gap between the market price and the exercise price of the option.

Index

Stock market index is a representative sample of companies that represent the market as a whole. Like any index, the stock market index is also based on the base year value of 100 and the current value is calculated with reference to that base value. The two popular indexes in the Indian stock markets are Nifty and Sensex. The Sensex has a base year of 1978-79 and base value of 100. The current value of Sensex at 36,000 means that wealth has multiplied by 360 times over the last 40 years in the stock markets.

Index Option

An index option is the right to buy or sell the index. An option is a right to buy or sell an index at a specified price without the obligation. In options, the buyer has the right and it is seller who has the obligation. Options on the Nifty and Bank Nifty are examples of index options and they are among the most liquid contracts in the Indian futures and options market. Index options are used to trade market direction and also used to hedge the risk of portfolio against adverse price movements in the market.

Index Participation Unit (IPU)

Index participation units (IPUs) are a passive rather than actively managed investment. You can get the returns of the index like Sensex or Nifty by buying such index participation units. The IPU are units themselves, unlike a mutual fund, traded on a stock exchange. To that extent an IPU is more like an index ETF where you have proportionate participation in the index and at the same time is secured by holdings in the underlying index stocks.

Initial Public Offering (IPO)

Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company are sold to institutional investors and also to retail (individual) investors. IPOs are an opportunity for investors to participate in a new business raising equity for the first time. Normally, IPOs are underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchange post the IPO.

Inside Information

Insider information is privileged or non-public information regarding the plans or condition of a publicly traded company. Normally, such insider information is price sensitive and the general insiders who have access to such information are promoters, independent directors, auditors, solicitors, investment bankers etc. Inside information can provide a financial advantage when used to buy or sell shares of a company and hence SEBI regulates the misuse of insider information very closely and has prescribed strict penalties for the same.

Insider

Insider is a term describing a director or senior officer of a company, as well as any person or entity that beneficially owns more than 10% of a company's voting shares. For the purpose of insider trading, the definition is expanded to include anyone who trades a company's shares based on material non-public knowledge. An insider is a person with privileged access to price sensitive information on the stock.

Insider Trading

Insider trading is the buying or selling of a security by someone who has access to privileged material and non-public information about the security. Insider trading can be illegal or legal depending on when the insider makes the trade. Normally, whenever companies make price sensitive announcements like quarterly results, dividends or merger plans, the defined insiders are asked to enter a cooling period during which time they cannot buy or sell the shares of the company. This is intended to protect the interests of the minority shareholders.

International Securities Identification Number (ISIN)

The International Securities Identification Number (ISIN) is a code that uniquely identifies a specific securities issue. The organization that allocates ISINs in any particular country is the country's respective National Numbering Agency (NNA). All demat shares are identified by the ISIN number only. For example, in India the ISIN code of Reliance Industries is - INE002A01018. The ISIN code will change after a bonus issue or a stop split and your demat account will automatically reflect the new ISIN and new shares.

Intraday

Intraday trading refers to closing out the trade on the same day. In an intraday trade, you either buy first or sell it before the end of day or you sell first and then buy it back before the end of day. Intraday trades are closed on the same day and hence are cash settled. Profits or losses on the trade are directly credited debited to the trading account. Intraday trades account for over 65% of the daily volumes on the NSE on an average day.

Intrinsic Value

Intrinsic value or fundamental value of a stock is an estimate of the true worth of a company. Intrinsic value is calculated by projecting the cash flows for the next five years and then determining their present value by discounting back the cash flows. Additionally, other qualitative factors are also considered to arrive at the intrinsic value of the stock. Market value is the current value of a company as reflected by the company's stock price. Therefore, market value may be significantly higher or lower than the intrinsic value.

IPO Financing

IPO Financing is a loan facility where investors can apply for IPOs by investing only Margin amount. The IPO shares get hypothecated to the financier and when the shares are sold the loan is repaid. The IPO financing is extensively used by the HNIs. However, IPO financing can be expensive if the issue gets heavily oversubscribed. That is because you pay interest on the application money but repay the loan out of profits made on allotted shares only.

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Large-Cap

Large cap stocks are used to refer established names in the market where the market cap is greater than $10 billion. In rupee terms that is around Rs.70,000 crore market cap. In the Indian context, it is normally, Rs.50,000 crore that is considered as a cut off to classify a company as a large cap. Companies like HDFC bank, TCS, Infosys, Reliance Industries, Bajaj Auto, Hero Moto, and Maruti will all classify as large caps in India.

LEAPS (Long-Term Equity Appreciation Participation Securities)

Long-term equity anticipation securities (LEAPS) are publicly traded options contracts with expiration dates that are longer than one year. This is unlike the current structure in India where the maturity ranges from 1 month to 3 months. Structurally, LEAPS are no different than short-term options, but the later expiration dates offer the opportunity for long-term investors to gain exposure to price changes without worrying about large investment or rolling over.

Limit Order

A limit order in the stock market is the other end of a market order. Limit order is when the limit for execution is defined. A limit order will be executed at the price or better. For example, if you place an order to buy Infosys 200 shares at Rs.720, the limit order will only be executed only if the best bid price is Rs.720 or lower. In case of selling, the limit order will execute at the limit price or higher. Limit orders are very useful in volatile markets.

Liquidity

Liquidity describes the extent to which an asset or security can be quickly bought or sold in the market without affecting the asset's price. Market liquidity refers to the extent to which a market, such as a country's stock market allows assets to be bought and sold at stable prices. Liquidity is very important for stock to reduce the impact risk. The liquidity for a company balance sheet refers to the availability of current assets to meet current liabilities.

Listed Stock

A listed security is a financial instrument that is officially listed on a recognize stock exchange and traded through an exchange, such as the NSE, BSE, NYSE or Nada. When a private company decides to go public and issue shares, it will need to choose an exchange on which to be listed. Listed stocks offer an entry and exit route to equity investors and are hence preferred by investors.

Margin

Margin is the basic funding you need to put into your trading account before you can start trading. Even for intraday trading, you need to put margins to manage your risk. Then there is buying on margin; which is borrowing money from a broker to purchase stock. You can think of it as a loan from your brokerage. Margin trading allows you to buy more stock than you'd be able to normally. To trade on margin, you need a margin account.

Margin Call

A margin call is a situation when a broker demands that an investor deposits additional money or securities so that the margin account is brought up to the minimum maintenance margin. A margin call is necessitated when the stock / F&O position moves sharply unfavourably to you. When the broker makes a margin call, the investor must either deposit more money in the account or sell some of the assets held in the account. Quite often, due to margin shortfalls, the broker is forced to sell the positions in the market to reduce the cash flow shortfalls.

Market

Market is a place where buyers and sellers come together under a single platform. The stock market is the place where buyer and sellers of shares and securities come under the NSE or BSE platform. The market has an important role to play in providing secondary market liquidity as well as help in the process of price discovery. The markets are best represented by the benchmark indices like the Nifty and the Sensex.

Market Capitalization

Market capitalization (market cap) is the market value of a publicly traded company's outstanding shares. Market capitalization is equal to the share price multiplied by the number of shares outstanding. Market capitalization is the best proxy for the market value of the company and changes in market value are used as the best approximation of wealth creation or wealth destruction, as the case may be.

Mid-Cap

Mid caps or mid cap stocks are typically defined as companies with market caps that are between $2 billion and $10 billion. In India, companies with market cap between Rs.10,000 crore to Rs.50,000 crore are classified as mid caps. Mid-cap stocks tend to be riskier than large-cap stocks but less risky than small-cap stocks. However, mid caps stocks also give better returns than large cap stocks as their business models are normally more focused and even the debt in their books is quite limited.

Momentum Analysis

Momentum shows the rate of change (ROC) in price and is used to gauge whether the trend is having underlying strength or not. Momentum is the absolute difference in stock, commodity and generally refers to prices continuing to trend. In technical analysis you just don't go and buy a stock that is in a positive trend but you buy stocks that also have momentum in their favour. A stock in a strong up trend but with momentum faltering is not a great idea to invest in.

Momentum Stocks

Momentum investing is a strategy that aims to capitalize on the continuance of existing trends in the market. It involves going long on stocks where such momentum is expected to continue. Momentum looks at the strength of the price change and as a practical trading strategy it is more of a practical approach to trading. Most chartists and short term traders use this momentum investing quite heavily.

Money Market

The money market is where financial instruments with high liquidity and very short maturities are traded. It is used by participants as a means for borrowing and lending in the short term, with maturities that usually range from overnight to just under a year. In India, the popular money market instruments include call money, commercial paper (CP), certificates of deposit (CD), 91-day T-Bills, 364-day T-Bills are all examples of the short term money market.

Moving Average (MA)/span>

Moving averages smooth the price data to form a trend following indicator. They do not predict price direction, but rather define the current direction with a lag. For example if you have price of the stock for the last 5 days then you can calculate moving averages of day 3 as (1+2+3), of day 4 as (2+3+4) and so on. Moving averages help to give more importance to the latest price data and also to smoother out the fluctuations in the price levels.

Moving Average Convergence/Divergence (MACD)/span>

Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security's price. The MACD is calculated by subtracting the 26-period Exponential Moving Average (EMA) from the 12-period EMA. MACD is an important variable for chartists and traders to decide whether a trend is sustainable based on recent data and whether it is worthwhile to commit funds to the trade.

Naked Writer

A naked writer is the seller of an options contract (applies to calls and to puts. In case of a call option naked writing, the person does not own the underlying security and in case of put option has not shorted the underlying security. In other words, the naked option writer is un-hedged. Option writing is the other name for options selling and when you sell options your returns are limited to the premium and risks are unlimited. Hence it is risky to sell or write naked options.

Net Worth

Net worth is the value of all the non-financial and financial assets owned by an individual or business unit (minus) the value of all outstanding liabilities. Net worth can apply to companies, individuals, governments or economic sectors such as the sector of financial corporations or to entire countries. Net worth statements are useful for individuals and for companies to raise funding from banks.

New Listing

New listing of a security means that the stock is newly added to the list of tradable security issues of an exchange. It is accompanied with a new listing date, which is around 10-15 days after the closure of the IPO. New listing gives much wider market acceptability to the stock. In India and abroad, the new listing of a stock is accompanied by a ceremonial ringing of the listing bell.

Open Interest

In the case of futures and options, open interest is the total number of open or outstanding options and futures contracts at a given point of time. If A buys 1 lot of RIL and B sell 1 lot, then it only creates one lot of open interest. When both the traders close the positions then the OI reduces by 1 lot. Open interest trends are very useful for an F&O trader to understand where the accumulation is happening, where short covering is happening and where the positions are actually getting unwound.

Open End Mutual Fund

An open-end fund is a mutual fund issuing unlimited units of investments in stocks and/or bonds. In an open ended fund, the units are bought and sold on demand at their net asset value (NAV), which is based on the value of the fund's underlying securities and is calculated at the end of the trading day. Open ended funds offer free entry and redemption at the existing NAV on all the trading days.

Open Order

An open order is an order to buy or sell a security that remains in effect until it is cancelled by the customer, until it is executed, or until it expires. Open orders are not yet trades and they will become trades when they are executed. Open orders can be viewed at any point of time on the online interface of the trading account.

Open-End Investment Fund

Open-end Investment fund (or open-ended fund) is a collective investment scheme that can issue and redeem units at any time. One needs to understand this term in contrast with a closed-end fund, which typically issues units at the beginning of the tenure and then shuts fresh sales and redemption. While closed ended funds are traded on a stock exchange, these open ended investment funds do not need to be traded since the AMC provides the sale and repurchase based on a price linked to NAV of the underlying fund.

Operating Cash Flow

Operating cash flow is a measure of the amount of cash (not accrued income) generated by a company's normal business operations during a fixed time period (1 quarter or 1 year). Operating cash flow indicates whether a company can generate sufficient positive cash flow to maintain and grow its operations, or whether it will require external financing for capital expansion. Generally operating cash flows must be able to finance the capital and operating expenses of business.

Operating Earnings

Operating earnings or operating profits represent the net income earned after subtracting from revenues those expenses that are directly associated with operating the business. Such expenses are referred to as operating expenses and include cost of goods sold, general and administration, selling and marketing, research and development, depreciation and other operating costs. Not that depreciation is treated as an operating cost in this case.

Operating Income

Operating income is an accounting figure that measures the amount of profit realized from a business's operations, after deducting operating expenses such as wages, depreciation and cost of goods sold (COGS). This is also popularly referred to as gross profit or the contribution of the core operations of the business.

Operating Margin

Operating Profit Margin (OPM) is the profitability or performance ratio used to calculate the percentage of profit a company produces from its operations, prior to subtracting taxes and interest charges. OPM is calculated by dividing the operating profit by total revenue, and expressing as a percentage. The margin is also known as EBIT (Earnings Before Interest and Tax) Margin. Ideally, a company should have an OPM that is steady or gradually increasing over time. That is the signal of a robust business model.

Option Cycle

Option cycle refers to the expiration dates that apply to the different classes of options. In the context of the Indian F&O market, option cycle refers to the cycle of months available for a listed option class. Option cycles are integrated across all of the options and futures markets. Cycles are regulated by regulatory authorities. In the Indian we have near month, mid month and far month options available at all points of time.

Option Expiry

Options expiry refers to the expiration date of an option contract and it is the last date on which the holder of the option may exercise the option or reverse the option. In India, the option expiry happens on t he last Thursday of the month. On this day, all open options that are not either exercised or reversed are automatically closed out by the exchange.

Option Holder

The option holder is another term for the option buyer and they have the right, but not the obligation, to buy or sell the underlying asset. In case the option holder has a put option then it is a right to sell the stock or index without the obligation. An option holder can either sell the option during trading hours or exercise the option when it is in-the-money or an also just leave it to expiry.

Option Series

An option series refers to an option on an underlying security with a specified strike price and expiration date. For example if we look at the Nifty options for March 2019 expiry then the Nifty 10,900 March call and the 10,900 March put will form an option series. Options can be calls or puts but the only condition is that the strike price and the expiry must be the same in both the cases. Nifty March-19 strike of 10,900 CE and PE will form a series.

Option Type

Options types are basically option classification of options and they can be done on various parameters. For example, there are index options and stock options depending on the underlying. Then there American options and European options depending on when they can exercised. Options can also be ITM or OTM depending on how the spit price of the underlying stacks up against the exercise strike price.

Out of the Money (OTM)

Out of the money (OTM) is a term used to describe any options that is fit to be exercised. In case of a call option if the strike price is higher than the market price of the underlying asset then it becomes an OTM option. Similarly, in case of a put option if the strike price is lower than the market price of the underlying asset then it becomes an OTM option. Normally exercise of options only refers to ITM options and not to OTM option, as they have an intrinsic value of zero.

Overbought

Overbought refers to a stock price level at which the analysts or traders believe is trading above its intrinsic value. Overbought generally describes recent or short-term movement in the price of the security, and reflects an expectation that the market will correct the price in the near future. In fact, technical analysis is commonly used to identify overbought zones where the stock can be sold.

Oversold

Oversold refers to a stock price level at which the analysts or traders believe is trading well below its intrinsic value. Oversold generally describes recent or short-term correction in the price of the security, and reflects an expectation that the market will bounce the price higher in the near future. In fact, technical analysis is commonly used to identify oversold zones where the stock can be bought.

P/E

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). It can also be seen as the ratio of market capitalization to the net profits. The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple and is an important tool in valuation of equity. Normally, P/E ratios are ratified by comparing to the peer group and to industry benchmarks.

Par Value

Par value is the face value or the nominal value of the share. Normally, the share capital of the company is subdivided into shares with a fixed par value. For example, share of capital of Rs.1 crore can be subdivided into 10 lakh shares of Rs.10 each. While Rs.10 is the most common par value of a stock, you also have stocks with par value of Rs.5, Rs.2 and Rs.1 in India. The dividends are paid on the par / face value of the stock. This is the cost that is shown in the share certificate (demat account).

Portfolio

A portfolio is a combination of financial assets and includes stocks, bonds, commodities, currencies and cash equivalents, mutual, ETFs, property, gold etc. The whole of logic of a portfolio is that when you combine assets classes that have a low correlation with one another, then this leads to reduction in overall levels of risk as bad times for one asset is made up by good times for the other. Portfolio is based on the premise of diversification.

Power of Compounding

Power of compounding is all about earning interest on interest. Contrast that to simple interest; wherein you only earn the interest on principal. Compounding leads to geometric growth in your investments and savings. You can start with a small sum as the key is not the initial investment but the duration of investment and the rate at which you compound. That is one of the reasons, investors tend to accumulate large corpuses by just staying invested in equities.

Preferred Shares

Preferred shares are a class of shares in a company that has a higher claim on its assets and earnings compared to normal shares issued. 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. In India preference shares can either be participating or non-participating. While non-participating is debt, participating preference is classified as equity.

Preferred Stock

Preferred stock is the same as preference shares and represents a class of shares in a company that has a higher claim on its assets and earnings compared to normal shares issued. Preferred stock generally has a dividend that must be paid out before dividends to common shareholders, and the shares usually do not carry voting rights. While it is called preference shares in India, the same instrument is referred to as Preferred stock in the US.

Price Gap

A price gap in the stock market describes a situation where a stock opens at a price either higher or lower than the closing price of the previous trading day. This usually happens when some news affecting the value of the stock is announced after the market closes e.g. positive or negative earnings. Normally price sensitive information announced after the close of trade creates overnight risk and is normally the reason for the Price Gap

Price to Earnings Ratio (p/e)

The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS). It can also be seen as the ratio of market capitalization to the net profits. The price-to-earnings ratio is also sometimes known as the price multiple or the earnings multiple and is an important tool in valuation of equity. Normally, P/E ratios are ratified by comparing to the peer group and to industry benchmarks.

Price to Sales Ratio (p/s)

Price–sales ratio, P/S ratio, or PSR, is a valuation metric for stocks. It is calculated by dividing the company's market capitalization by the revenue in the most recent year; or, equivalently, divide the per-share stock price by the per-share revenue. Price to Sales ratio is very useful in case of companies where it is yet to start generating profits. Also in case of cyclical businesses, P/S ratio can be a lot more useful and meaningful.

Profit

Profit is a financial gain, essentially the difference between the amount earned and the amount spent in buying, operating, or producing something. While we all know of profit made on sale of assets, from a business perspective, profit has many definitions like operating profit, net profit, gross profit etc. We normally refer to net profit as profit.

Profit Margin

When you convert the profit earned by the company to a ratio of its sales, it gives you the profit margin for the company. Profit margin is a profitability ratio calculated as net income divided by revenue, or net profits divided by sales. It shows how effectively the sales revenues are leveraged to generate profits. Higher the better it is!

Put/Call Ratio

The put-call (P/C) ratio is a popular tool used by investors and the traders in futures and options to gauge the overall sentiment in the market. Put call ratio measures how many put options are being traded relative to call options. P/C ratio can be measured for the traded volumes or for the open interest in the market. Normally, the P/C ratio is not seen in isolation but in combination with other F&O parameters to get a colour of the market.

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Rally

A stock price rally or a market rally is a period of sustained increases in the prices of stocks, bonds or indexes. Normally rallies last from a few weeks to a few months. This type of price movement can happen during either a bull or a bear market and accordingly it is known as either a bull market rally or a bear market rally respectively. Traders can participate in two ways; either by riding the momentum or by using a contra call i.e. buying on dips in a bull rally.

Record Date

he record date is the cut-off date established by a company in order to determine which shareholders are eligible to receive a dividend or distribution of shares like a stock split, rights issue or a bonus issue. The shareholders of record as of the record date will be entitled to receive the dividend or distribution, declared by the company. The record date for any dividend, bonus, and rights issue is announced well in advance and delivery should be in before the record date.

Resistance

Resistance, as the name suggests, is the price level which the stock finds hard to breach on the up side. In technical analysis, support and resistance are predetermined levels of the price of a security at which it is thought that the price will tend to stop and reverse. Resistance has two implications; it either results in a stoppage of the rally or if broken results in a break-out on the upside. Sellers in the market will place their stop losses above the support level.

Return on Capital Employed (ROCE)

Return on capital employed (ROCE) is a financial ratio that measures a company's profitability and the efficiency with which its capital is employed. ROCE is calculated as (Earnings Before Interest and Tax (EBIT) / Capital Employed). Total capital employed is the sum of equity and long term debt capital. Unlike ROE which only looks at the equity shareholders of the company, the ROCE looks at all stakeholders like equity and debt capital providers.

Return on Equity (ROE)

Return on equity (ROE) is a measure of financial performance calculated by dividing net income by shareholders' equity. Because shareholders' equity is equal to a company's assets minus its debt, ROE could be thought of as the return on net assets. Equity can also be defined in this case as the share capital plus the free reserves and share premium. The ROE has a directly influence on the P/E ratio and normally companies with high ROE enjoy a high P/E ratio.

Revenue

In the realm of accounting, Revenues refer to the income that a business has generated from its normal business activities, usually from the sale of goods and services to customers. Revenue is also referred to as sales or turnover. Some companies in the banking and financial services space receive revenues from interest, fees and investment income. For manufacturing companies, revenues are expressed as net sales (which mean net of excise duties).

Reverse Stock Split

A reverse stock split or reverse split is a process by which shares of a company are effectively merged to form a smaller number of proportionally more valuable shares. A reverse stock split is also called stock consolidation in most countries and is the exact opposite of a stock split. For example, shifting the face value of a stock from Rs.10 to Rs.5 is a stop split while shift from Rs.5 to Rs.10 is a stock consolidation or reverse stock split.

Rolling Settlement

Indian markets follow the rolling system for trading in the stock markets. A rolling settlement is the process of settling security trades on successive dates based upon the specific date when the original trade was made so that trades executed today will have a settlement date one business day later than trades executed yesterday. For example, if you buy 500 shares of RIL today then you can close it intraday. If it is not closed it automatically goes for delivery on T+2.

RSI

In technical analysis, the relative strength index (RSI) is a very popular momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100. Normally, the acceptable range is that RSI of 30 is underpriced and RSI of 70 is overpriced.

Sector Funds

A sector fund or an industry specific fund is a fund that invests solely in businesses that operate in a particular industry or sector of the economy. Sector funds are commonly structured as mutual funds or exchange-traded funds (ETFs). In India, some of the common sectors funds are based on large sectors like banking, IT, auto, FMCG, pharma etc. Sector funds have the potential to give higher returns in an upturn but they also run a high risk of concentration.

Securities

Securities are investment instruments like equity and debt that are traded on a public stock exchange. The securities market basically covers the listed market. These securities can be bought and sold through the stock exchange market mechanism. Securitas include equity, bonds, money market instruments, mutual funds, index ETFs, gold ETFs, RBI bonds gold bonds etc. The securities market in India is regulated by SEBI.

Settlement Date

Settlement Date is a commonly used in the capital markets and denotes the date on which a trade (bonds, equities, foreign exchange, commodities, etc.) settles. That is, the actual day on which transfer of cash or assets is completed and is usually a few days after the trade was done. In the case of equity, the settlement happens on T+2 date and after the settlement the buyers get the credit of shares in their demat account and sellers get the cash in their bank accounts.

Share Certificate

A share certificate is a certificate issued by a company certifying that on the date the certificate is issued a certain person is the registered owner of shares in the company. The key information contained in the share certificate is: the name and address of the shareholder. The number of shares held and the certificates are normally identified by a Folio Number. In India, share certificates have become largely redundant after shifting to demat in the mid 1990s.

Shareholders’ Equity

Shareholders equity is the difference between total assets and total outside liabilities. It is also the Share capital retained in the company in addition to the retained earnings minus the treasury shares. Shareholders equity is also called Share Capital, Stockholder's Equity or Net worth. When we talk of ROE, we are actually referring to the return on this shareholders equity only. Normally, with smaller shareholder equity tend to outperform in the markets.

Shares outstanding

Shares outstanding refers to all shares currently owned by stockholders, company officials, and investors in the public domain, but does not include shares repurchased by a company. The shares outstanding are used for calculation of EPS and that also includes the promoter’s stake. When the company does buyback of shares, the outstanding shares reduce and that is what makes buybacks EPS accretive.

Short

In stock markets, Short is a Position in the market and refers to a technique used when an investor anticipates that the value of a stock will decrease in the short term, perhaps in the next few days or weeks. In a short sell transaction the investor borrows the shares of stock from the investment firm to sell to another investor. In India, it is possible to sell shares for intraday purposes even without owning shares but such positions have to be closed the same day.

Short Sale

A short sale is the sale of a security that the seller has borrowed essentially because the seller does not have delivery of these shares in the demat account. A short seller profits if a security's price goes down. In other words, the trader sells to open the position and expects to buy it back later at a lower price and will keep the difference as a gain. In fact, short sales are looked with suspicion in the Indian markets as they are known to destroy prices of stocks.

Short Selling

Short selling is act of selling a security that the seller has borrowed, essentially because the seller does not own the security in demat account. A short seller profits if a security's price falls from the level at which it was sold. In other words, the trader sells to open the position and expects to buy it back later at a lower price and will keep the difference as a gain. If a short sale is not covered on time, it can lead to auction of shares with losses.

Short-term Debt

Any debt that has an outstanding period of less than 1 year is short term debt. In fact, even a long term bond having residual maturity of less than 1 year will be classified as short term debt. Short-term debt is an account shown in the current liabilities portion of a company's balance sheet. The debt in this liabilities account is usually made up of short-term bank loans taken out by a company or of commercial paper; among other types. It is repaid through current assets.

Short-term Investments

Short term investments are those investments in the balance sheet that have maturity tenure of less than 1 year. This includes long term investments with residual maturity of less than 1 year too. Short term investments are held in the current assets header and are meant to be used for meeting short term current liabilities. Some of the popular short term investments are treasury bills, CP, CDs, call money etc.

Simple Moving Average (SMA)

A simple moving average (SMA) is an arithmetic moving average calculated by adding recent closing prices and then dividing that by the number of time periods in the calculation average. SMA is useful in smoothening the price curve as the moving averages tend to blunt the sharp edges in the price movement.

Small Cap

A small-cap stock is generally a company with a market capitalization of between Rs.2000 crore and Rs.10,000 crore The reason we don't consider market caps below Rs.1000 crore is that they are normally penny stocks. The advantage of investing in small-cap stocks is the opportunity to beat institutional investors. Small-cap stocks have historically outperformed large-cap stocks in the Indian context, although they also entail higher risk.

Special Trading Session

A session during which trading in a listed security is limited is a Special Trading Session. The most popular example of a special trading session is the Muhurat Trading on the day of Diwali wherein the traders open trades for an hour before closing for the day. The special trading session sees actual trading unlike a mock trading session.

Speculator

A speculator is popularly referred to as a punter as he essentially bets on price movements based on odds. The speculator utilizes strategies with a shorter time frame in an attempt to outperform traditional longer-term investors. Speculators take on risk, especially with respect to anticipating future price movements, in the hope of making gains that are large enough to offset the risk.

Split Shares

Once the company completes the stock split (lowering the par value of the stock), the resultant shares are called split shares. Split shares have a distinct ISIN number compared to the pre-split stocks. A stock split or stock divide increases the number of shares in a company. The price is adjusted such that the pre and the post market capitalization of the company remains the same and dilution does not occur. Effectively, the stock split is value neutral.

Spread

A spread is defined as the difference between two prices or two rates. In stock trading, the difference between the current bid and ask prices for a stock (the bid/ask or bid/offer spread). In futures trading, the price difference between the near month and mid month or the mid monthly and the far month are examples of spreads. Spread trading is quite popular where smart traders don't bet on prices but just on spreads narrowing or widening.

Stock Dividend/Distribution

A stock dividend is a dividend payment made in the form of additional shares rather than a cash payout. In India, the stock dividend is popularly referred to as a bonus issue. A bonus ratio of 1:1 means the company will issue 1 free share for each 1 share held on the record date. Bonuses or stock dividends are used when the company has substantial free reserves but short term cash flows may be strained. Stock dividends are also value neutral since the shareholder equity does not change. The movement happens internally from reserves to share capital.

Stock Index Futures

Stock index future is a cash-settled futures contract on the value of a particular stock market index, such as the Nifty 50 or the Bank Nifty or the Sensex. The turnover in case of index futures is generally notionally valued. That means, the valuation of the contract and not the margin. Index futures can be used for trading by taking a long / short view on the index and can also be used for hedging the market risk in the portfolio through Beta hedging.

Stock Price Index

A stock index or stock market index is a barometer of the market as a whole or a section of the market. Stock indices are created by using a representative sample of stocks. It is computed from the prices of selected stocks (typically a weighted average). It is a tool used by investors and financial managers to describe the market, and to compare the return on specific investments. Stock index is always with reference to a specific base year.

Stock Split

A stock split is a corporate action in which a company divides its existing shares into multiple shares to boost the liquidity of the shares. Stock split happens to be value neutral since the par value is split. This doubles the number of shares owned but the price halves in case of 1:1 stock split. While stock splits don't create wealth, they are certainly useful in reducing the price of the stock and bringing it within a more acceptable range of prices.

Stop Loss

A stop-loss is an order placed with a broker to sell a security when it reaches a certain price. Stop-loss orders are designed to limit the risk of any trade when the price movement goes against you. Stop loss is like insurance to your trading as it will ensure that even in the worst of conditions the loss will not exceed a particular level.

Stop Loss Order

Stop loss order is an order placed with a broker to buy or sell once the stock reaches a certain price. A stop-loss is designed to limit an investor's loss on a security position. Setting a stop-loss order for 5% below the price at which you bought the stock will limit your loss to 5%. Normal, in case of buying stocks the stop loss is placed below the support level whereas in case of selling of stocks the stop loss order is placed above the resistance level.

Sub broker and Jobber

Sub brokers and jobbers have for long been the bread and butter of the capital markets. Sub brokers are small regional champions who are affiliated to a particular broker. A single broker can have multiple sub brokers but a sub broker can only have one principal broker. The jobber is not needed as they used to trade on the floor of the house giving buy and sell bids to keep liquidity on the stock. Internet trading has largely done away with the need for sub brokers too.

Support Levels

In stock market technical analysis, support and resistance are certain predetermined levels of the price of a security at which it is thought that the price will tend to stop and reverse. These levels are denoted by multiple touches of price without a breakthrough of the level. Support is on the lower side and long traders typically prefer to place stop losses below the support when they buy and above the resistance when they sell.

Technical Analysis

Technical analysis is the study of charts and is based on the premise that past trends and patterns repeat themselves. Hence one can predict future trends but extrapolating past trends. The study and use of price and volume charts and other technical indicators to make trading decisions is called technical analysis. Technical analysis is used by traders to trade for the short term and by investors to fine tune entry and exit levels.

Tick

A tick size is the minimum price movement of a trading instrument. In asset classes like forex currency trading, the tick size is as low as 0.0025 paisa as that is granular levels to which the ticks trade. In case of equities, the minimum tick size varies between 0.05 paisa and 0.10 paisa. The price movements of different trading instruments vary, with their tick sizes representing the minimum amount they can move up or down on an exchange.

Ticket Fee

The ticket fee is the administrative fee charged for each trade. While the broker charges the brokerage charge for the execution, the administrative fee for a trade also includes the other costs like STT, GST, exchange charges, SEBI turnover fees, stamp duty etc. The brokerage component is fixed at times but other charges will be on actuals.

Time Value of Option

The time value of an option is an important component of the value of the option. For example, the option value consists of time value and intrinsic value. Only ITM options have intrinsic value. ATM options and OTM options only have time value. Time value is a wasting asset and as the expiry date approaches this component keeps on depleting and touches near-zero by expiry date. Time value is a useful concept of volatility traders and theta option sellers.

Top-Line

The top line is a record of a company's income or revenue that reflects the full value of goods or services sold to consumers within the statement period. It is called as top line because that is the number that is available on the top of the income statement and then after all deductions you come to the net profit which is the bottom line. Top line growth is a critical parameter to judge if the company is a high growth story or a low growth story.

Trader & Investor

In simple terms, trader is a short term player while the investor is a long term player. Traders rely more on stop losses and risk management to churn funds quickly in short periods of time. Investors are more about taking a long term view on the market and then holding on the stock till the actual value realized in the form of price. Investors rely extensively on fundamental factors while traders focus more on charts and news flows.

Trading Halt

A trading halt is a temporary suspension of trading for a particular security or securities at one exchange or across numerous exchanges. Trading halts are typically enacted in anticipation of a news announcement, to correct an order imbalance, as a result of a technical glitch or due to regulatory concerns. In India, trading halt is done in phases when the index hits circuits of 10%, 15% and 20%.

Trading Range

A trading range occurs when a security trades between consistent high and low prices for a period of time. The top of a security's trading range often provides price resistance, while the bottom of the trading range typically offers price support. An established trading range is very useful in trading stocks and other asset classes by timing right and minimizing risk of the trade.

Trading Session

A trading session is measured from the opening bell to the closing bell during a single day of business within a given financial market. In India, the trading session on the NSE begins at 9.15 and trading closes at 3.30 in the evening. Commodity markets and forex markets trade for longer hours and are more like round the clock markets.

Transaction Date

Transaction date is the date on which a trade takes place for a security or other financial instrument. The transaction date represents the time at which ownership officially transfers. This point needs to be understood properly. When A sells shares to B on Monday, the transaction date is Monday even through B will get the delivery only on Wednesday. While the demat credit comes on T+2, the official transfer of ownership has happened on Monday itself.

Transactions

A transaction is an agreement between a buyer and a seller to exchange goods, services or financial instruments. Any action in the market with a financial implication is a transaction. When A buy and B sells both are entering into transactions. An intraday trade is also a transaction just like a delivery trade.

Transferable Security

Transferable Securities are essentially securities where the ownership can be transferred through an organized and exchange supervised mechanism after the trade is actually executed on the stock exchange. Transferable securities are also called securities in technical parlance. This excludes shares under lock-in period.

Trend Lines

Trend Line is the line indicating the general course or tendency of something, e.g. a geographical feature or a set of points on a graph. When it comes to stock price, the trend line can be upward trending or downward trending. A normal price chart in excel can be smoothened by a trend line that passes through the data points to give an idea of trend.

Trending Market

A trending market is a market that is trending in a specific direction. Markets can have bullish, bearish or sideways trends. Trending markets are all about situations wherein the trend can be established and displayed on a chart. The trending markets are useful because the trader can either ride the momentum or can use every reverse to the trend. That means; use dips to buy in an up trending market and use bounces to sell into a down trending market.

Underlying Interest

Underlying interest means the assets, liabilities, or other interests, or a combination thereof, underlying a derivative instrument. As we know, derivatives are called thus because their value is derived from an underlying asset. The underlying interest for a derivative transaction can be a stock, an index, a commodity, interest rates, inflation, weather or even precious metals like gold.

Underlying Interest

Underlying interest means the assets, liabilities, or other interests, or a combination thereof, underlying a derivative instrument. As we know, derivatives are called thus because their value is derived from an underlying asset. The underlying interest for a derivative transaction can be a stock, an index, a commodity, interest rates, inflation, weather or even precious metals like gold.

Undervalued

An Undervalued stock is a security for which the market price is considered too low for its fundamentals. In other words, the market price is substantially below the intrinsic value of the company. Some metrics used to evaluate whether a security is undervalued are, projection of cash flows, P/E ratio, growth potential, balance sheet health, intangibles like brands / entry barriers, moat etc. Undervalued stock is the opposite of an overvalued stock.

Unlisted

An unlisted security is a stock or other financial instrument that is not traded on a formal exchange. Quite often, such unlisted securities trade in the over-the-counter (OTC) market, which is an informal telephone market. Unlisted securities are also called OTC securities. Normally, market makers facilitate the buying and selling of unlisted securities in the OTC market and provide liquidity to enable such security owners to participate.

Upside Breakout

An upside breakout refers to a situation when the price of an asset moves above a resistance area or a resistance level with decisive price movement and volumes. Upside breakouts indicate the potential for the stock price to start trending upwards in the breakout direction. Breakouts are a very specific pattern used by chartists. Breakouts that occur on high volume (as a percentage of normal volumes) show greater conviction meaning the uptrend is likely to sustain direction.

Uptick

Uptick refers to the increase in the market price of a security over the preceding transaction. Essentially, it is the movement in the price as compared to the previous trade. Upticks are small for liquid stocks but can be wide for less liquid stocks. If a new trading price for a security is higher than the preceding one (even by one cent), the security is on an uptick. Sustained upticks and downticks are useful inputs for technical chartists.

Uptrend

An uptrend describes the price movement of a financial asset when the overall direction is upward. In an uptrend, each successive peak and trough is higher than the ones found earlier in the trend. In fact you can draw an upward sloping line through the subsequent peaks and subsequent troughs of the chart.

Value Investor

Value investor is a fundamental investor who selects stocks which appear to trade for less than their intrinsic value. Value investors actively seek out the stocks they believe the market has undervalued, either due to market perception or due to some structural changes that are forthcoming. Warren Buffett is one of the classic examples of value investing in the world. Value investors are not driven by momentum but purely by the extent to which stock is undervalued.

Value Stocks

A value stock is a stock that tends to trade at a lower price relative to its fundamentals, such as dividends, earnings and sales, making them appealing to value investors. Value investors are normally picked by long term investors and value investors who propose to hold on to the stock for a long time into the future. Volatility does not affect them!

Volatile

A stock is considered volatile if the fluctuations in the stock price in any given timeframe are too high. The most volatile stocks may demonstrate price fluctuations of up to several percentage points during the day. A stock is considered to be a volatile stock if the standard deviation is too high or if the variance is too high.

Volatility

Volatility means that a security's value fluctuates dramatically and hence tends to be less steady. There are different measures of volatility. Systematic volatility can be measured by Beta whereas the overall volatility can be measured by the standard deviation. Normally, volatility of a stock and its value are negatively related. The markets don't like volatility and that is why there is a premium valuation on stocks that are less volatile.

Volume

Trading Volume is a measure of the total shares that have changed hands for a specific time period. The trading volume can be measured as number of shares or in terms of value. For large cap companies, it is the number of shares that is more relevant whereas for mid caps and small capos it is the value that is more relevant. Trading volumes help to underline and ratify the signals given by price.

Write

Writing a put option or call option refers to an investment contract in which a fee is received for giving another person the right to buy or sell shares at a future date. An options writer is also called the option seller. The option writer gets the maximum profit of the total premium received but his total losses can be unlimited if the price movement goes adverse. That is why writing options always must be hedged or must be done with strict stop losses.

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