Stock Exchanges and Stock Indices--Part One

Handout No.13
Stock Market Concepts
Acquisition
When one company purchases a majority stake in the acquired.
American Depository Receipt (ADR)
A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADRs are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas.
American Depository Share (ADS)
A share issued under deposit agreement that represents an underlying security in the issuer's home country. The terms American depositary receipt (ADR) and American depositary share (ADS) are often thought to mean the same thing. However, an ADS is the actual share trading, while an ADR represents a bundle of ADSs.
Annual General Meeting (AGM)
A mandatory yearly meeting of shareholders that allows stakeholders to stay informed and involved with company decisions and workings.
Annual Report
A company's annual statement of financial operations. Annual reports include a balance sheet, income statement, auditor's report, and a description of the company's operations.
Annuity
A financial product sold by financial institutions that is designed to accept and grow funds from an individual and then, upon annuitization, pay out a stream of payments to the individual at a later point in time. Annuities are primarily used as a means of securing a steady cash flow for an individual during their retirement years.
Arbitrage
The difference between price of a security in two different exchanges. The difference can be used to make profits by persons holding a security to sell the same at an exchange where its price is high and buy it at an exchange where it is available at a lower price.
Back door listing
A strategy of going public used by a company that fails to meet the criteria for listing on a stock exchange. To get onto the exchange, the company desiring to go public acquires an already listed company.
Bad Debt
A debt that is not collectible and therefore worthless to the creditor. This debt, once considered to be bad, will be written off by the company as an expense.
Balance Sheet
A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.
Balanced Fund
A mutual fund that invests its assets into the money market, bonds, preferred stock, and common stock with the intention to provide both growth and income.
Bankruptcy
The state of a person or firm unable to repay debts.
Basis Point
A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly used for calculating changes in interest rates, equity indexes and the yield of a fixed-income security.
Bear Market
A market condition in which the prices of shares are falling or are expected to fall.
Best Bid
The highest quoted bid for a particular share among all those offered by competing market makers.
Blue Chip
A nationally recognized, well-established and financially sound company.
Bond
A debt investment with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate


Book Building
The process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors.
Book Closure
A company's announcement of a dividend or bonus to investors.
Book Value
The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.
Boom
A period of time during which sales or business activity increases rapidly.
Bottom
The lowest point or price reached by a financial security, commodity, index or economic cycle in a given time period, which is followed by a steady increase.
Broker
An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor.
Bubble
A surge in equity prices, often more than warranted by the fundamentals and usually in a particular sector, followed by a drastic drop in prices as a massive selloff occurs.
Bull Market
A financial market of a certain group of shares in which prices are rising or are expected to rise.
Bullion
Gold and silver that is officially recognized as high quality (at least 99.5% pure), and is in the form of bars rather than coins.
CAGR
The year-over-year growth rate of an investment over a specified period of time. It's an imaginary number that describes the rate at which an investment would have grown if it grew at a steady rate
Capital Gain
An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold.
Capital Gains Tax
A type of tax levied on capital gains incurred by individuals and corporations. Capital gains are the profits that an investor realizes when he or she sells the capital asset for a price that is higher than the purchase price.
Cash Flow Statement
This document provides aggregate data regarding all cash inflows a company receives from both its ongoing operations and external investment sources, as well as all cash outflows that pay for business activities and investments during a given quarter.
Choppy Market
A stock market condition whereby prices swing up and down considerably but with no resulting overall price movement in either direction.
Closely Held Shares
The shares held by individuals closely related to a company.
Closing Price
The final price at which a security is traded on a given trading day.
Commodity
A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services.
Commodity Index
An index that tracks a basket of commodities to measure their performance.
Common Shareholder
An individual, business or institution that holds common shares in a company, giving the holder an ownership stake in the company. This will also give the holder the right to vote on corporate issues such as board elections and corporate policy, along with the right to any common dividend payments.
Crash
A major decline in a financial market.
Demat – Dematerialization
The move from physical certificates to electronic book keeping.



Dalal Street
A term that refers to the Bombay Stock Exchange, the major stock exchange in India. The street is home not only the Bombay Stock Exchange but also a large number of other financial institutions.
Day Trader
A stock trader who holds positions for a very short time (from minutes to hours) and makes numerous trades each day. Most trades are entered and closed out within the same day.
De-merger
A corporate strategy to sell off subsidiaries or divisions of a company.
Debenture
A type of debt instrument that is not secured by physical asset or collateral. Debentures are backed only by the general creditworthiness and reputation of the issuer. Both corporations and governments frequently issue this type of bond in order to secure capital.
Debt
An amount of money borrowed and owed by one party to another.
Debt Fund
An investment pool, such as a mutual fund or ETF, in which core holdings are fixed income investments.The fee ratios on debt funds are lower, on average, than equity funds because the overall management costs are lower.
Deflation
A general decline in prices, often caused by a reduction in the supply of money or credit. It is the opposite of inflation.
Delisting
The removal of a listed security from the exchange on which it trades.
Derivative
A security whose price is dependent upon or derived from one or more underlying assets. The derivative is a contract between two or more parties. Its value is determined by fluctuations in the underlying asset like commodities, bonds, stocks, etc
Disinvestment
The action of an organization or government selling or liquidating an asset or subsidiary.
Diversification
A risk-management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.
Dividend
Distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders.
Downgrade
A negative change in the rating of a security.
EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization
EBITDA is a good metric to evaluate profitability
EPS - Earnings Per Share
EPS is the earning on each share of a company
ESOP - Employee Stock Ownership Plan
A qualified, defined contribution, employee benefit plan designed to invest primarily in the stock of the sponsoring employer.
FCCB - Foreign Currency Convertible Bond
A type of convertible bond issued in a currency different than the issuer's domestic currency.
FDI - Foreign Direct Investment
An investment abroad, usually where the company being invested in is controlled by the foreign corporation.
FII - Foreign Institutional Investor.
Fiscal Year
Any 12-month period that a company uses for accounting purposes.
Fund Of Funds
A mutual fund that invests in other mutual funds.
Fundamental Analysis
Fundamental analysis is to produce a value that an investor can compare with the security's current price in hopes of figuring out what sort of position to take on that stock.


GAAP - Generally Accepted Accounting Principles
The common set of accounting principles, standards and procedures that companies use to compile their financial statements.
GDR - Global Depositary Receipt
A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank.
Gilt Fund
A mutual fund that invests in several different types of medium and long-term government securities in addition to top quality corporate debt.
Going Public
The process of selling shares that were formerly privately held to new investors for the first time. Also known as Initial public offering (IPO).
Growth Fund
A diversified portfolio of stocks that has capital appreciation as its primary goal, and thereby invests in companies that reinvest their earnings into expansion, acquisitions, and/or research and development.
Haircut
The difference between prices at which a market maker can buy and sell a security.
Hammering
The rapid and concentrated sale of a stock thought to be overvalued by the market.
Hedge
Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.
Hedge Fund
An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns.
Holding Period
In a long position, holding period refers to the time between an asset's purchase and its sale. In a short sale, the length of time for which the short position is held.
Initial Public Offering – IPO
The first sale of stock by a private company to the public.

Iceberg Order
A large single order that has been divided into smaller lots, usually by the use of an automated program, for the purpose of hiding the actual order quantity.
In And Out
The purchase and sale of a security within a short period of time, usually on the same day.
Income Fund
A mutual fund that seeks to provide stable current income by investing in securities that pay interest or dividends.
Index
A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is essentially an imaginary portfolio of securities representing a particular market or a portion of it.
Index Fund
A portfolio of investments that is weighted the same as a stock-exchange index in order to mirror its performance.
Inflation
The rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power is falling.
Inorganic Growth
A growth in the operations of a business that arises from mergers or takeovers, rather than an increase in the companies own business activity.
Insider Trading
The buying or selling of a security by someone who has access to material, nonpublic information about the security. Insider trading can be illegal or legal depending on when the insider makes the trade. It is illegal when the material information is still nonpublic.
Institutional Investor
A non-bank person or organization that trades securities in large enough share quantities or dollar amounts that they qualify for preferential treatment and lower commissions.
Liquidity
The degree to which an asset or security can be bought or sold in the market without affecting the asset's price.
Maturity Date
The date on which the principal amount of a note, draft, acceptance bond or other debt instrument becomes due and is repaid to the investor and interest payments stop.
Medium Term
An intermediate period of time to hold an asset.
Mid Cap
Companies having a market capitalization between Rs 500 crore and Rs 1,000 crore
Monetary Policy
The actions of a reserve bank of india, that determine the size and rate of growth of the money supply, which in turn affects interest rates.
Money Market
The securities market dealing in short-term debt and monetary instruments.
Mutual Fund
A security that gives small investors access to a well-diversified portfolio of equities, bonds and other securities. Each shareholder participates in the gain or loss of the fund. Units are issued and can be redeemed as needed.
NAV - Net Asset Value
The total value of the fund's portfolio less liabilities.
Open End Fund
A type of mutual fund where there are no restrictions on the amount of shares the fund will issue. If demand is high enough, the fund will continue to issue shares no matter how many investors there are. Open-end funds also buy back shares when investors wish to sell.
Oversubscribed
A situation in which the demand for an initial public offering of securities exceeds the number of shares issued.
P/E Ratio - Price-Earnings Ratio
PE ratio or PE multiples is the ratio arrived by dividing Current market Price by Earnings per share of that stock.
Pension Fund
A fund established by an employer to facilitate and organize the investment of employees' retirement funds contributed by the employer and employees.
Portfolio
The group of assets - such as stocks, bonds and mutuals - held by an investor.
Preferred Stock
A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock.
Company
A company that has issued securities through an initial public offering and which are traded on at least one stock exchange.
Public Offering
he sale of equity shares or other financial instruments by an organization to the public in order to raise funds for business expansion and investment.
Redemption
The return of an investor's principal in a security, such as a stock, bond, or mutual fund.
Registrar
An institution or organization that is responsible for keeping records of bondholders and shareholders.
Sensex
An abbreviation of the Bombay Exchange Sensitive Index (Sensex) - the benchmark index of the Bombay Stock Exchange (BSE). It is composed of 30 of the largest and most actively-traded stocks on the BSE.
Warrant
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.
Write-Off
A reduction in the value of an asset or earnings by the amount of an expense or loss.
YOY - Year Over Year
A method of evaluating two or more measured events that compares the results of measurement at one time period with those from another time period, on an annualized basis.
Yield
Yield is the annual rate of return for any investment and is expressed as a percentage.
Derivatives
The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future, option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities. With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition of Securities.
Futures Contract
Futures Contract means a legally binding agreement to buy or sell the underlying security on a future date. Future contracts are the organized/standardized contracts in terms of quantity, quality (in case of commodities), delivery time and place for settlement on any date in future. The contract expires on a pre-specified date which is called the expiry date of the contract. On expiry, futures can be settled by delivery of the underlying asset or cash. Cash settlement enables the settlement of obligations arising out of the future/option contract in cash.
Option contract
Options Contract is a type of Derivatives Contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at end of a specified period. The buyer / holder of the option purchases the right from the seller/writer for a consideration which is called the premium. The seller/writer of an option is obligated to settle the option as per the terms of the contract when the buyer/holder exercises his right. The underlying asset could include securities, an index of prices of securities etc.
Under Securities Contracts (Regulations) Act,1956 options on securities has been defined as "option in securities" meaning a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities.
An Option to buy is called Call option and option to sell is called Put option. Further, if an option that is exercisable on or before the expiry date is called American option and one that is exercisable only on expiry date, is called European option. The price at which the option is to be exercised is called Strike price or Exercise price.
Therefore, in the case of American options the buyer has the right to exercise the option at anytime on or before the expiry date. This request for exercise is submitted to the Exchange, which randomly assigns the exercise request to the sellers of the options, who are obligated to settle the terms of the contract within a specified time frame.
As in the case of futures contracts, option contracts can be also be settled by delivery of the underlying asset or cash. However, unlike futures cash settlement in option contract entails paying/receiving the difference between the strike price/exercise price and the price of the underlying asset either at the time of expiry of the contract or at the time of exercise / assignment of the option contract.
The operations in the Indian market have been confined to call options known as teji, put options known as mandi, their combination in the form of straddles known as jhota or do ranga and bhav-bhav on stocks only. While in option trading markets in the world, options with exercise prices are available so that the call options are accordingly labeled as in-the- money, at-the-money or out-of-money in the Indian markets only out-of-moneycall options, i.e.options with an exercise price higher than the current stock price are traded. Hence the name teji for a value, the option premium. The buyer of the option is called teji lagaii-wal. Similarly, the put options traded are also those which are out-of-money options, i.e.,options with an exercise price lower than the present stock price. The writers of such options agree to buy a share in the event of its price falling below the exercise price, i.e., mandi , in consideration for a premium. The writer of an option of this type is called mandi khaii-wal while the buyer is a mandi lagaii-wal. Both teji and mandi usually have the expiry time at the stroke of 15 minutes before closing the time of trading of the next business day.
Index Futures and Index Option Contracts
Futures contract based on an index i.e. the underlying asset is the index, are known as Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These contracts derive their value from the value of the underlying index.
Similarly, the options contracts, which are based on some index, are known as Index options contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the right but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are generally European Style options i.e. they can be exercised / assigned only on the expiry date.
An index, in turn derives its value from the prices of securities that constitute the index and is created to represent the sentiments of the market as a whole or of a particular sector of the economy. Indices that represent the whole market are broad based indices and those that represent a particular sector are sectoral indices.
In the beginning futures and options were permitted only on S&P Nifty and BSE Sensex. Subsequently, sectoral indices were also permitted for derivatives trading subject to fulfilling the eligibility criteria. Derivative contracts may be permitted on an index if 80% of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in the index shall have a weightage of more than 5% in the index. The index is required to fulfill the eligibility criteria even after derivatives trading on the index has begun. If the index does not fulfill the criteria for 3 consecutive months, then derivative contracts on such index would be discontinued.
By its very nature, index cannot be delivered on maturity of the Index futures or Index option contracts therefore, these contracts are essentially cash settled on Expiry.
Bond Index
A bond index is used to measure the performance of bond markets. The index is used as a benchmark against which investment managers measure their performance. It is also used as a measure to compare the performance of different asset classes. The government bond market is the most liquid segment of the bond market.
Volatility Index
Volatility Index is a measure of expected stock market volatility, over a specified time period, conveyed by the prices of stock / index options. It depicts the collective sentiment of the market on the implied future volatility.
Currency Futures
Currency futures are contracts to buy or sell a specific underlying currency at a specific time in the future, for a specific price. Currency futures are exchange-traded contracts and they are standardized in terms of delivery date, amount and contract terms.
Currency future contracts allow investors to hedge against foreign exchange risk. Since these contracts are marked-to-market daily, investors can--by closing out their position--exit from their obligation to buy or sell the currency prior to the contract's delivery date.
Depository
A depository is an organisation which holds securities (like shares, debentures, bonds, government securities, mutual fund units etc.) of investors in electronic form at the request of the investors through a registered Depository Participant. It also provides services related to transactions in securities.
Depositories are registered with SEBI
At present two Depositories viz. National Securities Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL) are registered with SEBI.
Dematerialisation
27.Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited into the BO’s account with his DP.