Finance Made Easy - Part II

sushobhan

sushobhan

Sushobhan Sanyal
Dear All,

When I originally started the thread "Finance Made Easy", I never dreamt that it would become so popular. I have got some extremely good feedbacks regarding "Finance Made Easy".

It is all this praise that has enabled me to focus on my next thread i.e. "Finance Made Easy - Part II"

I hope you will enjoy this thread much more than you enjoyed the earlier one.
 
Here is a collection from my financial library of e-docs which will enhance your knowledge regarding finer aspects of finance:
 
Understand These Stock Terms

A GROUP -> The A group consists of 150 scrips in which carry forward (badla) facility is provided.

ACID TEST RATIO -> It is the ratio indicated by dividing the company's current assets to the currents liabilities. It reflects the financial strength of a company and hence called Acid test ratio. Also known as quick ratio.

ACTIVE MARKET -> Heavy volume for a specific share or the entire exchange.

ANNUAL REPORT -> Audited document sent to the share holders at the end of each fiscal year reporting the financial results of the company.

ASKING PRICE -> The lowest price at which someone is willing to sell a share. Also known as offer.

ASSUMED BOND -> Bond which is issued by one company but whose liability is taken over by another company.

B1 GROUP -> This is also called as non-specified group and consists of good quality, high volume scrips.

B2 GROUP -> This is also called as non-specified group and these are low market capitalisation, thinly traded stocks.

BADLA -> Carry forward trading.

BEAR MARKET -> A bear market refers to a continuous phase of declining share prices. Bear markets are characterised by overall pessimism as market participants expect prices to decline in the future.

BID -> The highest price at which someone is willing to buy a share.

BLUE-CHIP -> The term 'Blue-chip' refers to stock of well known companies with stable businesses. These shares are actively traded, as the company's growth prospects are considered good.

BONDS -> They are loan instruments. A bond holder is the creditor of the company. Bonds are normally issued for a minimum period of 3 years for a specific interest rate.

BONUS SHARES -> Bonus shares are the shares given to share holders free of cost.

BOOK BUILDING -> The process of securing the optimum price for a company's share. The issuing company decides the price of the security by asking investors how many shares and at what price they would be interested in.

BOOK RUNNER -> Institutions that arranges and manages the book building process for the new public issue.

BOOK VALUE -> It is the value at which an asset is carried on a balance sheet. The book value of a share is obtained by dividing the equity reserves of the company by the number of shares issued.

BROKERAGE -> Brokerage is the commission charged by a broker. The maximum brokerage chargeable, as stipulated by SEBI is at present 2.5% of the trade value.

BULL MARKET -> A bull market refers to a continuous phase of rising share prices. Bull markets are characterised by optimism about the upward movement of prices in the future.

BUY-BACK -> The repurchase by a company of its own stock or bonds.

CAPITAL MARKET -> Markets where the capital funds -debt and equity are traded. Included are private placement sources of debt and equity as well as organized markets and exchanges.

CARRY FORWARD TRADING -> The process of postponement of the payment by an investor for the purchase of securities from one settlement to another by paying a charge is called carry forward trading.

CIRCUIT FILTER or CIRCUIT BREAKER -> The limit imposed by the stock exchange to control fluctuations in share prices in one session. The circuit filter for A group stock is 8% and that of B1 group is 25%.

CLOSING PRICE -> The trade price of a security at the end of a trading day. Based on the closing price of the security, the base price at the beginning of the next trading day is calculated.

COMMON STOCK -> A stock with a fixed dividend that is paid before preferred stock dividends. Generally, the preferred dividend is higher than the common stock dividend.

CONTANGO -> This is one of the special conditions where a minimum quantity is specified for an order. In carry forward transactions when the buyer pays interest on borrowed funds it is known as Contango charges (Vyaj Badla). When the seller pays a charge for borrowing securities it is undha badla.

CUM DIVIDEND -> The shares that are traded on dividend containing basis are called Cum dividend shares. The Ex dividend shares become Cum dividend, immediately after the company declares dividend.

CONVERTIBLE BONDS -> Bonds that can be exchanged at the option of the holder for preference shares or equity shares at a pre-decided price.

CURRENT YIELD -> Dividend or interest received calculated as a percentage of a share's or debenture's currents market price.

DEBENTURE -> Same as Bond.

DEFERRED EQUITY -> A common term for convertible debentures/ bonds referring to their equity component which will ultimately get converted into equity shares.

DEMAT TRADING -> Demat trading is trading of shares that are in the electronic form or dematerialised shares. Dematerialisation is the process by which shares in the electronic form are cancelled and credit in the form of electronic balances are maintained on highly secure systems at the depository.

DIVIDEND -> Dividend is the amount of money or stock that a company distributes to its shareholders, in the ratio that they hold shares in the company.

EQUITY -> Same as stock.

EX DIVIDEND SHARES -> Ex dividend is the price of the share which does not contain dividend declared by the company. The buyer is not entitled to the dividend amount.

FACE VALUE -> The nominal value printed on the face of the share, debenture or bond. Also known as Par value.

FORWARD TRADING -> Forward trading refers to trading where contracts traded today are settled at some future date at prices decided today.

GDR-> Global Depository Receipt. It is an instrument issued abroad, listed and traded on foreign stock markets. A GDR is convertible into shares, which are listed and traded on the domestic exchange, the dividend being paid in the domestic currency.

IPO -> Initial public offer. It is the first offering of equity shares made by a company to the general public. Prior to the IPO the company's shares are held by a selected group of people and are not available to the public.

LIQUIDITY -> Liquidity refers to the amount of transactions in particular counter, the larger the volume of trading, higher the liquidity.

LISTED SECURITIES -> Securities listed on a stock exchange, as opposed to 'permitted securities', which are not listed but can be traded on the exchange.

LYON'S RANGE -> Calcutta stock exchange.

MARKET CAPITALISATION -> Market capitalisation is the total market value, at the current stock exchange list price multiplied by the total number of equity shares issued by a company.

NASDAQ -> Short for National Association of Securities Dealer Automated Quotations system, a US based computerised stock exchange designed to facilitate over-the-counter stock trading.

NET WORTH -> It is the total of equity share capital and reserves. It is also the value of total assets minus total liabilities.

NIFTY -> Fifty selected stocks of National Stock Exchange.

NON-CONVERTIBLE BONDS -> Regular bonds are also called non-convertible bonds.

NSE -> National Stock Exchange.

ONLINE TRADING -> The sale and purchase of securities over the internet or through a broker's proprietary software.

OVER THE COUNTER TRADING -> A market (unlike an exchange) where dispersed dealers trade, using a network of phones and computer screens. The NASDAQ market is an OTC market in USA.

P/E RATIO or PRICE-EARNINGS RATIO -> The P/E ratio is calculated by dividing the stock's market price per share to the firm's earnings per share, for the most recent 12-month period. P/E ratio is a measure of the investors idea of a stock's growth and risk prospects.

PAR VALUE -> Face value, also referred to as the Par Value, is the national value of the share derived from the total capital issued by the company and the number of shares issued to raise that capital.

PORTFOLIO -> A collection of assets of an individual or organization. A portfolio may contain all the financial assets such as shares, debentures, government bonds by the same individual or organization.

PREFERRED STOCK -> A stock with voting and dividends rights. In the event of liquidity, the preferred stock holders are given a priority aver the common stock holders.

PRIMARY MARKET -> A market for new issues of shares, debentures and bonds, where investors apply directly to the issuer for allotment on a pre-specified basis (price, minimum application amount etc.)

SCRIP -> Same as stock.

SECONDARY MARKET -> A market of buyers and sellers who trade in securities that have already been issued in the primary market. Distinguished from the primary market in which the issuer sells shares directly to the investor.

SEBI -> Short for Securities and Exchange Board of India. The regulator for the Indian capital markets.

SENSEX -> Measure of the performance of the collection of 30 "blue-chip' stocks traded on the BSE, considered to represent the barometer of market activity and sentiment.

SETTLEMENT -> Scrip-wise netting of trades by a broker after a trading period is over.

SETTLEMENT DATE -> The date on which the transactions between members of a stock exchange, done during a particular trading period, are settled by the delivery/receipt of shares.

SHARE CERTIFICATE -> Share certificate is a document that certifies a person's nominal value and its sale price. It is the amount in excess of the face of a share charged by a company on its share issue.

STOCK -> Stock means representation of ownership in a company. Stock, share, security. equity and scrip mean the same.

STOCK EXCHANGE -> Stock exchange is an organized marketplace for buying and selling listed securities. Stock exchange is also known as bourse.

STOCK INDEX -> Stock index is a measurement of the trend of share prices. The BSE, NSE, NASDAQ are the three most widely quoted market indices here.

STOCK SPLIT -> When a company splits its stock, it means that it will issue additional shares to the existing investors by reducing the face value of a stock.

STOCK TRADING -> buying and selling of stocks is called as stock trading.

STOCKBROKER -> A member of the stock exchange who is licensed to buy or sell shares on his own or his client's behalf. He charges a commission brokerage on the deals.

UNDERVALUED SHARES -> Shares that are traded below their book value or the price-earning ratio.

YIELD -> Yield is the return earned by the investor or shareholder on his investment.​
 
Understand Book Building

Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria.

The Process - The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. The Issuer specifies the number of securities to be issued and the price band for orders. The Issuer also appoints syndicate members with whom orders can be placed by the investors. Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction.

A Book should remain open for a minimum of 5 days. Bids cannot be entered less than the floor price. Bids can be revised by the bidder before the issue closes. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include -
1. Price Aggression
2. Investor quality
3. Earliness of bids, etc.

The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities.Generally, the number of shares are fixed, the issue size gets frozen based on the price per share discovered through the book building process.

Allocation of securities is made to the successful bidders. Book Building is a good concept and represents a capital market which is in the process of maturing.

Guidelines for Book Building - Rules governing book building is covered in Chapter XI of the Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000.

BSE's Book Building System - BSE offers the book building services through the Book Building software that runs on the BSE Private network.
This system is one of the largest electronic book building networks anywhere spanning over 350 Indian cities through over 7000 Trader Work Stations via eased lines, VSATs and Campus LANS. The software is operated through book-runners of the issue and by the syndicate member brokers. Through this book, the syndicate member brokers on behalf of themselves or their clients' place orders.

Bids are placed electronically through syndicate members and the information is collected on line real-time until the bid date ends. In order to maintain transparency, the software gives visual graphs displaying price v/s quantity on the terminals.

Initial Public Offerings - Corporates may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book building method or a combination of both.

In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner:
1. 100% of the net offer to the public through the book building route.
2. 75% of the net offer to the public through the book building process and 3. 25% through the fixed price portion.


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What is Stop Loss?

​
A stop loss is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit) or a limit order (fixed or pre-determined price).

With a stop order, the trader does not have to actively monitor how a stock is performing. However because the order is triggered automatically when the stop price is reached, the stop price could be activated by a short-term fluctuation in a security's price. Once the stop price is reached, the stop order becomes a market order or a limit order.

In a fast-moving volatile market, the price at which the trade is executed may be much different from the stop price in the case of a market order. Alternatively in the case of a limit order the trade may or may not get executed at all. This happens when there are no buyers or sellers available at the limit price.

Types of Stop Loss order

1) Stop Loss Limit Order - A stop loss limit order is an order to buy a security at no more (or sell at no less) than a specified limit price. This gives the trader some control over the price at which the trade is executed, but may prevent the order from being executed.

A stop loss buy limit order can only be executed by the exchange at the limit price or lower. For example, if an trader is short and wants to protect his short position but doesn't want to pay more than Rs.100 for the stock, the investor can place a stop loss buy limit order to buy the stock at any price up to Rs.100. By entering a limit order rather than a market order, the investor will not be caught buying the stock at Rs.110 if the price rises sharply.

Alternatively a stop loss sell limit order can only be executed at the limit price or higher.

The main advantage of a stop loss limit order is that the trader has total control over the price at which the order is executed. The main disadvantage of the stop loss limit order is that in a fast moving volatile market your stop loss order may not get executed if there are no buyers/sellers at the limit price.

2) Stop Loss Market Order - A stop loss market order is an order to buy (or sell) a security once the price of the security climbed above (or dropped below) a specified stop price. When the specified stop price is reached, the stop order is entered as a market order (no limit). In other words a stop loss market order is a order to buy or sell a security at the current market price prevailing at the time the stop order is triggered. This type of stop loss order gives the trader no control over the price at which the trade will be executed.

A sell stop market order is a order to sell at the best available price after the price goes below the stop price. A sell stop price is always below the current market price. For example, if an trader holds a stock currently valued at Rs.100 and is worried that the value may drop, he/she can place a sell stop order at Rs.90. If the share price drops to Rs.90, the exchange will sell the order at the next available price. This can limit the traders losses (if the stop price is at or below the purchase price) or lock in some of the profits.

A buy stop market order is typically used to limit a loss (or to protect an existing profit) on a short sale. A buy stop price is always above the current market price. For example, if an trader sells a stock short hoping the stock price goes down in order to book profits at a lower price, the trader may use a buy stop order to protect himself against losses if the price goes too high.

The main advantage of a stop loss market order is that the stop loss order will always get executed. The main disadvantage of the stop loss market is that the trader has no control over the price at which the transaction is executed.

Conclusion - Stop loss orders are great insurance policies that cost you nothing and can save you a fortune. Unless you plan to hold a stock forever, you should consider using them to protect yourself.
 
great going sushobhan

Glad that you are back :) .. is it possible to have similar " SUBJECT made easy" for other subjects as well ? that would be just amazing !!
 
Here are two more documents from my e-library that will help finance students to understand two very important concepts in finance.
 
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