Glossary On Financial Terms

Q) What is the difference between stocks and shares?

Ans: “Stock” is a general term used to describe the shares of any company and "shares"
refers to a specific stock of a particular company. So, if investors say they own stocks, they
are generally referring to their overall ownership in one or more companies. If investors say
they own shares - the question then becomes - shares in what company?
Stocks: A type of security that signifies ownership in a corporation and represents a claim on
part of the corporation's assets and earnings.
Shares: A unit of ownership interest in a corporation or financial asset. While owning shares
in a business does not mean that the shareholder has direct control over the business's day-
to-day operations, being a shareholder does entitle the possessor to an equal distribution
in any profits, if any are declared in the form of dividends. The two main types of shares are
common shares and preferred shares.

Capital Markets: The capital market (securities markets) is the market for securities, where
companies and the government can raise long-term funds. The capital market includes the
stock market and the bond market. It is a place where investors come together to buy and sell
shares.

Primary Markets: The primary market is that part of the capital markets that deals with the
issuance of new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done through a syndicate
of securities dealers. The process of selling new issues to investors is called underwriting. In the
case of a new stock issue, this sale is called an initial public offering (IPO). Dealers earn a
commission that is built into the price of the security offering, though it can be found in the
prospectus.

Secondary Market: The secondary market is the financial market for trading of securities that
have already been issued in an initial private or public offering.

Dividend
The periodic, usually quarterly, payment made by a corporation to its shareholders, generally
expressed as dividend per share. Dividends represent earnings that are not reinvested by the
corporation. Some stocks pay no dividends and others, such as utility companies pay
substantial ones that represent a large portion of the total return a shareholder will get from his
investment. Dividends are a type of distribution and are usually taxable in year received.

Equity is, normally, ownership or percentage of ownership in a company.

Equity Share is a) a share or class of shares whether or not the share carries voting rights, b)
any warrants, options or rights entitling their holders to purchase or acquire the shares
referred to under (a), or c. other prescribed securities.

Preference Shares usually, non-voting capital stock that pays dividends at a specified rate
and has preference over common stock in the payment of dividends and the liquidation of
assets.

Debenture
A bond issued by a corporation which is secured by the general credit or promise to pay of the
issuer. It is not backed by collateral such as tangible assets.
Example: 1. A certificate or voucher acknowledging a debt.
2. An unsecured bond issued by a civil or governmental corporation or
agency and backed only by the credit standing of the issuer.
Derivatives:
Financial instruments, such as futures and options, which derive their value from underlying
securities including bonds, bills, currencies, and equities. Equity derivatives are financial
derivative products whose value is dependent on the value of an underlying share or group of
shares.

Underlying Security
The security that must be delivered when another security is exercised. For example, if a call
option is exercised, then the underlying stock is delivered to the call owner. Warrants, rights,
options, and convertible securities all have underlying securities. For futures options, futures are
the underlying security.

Futures
Investment contracts which specify the quantity and price of a commodity to be purchased or sold
at a later date. On contract date, the buyer must take physical possession or make delivery of the
commodity, which can only be avoided by closing out the contract(s) before that date. Futures
can be used for speculation or hedging.

Option
A contract that gives the owner the right, if exercised, to buy or sell a security or basket of
securities (index) at a specific price within a specific time limit. Usually, they are traded as
securities themselves, with buyers and sellers trying to profit from price changes. They are
generally available for 1 to 9 months, with some longer term options (called LEAPS) also
available for selected securities. Stock option contracts are generally for the right to buy or sell
100 shares of the underlying stock (100 is the multiplier). Trading in options should only be
undertaken by sophisticated investors.

Call Option
A call option gives the owner the right, but not the obligation, to buy the underlying stock at a
given price (the strike price) by a given time (the expiration date). The owner of the call is
speculating that the underlying stock will go up in value, hence, increasing the value of the option.
The purpose can be to speculate with the option (hope it goes up and sell for a profit), to invest in
the underlying stock at a locked in price if the stock price goes high enough, or to generate
income. Each option contract equals 100 shares of stock. For example, an AAA MAR 65 call,
would give the owner the right to buy 100 shares of AAA at $65 (strike price) per share between
now and the third Friday in March (expiration date).

Put Option
A put option gives the owner the right, but not the obligation, to sell the underlying stock at a
given price (the strike price ) by a given time (the expiration date). The owner is speculating that
the option will go up in value and the underlying stock will go down in value. The purpose can be
to either speculate with the option (hope it goes up and sell for a profit) or trade the underlying
stock at a locked in price if the stock price goes down enough. For example, an AAA MAR 65 put
would give the owner the right to sell 100 shares of AAA at $65 (strike price) per share between
now and the third Friday in March (expiration date).

Hedging
An investment strategy of lowering risk by buying securities that have offsetting risk
characteristics. A perfect hedge eliminates risk entirely. Hedging strategies lower return since
there is a cost involved in hedging. For example, a portfolio manager could short a futures
contract which will perfectly offset any decrease in the value of the portfolio. Options and short
selling stock can also be used for hedging. Hedge funds are investment pools that are free to use
any hedging techniques they desire and they often make large bets in a relatively small number
of different holdings.

Intraday Trading
Intraday share trading refers to the buying and selling (or vise versa) of the same script in the
same trading session ( on the same day).

Portfolio Management:
Where assets are combined into a portfolio that fits the investor's preferences (eg, level of
risk) and needs (eg, regular dividends).
The aim of Portfolio Management is to achieve the maximum return from a portfolio which has
been delegated to be managed by an individual manager or financial institution. The manager
has to balance the parameters which define a good investment ie security, liquidity and return.
The goal is to obtain the highest return for the client of the managed portfolio.

Blue Chip Companies:

A blue chip stock is the stock of a well-established company having stable earnings and no
extensive liabilities. Most blue chip stocks pay regular dividends, even when business is faring
worse than usual. They are valued by investors seeking relative safety and stability, though
prices per share are usually high.

Bond A long-term debt instrument on which the issuer pays interest periodically, known as
‘Coupon’. Bonds are secured by COLLATERAL in the form of immovable property. While
generally, bonds have a definite MATURITY, ‘Perpetual Bonds’ are securities without any
maturity. In the U.S., the term DEBENTURES refers to long-term debt instruments which are
not secured by specific collateral, so as to distinguish them from bonds.

NASDAQ An acronym for National Association of Security Dealers Automated Quotations

System, which is a nationwide network of computers and other electronic equipment that
connects dealers in the over-the-counter market across the U.S. The system provides the latest
BID and ASKING PRICES quoted for any security by different dealers. This enables an investor
to have his or her transaction done at the best price. Due to NASDAQ, the over-the-counter
market in the U.S. is like a vast but convenient trading floor on which several thousand stocks
are traded.

National Stock Exchange (NSE) It is a nationwide screen-based trading network using

computers, satellite link and electronic media that facilitate transactions in securities by
investors across India. The idea of this model exchange (traced to the Pherwani Committee
recommendations) was an answer to the deficiencies of the older stock exchanges as reflected
in settlement delays, price rigging and a lack of transparency.

Volatility
The measure of the tendency of prices to fluctuate widely. Prices of small companies tend to be
more volatile than those of large corporations. Beta is a measure of volatility.

Liquidity
The ability to turn an asset into cash. A highly liquid asset is easy to sell because an active
market exists that sets prices which are continuously adjusted for supply and demand. An
example is a listed stock or mutual fund. A less liquid asset is real estate or a collectible
Lot
A group of identical UNITS (for securities) or nearly identical units (for collectibles) of an
investment that are traded at the same time and price. Open lots are the contents of open
investments and can be long (buys) or short (short sell). Closed lots are the contents of closed
investments and can be long (sell) or short (buy to cover).

Net Asset Value (NAV)

The per share price of a mutual fund. For a no-load fund, NAV is the price received by both
buyers and sellers. For front loaded mutual funds, NAV is equivalent of the bid price (what
shareholders can get for selling a share), while the offering price is the price buyers must pay per
share (and includes front load). The NAV is usually calculated at the end of each trading day by
taking the closing prices of all securities owned plus cash and equivalents and subtracting all
liabilities then dividing by the number of shares outstanding, which for open-end funds, fluctuates
depending on daily number of redemptions and purchases. Many new funds are issued at a NAV
of $10. After a distribution, the NAV falls by the amount equal to the distribution.

Depository A system of computerized book-entry of securities. This arrangement enables a

transfer of shares through a mere book-entry rather than the physical movement of certificates.
This is because the scrips are ‘dematerialized’ or alternatively, ‘immobilized’ under the system.

Bear A person who expects share prices in general to decline and who is likely to indulge in
SHORT SALES.

Bear Market A long period of declining security prices. Widespread expectations of a fall in
corporate profits or a slowdown in general economic activity can bring about a bear market.

Bull A person who expects share prices in general to move up and who is likely to take a long
position in the stock market.

Transfer agent: The person or firm that cancels the shares in the name of the seller and

The complete lifecycle of a U.S equity trade : Order Capture, its execution in the market,
affirmation/confirmation, foreign exchange, clearing, settlement, and reporting.

Mutual Fund
Fund operated by an investment company that raises money from shareholders and invests it
in stocks, bonds, options, commodities or money market securities. The sum of the collected
amount is called ‘Corpus’.

Retained Earnings
Net profits kept to accumulate in a business after dividends are paid.

Custodian
A financial institution that has the legal responsibility for a customer's securities. This implies
management as well as safekeeping.

Bonus Shares The issue of shares to the shareholders of a company, by capitalizing a part of
the company’s reserves. The decision to issue bonus shares, or stock DIVIDEND as in the U.S.,
may be in response to the need to signal an affirmation to the expectations of shareholders that
the prospects of the company are bright; or it may be with the motive of bringing down the share
price in absolute terms, in order to ensure continuing investor interest. Following a bonus issue,
though the number of total shares increases, the proportional ownership of shareholders does not
change. The magnitude of a bonus issue is determined by taking into account certain rules, laid
down for the purpose. For example, the issue can be made out of free reserves created by
genuine profits or by share PREMIUM collected in cash only. Also, the residual reserves, after the
proposed capitalization, must be at least 40 percent of the increased PAID-UP CAPITAL. These
and other guidelines must be satisfied by a company that is considering a bonus issue. )See also
MARKET CAPITALIZATION.)

Subprime
The term used for lending to borrowers at a higher rate than the prime rate as they have a higher
risk of default. Subprime borrowers typically have low credit scores due to prior bankruptcy,
missed loan payments, home repossession etc.

Settlement
The process whereby obligations arising under a derivative transaction are discharged through
payment or delivery or both. What is a settlement cycle?

The accounting period for the securities traded on the Exchange. On the NSE, the cycle begins
on Wednesday and ends on the following Tuesday, and on the BSE the cycle commences on
Monday and ends on Friday. At the end of this period, the obligations of each broker are
calculated and the brokers settle their respective obligations as per the rules, bye-laws and
regulations of the Clearing Corporation.

If a transaction is entered on the first day of the settlement, the same will be settled on the eighth
working day excluding the day of transaction. However, if the same is done on the last day of the
settlement, it will be settled on the fourth working day excluding the day of transaction.

What is a Split?

A Split is book entry wherein the face value of the share is altered to create a greater number of
shares outstanding without calling for fresh capital or altering the share capital account. For
example, if a company announces a two-way split, it means that a share of the face value of Rs
10 is split into two shares of face value of Rs 5 each and a person holding one share now holds
two shares.

How does the SHARE MARKETS works?

Share market is a place where companies list their shares available to common public for buying
& selling.
these shares are now mostly held in demat form, i.e. electronic and not physical.

share - a share entitles you to own a certain % of the company. if the company has total 100
shares listed and you buy 1, then you are 1% owner of the company and are entitled to
participate in AGM, vote for general resolutions or receive dividends (money) if the company
declares some.
at the end of the day, all shares in company are summed up - total buy and total sell. this should
tally by the end of 2 days (T+2). this means that if you sell 1 share today, you need to transfer 1
share from your account so that it can be given to someone else who has bought 1 share. this
entire process should be complete within 2 days.
complications start from here and if i write more, you will start getting confused. you can read up
100s of articles on stock markets on the net. you can post further questions if they are more
specific.
Cash Flow Statement

The terms "Cash Flow Statement" and "Statement of Cash Flows" are interchangeable.

The Cash Flow Statement is relatively easy to prepare. It is better to use logic and "common
sense" to understand what is happening and how information should be presented in this
statement.

The Income Statement and Balance Sheet are both prepared using Accrual Accounting.
This involves making a combination of adjustments to the books, including accruals,
deferrals, apportioning costs such as depreciation, and charging Income with future
expenditure such as warranty claims and post-retirement benefits. Every time we make an
adjustment in the books and records, the resulting financial statements comply with

The Cash Flow Statement is fairly simple. There are only 3 sections, which report
Increases and Decreases in Cash. The sections are always presented in the following
order.

Operating Cash Flows -

Inflows - Money received from customers for sales of products or services.
Outflows - Money paid to suppliers, employees, etc. for normal business expenses.

Investing Cash Flows -

Inflows - Money received from selling assets, including land, buildings equipment, stocks, bonds.
Money received from loans made to others, such as Notes Receivable.
Outflows - Money paid to purchase assets; and money paid out to make loans to others.

Financing Cash Flows -

Inflows - Money received from stockholders purchasing company stock, from bondholders for
bonds payable, and money borrowed from banks and other creditors.
Outflows - Money paid to stockholders for dividends, to bondholders, banks and other creditors.
The Statement of Cash Flows also reconciles the Cash balance from the beginning to end of the
year. The beginning and ending Cash balances can be found on the Balance Sheet.
Despite these statistics, most accounting textbooks teach the Direct Method. You should also
note that when the Direct Method is used, the statement must also include a supplemental
calculation of Operating Cash Flows using the Indirect Method. Accountants should be able to do
both methods.

Preparing the Statement of Cash Flows

I generally include the cash flow worksheet as part of my 13-column trial balance worksheet. I
use the space in the far right side of the trial balance worksheet to analyze cash flows for all
accounts. Calculate the difference between the beginning and ending balances for all accounts,
and determine if the change reflects an increase or decrease in cash flow. Mark each account
with and O for Operating cash flows, I for Investing cash flows and F for financing cash flows.
Next lay out the general format of the statement on a piece of paper or spreadsheet. I generally
identify the Investing and Financing activities first, and put them in the appropriate place. There
should only be a few items that fall in these categories. Most of the accounts will be Operating
activities. These include all Income and Expense accounts - the majority of accounts on the trial
balance.