Some Important
Banking Terms:
Accrued
interest: Interest due from issue date or
from the last coupon payment date to the settlement date. Accrued interest on
bonds must be added to their purchase price.
Arbitrage:
Buying a financial instrument in one
market in order to sell the same instrument at a higher price in another
market.
Ask
Price: The lowest price at which a dealer
is willing to sell a given security.
Asset-Backed
Securities (ABS): A type of security that is backed by
a pool of bank loans, leases, and other assets. Most ABS are backed by auto
loans and credit cards – these issues are very similar to mortgage-backed
securities.
At-the-money: The exercise price of a derivative that is closest to the
market price of the underlying instrument.
Basis
Point: One hundredth of 1%. A measure
normally used in the statement of interest rate e.g., a change from 5.75% to
5.81% is a change of 6 basis points.
Bear
Markets: Unfavorable markets associated with
falling prices and investor pessimism.
Bid-ask
Spread: The difference between a dealer’s
bid and ask price.
Bid
Price: The highest price offered by a
dealer to purchase a given security.
Blue
Chips: Blue chips are unsurpassed in
quality and have a long and stable record of earnings and dividends. They are
issued by large and well-established firms that have impeccable financial
credentials.
Bond:
Publicly traded long-term debt
securities, issued by corporations and governments, whereby the issuer agrees
to pay a fixed amount of interest over a specified period of time and to repay
a fixed amount of principal at maturity.
Book
Value: The amount of stockholders’ equity
in a firm equals the amount of the firm’s assets minus the firm’s liabilities
and preferred stock
Broker:
Individuals licensed by stock
exchanges to enable investors to buy and sell securities.
Brokerage
Fee: The commission charged by a broker.
Bull
Markets: Favorable markets associated with
rising prices and investor optimism.
Call
Option: The right to buy the underlying
securities at a specified exercise price on or before a specified expiration
date.
Callable
Bonds: Bonds that give the issuer the
right to redeem the bonds before their stated maturity.
Capital
Gain: The amount by which the proceeds
from the sale of a capital asset exceed its original purchase price.
Capital
Markets: The market in which long-term
securities such as stocks and bonds are bought and sold.
Regulated by SEBI (Security Exchange Board of India).
Certificate
of Deposits (CDs): Savings instrument in which funds
must remain on deposit for a specified period, and premature withdrawals incur
interest penalties.
Closed-end
(Mutual) Fund: A fund with a fixed number of
shares issued, and all trading is done between investors in the open market.
The share prices are determined by market prices instead of their net asset
value.
Collateral:
A specific asset pledged against
possible default on a bond. Mortgage bonds are backed by claims on property.
Collateral trusts bonds are backed by claims on other securities. Equipment
obligation bonds are backed by claims on equipment.
Commercial
Paper: Short-term and unsecured promissory
notes issued by corporations with very high credit standings.
Common
Stock: Equity investment representing
ownership in a corporation; each share represents a fractional ownership
interest in the firm.
Compound
Interest: Interest paid not only on the
initial deposit but also on any interest accumulated from one period to the
next.
Contract
Note: A note which must accompany every
security transaction which contains information such as the dealer’s name
(whether he is acting as principal or agent) and the date of contract.
Controlling
Shareholder: Any person who is, or group of
persons who together are, entitled to exercise or control the exercise of a
certain amount of shares in a company at a level (which differs by jurisdiction)
that triggers a mandatory general offer, or more of the voting power at general
meetings of the issuer, or who is or are in a position to control the
composition of a majority of the board of directors of the issuer.
Convertible
Bond: A bond with an option, allowing the
bondholder to exchange the bond for a specified number of shares of common
stock in the firm. A conversion price is the specified value of the shares for
which the bond may be exchanged. The conversion premium is the excess of the
bond’s value over the conversion price.
Corporate
Bond: Long-term debt issued by private
corporations.
Coupon: The feature on a bond that defines the amount of annual
interest income.
Coupon
Frequency: The number of coupon payments per
year.
Coupon
Rate: The annual rate of interest on the
bond’s face value that a bond’s issuer promises to pay the bondholder. It is
the bond’s interest payment per dollar of par value.
Covered
Warrants: Derivative call warrants on shares
which have been separately deposited by the issuer so that they are available
for delivery upon exercise.
Credit
Rating: An assessment of the likelihood of
an individual or business being able to meet its financial obligations. Credit
ratings are provided by credit agencies or rating agencies to verify the
financial strength of the issuer for investors.
Currency
Board: A monetary system in which the
monetary base is fully backed by foreign reserves. Any changes in the size of
the monetary base has to be fully matched by corresponding changes in the
foreign reserves.
Current
Yield: A return measure that indicates the
amount of current income a bond provides relative to its market price. It is
shown as: Coupon Rate divided by Price multiplied by 100%.
Custody
of Securities: Registration of securities in the
name of the person to whom a bank is accountable, or in the name of the bank’s
nominee; plus deposition of securities in a designated account with the bank’s
bankers or with any other institution providing custodial services.
Default
Risk: The possibility that a bond issuer
will default ie. fail to repay principal and interest in a timely manner.
Derivative
Call (Put) Warrants: Warrants issued by a third party
which grant the holder the right to buy (sell) the shares of a listed company
at a specified price.
Derivative
Instrument: Financial instrument whose value
depends on the value of another asset.
Discount
Bond: A bond selling below par, as
interest in-lieu to the bondholders.
Diversification: The inclusion of a number of different investment vehicles
in a portfolio in order to increase returns or be exposed to less risk.
Duration:
A measure of bond price volatility,
it captures both price and reinvestment risks to indicate how a bond will react
to different interest rate environments.
Earnings: The total profits of a company after taxation and interest.
Earnings
per Share (EPS): The amount of annual earnings
available to common stockholders as stated on a per share basis.
Earnings
Yield: The ratio of earnings to price
(E/P). The reciprocal is price earnings ratio (P/E).
Equity: Ownership of the company in the form of shares of common
stock.
Equity
Call Warrants: Warrants issued by a company which
give the holder the right to acquire new shares in that company at a specified
price and for a specified period of time.
Ex-dividend
(XD): A security which no longer carries
the right to the most recently declared dividend or the period of time between
the announcement of the dividend and the payment (usually two days before the
record date). For transactions during the ex-dividend period, the seller will
receive the dividend, not the buyer. Ex-dividend status is usually indicated in
newspapers with an (x) next to the stock’s or unit trust’s name.
Face
Value/ Nominal Value: The value of a financial instrument
as stated on the instrument. Interest is calculated on face/nominal value.
Fixed-income
Securities: Investment vehicles that offer a
fixed periodic return.
Fixed
Rate Bonds: Bonds bearing fixed interest
payments until maturity date.
Floating
Rate Bonds: Bonds bearing interest payments
that are tied to current interest rates.
Fundamental
Analysis: Research to predict stock value
that focuses on such determinants as earnings and dividends prospects,
expectations for future interest rates and risk evaluation of the firm.
Future
Value: The amount to which a current
deposit will grow over a period of time when it is placed in an account paying
compound interest.
Future
Value of an Annuity: The amount to which a stream of
equal cash flows that occur in equal intervals will grow over a period of time
when it is placed in an account paying compound interest.
Futures
Contract: A commitment to deliver a certain
amount of some specified item at some specified date in the future.
Hedge: A combination of two or more securities into a single
investment position for the purpose of reducing or eliminating risk.
Income: The amount of money an individual receives in a particular
time period.
Index
Fund: A mutual fund that holds shares in
proportion to their representation in a market index, such as the S&P 500.
Initial
Public Offering (IPO): An event
where a company sells its shares to the public for the first time. The company
can be referred to as an IPO for a period of time after the event.
Inside
Information: Non-public knowledge about a
company possessed by its officers, major owners, or other individuals with
privileged access to information.
Insider
Trading: The illegal use of non-public information
about a company to make profitable securities transactions
Intrinsic
Value: The difference of the exercise
price over the market price of the underlying asset.
Investment: A vehicle for funds expected to increase its value and/or
generate positive returns.
Investment
Adviser: A person who carries on a business
which provides investment advice with respect to securities and is registered
with the relevant regulator as an investment adviser.
IPO
price: The price of share set before being
traded on the stock exchange. Once the company has gone Initial Public
Offering, the stock price is determined by supply and demand.
Junk
Bond: High-risk securities that have
received low ratings (i.e. Standard & Poor’s BBB rating or below; or
Moody’s BBB rating or below) and as such, produce high yields, so long as they
do not go into default.
Leverage
Ratio: Financial ratios that measure the
amount of debt being used to support operations and the ability of the firm to
service its debt.
Libor: The London Interbank Offered Rate (or LIBOR) is a daily
reference rate based on the interest rates at which banks offer to lend
unsecured funds to other banks in the London wholesale money market (or
interbank market). The LIBOR rate is published daily by the British Banker’s
Association and will be slightly higher than the London Interbank Bid Rate
(LIBID), the rate at which banks are prepared to accept deposits.
Limit
Order: An order to buy (sell) securities
which specifies the highest (lowest) price at which the order is to be
transacted.
Limited
Company: The passive investors in a
partnership, who supply most of the capital and have liability limited to the
amount of their capital contributions.
Liquidity: The ability to convert an investment into cash quickly and
with little or no loss in value.
Listing: Quotation of the Initial Public Offering company’s shares
on the stock exchange for public trading.
Listing
Date: The date on which Initial Public
Offering stocks are first traded on the stock exchange by the public
Margin
Call: A notice to a client that it must
provide money to satisfy a minimum margin requirement set by an Exchange or by
a bank / broking firm.
Market
Capitalization: The product of the number of the company’s
outstanding ordinary shares and the market price of each share.
Market
Maker: A dealer who maintains an inventory
in one or more stocks and undertakes to make continuous two-sided quotes.
Market
Order: An order to buy or an order to sell
securities which is to be executed at the prevailing market price.
Money
Market: Market in which short-term
securities are bought and sold.
Regulated by RBI (Reserve Bank of India).
Mutual
Fund: A company that invests in and
professionally manages a diversified portfolio of securities and sells shares
of the portfolio to investors.
Net
Asset Value: The underlying value of a share of
stock in a particular mutual fund; also used with preferred stock.
Offer
for Sale: An offer to the public by, or on
behalf of, the holders of securities already in issue.
Offer
for Subscription: The offer of new securities to the
public by the issuer or by someone on behalf of the issuer.
Open-end
(Mutual) Fund: There is no limit to the number of
shares the fund can issue. The fund issues new shares of stock and fills the
purchase order with those new shares. Investors buy their shares from, and sell
them back to, the mutual fund itself. The share prices are determined by their
net asset value.
Open
Offer: An offer to current holders of
securities to subscribe for securities whether or not in proportion to their
existing holdings.
Option: A security that gives the holder the right to buy or sell a
certain amount of an underlying financial asset at a specified price for a
specified period of time.
Oversubscribed: When an Initial Public Offering has more applications than
actual shares available. Investors will often apply for more shares than
required in anticipation of only receiving a fraction of the requested number.
Investors and underwriters will often look to see if an IPO is oversubscribed
as an indication of the public’s perception of the business potential of the
IPO company.
Par
Bond: A bond selling at par (i.e. at its
face value).
Par
Value: The face value of a security.
Perpetual
Bonds: Bonds which have no maturity date.
Placing: Obtaining subscriptions for, or the sale of, primary
market, where the new securities of issuing companies are initially sold.
Portfolio: A collection of investment vehicles assembled to meet one
or more investment goals.
Preference
Shares: A corporate security that pays a
fixed dividend each period. It is senior to ordinary shares but junior to bonds
in its claims on corporate income and assets in case of bankruptcy.
Premium
(Warrants): The difference of the market price
of a warrant over its intrinsic value.
Premium
Bond: Bond selling above par.
Present
Value: The amount to which a future
deposit will discount back to present when it is depreciated in an account
paying compound interest.
Present
Value of an Annuity: The amount to which a stream of
equal cash flows that occur in equal intervals will discount back to present
when it is depreciated in an account paying compound interest.
Price/Earnings
Ratio (P/E): The measure to determine how the
market is pricing the company’s common stock. The price/earnings (P/E) ratio
relates the company’s earnings per share (EPS) to the market price of its
stock.
Privatization: The sale of government-owned equity in nationalized
industry or other commercial enterprises to private investors.
Prospectus: A detailed report published by the Initial Public Offering
company, which includes all terms and conditions, application procedures, IPO
prices etc, for the IPO
Put
Option: The right to sell the underlying
securities at a specified exercise price on of before a specified expiration
date.
Rate
of Return: A percentage showing the amount of
investment gain or loss against the initial investment.
Real
Interest Rate: The net interest rate over the inflation
rate. The growth rate of purchasing power derived from an investment.
Redemption
Value: The value of a bond when redeemed.
Reinvestment
Value: The rate at which an investor
assumes interest payments made on a bond which can be reinvested over the life
of that security.
Relative
Strength Index (RSI): A stock’s price that changes over a
period of time relative to that of a market index such as the Standard &
Poor’s 500, usually measured on a scale from 1 to 100, 1 being the worst and
100 being the best.
Repurchase
Agreement: An arrangement in which a security
is sold and later bought back at an agreed price and time.
Resistance
Level: A price at which sellers
consistently outnumber buyers, preventing further price rises.
Return: Amount of investment gain or loss.
Rights
Issue: An offer by way of rights to
current holders of securities that allows them to subscribe for securities in
proportion to their existing holdings.
Risk-Averse,
Risk-Neutral, Risk-Taking:
- Risk-averse describes an investor who requires greater
return in exchange for greater risk.
- Risk-neutral describes an investor who does not require
greater return in exchange for greater risk.
- Risk-taking describes an investor who will accept a
lower return in exchange for greater risk.
Senior
Bond: A bond that has priority over other
bonds in claiming assets and dividends.
Short
Hedge: A transaction that protects the
value of an asset held by taking a short position in a futures contract.
Settlement: Conclusion of a securities transaction when a customer pays
a broker/dealer for securities purchased or delivered, securities sold, and
receives from the broker the proceeds of a sale.
Short
Position: Investors sell securities in the
hope that they will decrease in value and can be bought at a later date for
profit.
Short
Selling: The sale of borrowed securities,
their eventual repurchase by the short seller at a lower price and their return
to the lender.
Speculation: The process of buying investment vehicles in which the
future value and level of expected earnings are highly uncertain.
Stock
Splits: Wholesale changes in the number of
shares. For example, a two for one split doubles the number of shares but does
not change the share capital.
Subordinated
Bond: An issue that ranks after secured
debt, debenture, and other bonds, and after some general creditors in its claim
on assets and earnings. Owners of this kind of bond stand last in line among
creditors, but before equity holders, when an issuer fails financially.
Substantial
Shareholder: A person acquires an interest in
relevant share capital equal to, or exceeding, 10% of the share capital.
Support
Level: A price at which buyers
consistently outnumber sellers, preventing further price falls.
Technical
Analysis: A method of evaluating securities
by relying on the assumption that market data, such as charts of price, volume,
and open interest, can help predict future (usually short-term) market trends.
Contrasted with fundamental analysis which involves the study of financial
accounts and other information about the company. (It is an attempt to predict
movements in security prices from their trading volume history.)
Time
Horizon: The duration of time an investment
is intended for.
Trading
Rules: Stipulation of parameters for
opening and intra-day quotations, permissible spreads according to the prices
of securities available for trading and board lot sizes for each security.
Trust
Deed: A formal document that creates a
trust. It states the purpose and terms of the name of the trustees and
beneficiaries.
Underlying
Security: The security subject to being
purchased or sold upon exercise of the option contract.
Valuation: Process by which an investor determines the worth of a
security using risk and return concept.
Warrant: An option for a longer period of time giving the buyer the
right to buy a number of shares of common stock in company at a specified price
for a specified period of time.
Window
Dressing: Financial adjustments made solely
for the purpose of accounting presentation, normally at the time of auditing of
company accounts.
Yield
(Internal rate of Return): The
compound annual rate of return earned by an investment
Yield to Maturity: The rate of
return yield by a bond held to maturity when both compound interest payments
and the investor’s capital gain or loss on the security are taken into account.
Zero
Coupon Bond: A bond with no coupon that is sold
at a deep discount from par value.
