Stock Market Terminology for Beginners

Key Factors and Indicators to be considered before making Investment in Capital Market:

Investors have a different mindset when they decide about investing in a particular avenue. Every individual wants his saving to be invested in the most secure and liquid way. However, the decision varies for every individual depending upon their risk aptitude. Investors shall look at the Fundamental part of the company and bifurcate them into quantitative and qualitative aspects before making an investment in the companies listed in the capital market.

By the end of the blog, you will be able to know the basic terminology used in the capital market.

Share: Total capital of the company is divided into units of small denomination. one of the units into which the capital of the company is divided is called a Share. for example, in one company the total capital of Rs 7,00,000 is divided into 7,000 units of Rs 100 each then each unit of Rs 100 is called a Share.

Capital: Any investment done by the owner in the business is called capital. It must be provided by the owner and it must be of some value. it also should be used in the business. In the case of sole proprietorship business, the proprietor brings capital. In the case of the partnership business, partners bring capital. In the case of a company, shareholders bring capital and they are the owners of the company.

Authorized Capital: This is the maximum capital that the company is authorized to raise and this amount is stated in the memorandum of association. This is also described as 'Registered capital' or 'Nominal Capital'.

Issued Capital: This is the part of the capital that can be offered to public/private placement for a subscription. If ABC ltd issued 1,00,000 units of shares of Rs 100 each then the issued capital of ABC ltd is Rs 1,00,00,000.

Paid-up Capital: It refers to that part of the capital that has been actually paid up by the shareholders. If ABC ltd issued 1,00,000 units of shares of Rs 100 each and all the shareholders fully paid the call money then Rs 1,00,00,000 is the paid-up capital. But in case some shareholders fail to pay the call money then such defaulted amount is known as calls in arrears. In our above example if 20,000 shares have defaulted then paid-up capital will be 80,00,000.

Minimum Subscription: In the case where at least fifty percent of the total shares issued publicly cannot be sold failing a guarantee/underwriting agreement on the subscription of at least fifty percent of the publicly issued shares, no shares shall be allotted.

Under Subscription: Due to poor response, all the shares offered may not be taken by the public which is known as under subscription. If ABC ltd issued 1,00,000 units of shares to the general public but only 60,000 units of share are subscribed by the public then it is the case of under subscription.

Over Subscription: It is the situation when the issuing company receives an application for a share exceeding the total number of shares offered for sale. supposed 1,00,000 units of shares have been issued by the ABC ltd to the general public but the applicant apply for 2,00,000 units of share. hence it is the case of oversubscription.

Primary Market: Under this market, securities are issued by the company itself for the purpose of raisings capital. some of the examples of the primary market are IPO, FPO, and Right issue. It deals with new securities, i.e. securities that were not previously available, and are offered for the first time to the investors. It provides funds to new entities and also for expansion and diversification of the existing ones. It is not rooted in any particular spot and has no geographical existence. It has neither any tangible form nor any administrative organizational setup.

Secondary Market: Under this market, securities that are already issued by the company are traded or bought/sold among the investors. securities are purchased and sold by the investors without any involvement of the companies. It does not supply additional funds to the company since the company is not involved in transactions. the secondary market has physical existence in the form of the stock exchange and is located in a particular geographical area having an administrative organization setup.

Capital Market: It is a market for long-term funds exceeding one year. It may be categorized as a primary and secondary market. The capital market is regulated by the securities exchange board of Nepal(SEBON). The transaction takes place at a formal place. Eg. stock exchange. the transaction has to be conducted only through authorized dealers i.e. Brokers, Merchant Bankers, Underwriters, Investors, and commercial banks. There is high credit and market risk in the capital market.

Money Market: It is a market for lending and borrowing of short-term funds not exceeding one year. There is no sub-division of the capital market. Participants are bankers, Nepal Rastra Bank, and the Nepal government. It deals with the instrument like commercial bills(bill of exchange, treasury bills, commercial papers, etc.) The central bank and commercial bank are the major institutions in the money market. Transaction mostly takes place over the phone and there is no formal place. the central bank is the regulator of the money market and it involves low credit and market risk.

Dematerialization (DEMAT): The process of conversion of physical securities into electronic form is called dematerialization of securities.

Remateralization (REMAT): The process of converting the electronic form of securities back to physical form is known as remineralization of the securities.

Depository: A depository is a service provider which takes custody of the listed securities from the concerned securities owners and performs the jobs of maintaining their securities account, performing clearing and settlement of the securities transaction including transfer of securities and other similar jobs. In Nepal, CDSC is the sole depository.

Depository Participants (DP): A Depository participant (DP)  is an agent of the depository who is authorized to offer depository service to investors. A DP shall be a bank or financial institution, stockbroker, investment banker, etc.

Beneficial Owner: Beneficial owners are the investors who open a DEMAT account with the depository participant to obtain depository services.

Registrar and Transfer Agents-RTA: "Registrar and transfer agent (RTA)" means any person / any body corporate, who on behalf of anybody corporates, maintains the records of holders of securities issued by such body corporate and deals with all matters connected with the transfer and redemption of its securities.

ASBA: ASBA means "Application Supported by the blocked amount". ASBA is an application containing an authorization to block the application money in the bank account, for subscribing to an issue. if an investor is applying through ASBA, his application money shall be debited from the bank account only if his/her application is selected for allotment after the basis of allotment is finalized, or the issue is withdrawn/failed.

Clearing House: clearing house is an exchange-associated body charged with the function of ensuring (guaranteeing) the financial integrity of each trade. orders are cleared using the clearing house acting as the buyer to all sellers and the seller to all buyers. clearing house provides a range of services related to the guarantee of contracts, clearance and settlement of trades, and management of risk for their members and associated exchange. It minimized credit risk by being a counter party to all trades. It ensures delivery of payment for assets on the maturity dates for all outstanding contracts. It also monitors the maintenance of speculation margins. CDS and clearing limited (CDSC), a subsidiary company of the Nepal stock exchange is the only clearing house of Nepal.

Rolling Settlement: A rolling settlement is that settlement cycle of the stock exchange, where all trades outstanding at end of the day have to settle, which means that the buyer has to make payment for securities purchased and the seller has to deliver the securities sold. In NEPSE, we have a T+3 settlement cycle. It means that a transaction entered into on Day 1 has to be settled on the Day 1+3 working days. From an investor's perspective, rolling settlement reduces delays. This also reduces the tendency for price trends to get exaggerated. Hence, investors not only get a better price but also payments are quicker than in weekly settlements. Thus, investors benefit from increased liquidity.

Bull Market: A bull market is a financial market of a group of securities in which prices are expected to rise. The term "bull market" is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, currencies, and commodities. Bull markets are characterized by optimism, investor confidence, and expectations that strong results should continue.

Bear Market: A bear market is a condition in which securities prices fall and widespread pessimism causes the stock market's downfall. A bear market should not be confused with a correction, which is a short-term trend that has a duration of fewer than two months.

Over-the-counter (OTC) Market: Over-the-counter market functions as part of the secondary market for stock and bonds not listed on a stock exchange. The market is composed of brokers and dealers who stand ready to buy and sell securities at quoted prices. Most corporate bonds and growing numbers of stocks are traded over the counter instead of being traded on an organized exchange.

Commodity Market: The commodity market is a platform where commodities are traded through the appointment of brokers. The commodities traded include gold, silver, copper, crude oil, rice, pulses, etc. Most trading of commodities occurs on a non-deliverable basis. i.e. physical settlement of commodities will not occur. Trading in derivatives first started to protect farmers from the risk of the value of their crop going below the cost price of their produce. Derivative contracts were offered on various agricultural products like cotton, rice, coffee, wheat, pepper, and so on. MEX Nepal, Merchantile exchange Nepal ltd, Nepal Derivative exchange ltd, etc. are some of the commodity stock exchanges operating in Nepal.

Listed Companies: The companies whose securities can be traded in the stock exchange are called listed companies. A public company fulfilling the necessary criteria may apply for listing its securities on Nepal Stock Exchange.

Stock Market Index: It is representative of the entire stock market. movements of the index represent the average returns obtained by investors in the stock market. A market index acts as a barometer for market behavior. Formula for the calculation of index value = today's market capitalization/yesterday's market capitalization * yesterday's index point.

Float Index: NEPSE float index calculates an index that is of concern to the general public. This index does not include the promotor shareholder's shares and employee-owned shares which cannot be sold for a certain period. majority of the Nepalese stock market is comprised of shares relating to financial institutions. out of these shares, most are owned by promoters that are rarely sold in the stock market. Hence the NEPSE index computation taking all of the shares that are listed may not be relevant to the general public. Therefore this concept of calculation of float index to measures the share transaction in the secondary market is a useful one.

Sensitive Index: Sensitive index is the index calculated from the market capitalization of companies classified under group A.

Sensitive Float Index: Sensitive float index represents the market capitalization of securities of companies listed under group A which are floated to the public.

Book Building: Book building is a price discovery mechanism and is becoming increasingly popular as a method of issuing capital. The idea behind this process is to find a better price for the issue. The issue price is not determined in advance. Book Building is a process wherein the issue price of a security is determined by the demand and supply forces in the capital market.

Investment Bankers(Merchant Bankers): Merchant bankers are the banks and financial institutions which specialize in the issue of securities to the market. Their function mainly includes underwriting securities, managing the issue of securities, acting as registrar to shares (RTS), providing portfolio management services to the client, and Depository participant service.

Green Shoe Option (GSO): It is an option that allows the underwriting of an IPO to sell additional shares if the demand is high. It can be understood as an option that allows the underwriter for a new issue to buy and resell additional shares up to a certain pre-determined quantity. Looking to the exceptional interest of investors in terms of oversubscription of the issue, certain provisions are made to issue additional shares or bonds to underwriters for distribution. The issuer authorizes additional shares or bonds to underwriters for distribution.

Bonus Shares: A Bonus share is simply the payment of additional ordinary shares to the existing shareholders. It is only a bookkeeping shift from the reserve and surplus account to the ordinary share capital account of the company. A shareholder's proportional ownership in the firms remains unchanged following the bonus issue. Bonus shares are sometimes employed to conserve cash. Instead of increasing cash dividends as earnings rise, a company may desire to retain a greater proportion of its earnings and declare the issue of bonus share. In the issue of bonus share, the face value of the share remains unaffected.

Stock Split: It is an increase in the number of shares outstanding by a proportional reduction in the face value of the share. The main purpose behind the stock split is to place the company's share in a more popular trading range thus attracting more buyers. 

Foreign Direct Investment (FDI): When a company situated in one country makes an investment in a company situated abroad, it is known as FDI. It brings long-term capital and helps to increase the gross domestic product of the country.

Foreign Portfolio Investment (FPI): FPI is when foreign companies make investments in the stock market of a country. Entry and exit are easy in FPI. FPI helps to increase the capital of the country.

Refinancing: Refinancing is a process by which a large financial institution provides funds or reimburses funds to another institution to help development. relief or other similar causes identified as the purpose of former. It can also, in another way, be described as wholesale distribution of financial assistance to a retailing institution. often, government support or subsidized funding is related to the ultimate beneficiaries through such channels. It is also termed wholesale financing. 

If you have any queries, feel free to comment below.

Keep Learning, Keep Investing.

Have a great time ahead.

Thank You.