Wealthy Wednesdays: Trading expressions you must know

Wednesday, 14 May 2014 - 3:16pm IST | Place: Mumbai | Agency: dna

Have you ever been trapped in a heated conversation involving the much hyped stock markets and felt clueless? Or have you ever faked a smile and nodded knowingly just to pretend that you understood the joke involving Indian markets? Well, if you're answer is yes then read on. Priya Krishnan gives you a few quick tips on important financial jargon

Stop loss
Oxford Dictionary Definition: Denoting or relating to an order to sell a security or commodity at a specified price in order to limit a loss
By definition, it is the price at which you decide to exit the stock; you don't want to risk holding the stock any more as further loss could deplete your investments beyond your comfort zone. Basically it is the price where you think enough is enough, I better exit before I burn my fingers.

Ideally it isn't a good sign to start with the word 'loss' while talking about equities, but honestly before having any meaningful conversations or investing in any asset, one must always keep in mind the risks involved in that particular asset. Even buying a house or gold is an investment and as it involves deploying your hard earned money, you should think wisely about the consequences of a downturn on your investments. Also it is always sensible to decide this price while making the initial investment.

Similarly the phrase 'take profit' is the level at which you are happy to book your profit. Time to pat yourself on the back and visit the shopping malls for investing wisely.

Index Top Gainers
Definition by Dictionary of Financial Terms by Virginia B. Morris, Kenneth M. Morris Definition: Index measures the market or economy it tracks from a specific starting point
Stocks that increase in value over the course he trading day are described as gainers or advancers

As the name suggests these are stocks which have climbed the most during the day. They have outperformed the other stocks and are ready to stand on the podium to accept their golden medals. They have either gained maximum in percentage to their opening levels or have gained the highest number of points during the day. These stocks are usually the talk of the town and the reasons for their performance will be closely analysed.
Similarly, Index Top Losers are those stocks that have had a bad day and are trailing behind in the red.

Investopedia Definition: The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability
To understand EPS we need to understand different types of profits and shares, which can get complicated. So in simple terms, EPS (Earnings Per Share) is nothing, but the net profits of the firm divided by the number of outstanding shares (ordinary shares). Now ordinary shares or common stock are basically the owners of the corporate entity. In case the company goes bust, these shareholders will get their money only after all the other creditors are paid off. The reason we specify 'ordinary' shareholder is because there are also 'preference shareholders' who as the name suggests get a preference in getting their money back when the company goes bankrupt. So the earnings left after paying dividends to the preference shareholders is divided by the number of outstanding ordinary shares which the EPS. The ordinary shares are the ones that are usually traded on the exchanges. The general public that invests in the IPOs or buy the shares of the company on an exchange become part of this group.

These numbers are extremely critical during the earning season and are discussed in great detail. Analysts usually estimate these numbers and results are compared to these estimates. Generally, the higher the number of EPS the better the results.
EPS is often confused with with DPS (Dividend Per Share); dividend is the money that each shareholder receives from the company as a reward for holding or investing in that particular company. Sometimes the company can decide to retain part of the earning to reinvest in their operations and then they can distribute dividends to their ordinary shareholders.

Take an example of guests at home for a meal. Following the Indian concept of Atithi Devo Bhavah, where the guest is God, I will serve my guests first and whatever is left I will consume myself or share it with my family members. In this example, I am the company, the guests are the creditors and preference shareholders, and the family members are the ordinary shareholders.

Bulls and Bears
Oxford Dictionary Definition: Bull market refers to a market in which share prices are rising, encouraging buying
Bear market refers to a market in which share prices are falling, encouraging selling
Just like fashion trends you also have trends in the stock markets. A particular stock could become a favourite. It might receive a lot of buying interest from market participants, while similarly the index itself, could witness a similar trend or a particular sector. When the prices move in an upward trend the markets are said to be bullish. The symbolic bull is in itself a sign of aggression.

Bears on the other hand signify a selling trend. When a person says, "I am bearish on XYZ stock" he means that he feels that the price of the stock is going to move downward. Here he could either sell the stock if he is in possession of it or he could short sell the stock and buy back the stock at a lower price in the event that his expectation turns true and the price has moved down.

Market Cap
Investopedia Defintition: The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures. Frequently referred to as "market cap"
The total number of outstanding shares multiplied by the market price gives us the Market Capitalization of the company. As the outstanding stocks of a company are constantly trading, the market cap keeps changing with the change in price and is generally used as an indication of the market sentiment of the company's net worth. It is also used along with other ratios to determine value of the company.

For example, if company XYZ has 100 shares (clearly a fictitious situation) and the current price of each stock (trading on the exchange) is Rs 10. In this case the market cap will be Rs 100 multiplied by Rs 10 giving us a Market cap of Rs 1000. If the price goes up to Rs 15 the market cap will also change to Rs 1500. This is sometimes confused with the word ‘capitalisation’ which refers to the capital of the firm, and has nothing to do with the market price of the company’s stocks. This parameter is a good indication of the company’s size and market strength.

Definition by Dictionary of Financial Terms by Virginia B. Morris, Kenneth M. Morris: A corporation goes public when it issues shares of its stock in the open market for the first time, in what is known as an Initial Public Offering (IPO)
Initial Public Offering (IPO) takes place when a private company decides to offer its shares to the general public. The shares are later listed and traded on an exchange. The first offering is often done with the help of an investment bank, which helps establish the value of the company; an auction process can also be undertaken to identify the initial price of the shares. Once these shares are allotted to the public these are traded freely on the securities exchange.

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