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Finance Glossary

Power-up your financial vocabulary with key finance terms and concepts

Finance Glossary

Power-up your financial vocabulary with key finance terms and concepts

All Stock Market Definitions Simplified for You!

52 Week High

A 52-week high is the highest closing price of a stock or ETF in the last 365 days. Say for example you’re checking the history of a stock on 01-01-2022. Then its 52 week high will be the highest price it closed at between 01-01-2021 and 01-01-2022. 52 week highs are used as technical indicators by traders.

52 Week Low

A 52 week low is the lowest closing price of a stock or ETF in the last 365 days. Let’s say you check a stock’s history on 01-01-2022. Then the 52 week low will be the stock’s lowest closing price between 01-01-2021 and 01-01-2022. 52 week lows are used as technical indicators by traders.

Abandoned Baby Pattern

An Abandoned Baby Pattern is a type of candlestick pattern that signals the reversal of a bullish or bearish trend. It is made up of three candles, each of which varies based on the trend.

Bullish Abandoned Baby Pattern

Candle #1: Red in color & forms during a downward trend
Candle #2: Forms a Doji Star below Candle #1’s closing price
Candle #3: Leads to a bullish trend & forms above the Doji Star (similar size to Candle #1)

Bearish Abandoned Baby Pattern

Candle #1: Green in color & forms during an upward trend
Candle #2: Forms a Doji Star above Candle #1’s closing price
Candle #3: Leads to a bearish trend & forms below the Doji Star (similar size to Candle #1)

Abc Wave Theory

Abc Wave Theory or Elliot Wave Theory is used to determine the direction of the stock market by identifying recurring waves or patterns over the long term. The theory is named after Ralph Nelson Elliott.

5 Motive or Impulse Waves are formed if the movement is in the direction of the trend. 3 Corrective Waves are formed if the movement is against the direction of the trend.

Abridged Prospectus

An abridged prospectus is a short version of a company prospectus. As per SEBI norms, a company looking to offer equity or debt to investors must file a prospectus.

This document contains crucial details that can help investors make investment decisions. But a regular prospectus is lengthy.

That’s why Section 2(1) of the Companies Act of 2013 came into effect. It directed companies to publish an abridged or shorter version of their prospectus.

Acceptance Credit

Acceptance Credit is a way for buyers to authorize fund transfers to sellers at a specific date when various terms & conditions are met.

This is done through a letter of credit which is a creditworthy bank’s promise that the payment will be made.

There are two types of Acceptance Credit:

Confirmed: Bank guarantees payment in case the buyer defaults
Unconfirmed: Bank does not guarantee payment in case the buyer defaults

Accrued Expenses

An accrued expense is the cost that is incurred in the current accounting period but is due to be paid in the future.

More simply, an accrued expense is an unpaid bill due in the future for goods or services that have already been received by a company.

Accrued expenses show up as liabilities on a company’s books.

Accrued Interest

An accrued interest is the interest incurred in the current accounting period but the actual interest is due to be paid or received in the next accounting period.

Accumulation/Distribution Indicator (A/D)

An Accumulation/Distribution Indicator is used to figure out the trend of a stock based on the relationship between the price and volume. There are two parts to the name Accumulation Distribution Indicator:

Accumulation: Denotes demand or the buying levels of a particular stock
Distribution: Denotes the supply or the selling levels of a particular stock

Long story short, A/D tells you whether a stock is facing buying or selling pressure. A rising A/D depicts an upward trend while a falling A/D depicts a downward trend.

Acid Test Ratio

An Acid Test Ratio shows whether a company has enough liquid short-term assets to deal with current liabilities.

The higher the Acid Test Ratio the better a company’s ability to deal with debt.

Acid Test Ratio = (Cash + Marketable Securities + Accounts Receivable)/Current liabilities

Adjusted Closing Price

The adjusted closing price of stock accounts for any changes that happen due to corporate actions like dividends, stock splits, and others after trading hours.

Adjusted Futures Price

An adjusted futures price shows the cost of purchasing, financing, and delivering the underlying assets of a futures contract.

The adjusted futures price is calculated by multiplying the price of the underlying asset by the number of units to be delivered (known as the conversion factor).

Advance/Decline Line

An Advance/Decline Line can help you plot the daily difference between the number of advancing and declining stocks.

As a result, the Advance/Decline Line is a technical indicator used to gauge market sentiment, price trends, and trend reversals.

Here’s how the Advance/Decline Line is calculated:

Calculate the number of stocks that finished in the red.
Calculate the number of stocks that finished in the green.
Subtract #1 from #2 to find out the net movement aka Net Advance.
Repeat #1, #2, and #3 the next day and add the values for Net Advance.
Add both the previous day’s and the present day’s Net Advance. Repeat for future calculations.

Advance Payment Guarantee/Bond

An Advance Payment Guarantee or Advance Payment Guarantee Bond is a contract issued by a third party willing to take responsibility for fulling the terms of an agreement or payments owed by one party to another.

The guarantee could be:

Primary: Indemnity (fulling payments)
Secondary: Guarantee (assuring that the outcome will be met)

After Hours Trading

After hours trading means buying and selling securities after the end of regular market hours. In India, the stock market is open for regular trade from 9.15 AM to 3.30 PM.

After hours trading is allowed from 3.40 PM to 4 PM. Around the world, stocks are known to suffer from a lack of liquidity during after hours trading.

Algorithmic Trading

Algorithmic trading or algo trading means buying and selling securities using computer algorithms that follow a set of predefined rules to execute trades.
In algo trading, predefined rules can be set to act on triggers like stock price, volume, time, and others.

All Or None Order

An all or none order is an instruction to execute the entire order or none of it. For example, you place an order for 1000 shares with a contingency that it should be an all or none order.

If so, then the order will be not executed if 999 shares are available. The order will only go through if 1000 shares are available. Otherwise, the order will be canceled.

Alpha

An Alpha indicates the measure by which a stock or portfolio has managed to outperform a benchmark like an index of shares.

A positive Alpha means that the security or portfolio is beating the market while a negative Alpha means that it is lagging.

Alpha can also be used to measure the competence of a fund manager and their strategies.

American Option

An American Option allows the contract holder to exercise the right any time before or on the expiry date. American style options contracts are not available in India.

Anaume Pattern

An Anaume Pattern can be seen when a gap is filled after a change in the direction of a security or market’s price.

Anaume Patterns are gap-filling patterns that can signal the reversal of a bearish trend, which is nothing but a potential onset of a bullish trend, when used in conjunction with other patterns.

Anaume Patterns are also known as exception exhaustion patterns.

Anchoring and Adjustment

Anchoring is a bias that drives people to make decisions that are based on (anchored to) pre-existing notions, ideas, and suggestions that may or may not be true.

Adjustments around anchoring are common as it becomes a starting point for many when it comes to decision-making.

For example, someone is anchored to a financial model or strategy. They may choose to use the anchor in situations where it may not fit and as a result, may end up getting an unfavorable outcome.

Annual Earnings Change

An Annual Earnings Change is the difference between a company’s earnings from the present and previous fiscal year. The formula for annual earnings change is:

Current Fiscal Year Earnings - Previous Fiscal Year Earnings

Say for example a liquid nitrogen manufacturing company earned Rs. 50 crores in the current fiscal year and Rs. 29 crores in the previous fiscal year. Their annual earnings change will be:
Rs. 50 crores - Rs. 29 crores = Rs. 21 crores.

Annual General Meeting

An Annual General Meeting or AGM is an event where a company’s board of directors presents the annual report, future outlook, and strategy to shareholders. AGMs serve as one of the few occasions when shareholders get to interact with a company’s board of directors.

Annual Net Profit Margin

A Net Profit Margin is the ratio of a company’s net profits to revenues. The formula to calculate Net Profit Margin is:

Net Profit Margin = Net Profit* / Revenue * 100

*Net profit = Revenue - Cost of goods - Operating Cost - Other Expenses - Interest - Taxes

Net Profit Margin is expressed as a percentage, which means that you can compare the financial health of multiple companies.

A company can use its Net Profit Margin to understand whether its strategies and business models are effective.

Annual Report

An annual report is an exhaustive written account of a company’s finances, activities, and other relevant information for the fiscal year.

Publicly traded companies are required to publish annual reports so that existing and potential shareholders have full transparency into the company’s finances and overall health.

Arbitrage

Arbitrage is a strategy where a security is bought in one market and sold in another market to generate profits due to the difference in price. This difference is known to be minor.

Say for example a share trades at Rs. 1000 on NSE and Rs. 1002 on BSE. The share can be arbitraged by buying it on BSE and selling it on BSE for a profit of Rs. 2.

Ask Or Offer Price

The ask or offer price is the price at which an investor is willing to sell a security like stocks, bonds, currencies, ETFs, and others.

Ask Size

The ask size is the number of units of a security that an investor is willing to sell at the ask or offer price.

Asset Allocation

Asset allocation is a strategy or method in which an investor decides how much money they should allocate to an investment based on their risk profile, financial goals, and other factors to maximize returns and minimize risk.

Assets

An asset is anything that has economic value and is owned by an individual, company, or group. Assets are bought to generate returns in the future.

Assets And Liabilities

An asset is something that has monetary value and can generate profits in the future while a liability is a debt that’s repayable immediately or in the future. Assets are owned whereas liabilities as owed.

At The Close Or Closing Price

At the close or closing price is the last traded price of securities like stocks, ETFs, and others at the end of regular market hours.

For example, if a stock hit Rs. 4,500 at 3.30 PM (market close), then that is its price at the close also known as the closing price.

Unlike Adjusted Closing Price, at the close or closing price does not take into account price changes due to corporate actions.

At The Money

At The Money is a scenario in which the strike price of an options contract is the same as the market price of its underlying security.

Exercising an option At The Money can lead to a loss as the premium paid for the contract won’t be recovered.

That said, At The Money is known to be a positive indicator as it indicates the option may soon have intrinsic value.

At The Opening

At the opening is an instruction to execute an order at the open price, which is the price of a security at the start of regular stock market hours.

Authorized Capital

Authorized capital or authorized share capital is the maximum amount of capital for which shares can be issued by a company to its shareholders.

Or in other words, authorized capital denotes all the shares across all the categories that a company could issue if it wanted to raise money.

Autoregressive Model

An autoregressive model uses one or more past values to forecast the current value of an asset.

The model assumes that past values can have an impact on the current value but the number of past values it takes into account can vary.
For example, an AR(1) model will use one preceding value, an AR(2) model will use two preceding values, and so on.

Average Daily Trading Volume

The Average Daily Trading Volume (ADTV) is a technical indicator that indicates the number of shares that were bought and sold on average across one or more trading days.

A high ADTV means that more investors are interested in a stock while a low ADTV implies that a stock isn’t on the radar of many investors. The formula for Average Daily Trading Volume (ADTV) is:

ADTV x days = Total trading volume of stock across x days / x days

Average True Range Atr

The Average True Range (ATR) is a technical indicator used to measure market volatility, typically using the average of true ranges from 14 periods that can be daily, weekly, monthly, or even intraday values.

The formula for ATR is:

ATR = Previous ATR (n - 1) + True Rangen / n

n= number of periods
True Range = The greater/highest of these:

High - low (Day 1)
Absolute value of (Day 1’s high - Day 0’s close)
Absolute value of (Day 1’s low - Day 0’s close)

Averaging Down

Averaging down means buying more shares when the price drops, thereby bringing down your overall average cost of investing. For example:

Day 1 (Normal price)

Shares bought of XYZ: 10
Price of each share: Rs. 1000
Total cost of investing: Rs. 10,000
Average investment cost: Rs. 1000

Day 2 (Lower price)

Shares bought of XYZ: 10
Price of each share: Rs. 900
Total cost of investing: Rs. 9,000
Average investment cost: Rs. 900

Averaging Down

Initial average cost of investing (Day 1): Rs. 1000
New average cost of investing (Day 1 & Day 2): Rs. 950

Back Months

“Back months” is used to refer to futures contracts that have a delivery date that’s due far into the future. Back months is generally known to be a popular term in commodity trading.

Backtesting

Backtesting means simulating trading strategies and models using historical data to understand whether they are effective.

In many ways, backtesting is considered to be an important part of crafting trading strategies that work.

If backtesting leads to positive results, then the trading strategy or model may be viable.

Balance Sheet

A balance sheet is a financial statement that reveals a company’s assets, liabilities, and shareholders’ equity. It can help current and potential investors understand the financial health of a company.

These are some of the key components of a balance sheet:

Current assets : Cash & cash equivalents, marketable securities, accounts receivable, inventories, prepaid expenses, and other liquid assets

Fixed assets : Property, equipment, furniture, machinery, software, and other intangible assets

Current liabilities : Short-term debt, unearned revenue, accounts payable, other accrued expenses & liabilities

Long Term liabilities : Long-term loans, bonds, and others

Shareholders’ equity : Paid-in capital and retained earnings

Basing

Basing happens when a security trades sideways after prolonged periods of falling prices.

As a result, the security forms a “base” or flat pattern which means there is little to no upward or downward movement and a decline in volatility.

This may go on for a relatively long time but is crucial as basing is an indicator of any meaningful reversal that may happen.

Basis Trading

Basis trading means futures trading strategies that use the difference between the spot price and the futures contract price of a stock or commodity.

The difference between the spot and futures prices forms the “basis” for the trading strategy. Hence the name basis trading. These are the two ways in which a trader may use the basis:

Short the basis : Done if the price difference or basis is expected to reduce

Long the basis :Done if the price difference or basis is expected to increase

Basis Of Allotment

The basis of allotment is the criteria to allocate shares to investors, most commonly during IPOs. Criteria or basis for allotment lays out the following information:

The difference between the spot and futures prices forms the “basis” for the trading strategy. Hence the name basis trading. These are the two ways in which a trader may use the basis:

Share allocation ratio
Bids
Demand
Final price

The basis of allotment can vary based on the type of investor in question. Bidders during an IPO for whom a different basis of allotment applies include:

Retail Individual Investors (RII)
Qualified Institutional Buyer (QIB)
Non-Institutional Buyers (NIBs)
High Net-worth Individuals (HNIs)
Anchor Investors

Bear Market

A bear market is a period of continuous decline in the stock or commodity market.

Typically, investors believe that a bear market has arrived when a stock, commodity, or entire index fall by 20% or more from its most recent highs.

The onset of a bear market is generally in tandem with poor economic conditions.

Benchmark

A benchmark is a standard used by investors to compare the performance of a stock, commodity, or other securities.

Stock indices like Nifty 50, Sensex, Nifty Bank, and others are often used as benchmarks to evaluate the performance of one or more stocks.

The onset of a bear market is generally in tandem with poor economic conditions.

Benchmarks are not just used for evaluating markets or securities, they can also be used to assess the performance of an investor or wealth manager. Here are some outcomes if the returns are:

Greater than benchmark: the asset is doing considerably well (great)
Same as benchmark: the asset is moving with the market (okay)
Less than benchmark: the asset is performing poorly (bad)

Best Efforts Underwriting/Offering

A best efforts underwriting or offering means the underwriter will do their best to market the securities for the issuer (company, supplier, etc) to investors. The underwriter will not buy all the securities from the issuer, only those the underwriter’s clients want to purchase.

Beta Coefficient

Beta coefficient is used to measure the volatility of stocks in relation to changes in the market. Basically, Beta helps investors understand the risks associated with a stock compared to the market.

The formula to calculate the Beta coefficient is:

Beta (β) = Covariance (Ri, Rm) / Variance (Rm)

Where:

Ri = a stock's return
Rm = overall market's return
Covariance = ups & downs of stock returns versus ups & downs of market returns
Variance = the difference between market returns and its average

Generally, Beta values are of four types:

Beta < 1.0: stock less volatile than the market
Beta = 1.0: stock just as volatile as the market
Beta > 1.0: stock more volatile than the market
Negative Beta: stock shares inverse relation with the market

Beta Stocks

Beta of stocks measures the risk that the shares carry compared to the broader market. Theoretically, the market is said to have a default Beta of 1. As a result, Beta stocks can be of four types:

High Beta Stocks : typically having a Beta value of more than 1, these stocks are known to be high-risk, high-reward investments
Low Beta Stocks : typically having a Beta value of less than 1, these stocks are known to be low-risk, low-reward investments
Negative Beta Stocks : typically having a Beta value of less than zero, these stocks are known to have an inverse correlation with the market
Same as the market : typically having a Beta that’s equal to 1, these stocks are known to share characteristics with the market

Block Trade

A block trade is a substantially large buy or sell order for a stock, commodity, or other security. Block trades are typically done by institutional investors like hedge funds, mutual funds, and others to mask the true size of the transaction.

Shares change hands between companies after the price of the security is privately negotiated. Most block trades are routed through investment banks and executed outside the conventional market.

Blue Chip Stocks

Blue chip stocks are shares of iconic companies in India that have been leaders of their respective industries for years, if not decades, and have a stellar yet consistent business track record. Example of blue chip stocks in India are: HDFC Bank, TCS, Reliance Industries, Hindustan Unilever, Infosys etc.

Bombay Stock Exchange

Established in 1875, Bombay Stock Exchange or simply BSE is a place where stockbrokers and traders can buy and sell securities like stocks, bonds, ETFs, and more. 5000+ securities are listed on BSE, which is the oldest stock exchange in India and Asia.

Bond Market

A bond market is a place where bonds are issued, bought, and sold. Bonds are issued in exchange for a loan generally by governments and corporations.

Bonds

Bonds are fixed income securities issued in exchange for a loan, generally by governments and corporations. A bond will generate a fixed interest rate on top of the principal across a fixed time period. A bond market is a place where bonds are issued, bought, and sold. Bonds are issued in exchange for a loan generally by governments and corporations.

The quality of a bond can be understood by its credit rating, which is nothing but the creditworthiness of the company issuing it. The best bonds in India are known to have the following credit rating:

SOV: Only for government bonds
AAA: Highest
AA+: High-medium
A+: Upper-medium
BBB+: Lower-medium
BB+: Speculative
B+: Highlight speculative
CCC+: Risky
CC: Extremely risky

Book Building

Book building is the process of determining the potential issue price of a financial instrument based on investor demand, generally during an IPO.

Book building is typically done by an underwriter (like an investment bank) who will invite institutional investors like hedge funds, mutual funds, and others to submit bids for the financial instrument.

These bids act as a range that the underwriter can use to fix a price that satisfies the company issuing the security and market participants.

Book Entry Securities

Book entry securities are financial instruments like stocks, bonds, ETFs, and others whose ownership is recorded and tracked electronically. Book building is the process of determining the potential issue price of a financial instrument based on investor demand, generally during an IPO.

For context, there was a time when physical ownership certificates were issued. If someone wanted to sell their shares, they’d have to present the ownership certificate and get it transferred to the buyer.

Book entries have made ownership certificates obsolete as they track who owns what electronically.

The trades are settled by the depository like NSDL or CSDL which sends the buyer a statement confirming ownership.

Book Running Lead Manager

A book running lead manager is the head or lead of the underwriting process when new shares or securities are issued for their client, most commonly during an IPO.

For context, there was a time when physical ownership certificates were issued. If someone wanted to sell their shares, they’d have to present the ownership certificate and get it transferred to the buyer.

Also known as the book runner, the book running lead manager handles these crucial elements of the underwriting process:

Perform due diligence
Determine the final offering price
Record & track interested buyers
Confirm orders
Guarantee purchase

Book To Bill Ratio

Book to Bill ratio is the value you get by dividing the total worth of new orders received by the total worth of orders sold. The formula to calculate Book to Bill ratio is:

Book to Bill ratio: Total worth of new orders received / Total worth of orders billed

Book to Bill ratio helps companies understand the demand and supply for their goods or services. A Book to Bill ratio of more than 1 means that there’s more demand and less supply.

Whereas, a Book to Bill ratio of less than 1 means that there’s less demand and more supply. Using these indicators, the company can work on increasing or limiting production.

Book Value

Book value of an asset is what you get by subtracting its accumulated depreciation from the original cost of the asset.

That’s why book value is referred to as the Net Asset Value (NAV) in the UK.

For a company, the book value is its total assets subtracted by liabilities, intangible assets and/or goodwill.

Bottom Line in Finance

Bottom line in finance is used to refer to a company’s crucial metrics like earnings, profits, net profits, earnings per share (EPS), and others.

Any move or action that can impact a company’s profit or net profit in a positive or negative direction is also referred to as the bottom line.

“Bottom line” is called such because the crucial metrics of a company are generally found at the bottom of a financial statement.

Bottom Up Investing

Bottom-up investing is a stock picking strategy that uses analysis of individual companies and shares for decision-making instead of focusing on the broader economy, market, or industry.

Bought Out Deal

A bought-out deal is a stock offering where an investment bank buys the entire issue of shares from a company. In turn, the investment bank will attempt to sell the shares to other investors. A deal of this kind has two benefits:

The company need not worry about subscription as the investment bank will purchase the entire offering
The investment bank can negotiate with the company and get the shares at a discount

That said, there are risks to a bought out deal like:

It is up to the investment bank to sell the shares to investors in order to recoup the principal or make a profit
The investment bank also runs the risk of receiving no interest in the shares from other investors
Guarantee purchase

If the issue size of the bought-out deal is large enough, the investment bank may team up with others to fulfil the purchase.

Bounce Trading

Bounce trading refers to buying a position in security when its price falls to a particular support level with the anticipation that it will “bounce” back to a certain price level. Technical analysis is the bedrock of bounce trading but various patterns and strategies can be used to achieve the desired goal.

Box Spread

A box spread is a trading strategy that involves buying a bull call spread and a matching bear put spread. The components of a box spread are designed as so:

Bull call spread : two call options with a lower and upper strike price
Bear put spread : buying and selling puts at different strike prices of the same underlying asset with the same expiration

Bracket Order

A bracket order is used in intraday trading to limit downside and lock upside by placing three types of orders together:

Buy or sell order at market price
Target order to square off & book profits
Stop-loss order to limit loss

Broker

A broker is an intermediary between a securities exchange and investors. Only registered entities can place trades on a securities exchange. These members can be individuals or firms known as stockbrokers.

That’s why investors must go through a broker when they want to trade or invest in stocks, ETFs, futures, options, and others.

Brokerage

Brokerage is the fee that an investor or trader must pay to a brokerage in exchange for its services. Brokerage varies from platform to platform. But, broadly speaking, brokerage on intraday, futures, and options trading is known to be higher than equity delivery (investing).

BSE

Bombay Stock Exchange or BSE is a stock exchange that allows companies to issue new securities through IPOs or FPOs and enables traders & investors to buy and sell securities like shares and ETFs. Established in 1875 under a banyan tree in Mumbai, BSE is the oldest stock exchange in India and Asia.

Bull Market

Bull market is a positive trend in the stock market where price of shares increase by 20% or more after falling by 20%. Investors may say they’re bullish or expect a bull market to arrive when they believe that there will be prolonged periods of increase in the stock market.

Bullion

Bullion is used to refer to gold, silver, and other non-ferrous metals that have been designed to have high purity. These metals are generally molded into bars, coins, and other valuable items.

Bureau Of Indian Standards

Bureau Of Indian Standards (BIS) is responsible for standardizing and certifying goods and services from third parties so that the end consumer knows that the products are safe and reliable.

BIS was established in 1986 and was rebranded from the Indian Standards Institution (ISI) to BIS during the year to adapt to the changing product landscape of India.

Butterfly Spread

A butterfly spread is an options strategy that combines bull and bear spreads to generate a small chunk of profit. To achieve this, a butterfly strategy consists of four positions in four options contracts that have the same expiration but different strike prices.

Buy and Hold

Buy and hold is a long term investment strategy that is designed to help investors ride out market volatility by buying and holding fundamentally solid businesses that have the potential to grow over decades.

Call Option

A call option is a type of derivative contract that gives the right but not the obligation to buy an underlying asset like shares, commodities, currencies, and others at a pre-agreed price and date.

There are three components to a call option:

Premium: the price paid to buy a call option
Strike price: the pre-agreed price of the underlying asset
Expiration date: the day after which the option contract will be worthless

Candlesticks

Candlesticks are technical charts used in trading to understand price movements. A candlestick chart will show the following information: There are three components to a call option:

High (for the period)
Low (for the period)
Open price
Closing price

The main body of the candle will be green if the closing price is higher than the opening price and red if the closing price is lower than the opening price.

Long green candles mean more investors and traders want to buy a stock. Long red candles mean more investors and traders want to exit a stock.

CANSLIM

CANSLIM is an acronym for a seven-step strategy to pick growth stocks by combining fundamental and technical analysis. Here’s the full form of CANSLIM:

Current quarterly Earnings Per Share (EPS): compare this fundamental indicator with the same figure from the previous quarter. If the figure grows (by 20% or more as a rule of thumb), the company is fundamentally strong.

Annual earnings: Compare this fundamental indicator from the previous years. If there’s year-on-year growth, the company is fundamentally strong. If the year-on-year growth is by 20-25%, even better.

New product or service: strong companies continue to innovate. That’s what this letter is about - checking if the company is continuously launching new products, services, or holding events.

Supply: a fundamentally strong business should have a good supply and demand when it comes to its goods, services, and stock. Executive supply of shares may reduce the value of the company - that’s why it should always be scarce in supply.

Leader: the company should be a leader in its own right, either in or across industries.

Institutional holding: a valuable company will have higher institutional ownership, the percentage of which should always be tracked.

Market trend: an investor must check whether the company or stock is going or against the trend by comparing it to broader indices.

Capital in Trading

Capital is the total amount of money that a trader can use to buy and sell securities. There are variations of the term, the most common one is “starting capital”. This is the amount of money a trader starts their journey with.

Capital Asset Pricing Model

Capital Asset Pricing Model or CAPM is used to determine the expected return one can earn on an asset by evaluating the associated risks and how markets price the asset.

Capital Expenditure

Capital expenditure or CapEx is the amount of money a company spends on maintaining, upgrading, or buying new assets like machinery, equipment, property, and others.

Capital Gain Or Loss

A capital gain is a profit that an investor or trader earns by selling an asset while a capital loss is the money a trader or investor loses after selling an asset. Capital gains are taxed while capital losses can be used to offset gains.

Capital Gains

A capital gain is a profit an investor or trader earns by selling shares, commodities, futures, options, currencies, and other assets. More literally, a profit is a gain on the capital that’s invested - hence the term capital gains.

Say someone buys a share for Rs. 1000 and sells it for Rs. 1100. The capital gains will be Rs. 100 in this case. The taxation of capital gains varies based on the asset type and the duration after which it was sold.

Capital Gains Exemption

Capital gains exemption is the tax break that a government offers on profits earned by selling assets. Generally, an investor must pay a tax on the short-term capital gains or long-term capital gains earned.

But in certain cases, the government allows investors to offset taxes. For example, if an investor sells property and reinvests the entire amount back again into another property, they can avail of capital gains exemption.

Capital Gains Tax

Capital gains are profits, which means they can be taxed. The rate of taxation is based on the type of asset (debt/equity) and holding period. Here is the list of ways capital gains are taxed in India:

Asset Type	Gains Type	Holding Period	Tax Rate
Equity	Short Term Capital Gains	< 1 year	15%
Equity	Long Term Capital Gains	> 1 year	10%
Debt	Short Term Capital Gains	< 3 years	As per I-T slab
Debt	Long Term Capital Gains	> 3 years	20%

Capital Growth

Capital growth is the profits an investment generates on the principal amount. Since the capital grows on earning profits, the term capital growth is also used to describe the overall corpus of an individual (principal + profits).

Capped Style Option

Capture Ratio

The capture ratio is used to measure the performance of an asset during market highs and lows by comparing it to a benchmark.

The result is expressed as a percentage and helps investors understand whether the asset manager was able to steer through volatility the right way. There are two types of capture ratios investors can turn to:

Up market capture ratio
Down market capture ratio

Here’s how to calculate the up market capture ratio:

Returns during market highs / Benchmark returns * 100

Here’s how to calculate the down market capture ratio:

Returns during market lows / Benchmark returns * 100

Carrying Charge

Carrying charge or cost of carry is the money involved in the upkeep or general holding of an asset or financial instrument. Examples of carrying charges include maintenance costs, insurance, and others.

A carrying charge can increase the cost of owning an asset. At times, the cost of carry may exceed the potential returns, in which case an investor must evaluate whether the asset is worth keeping.

Cash and Cash Equivalents

Cash and cash equivalents are short-term assets or holdings which fall under the current assets of a business. Cash and cash equivalents have very high liquidity. When you take the term literally, you have two components:

Cash: money like cash holdings in a bank account, petty cash, and others
Cash equivalents: assets or investments like T-bills, commercial paper, and others that have a short maturity which can easily be converted into cash

Cash Commodity

A cash commodity refers to physical goods like aluminium, cotton, gold, silver, zinc, and other tangible goods which are delivered to a trader or company most commonly after exercising derivatives like options and futures contracts.

Cash commodities are also known as actuals. A derivative contract for cash commodities will explicitly state the delivery date, price, and quantity. These details are necessary as some contracts may not involve the delivery of goods.

Cash Contract

A cash contract is an agreement between two parties in which the delivery of goods is involved at a predetermined price and date. Typically, bulk buyers like big companies enter into cash contracts on the spot price of a commodity.

These companies aren’t in the business of speculation. As a result, the delivery of goods is always involved in cash contracts, unlike futures where the contract can be settled with cash without taking delivery.

Cash Conversion Cycle

A Cash Conversion Cycle (CCC) tells you how many days it will take to convert a company’s inventory or resources into cash. The formula for Cash Conversion Cycle is:

Cash Conversion Cycle = (DIO + DSO) – DPO

DIO: Days Inventory Outstanding is the average number of days it takes for a company to turn inventory into cash through sales
DSO: Days Sales Outstanding is the average number of days it takes for a company to collect its receivables
DPO: Days Payable Outstanding is the average number of days it takes fo a company to fulfil its obligations or payables

Cash Flow

The cash flow describes the amount of money that moves in or out of a company or an individual’s pocket. Cash flow can be of two types:

Positive cash flow: more money earned than spent
Negative cash flow: more money spent than earned

Cash flow is an important metric in finance because it helps calculate metrics like liquidity, cash conversion ratio, and others along with giving a broad overview of a company’s financial health.

Cash Flow Statement

A cash flow statement is used to present the amount of money that has been earned and spent by a business over a specific period of time. There are three sections or parts to a cash flow statement:

Operating Activities: cash flows from the core activities of a business that generate income as well as cash equivalents (current assets & liabilities)
Investing Activities: cash flows from investments or sales of long term assets
Financing Activities: an action or activity that brings a change in a business’ equity capital and/or borrowings

Cash Market

A cash market is a place where assets, goods, and services are bought and sold on the spot. That’s why it is also known as the “spot market”.

A stock market exchange like NSE or BSE is an example of a cash market as trades are settled on the spot at the spot price. Derivatives like futures are not a part of the cash market are trades are settled in the future.

Cash Ratio

A cash ratio measures a company’s ability to fulfill short-term debt obligations using only its cash and cash equivalents, which are known to have high liquidity. The formula for calculating cash ratio is:

Cash Ratio: Cash + Cash Equivalents / Current Liabilities

Cash Reserve Ratio

Cash Reserve Ratio (CRR) is the amount of liquid cash a bank has to deposit with the Reserve Bank of India (RBI), calculated as a percentage of the total deposit of the bank. The latest Cash Reserve Ratio in India is 4.5%.

There are two important uses of CRR:

It acts as a reserve or collateral because banks borrow money from the RBI
The RBI decides the interest rate for borrowing based on the CRR

These two pointers become extremely important during high inflation as the RBI can hike interest rates with the assurance of having collateral from banks.

Cheapest To Deliver

Cheapest to deliver (CTD) refers to the cheapest or lowest priced security in a futures contract that a seller can deliver to a buyer who holds a long position. Here’s the formula to calculate the cheapest security that can be delivered:

Short position: Current price of security + accrued interest
Long position: Settlement price x conversion factor + accrued interest

Circuit Breaker

A circuit breaker or market curb is a measure that exchanges use to put a stop to all trading activities across an index or entire market. This regulatory measure is put in place to curb panic selling, especially when markets are in free fall.

That’s why circuit breakers are also known as trading curbs and are put in place when an index or market reaches a specific level. These are the current circuit breaker limits on NSE:

Circuit Breaker Trigger	Trading Halt Duration
10%	0-45 minutes
15%	45 minutes; 1 hour 45 minutes; rest of the day
20%	Rest of the day

Commodity

A commodity refers to physical goods and raw materials like aluminium, cotton, copper, sugar, steel, zinc, and others. Commodities are an essential part of the day-to-day life of individuals, companies, and industries.

But they can’t be traded like stocks in India. Instead, a commodity trader will enter into either of these three contracts to secure commodities or benefit from its price fluctuations:

Futures contracts
Options contracts
Cash contracts

These derivative contracts are traded on commodity exchanges in India like:

Indian Commodity Exchange (ICEX)
Multi Commodity Exchange of India (MCX)
National Commodity & Derivatives Exchange Limited (NCDEX)
National Multi Commodity Exchange of India (NMCX)

Commodity Exchange

A commodity exchange is a marketplace where commodities and related derivative contracts are standardized and traded. The commodity exchange can be split into these sub-markets:

Derivatives market: this is where commodity exchanges allow futures, options, forwards, and other derivatives to be traded
Spot market: this is where commodity exchanges allow buying and selling of commodities in real-time (on the spot), including cash contracts

In India, there are 4 commodity exchanges that are popular and widely turned to:

Indian Commodity Exchange (ICEX)
Multi Commodity Exchange of India (MCX)
National Commodity & Derivatives Exchange Limited (NCDEX)
National Multi Commodity Exchange of India (NMCX)

Within these exchanges, the most commonly traded commodities include:

Crude oil
Coffee
Corn
Cotton
Gold
Natural gas
Silver
Sugar
Wheat

Commodity Futures

A commodity futures is a contract between two parties to buy or sell an underlying commodity like gold, silver, corn, and others are a pre-determined price and date.

A commodity futures contract is an obligation that’s entered into not just by retail traders but also companies who want to lock in a favorable price. This is the place to understand all about futures contracts in trading.

Commodity Options

A commodity option is a contract that gives the buyer or seller the right but not the obligation to execute a trade for a commodity like copper, cotton, zinc, and others at a pre-agreed price and date. Commodity options are derivative contracts that require a trader to pay a premium in order to secure the “option”.

Commodity Spread Straddle

A commodity spread straddle or simply a commodity straddle is an options trading strategy where a trader will buy call and put options with the same strike price and expiration date.

The goal of a commodity straddle is to create a neutral strategy that wins in the event that the underlying security’s price rises or falls. That said, the profits must be higher than the total premium paid for the options.

Common Stocks

A common stock is a type of share that gives the holder the right to a part of a company’s profits, voting on key policies and decisions. Common stockholders have an advantage over preferred stockholders because they can:

Get higher returns
A part of the assets left after a company is liquidated (in case of default)

Company Debentures

A debenture is a debt instrument that a company uses to take out a loan in exchange for a fixed interest rate. Debentures can either be used to refer to bonds or documents created in exchange for a medium to long-term loan.

Comparable Company Analysis

Comparable Company Analysis (CCA) is a method used to evaluate a company’s value by comparing its essential metrics like EBIT, EBITA, and more with other companies.

The underlying assumption of CCA or “Comps” is that publicly traded companies from the same sector or industry will have similar metrics that are comparable.

Compounded Annual Growth Rate (CAGR)

Compounded Annual Growth Rate shows how much returns on average an investment can generate over a year, given the data for a period of time (say 5+ years).

CAGR is an indicative measure of yearly returns growth that assumes the profits are reinvested. The formula to calculate Compound Annual Growth Rate is:

CAGR = [(Ending value/Beginning Value)^(1/N)]-1

Consolidated Financial Statements

A consolidated financial statement is a record of all the assets, liabilities, income, expenses, and other financial data of a company and its subsidiaries.

Consumer Price Index

The Consumer Price Index (CPI) measures how costly goods and services have become over time. It is calculated by measuring the weighted average of the percentage change in the price of a basket of goods and services.

If the CPI increases, it means that inflation is on the rise. In India, the CPI replaced Whosale Price Index (WPI) as the primary measure of inflation in 2013.

Contingent Liabilities

A contingent liability is shown on a balance sheet for an event that may or may not happen in the future. The potential liability arising out of such an uncertain event is recorded as a contingency in both GAAP and IFRS accounting standards.

Contract Note

A contract note is a compilation of all the trades and transactions made through a stockbroker on a stock exchange. It is a legal record that all recognized stockbrokers must send to traders and investors at the end of each trading day.

Convertible Arbitrage

A convertible arbitrage is a trading strategy that involves buying convertible securities - most commonly bonds and preferred stock - and a short option on the common stock of the same company.

Because of this combination of purchases, a convertible arbitrage strategy is known as a neutral strategy designed to profit from the supposed inefficiencies that lie in the pricing of convertible securities.

Convertible Bonds

A convertible bond is a hybrid security that’s initially designed to be a debt instrument that pays a fixed interest rate in exchange for a loan. Once the loan’s tenure ends, the holder can decide to take one of either action:

Don’t convert bond: face value of the bond is transferred to the holder on maturity

Convertible Debentures

A convertible debenture is a long term debt instrument that can be converted into equity on maturity. Convertible debentures are generally unsecured loans that small to mid-size companies take on in exchange for an interest rate.

Cost Inflation Index

A Cost Inflation Index or CII is used to calculate a financial security’s price after adjusting for inflation.

Cost Of Carry
Cost Of Revenue
Cover Order
Covered Call Option
Covered Interest Arbitrage
Covered Put
Cross Currency
Currency Futures
Currency Options
Currency Trading
Current Assets
Current Liabilities
Current Ratio
Custodian
Cyclical Stocks

Debentures

A debenture is a legal certificate that a company issues in exchange for a long-term unsecured loan. A debt instrument like a debenture is issued by companies who want to fund their business without diluting existing shares.

The components of a debenture are as follows:

Principal: The loan amount or the money lent by an investor
Tenure: The duration of the loan
Interest rate: The rate of interest
Repayment: Terms and conditions of the amount to be repaid

Debenetures can also be issued by small-size companies who may not be creditworthy enough to secure a loan from traditional lenders. Hence, the unsecured aspect of the loan may help achieve their objective.

Debt To Equity Ratio

The debt to equity ratio is a measure of a company’s financial health that’s calculated by dividing liabilities from shareholder equity.

Debt to equity ratio: Total liabilities / Shareholder equity

A high debt to equity ratio means that a company is taking on more debt to run its business. A low debt to equity ratio means that a company is operating at low debt.

That’s why investors calculate the D/E ratio to understand a company’s ability to operate without debt. Generally, D/E is used for comparative analysis within sectors, not across industries because the ideal debt ratio may vary.

Defensive Stock

A defensive stock refers to the shares of iconic companies that generate stable and consistent returns and dividends, regardless of the market conditions.

Defensive stocks are rare because companies that have defense against every market condition are rare.

While defensive stocks may not generate high returns, they are known to add stability and defense against declining economic conditions. In India, stock of ITC Limited is an example of a defensive stock.

Deferred Tax

The term deferred tax in a financial statement is used to refer to future tax payments in the case of temporary differences, a situation where an asset or liability on the balance sheet is realised but is taxable in the future.

Common examples of deferred tax include line items such as employee bonus or PF contributions, depreciation of fixed assets, net losses, and others.

Deferred Tax Asset

A deferred tax asset is an item on a company’s financial statement that can be used to get tax relief, generally in the event of overpaying taxes or net losses that are carried forward.

Companies tend to deduct these overpayments or losses for accounting purposes and to reduce their overall taxable income. Common examples of deferred tax assets include:

Depreciation of fixed assets
Net financial loss
Bad debt

Deferred Tax Liability

A deferred tax liability is line item on a company’s balance sheet that refers to taxes that owed but due in the future. Common examples of deferred tax liabilities include:

Paying less tax
Sales in instalments

Delivery Date

The delivery date of a cash or derivative contract refers to the final day and time on which the underlying asset should be delivered to the contract holder to fulfil the terms and obligations of the contract.

Delivery Notice

A delivery notice is produced by the seller of a commodity futures contract. It is proof of confirmation of the sellers intention to physically deliver the underlying commodity to the buyer at the pre-agreed date.

Delivery Trading

Delivery trading refers to buying a stock or ETF and holding it for more than one day. In such a scenario, the buyer take delivery of the asset instead of squaring off their position in the same trading session. Delivery trading is applicable for short term and long term trades and can last overnight to a decade or more.

Demat Account

A Dematerialized or Demat account is used to store shares and ETFs in the electronic format. It is linked to a bank account and is necessary for trading or investing that involves delivery, that is, where the asset is held overnight.

Depository Participant

A depository participant is a financial institution that acts as a bridge between a depositories like NSDL/CDSL and investors. Moreover, a depository participant is responsible for holding shares in the Dematerialized format in a Demat account.

At the same time, a depository participant gives traders and investors access to an online trading account that can be used to buy and sell securities. The right depository participant will also ensure that your securities are safe.

Derivative

A derivative is a financial contract that is designed to derive its value from a single or group of underlying assets, generally between two parties or more. It contains a pre-agreed date of delivery and price.

The most common examples of a derivative contract are:

Futures
Options
Forwards
Swaps

A derivative can be bought and sold on an exchange or over the counter. Since derivatives derive value from underlying assets, their price is known to fluctuate when the underlying asset gains or loses value.

Derivatives Market

The derivatives market is a place where financial contracts like futures, options, forwards, and swaps are traded. It is a complex market that is a subset of the stock market, commodity market, currency market, and others depending on the underlying asset that’s a part of the derivative contract.

Derivatives Trading

Derivatives trading means buying and selling derivatives contracts like futures, options, swaps, and forwards either on an exchange or over the counter.

Trading derivatives means trading contracts that derive their value from an underlying asset like stocks, commodities, currencies, indexes, interest rates, and more.

The buyer of the contract can decide to take delivery to the underlying asset or offset it with an opposite contract.

Differential Pricing

Differential pricing is a strategy that involves setting different prices for the same product or service based on the type of customer or tming.

For example, a zoo ticket may cost Rs. 10 for domestic visitors and Rs. 100 for international visitors. Or, when buying a product gets costlier as and when the last date for the sale approaches.

That’s why differential pricing is also known as discriminatory pricing and variable pricing.

Differential Voting Rights

Differential Voting Rights or DVRs are special types of shares that carry more or less voting rights, depending on the issuing company. For example, a DVR share that carries less than usual voting rights may generate relatively high dividends.

A publicly traded company that wants to issue DVR shares must go through a postal ballot. There are other caveats as well. But broadly speaking, a company must have a healthy finanical track record if they want to issue DVR shares.

Direct Public Offerings

A Direct Public Offering or DPO allows a company to issue shares directly to the public without an intermediary like investment banks. In the process, the company becomes publicly traded.

The cost of a DPO is known to be relatively low compared to an IPO.

Furthermore, the issuer of the DPO has control over the issue price while the paperwork and effort involved is also comparatively low. That said, the company must go through proper regulatory procedures during the process.

Discount Brokers

Discount brokers are platforms that offer essential stock trading and investment services rather than a full stack of services that may or may not be useful for everyone.

Discount brokers are discount brokers because their service is priced competitively, meaning the cost of trading and investing may be significantly low than a fullservice broker.

Discounted Cash Flow

Discounted cash flow is a method of valuing a company in the present based on future cash flows. An investment may be profitable in the present if the discounted cash flow is above the current cost of investing.

The formula to calculate discounted cash flows is:

DCF = Cash Flow Year 1 / (1+r1)^1 + Cash Flow Year 2 / (1+r2)^2 + Cash Flow Year N / (1+r)^n

Diversification

Diversification is the act of investing in more than one asset class, sector, industry, or country to mitigate risk. It is an investment strategy designed to reduce risk by pairing a volatile asset class like equities with a fixed income asset class like fixed deposits. Or, by investing in equities in one country and complementing it by investing a portfolio in stocks from another country.

Dividend Payout Ratio

The Dividend Payout Ratio refers to dividends paid to shareholders as a percentage of the net income or Earnings Per Share (EPS) of a company. The formula to calculate dividend payout ratio is:

DPR = Dividend / Net income

or

DPR = Dividend / Earnings Per Share

A higher dividend payout ratio means that a company is redistributing a chunk of its profits to shareholders, which generally implies that the company is well-established.

Dividend Per Share

Dividend per share indicates the amount of dividends paid as a ratio of the number of shares outstanding. Or, dividend per share could also refer to the product of earnings per share and dividend payout ratio.

Thus, the formula to calculate dividend per share is:

DPS: Total dividend amount / Number of shares outstanding

Or

DPS: Earnings Per Share x Dividend Payout Ratio

An investor can determine how much dividends they stand to earn for each share they own by calculating dividends per share.

Dividend Reinvestment Plan (DRIP)

A Dividend Reinvestment Plan is a feature where an investor can reinvest the dividends they earn to buy additional shares or units of a mutual fund, either fractional or whole.

Stocks and mutual funds offer Dividend Reinvestment Plans. As a result of reinvesting dividends, investors can add more money to their existing holdings for better compounding. That said, dividends that are reinvested are taxable.

Dividend Stocks

Dividend stocks are shares of companies that redistribute their profits to shareholders in the form of dividends. Such companies are typically industry or sector leaders with stellar reputations and track records.

How much dividend a company offers can be calculated with the dividend yield ratio or dividend per share.

Investors prefer to buy dividend stocks because they can either reinvest the dividends to buy more shares or earn passive income. Examples of dividend stocks in India include:

Coal India
Indian Oil Corporation (IOC)
ONGC
SAIL
Tata Steel

Dividend Stripping

Dividend stripping is a strategy of buying a company’s stock days before it announces a dividend and then selling the same stock at a lower price once the current holder is entitled to get the dividend previously announced.

The resulting loss in capital gains is generally offset by the profits from dividends. Dividend stripping was once non-taxable, which made the strategy lucrative for smart investors. However, dividends in India are now subject to tax.

Dividend Yield

A dividend yield is a ratio of dividends paid per share by the latest share price, expressed as a percentage. It is used to understand how much dividends a company pays per share outstanding. The formula to calculate dividend yields is:

Dividend Yield: Dividend Per Share / Current Shar Price

A high dividend yield indicates a company’s willingness to redistribute more profits to shareholders, while a low dividend yield signals the opposite.

Doji Pattern

A Doji is a candlestick pattern that is formed when the open and close price of a share or market is identical. The word Doji means indecision in Japanese, which is fitting because the Doji pattern is an indicator of indecisiveness. In terms of appearance, a Doji looks like a cross or like the letter T.

Donchian Channels

A Donchian Channel is the area between upper (highest price) and lower (lowest price) bands formed around the median as a result of calculating the moving average of a security’s price over a period of time. Visually, the Donchian Channel will have three lines.

Draft Offer Document

A draft offer document is the preliminary version of the IPO document that a company must file with SEBI 21 days before submitting the actual IPO document. The draft offer document is open to the public for comments during the 21 -day period. SEBI may suggest changes to the draft offer document in this period.

Earnings Per Share

Earnings Per Share or EPS refers to the amount of profit that a company generates per outstanding share it has in the stock market. It is calculated by dividing the net income of a company by its shares outstanding.

Formula to calculate Earnings Per Share: Net Income / Number of Outsanding Shares

Generally, dividends distributed to preferred shareholders are deducted from the net income for EPS calculations. The EPS of a company can thus indicate whether or not it is generating enough profit. It can also be used as a valuation metric.

EBITDA

EBITDA is short for Earnings Before Interest, Taxes, Depreciation, and Amortization. EBITDA allows investors to understand cash flow from all operations while excluding certain non-cash expenses related to interest, depreciation, amortization, and taxes.

That’s why investors use EBITDA as a valuation technique to determine the profitability of a company. Interestingly, EBITDA is a variation of operating income which is known as EBIT.

While there are many ways to calculate EBITDA, the most common methods include:

1) EBITDA = Net Income + Taxes + Interest + Depreciation + Amortization 2) EBITDA = Operating Income + Depreciation & Amortization

EBITDA MARGIN

EBITDA margin is the ratio of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) by revenue, represented as a percentage. It is used to understand whether a company is profitable and as a valuation technique.

The formula to calculate EBITDA margin is: EBITDA Margin = (EBITDA/Revenue)*100

Just like EBITDA, the EBITDA margin also excludes non-cash expenses. That’s why a positive EBITDA margin doesn’t necessarily mean that a company is profitable.

Enterprise Value

Enterprive Value is a metric used to determine the total value of a company. It is valuation technique used by companies to understand how much money they need to pay to acquire another company.

Conversely, Enterprise Value is also used to figure out the amount of money a company can get on selling their business. To calculate the EV of a company, the total market capitalization is combined with the net debt or cash subtracted from debt. The formula to calculate Enterprise Value is:

EV = Market Capitalization + Net Debt

Or

EV = Market Capitalization + Debt - Cash

Equilibrium Price

Equilibrium price is achieved when the demand is exactly equal to the supply. It is a state where buyers and sellers have enough goods and services to meet each other’s demands - not more, not less. One could say that equilibrium price is a perfectly balance state in the market.

Equities

The term equities can be used to describe two different things. First, equities refers to stocks held by shareholders. Equities of this type represent residual ownership or stake in a company.

Second, equities are the amount of money shareholders shall receive in the event that a company is liquidated. In such a case, the equities will be calculated by subtracting the total debt from total assets.

Equity

Equity is generally defined as a stake or per share ownership in a company. That's why stocks are often called equity or equities. In the broader markets, equity is also used to refer to the total amount of money shareholders stand to get in case a company is liquidated.

Equity Capital Markets

Equity capital markets (ECMs) are a place where companies raise money by offering equity shares to financial firms, institutional investors, and retail investors.

Fund raising of this kind is often done through private placements or Initial Public Offerings (IPOs) in the primary market, which is a part of the ECM. The biggest IPOs in India are all part of the ECM.

The equity capital market is also a place where shares, futures, options, and other financial instruments are traded. This part of the ECM is known as the secondary market. The stock market is a popular example of an ECM.

Equity Delivery

In equity delivery, shares are delivered to an investor’s Demat account after the settlement period. That’s why it is called equity delivery. However, equity delivery is also known as delivery trading and long term investing.

For example, let’s say you place an order for 10 HDFC shares on Tuesday with a view of holding onto them for the long term. The trade will be settled on Thursday shortly after which the shares will be delivered to your Demat account.

Equity Market

The Equity Market is a place where shares are traded, money is raised, and stock is offered to investors. That's why it is divided into two categories:

Primary Market: An equity market where shares are offered to investors for the first time through IPOs while fundraising also happens through private placements.
Secondary Market: An equity market where shares, bonds, futures, options, more are traded

The primary market is typically over the counter but may be regulated in the case of exchange traded IPOs. The secondary market is often well-regulated as most securities listed are exchange traded.

Equity Options

An equity option gives the holder the right but not the obligation to buy or sell the underyling shares at a pre-agreed price and date. Equity options are derivative contracts that derive value from underlying shares.

Every equity option comes with a lot size that specifies the total number of underlying shares the contract contains. A trade who wants to start options trading can procure the derivative contract by paying a premium.

Equity Share Capital

The total amount of money that is raised by a company through the issuance of shares is known as equity share capital. Shares issued could be classified as common or preferred shares, both of which are a part of the equity share capital.

In general, share capital is known to be the money raised by issuing shares. Companies have the option of raising more equity share capital by issuing additional shares through a Follow on Public Offer (FPO) or other financing methods.

Equity Shares

Equity shares is a term used to describe stock of a company that’s issued via an Initial Public Offer (IPO), already issued and traded on the stock market, or freshly available through a Follow on Public Offer (FPO).

For a company, the goal of issuing equity shares is to raise money while investors who buy these equity shares get perks like voting rights, dividends, and even a share of the assets in case the company is liquidated.

Equity Trading

Equity trading refers to the buying and selling of equity shares on the primary and secondary market, either through a stock exchange or over the counter. Trading equity is done in many ways.

Some equity traders square-off their positions within one trading day. This is called intraday equity trading. Others look to ride price swings across days, weeks, or months. This is known as swing equity trading.

An individual who wants to engage in equity trading will need to open a trading & demat account. The charge for opening an equity trading account varies but the process is relatively simple.

European Option

A European Option allows a trader to exercise the contract only on the day of expiry. For example, let’s say an options trader bought a European Call Option that expires on 01-01-2023.

The options trader can only exercise the call option, that is, buy the underlying assets on the day of expiry which is 01-01-2023. In India, traders can only engage in European options.

Ex-Dividend Date

The ex-dividend date is the trading day on and after which a new buyer of the stock is not entitled to any dividends. Most traders say that a stock has gone ex-dividend when this happens.

Traditionally, the ex-dividend date is set a day before the record date when a company evaluates its records for existing shareholders. If a trader buys a stock that has gone ex-dividend from a seller, the one who'll get dividends is the seller.

Exit Load

Exit load is a type of premature withdrawal fee that mutual funds charge. The goal of charging an exit load is to ensure that investors think twice before exiting a fund, as premature withdrawals can affect existing investors.

Every mutual fund charges a different exit load based on the discretion of the fund manager. ETFs, liquid funds, and other debt funds typically have little to no exit load whereas equity funds do.

Expense Ratio

An expense ratio is a management fee that investors must pay for the services of the fund manager and their team. Mutual funds are handled by fund managers who take care of everyday stock analysis, buying & selling, and other activities. The expense ratio is a fee to compensate for this day-to-day management.

Exponential Moving Average

Exponential Moving Average (EMA) is a technical indicator used to follow price trends over a specific period of time. EMA assigns more weight to recent prices than older prices. The formula to calculate EMA is:

Exponential Moving Average = (K x (CP - PP)) + PP

C: Current Price of stock, currency, commodity, etc. P: The EMA of preceding periods K: Exponential smoothing constant

A Simple Moving Average (SMA) is used to calculate the value of the first period. Furthermore, the EMA can be used to identify support and resistance areas. However, it may not be optimal for identifying precise entry and exit points.

Face Value

The term face value refers to the actual price of a stock that’s obtained by dividing a company’s net value by its total shares outstanding. In India, the face value of shares can range from Rs. 1 to Rs. 100.

However, the market value of the share may vary. At times, the difference can be drastic. For example, the face value of an MRF share is Rs. 10 but the market value (LTP) of the same share is Rs. 86,313.45.

Face value is also known as nominal value or par value. The latter is used frequently in the case of bonds.

The face value of a bond is the amount that an investor receives from the issuer on maturity. Similar to stocks, bonds and other fixed income instruments may have a different face value and market value.

Fair Value

The fair value of a stock, product, or service is the price at which the buyer and seller willingly agree on without being on the losing end of the deal. Think of fair value as a win-win situation for both parties, assuming that all conditions are normal.

Say Mr. Apple is offered to buy shares of Mr. Orange’s company at Rs. 1000 per share. Mr. Apple evaluates the business and figures out that he can sell the same shares for Rs. 1200, even though Mr. Orange is content to sell the shares at Rs. 200 lower. Both parties agree on the deal at Rs. 1000 because both view it as a good deal.

The formula for the fair value of a stock or index is:

Fair Value = Cash * { 1 + r (X / 360)} - D

Where,

Cash = Latest stock or index value

r = interest rate on purchase

x = number of days to contract expiry

Dividend = Dividends

The definition of fair value is slightly different in the futures market. In the futures market, the fair value is reached when the supply meets the demand, which simply means that the spot price is equal to the futures contractprice.

However, due to inherent volatility of the markets, the price of a futures contract is known to fluctuate around the fair value of a stock or index. Thus, in the fair value in the context of futures is what the price of the contract should be, given the value of the stock or index, dividends, and others.

Fibonacci Retracement

A Fibonacci Retracement is a predictive technical indicator that is used to determine possible direction or trend reversal of a stock or index’s price with horizontal lines for potential support as well as resistance levels.

Fibonacci retracement in action

The logic behind tuning to a Fibonacci Retracement is the assumption that prices will reverse direction towards a previous price-level, especially after a new trend is in motion.

Filing

Fililng is the process of submitting important information and documents to SEBI before an Initial Public Offer (IPO). This term is commonly used when a company submits a Draft Offer Document, Draft Red Herring Prospectus (DRHP), and Final Offer Documents in order to go public.

The process of filing any document with SEBI before an IPO is done to ensure that a company is completely compliant and transparent. That’s how SEBI ensures that public investors can make informed decisions. Thus, filing is a crucial step in the IPO process.

Firm Allotment

Firm Allotment is the process of allocating shares during an IPO to investors who are not considered to be retail public investors. The firm allotment is done as per SEBI guidelines, which dictate that a portion of the IPO can be allocated to the likes of Mutual Funds, regular employees (permanent), and others.

The complete list of firm allotments for investors by allocation is as follows.

Foreign Institutional Investors (FIIs): 30%
Development Financial Institutions (DFIs): 20%
Mutual Funds: 20%
Regular Employees (permanent): 10%
Employee of Promoting Company: 10%
Lead Bankers: 5%

Any leftover percentage can be allocated to promoters.

Fixed Income Securities

Fixed Income Securities are issued in exchange for a loan and offer returns to investors in the form of a fixed interest rate. That’s why they are referred to as “fixed income” securities. The common types of fixed income securities are: Firm Allotment is the process of allocating shares during an IPO to investors who are not considered to be retail public investors. The firm allotment is done as per SEBI guidelines, which dictate that a portion of the IPO can be allocated to the likes of Mutual Funds, regular employees (permanent), and others.

Certificates of Deposit
Corporate Bonds
Municipal Bonds
Treasury Bonds
Treasury Bills

Such securities fall under the category of debt instruments, which means they do not give investors equity shares or ownership in the company but only a promise of returning the principal with interest on maturity.

Often referred to as the coupon rate, the interest on a fixed income security is determined by the creditworthiness of the issuing company or entity as well as the latest interest rate set by the government.

Fixed income securities also confer seniority of claim to investors, which means that the investors who’ve helped finance the loan will receive their money first in the event a company is liquidated.

Flipping

Flipping is the act of buying and selling an asset quickly to make a profit. The term is commonly used in real estate where an investor buys a property and sells it within a short span of time, say days or weeks, to make a quick buck.

The real estate investor may flip the property after making small improvements to it, thereby increasing the chance of making potentially lucrative returns. Flipping is also a term used to describe an investor’s actions during an IPO.

For example, let’s assume Mr. Apple invests in the IPO of Juice & Co. and intends to sell the shares days or weeks after the company’s stock is available on the secondary market.

The stock soars on the first day of listing, right at the opening bell, and Mr. Apple sells. In such a case, Mr. Apple will have earned potential profits by flipping IPO shares.

Floating Interest Rate

The rate of interest that changes across the tenure of a loan, generally every quarter, due to the government’s interest rate, market conditions, and other factors is known as a floating interest rate.

Personal loans and home loans are typical examples of borrowing that carry a floating interest rate. A point to note here: the floating interest rate is added on top of a base interest rate that is charged by lenders.

Follow On Public Offer

A Follow On Public Offer or FPO allows a publicly traded company to issue more stock to public investors. FPOs are similar to IPOs because FPOs allow companies to raise additional capital through the public market.

For an FPO to be possible, a company must have already done an IPO. FPO shares are typically issued at a discount by a company whose track record is already clear because they are publicly traded.

Foreign Direct Investment

Foreign Direct Investment (FDI) is the act of acquiring a majority stake in a company located in a different country with the intention of assisting, growing, and managing the business.

FDIs and FPIs may seem similar but there is a major difference - lasting interest. When a company or investor obtains at least 10% control of foreign company with the intention of actively managing the business, it’s known as lasting interest.

A company that establishes a subsidiary in another country can also be classified as FDI. FDIs can also be made through mergers and acquisitions as well as collaborations with foreign companies

Foreign Portfolio Investment

A Foreign Portfolio Investment includes stocks, bonds, ETFs, derivatives, and other financial instruments from another country. Generally, FPIs do not give an investor the right to ownership or a controlling stake in any organization. Instead, FPIs act as a passive income vehicle. That’s why FPIs are different to Foreign Direct Investment (FDI) in which an ownership stake is acquired with the intention of controlling and influencing business decisions.

Forex Futures Trading

Forex futures trading is the buying and selling of exchange-traded futures contracts for currency pairs . A forex futures contract gives the holder the right and the obligation to buy or sell a pair of currencies at a predetermined price and date. The important components of forex futures trading include:

Forex pair: the currency you will buy in exchange of the other at the end of the futures contract

Lot size: the value of the currency included in the contract

Contract price: the price at which the futures contract is trading

Spot price: the latest forex rate for the currency pair, different from the contract price

Margin: the amount of money you’re required to deposit with your currency trading platform
Tick size: the minimum amount by which a forex futures contract can move, which is Rs. 0.0025 in India
Expiration date: the preagreed day on which the contract must be excercised or squared off

Forex futures trading in India is possible through three exchanges: NSE, BSE, and MSE. The forex futures contracts are standardized derivatives that can be traded between 9.00 AM to 7.30 PM. Forex futures in India are cash settled, meaning profits or losses are settled in INR while the base currency is not delivered.

Forex Options

Forex options are exchange-traded derivative contracts that give the right but not the obligation to buy or sell a pair of underlying currencies at a pre-agreed price and date. Forex options are also known as currency options.

Every forex option can be split into a call or put option. A forex call option gives the holder the right to buy underlying forex pairs while a forex put option gives the holder the right to sell underlying currency pairs.

In either case, there is no obligation to exercise the contract but there is a pre-agreed price and expiration date attached. In India, forex options are only available for the USD-INR currency pair.

Forex Trading

Forex trading means buying and selling currency pairs through exchange-traded derivatives or on the OTC market. A currency can only be bought and sold in exchange for another currency, which is why forex trading is always done in pairs.

Trading forex derivatives is carried out on stock exchanges authorized by regulatory bodies (SEBI & RBI), in tandem with approved brokers who allow users to engage with the forex futures trading and options trading markets.

Forward Market

The forward market is a place where forward contracts are traded. A forward is an over-the-counter derivative that carries a pre-agreed expiration date and price on which the contract must be exercised. It carries a right and an obligation.

Forwards are similar to futures but there is one major difference - forwards are unregulated instruments. Any entity writing a forward contract can customize the lot size and other details to fit their needs.

The forward market, as a whole, is an unregulated market whose typical participants include banks, vendors, and other large financial players.

Forward Price

The forward price is the final value at which a forward contract is exercised, that is, delivered to the buyer by the seller. It is different from the spot price of the underlying asset as it includes the cost of carry like interest rates, storage cost, and other carrying charges. The formula to calculate forward price is:

Forward price: Spot Price − Cost of Carry (storage costs, interest rate, etc)

Founders Stock

The term founders stock refers to shares issued to the founders of a company. This type of stock is issued at face value and carries a vesting period, which is a lock-in period during which the shares cannot be sold.

During this period, the founders stock may not earn any returns, unless there are dividends attached to it. Founders stock is not an accounting term - it is used colloquially to denote the shares issued to founders.

Free Cash Flow

In accounting and earnings reports, free cash flow refers to the amount of money a company has after paying its maintenance expenses, salaries, utility expenses, and other operating expenses as well as capital expenditures.

The formula to calculate free cash flow: Operating Cash Flow − Capital Expenditures

Free cash flow is an important metric, especially for investors because it is a direct indicator of the financial competence of a company. For example, the amount of FCF a company has can decide whether it has enough cash to offer dividends, expand business, buy back shares, etc.

Free Cash Flow

Free float market capitalization is the market cap of a company based on the total freely available publicly traded outstanding shares. The formula to calculate free float market capitalization is:

Free float market capitalization = Share Price x (Number of Shares Available for Trading – Private and Locked-In Shares)

When calculating the free float market cap of a company, the number of shares held privately or the shares that are locked-in are not taken into account. Typically, these shares are held by promoters and the government.