CA Foundation Business & Commercial Knowledge Study Material Chapter 6 Common Business Terminologies – Finance, Stock and Commodity Markets Terminology
Terminology or vocabulary means a set of basic terms or concepts used in a particular field or discipline. Each and every subject (e.g. Economics, Accountancy, Law, Medicine, Management, etc.) has its own terminology. Good understanding of the correct meaning of the terms used is essential to gain conceptual clarity. A student or professional working in the concerned profession cannot be efficient without understanding the terminology used in the concerned profession. A Chartered Accountant is excepted to know and understand the terminology used not only in finance and accounts but also in related areas such as marketing banking, administration, etc. This is because a Chartered Accountant comes across these terminologies in course of audit.
Finance, Stock and Commodity Markets Terminology
- Above par: Price of a security quoted higher than its face value.
- Absorption or acquisition: Takeover of a firm by another firm.
- Accommodation bill: A bill of exchange drawn and accepted without receiving value in exchange. It is means of lending money.
- Account: A record of transactions relating to one head e.g. debtors.
- Accountancy: The held of knowledge containing principles and techniques used in preparing accounts. Account current: A running account summarizing business transactions during a given time period.
- Accounting: The process of measuring, and recording transactions in the books of account.
- Agent: (broker): One who buys and sells securities on behalf of his clients.
- Amortize: To charge regular portion of an expenditure over a fixed time period. For example an expenditure of Rs. 50,000 may be amortized over five years, charging Rs. 10,000 per year in the account books. Also called write off.
- Annuity: An equal amount paid at fixed intervals (e.g. every three months) for a specified period (e.g. twenty years).
- Appreciation: Increase in the value of an asset e.g. shares purchased for Rs. 1 lakh may be Rs. 5 lakh now. There is an appreciation of Rs. 4 lakh.
- Arbitrage: Simultaneous purchase and sale of a security/commodity in different markets to take advantage of price differences.
- Asset: An economic resource expected to give benefit in future. It may be tangible (e.g. a machine) or intangible (e.g. a patents). Assets are of three types:
- Current Assets: The assets which are likely to convert into cash within a year e.g. book debts and stock of finished goods.
- Fixed Assets: The assets which generate revenue and last more than one year e.g. building, vehicles, machinery.
- Intangible Assets: Assets having no physical shape e.g. patents, trademarks and copy-rights.
- Ask/Offer: The lowest price at which the owner is willing to sell his securities.
- Audit: The careful review of financial records to verify their accuracy.
- Auditor: The qualified Chartered Accountant authorised and appointed to conduct an audit.
- Authorised capital: The amount of share capital with which a company is registered. It is mentioned in the company’s Memorandum of Association.
- Backwardation: The charge paid big a bear speculator to a bill for postponement of settlement of a transaction.
- Bad debts: The debts which are not recoverable and are written off as a loss.
- Badla: Carry forward of a transaction from one settlement period to the next without any payment or delivery.
- Balance of payments: A statement of all money flows in and out of a country.
- Balance of trade: A statement of a country’s exports and imports during the year.
- Balance sheet: A statement containing the assets, liabilities and capital of an organisation. It shows the financial position on a specific date.
- Base price: A security’s price at the beginning of a trading day. It is used to determine the day’s lowest/highest price and the price range.
- Basket trading: The facility which enables investors to buy/sell in one go all the 30 scripts of Sensex in proportion of their current weights in the Sensex.
- Bear: A pessimist who expects prices to fall and sells quickly before the value of his holding declines. Bear market: A market situation when share price are continuously falling.
- Beta: A measurement of the relationship between the price of a security and the price movement of the whole market.
- Bid: The highest price a buyer is willing to pay for a share. It is the opposite of ask/offer.
- Blue chip: Shares of a large, well established and financially sound company. It can provide high capital gains.
- Bond: A long-term promissory note issued by a company or government. It shows the amount of the debt, rate of interest and the due date.
- Bonus shares: A free allotment of shares out of accumulated reserves to the existing shareholders in proportion to their current holding.
- Book closure: The period during which a company keeps its register of members closed for updating prior to payment of dividend or issue of new shares/debentures.
- Book value: The value of an asset recorded in the books of account. It also means the difference between total assets and total liabilities.
- Brokerage: The commission charged by brokers.
- Break even point: The number of units that must be sold to generate revenue equal to total expenses. Sale above this point create a profit and sales below it create loss.
- Budget: A detailed plan expressed in quantitative terms for a specific future period.
- Bull: One who expects prices to rise and buys in anticipation.
- Bull market: A market situation in which share prices continuously rise.
- Business days: The days on which stock markets are open – Monday to Friday, excluding public holidays.
- Business risk: The risk inherent in the operations of a firm which uses no debt.
- Buyer: The trading member who has placed on order for the purchase of securities.
- Call: The demand for payment by the company which has issued shares.
- Call option: The right (not obligation) to buy a particular share at a specified price within the specified time period.
- Capital budgeting: The process of planning expenditure on fixed assets.
- Capital gain: The increase in the value of a security.
- Capital market: The financial market for shares, debentures and long-term debt.
- Closing price: The price of a security at the end of a trading day.
- Commercial paper: Short term and unsecured promissory note issued by a large firm with an interest rate below the prime lending rate of commercial banks.
- Commodity: Products used for commerce and traded on authorized commodity platforms.
- Convertible security: A preference share, debenture, a bond that can be converted into equity shares at the option of the holder.
- Consolidation: Business combination of two or more firms.
- Credit period: The length of time for which credit is granted.
- Creditor: The individual/organization who owes money on a particular date.
- Debenture: An instrument acknowledging debt raised by a company/corporation.
- Debtor: An individual/enterprise who owes money, shown as an asset in the balance sheet. Defensive stock: A stock that provides constant dividends even during economic down turn. Depreciation: An expense allowance made for wear and tear of an asset over its estimated useful life.
- Derivatives: A security whose price is derived from one or more underlying assets such as shares, bonds, commodities, currencies, etc.
- Diversification: Spreading the investment risk by purchasing shares of different companies operating in different sectors. Also used to refer to a company investing in several related or unrelated business.
- Dividend: A part of the company’s earning paid to shareholders.
- Devaluation: Reducing the value of a currency in relation to other currencies, decided by the government.
- Disinvestment: Selling a part of the share holding of a public enterprise to private sector.
- E-commerce: Doing business transactions over the internet.
- Economic activity: Any activity undertaken to earn money.
- Equity capital: Funds provided by holders of equity shares.
- Equity: Equity capital, free reserves, retained earnings and preference capital.
- Exchange rate: The rate at which one currency can be purchased for another currency. Ex-dividend: Shares on which dividend declared after their purchase is not payable.
- Foreign company: A company incorporated outside India but having business operations in India.
- Forward trading: Buying and selling without the intention of delivery and payment, aim is to earn from fluctuations in price.
- Futures: The right to buy or sell at a future date and at the specified price.
- Face value: The price at which a share/bond/debenture is issued. Also known as par value.
- Financial instrument: A written document sharing an agreement or a transaction e.g. share, debenture, cheque, etc.
- Financial intermediary: One who acts as a link between buyers and sellers of securities, e.g. share brokers, banks.
- Goodwill: The estimated money value of a firm’s reputation.
- Government bonds: A security issued by a government to raise debt.
- Government company: A Company in which government owns 51 per cent or more of the share capital.
- Hedge: A strategy used to minimise the risk and maximize the return on investment.
- Holding period: The time period during which an individual/corporation holds/owns an asset. This period is considered while pledging the asset as collateral.
- Income stock: A security that offers dividend higher than that on common stock. It has a solid record of dividend payments.
- Index: A statistical measure of change in the security market/economy. It is usually calculated as a percentage change in the base value overtime.
- Initial public offer (IPO): A company’s first issue of shares to general public.
- Internet trading: Buying and selling securities over the internet. SEBI approved it in January 2000. Interim dividend: A dividend declared prior to the close of the financial year.
- Joint venture: A partnership between two or more independent firms resulting in the creation of a third enterprise.
- Journal: Datewise records of transactions, a book of original entry.
- Lame duck: A speculator struggling to honour his commitment due to unexpected fluctuations in the price of a security on the stock market.
- Lease: A legal right for the use of an asset.
- Ledger: A book of account in which entries are posted from the Journal into various accounts. Lien: A legal claim to property until repayment of debt.
- Limit order: An order to buy or sell a share at a specified price. It specifies the minimum price the seller is willing to accept or a maximum price the buyer is willing to pay.
- Liquidation: Piecemeal sale of the assets of a division of the company.
- Listed stock: The shares of a company that are eligible for trading on the stock exchange.
- Margin trading: Buying securities on a stock exchange after keeping a deposit with the broker. Market capitalization: The total market value of a company’s out standing shares.
- Minimum subscription: The minimum amount of share capital a company must receive in cash before making allotment of shares. It is equal to 90 per cent of issued capital.
- Money market: Market for raising short-term funds.
- Mutual funds: A pool of money managed by experts for investing in shares, debentures and other securities. .
- Nominee director: A director nominated by the financial institution from which the company has raised a loan.
- Odd lot: Shares less than the trading lot and held by a small investor.
- One sided market: A market having only potential buyers or only potential sellers.
- Out-of-the money (OTM): In case of call options, it means the share price is below the strike price. In case of put options, it means the share price is above the strike price.
- Par value: The value of a share printed on the share certificate.
- Portfolio: Various types of securities of different companies held by an investor.
- Preliminary expenses: Expenses incurred for the formation of a company.
- Pre-opening session: Time duration from 9.00 am to 9.15 a.m. during which order entry, modification and cancellation are done before the start of trading on stock exchange.
- Price earning (PIE) ratio: The market price of a share divided by the earning per share. Prospectus: A document issued by a Company to sell shares/debentures to the general public.
- Proxy: A written authority given by a member of a company to some one to attend the meeting on his/her benefit.
- Right shares: Equity shares issued by a company to the existing shareholders in proportion to their current holding.
- Securities: A transferable certificate of ownership of shares, debentures, etc.
- Share: A part in the share capital of a company.
- Stock: Fully paid shares of a company.
- Strike price: The price at which the shareholder can buy (in case of call option) or sell (in case of put option) a security.
- Stock split: Splitting one share into several shares to increase the availability of existing shares e.g., splitting a share with face value of 100 into 10 shares with face value of Rs. 10 each.
- Thin market: A market with a few bids to buy or offer to sell, the prices in such market vary highly. Trading session: The time period during which the stock market is open for trading.
- Underwriting: Guarantee to subscribe to an issue of shares in case public does not subscribe to it.
- Working capital: The capital used in day-to-day business activities, also called circulating capital.
- Yield: Percentage return on investment in case of shares it is calculated by dividing the annual dividend with the current price of the share.
- Yield-to-call: The rate of return earned on a bond when it is called before the date of maturity.
- Zero coupon bond: A bond sold at a discount below par but paid back at face value. No interest is payable on it.