QUANTEXPERT – STOCKS TERMS


Perhaps we should start by looking at the basics: What is stock? Why does a company
issue stock? Why do investors pay good money for little pieces of paper called stock
certificates? What do investors look for? What about Value Line ratings and what about
dividends?

Stock is nothing but a piece of ownership of a company. The owner of a stock is owner of
the company to the extent of his/her holding as a percentage of the total stock floating in
the market. Since the stockholder is the owner of the company, he obviously has right on
the profit of the company. At the end of the year when the profit gets distributed, he/she
also gets some booty depending upon his/her share. This we call as dividend. Now this is
more of bookish definition. Let us understand stock in more detail.

To start with, if a company wants to raise capital (money) one of its options is to issue
stock. It has other methods, such as issuing bonds and getting a loan from the bank. But
stock raises capital without creating debt, without creating a legal obligation to repay
those funds.

What do the buyers of the stock -- the new owners of the company -- expect for their
investment? The popular answer, the answer many people would give is: they expect to
make lots of money; they expect other people to pay them more than they paid
themselves. Well, that doesn't just happen randomly or by chance (well, maybe
sometimes it does, who knows?)

The less popular, less simple answer is: shareholders -- the company's owners -- expect
their investment to earn more, for the company, than other forms of investment. If that
happens, if the return on investment is high, the price tends to increase. Why?

Who really knows? But it is true that within an industry the Price/Earnings (i.e., P/E)
ratio tends to stay within a narrow range over any reasonable period of time -- measured
in months or a year or so.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

So if the earnings go up, the price goes up. And investors look for companies whose
earnings are likely to go up. How much?

There's a number -- the accountants call it Shareholder Equity -- which in some magical
sense represents the amount of money the investors have invested in the company. I say
magical because while it translates to (Assets - Liabilities) there is often a lot of
accounting trickery that goes into determining Assets and Liabilities.

But looking at Shareholder Equity, (and dividing that by the number of shares held to get
the book value per share) if a company is able to earn, say, $1.50 on a stock whose book
value is $10, that's a 15% return. That's actually a good return these days, much better
than you can get in a bank or C/D or Treasury bond, and so people might be more
encouraged to buy, while sellers are anxious to hold on. So the price might be bid up to
the point where sellers might be persuaded to sell.

A measure that is also sometimes used to assess the price is the Price/Book (i.e., P/B)
ratio. This is just the stock price at a particular time divided by the book value.

What about dividends? Dividends are certainly more tangible income than potential
earnings increases and stock price increases, so what does it mean when a dividend is
non-existent or very low? And what do people mean when they talk about a stock's yield?

To begin with the easy question first, the yield is the annual dividend divided by the stock
price. For example, if company XYZ is paying $.25 per quarter ($1.00 per year and XYZ
is trading at $10 per share, the yield is 10%. A company paying no or low dividends
(zero or low yield) is really saying to its investors -- its owners, "We believe we can earn
more, and return more value to shareholders by retaining the earnings, by putting that
money to work, than by paying it out and not having it to invest in new plant or goods or
salaries." And having said that, they are expected to earn a good return on not only their
previous equity, but on the increased equity represented by retained earnings.

So a company whose book value last year was $10 and who retains its entire $1.50
earnings increases its book value to 11.50 less certain expenses. That increased book
value - let's say it is now $11 -- means the company must earn at least $1.65 this year Just
to keep up with its 15% return on equity. If the company earns $1.80, the owners have
indeed made a good investment, and other investors, seeking to get in on a good thing,
bid up the price.

That's the theory anyway. In spite of that, many investors still buy or sell based on what
some commentator says or on announcement of a new product or on the hiring (or
resignation) of a key officer, or on general sexiness of the company's products. And that
will always happen.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS



Preferred stocks combine characteristics of common stocks and bonds. Garden-variety

preferred shares are a lot like general obligation bonds/debentures; they are called shares,
but carry with them a set dividend, much like the interest on a bond. Preferred shares also
do not normally vote, which distinguishes them from the common shares. While today
there are a lot of different kinds of hybrid preferred issues, such as a call on the gold
production of Freeport McMoran Copper and Gold to the point where they will deliver it,
we will consider characteristics of the most ordinary variety of preferred shares. In
general, a preferred has a fixed dividend (as a bond pays interest), a redemption price (as
a bond), and perhaps a redemption date (like a bond). Unlike a stock, it normally does not
participate in the appreciation (or drop) of the common stock (it trades like a bond).
Preferreds can be thought of as the lowest-possible grade bonds. The big point is that the
dividend must be paid from after-tax money, making them a very expensive form of
capitalization.

One difference from bonds is that in liquidation (e.g. following bankruptcy), bondholder
claims have priority over preferred shares, which in turn have priority over common
shares (in that sense, the preferred shares are "preferred"). These shares are also preferred
(hence the name) with respect to payment of dividends, while common shares may have a
rising, falling or omitted dividends. Normally a common dividend may not be paid unless
the preferred shares are fully paid. In many cases (sometimes called "cumulative
preferred"), not only must the current preferred dividend be paid, but also any missed
preferred dividends (from earlier time periods) must be made up before any common
dividend may be paid.

Basically, preferreds stand between the bonds and the common shares in the pecking
order. So if a company goes bankrupt, and the bondholders get paid off, the preferreds
have next call on the assets - and unless they get something, the common shareholders
don't either.

Some preferred shares also carry with them a conversion privilege (and hence may be
called "convertible preferred"), normally at a fixed number of shares of common per
share of preferred. If the value of the common shares into which a preferred share maybe
converted is low, the preferred will perform price-wise as if it were a bond; that is often
the case soon after issue. If, however, the common shares rise in value enough, the value
of the preferred will be determined more by the conversion feature than by its value as a
pseudo-bond. Thus, convertible preferred might perform like a bond early in its life (and
its value as a pseudo-bond will be a floor under its price) and, if all goes well, as a
(multiple of) common stock later in its life when the conversion value governs.

And as time has gone on, even more elaborate variations have been introduced. The
primary reason is that a firm can tailor its cost of funds between that of the common stock
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

and bonds by tailoring a preferred issue. But it isn't a bond on the books - and it costs
more than common stock.



An American Depositary Receipt (ADR) is a share of stock of an investment in shares of

a non-US corporation. The shares of the non-US corporation trade on a non-US
exchange, while the ADRs, perhaps somewhat obviously, trade on a US exchange. This
mechanism makes it straightforward for a US investor to invest in a foreign issue. ADRs
were first introduced in 1927.

Two banks are generally involved in maintaining an ADR on a US exchange: an

investment bank and a depositary bank. The investment bank purchases the foreign
shares and offers them for sale in the US. The depositary bank handles the issuance and
cancellation of ADRs certificates backed by ordinary shares based on investor orders, as
well as other services provided to an issuer of ADRs, but is not involved in selling the
ADRs.

To establish an ADR, an investment bank arranges to buy the shares on a foreign market
and issue the ADRs on the US markets.

For example, BigCitibank might purchase 25 million shares of a non-US stock. Call it
Infosys Technologies Limited (INFOSYS). Perhaps INFOSYS trades on the Paris
exchange, where BigCitibank bought them. BigCitibank would then register with the
SEC and offer for sale shares of INFOSYS ADRs.

INFOSYS ADRs are valued in dollars, and BigCitibank could apply to the NYSE to list
them. In effect, they are repackaged INFOSYS shares, backed by INFOSYS shares
owned by BigCitibank, and they would then trade like any other stock on the NYSE.

BigCitibank would take a management fee for their efforts, and the number of INFOSYS
shares represented by INFOSYS ADRs would effectively decrease, so the price would go
down a slight amount; or INFOSYS itself might pay BigCitibank their fee in return for
helping to establish a US market for INFOSYS. Naturally, currency fluctuations will
affect the US Dollar price of the ADR.

BigCitibank would set up an arrangement with another large financial institution for that
institution to act as the depositary bank for the ADRs. The depositary would handle the
day-to-day interaction with holders of the ADRs.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Dividends paid by INFOSYS are received by BigCitibank and distributed proportionally

to INFOSYS ADR holders. If INFOSYS withholds (foreign) tax on the dividends before
this distribution, then BigCitibank will withhold a proportional amount before
distributing the dividend to ADR holders, and will report on a Form 1099-Div both the
gross dividend and the amount of foreign tax withheld.



Dividend, as discussed earlier, is nothing but the portion of the profit, which is distributed
among the shareholders. Dividend is always a percentage of the face value of the share. If
the face value of the stock is $10, and the company declares 10% dividend, then you get
$1 for each share you hold. Now remember that, not all of profit is distributed. Part of it
is retained so that it can be used for further growth of the company or some contingency.
This part is aptly called Reserve.

A company may periodically declare cash and/or stock dividendsψ. This article deals with
cash dividends on common stock. Two paragraphs also discuss dividends on Mutual
Fund shares. A separate article elsewhere in this manual discusses stock splits and stock
dividends.

The Board of Directors of a company decides if it will declare a dividend, how often it
will declare it, and the dates associated with the dividend. Quarterly payment of
dividends is very common, annually or semiannually is less common, and many
companies don't pay dividends at all. Other companies from time to time will declare an
extra or special dividend. Mutual funds sometimes declare a year-end dividend and
maybe one or more other dividends.

If the Board declares a dividend, it will announce that the dividend (of a set amount) will
be paid to
Shareholders of record as of the RECORD DATE∗ and will be paid or distributed on the
DISTRIBUTION DATE (sometimes called the Payable Date).

Before we begin the discussion of dates and date cutoffs, it's important to note that three-
day settlements (T+3) became effective 7 June 1995. In other words, the SEC's T+3 rule
states that all stock trades must be settled within 3 business days.
ψ
Stock dividend is nothing but the dividend in forms of stock and is the distribution of stocks to the existing
stockholders as a percentage of the present holding. If the stock dividend is 1:2, you will get 1 stock extra for every 2
stocks you hold.

∗
Record Date: The date on which the tally is taken for who the shareholders are. The shareholders as of that date are
eligible for dividend. So if you buy some stock and sold it just before the record date, you can as well forget the
dividend. So bad !!!

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

In order to be a shareholder of record on the RECORD DATE you must own the shares
on that date (when the books close for that day). Since virtually all stock trades by
brokers on exchanges are settled in 3 (business) days, you must buy the shares at least 3
days before the RECORD DATE in order to be the shareholder of record on the
RECORD DATE. So the (RECORD DATE - 3 days) is the day that the shareholder of
record needs to own the stock to collect the dividend. He can sell it the very next day and
still get the dividend.

If you bought it at least 3 business days before the RECORD date and still owned it at
the end of the RECORD DATE, you get the dividend. (Even if you ask your broker to
sell it the day after the (RECORD DATE - 3 days), it will not have settled until after the
RECORD DATE so you will own it on the RECORD DATE.)

So someone who buys the stock on the (RECORD DATE - 2 days) does not get the
dividend. A stock paying a 50c quarterly dividend might well be expected to trade for 50c
less on that date, all things being equal. In other words, it trades for its previous price,
Except for the Dividend. So the (RECORD DATE - 2 days) is often called the EX-DIV
date. In the financial listings, an x indicates that.

How can you try to predict what the dividend will be before it is declared?

Many companies declare regular dividends every quarter, so if you look at the last
dividend paid, you can guess the next dividend will be the same. Exception: when the
Board of IBM, for example, announces it can no longer guarantee to maintain the
dividend, you might well expect the dividend to drop, drastically, next quarter. The
financial listings in the newspapers show the expected annual dividend, and other listings
show the dividends declared by Boards of directors the previous day, along with their
dates.

Other companies declare less regular dividends. Companies, whose shares trade as are
very dependent on currency market fluctuations, so will pay differing amounts from time
to time.
Some companies may be temporarily prohibited from paying dividends on their common
stock, usually because they have missed payments on their bonds and/or preferred stock.

On the DISTRIBUTION DATE shareholders of record on the RECORD date will get the
dividend. If you own the shares yourself, the company will mail you a check. If you
participate in a DRIP (Dividend reinvestment Plan, see article on DRIPs elsewhere in
this manual) and elect to reinvest

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

the dividend, you will have the dividend credited to your DRIP account and purchase
shares, and if your stock is held by your broker for you, the broker will receive the
dividend from the company and credit it to your account.

Dividends on preferred stock work very much like common stock, except they are much
more predictable. Since most of the time they are mentioned at the time of issue.

Finally, just a bit of accounting information. Earnings are always calculated first, and
then the directors of a company decide what to do with those earnings. They can
distribute the earnings to the stockholders in the form of dividends, retain the earnings,
or take the money and head for Brazil (NB: the last option tends to make the stockholders
angry and get the local district attorney on the case :-). Utilities and seasonal companies
often pay out dividends that exceed earnings - this tends to prop up the stock price nicely
- but of course no company can do that year after year.



Indexes are the barometers of the market and are indicators of how the market is moving.
They are constructed by taking some of the stocks, which are indicative of the market.
The sample is such that they represent various sectors of economy. The better the
sampling, the better is the indication. They are constructed by taking n number of stocks.
The examples below give idea about various indexes. This list is by no way exhaustive.
Investors use different indexes depending upon their requirements. For example the
mutual funds use indexes, which are fairly broad based (That is in index, which is
constructed by taking more number of shares into consideration. The reason - Better
sample which will represent the market better).

There are three major classes of indexes in use today in the US. They are:

A - equally weighted price index

An example is the Dow Jones Industrial Average
B - market-capitalization-weighted index
An example is the S&P Industrial Average
C - equally-weighted returns index
The only one of its kind is the Value-Line index.

Of these, A and B are widely used.

Type A index
As the name suggests, the index is calculated by taking the average of the prices of a
set of companies:

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Index = Sum(Prices of N companies) / N

Type B index
In this index, each of the N company's price is weighted by the market capitalization
of the company.

Sum (Company market capitalization * Price) over N companies

Index = ------------------------------------------------------------
Market capitalization for these N companies

Type C index
Here the index is the average of the returns of a certain set of companies. Value Line
publishes two versions of it:

the arithmetic index : (VLAI/N) = 1 * Sum(N returns)

the geometric index : VLGI = {Product(1 + return) over N}^{1/n}, which is just
the geometric mean of the N returns.



The Dow Jones averages are computed by summing the prices of the stocks in the
average and then dividing by a constant called the "divisor". The divisor for the Dow
Jones Industrial Average (DJIA) is adjusted periodically to reflect splits in the stocks
making up the average. The divisor was originally 30 but has been reduced over the years
to a value far less than one. The current value of the divisor is about 0.35; the precise
value is published in the Wall Street Journal and Barron's.

According to Dow Jones, the industrial average started out with 12 stocks in 1896. Those
original stocks, for all of you trivia buffs out there, were American Cotton Oil, American
Sugar, American Tobacco, Chicago Gas, Distilling and Cattle Feeding, General Electric
(the only survivor), Laclede Gas, National Lead, North American, Tennesee Coal and
Iron, U.S. Leather preferred, and U.S. Rubber. The number of stocks was increased to 20
in 1916. The 30-stock average made its debut in 1928, and the number has remained
constant ever since.

The most recent change was made effective 17 March 1997, when Hewlett-Packard,
Johnson & Johnson, Travelers Group, and Wal-Mart joined the average, replacing
Bethlehem Steel, Texaco, Westinghouse Electric and Woolworth.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS



US Indexes:

AMEX Composite
A capitalization-weighted index of all stocks trading on the ASE.
NASDAQ 100
The 100 largest non-financial stocks on the NASDAQ exchange.
NASDAQ Composite
Midcap index made up of all the OTC stocks that trade on the NASDAQ Market
System. 15% of the US market.
NYSE Composite
A capitalization-weighted index of all stocks trading on the NYSE.
Standard & Poor's 500
Made up of 400 industrial stocks, 20 transportation stocks, 40 utility, and 40
financial. Market value (#of common shares * price per share) weighted.
Dividend returns not included in index. Represents about 70% of US stock
market. Cap range 73 to 75,000 million.
Value Line Composite
It is a price-weighted index as opposed to a capitalization index. Many think this
gives better tracking of investment results, since it is not over-weighted in IBM,
for example, and most individuals are likewise not weighted by market cap in
their portfolios (unless they buy index funds).

Non-US Indexes:

CAC-40 (France)
The CAC-Quarante, this is 40 stocks on the Paris Stock Exchange formed into an
index. The futures contract on this index is probably the most heavily traded
futures contract in the world.
DAX (Germany)
The German share index DAX tracks the 30 most heavily traded stocks (based on
the past three years of data) on the Frankfurt exchange.
FTSE-100 (Great Britain)
Commonly known as 'footsie'. Consists of a weighted arithmetical index of 100
leading UK equities by market capitalization. Calculated on a minute-by-minute
basis. The footsie basically represents the bulk of the UK market activity.
Nikkei (Japan)
"Nikkei" is an abbreviation of "nihon keizai" -- "nihon" is Japanese for "Japan",
while "keizai" is "business, finance, economy" etc. Nikkei is also the name of
Japan's version of the WSJ. The nikkei is sometimes called the "Japanese Dow,"
in that it is the most popular and commonly quoted Japanese market index.
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

BSE (Sensex)
A capitalization weighted index, which is constructed by taking 30 blue chip
shares into consideration. The selection of the shares is done one basis of various
parameters. Some of them are market capitalization, Number of floating shares,
Volume of transaction etc.
NSE (Nifty)
A capitalization weighted index, which has been constructed by taking 50 shares
into consideration.



Introduction to IPOs

When a company whose stock is not publicly traded wants to offer that stock to the
general public, it usually asks an "underwriter" to help it do this work. The underwriter is
almost always an investment banking company, and the underwriter may put together a
syndicate of several investment banking companies and brokers. The underwriter agrees
to pay the issuer a certain price for a minimum number of shares, and then must resell
those shares to buyers, often clients of the underwriting firm or its commercial brokerage
cousin. Each member of the syndicate will agree to resell a certain number of shares. The
underwriters charge a fee for their services.

For example, if BigGlom Corporation (BGC) wants to offer its privately- held stock to
the public, it may contact BigBankBrokers (BBB) to handle the underwriting. BGC and
BBB may agree that 1 million shares of BGC common will be offered to the public at
$10 per share. BBB's fee for this service will be $0.60 per share, so that BGC receives
$9,400,000. BBB may ask several other firms to join in a syndicate and to help it market
these shares to the public.

A tentative date will be set, and the issuer will issue a preliminary prospectus detailing all
sorts of financial and business information, usually with the underwriter's active
assistance.

Usually, terms and conditions of the offer are subject to change up until the issuer and
underwriter agree to the final offer. The issuer then releases the stock to the underwriter
and the underwriter releases the stock to the public. It is now up to the underwriter to
make sure those shares get sold, or else the underwriter is stuck with the shares.

The issuer and the underwriting syndicate jointly determine the price of a new issue. The
approximate price listed in the red herring (the preliminary prospectus - often with words

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

in red letters which say this is preliminary and the price is not yet set) may or may not be
close to the final issue price.

Consider NetManage, NETM, which started trading on NASDAQ on Tuesday, 21 Sep

1993. The preliminary prospectus said they expected to release the stock at $9-10 per
share. It was released at $16/share and traded two days later at $26+. In this case, there
could have been sufficient demand that both the issuer (who would like to set the price as
high as possible) and the underwriters (who receive a commission of perhaps 6%, but
who also must resell the entire issue) agreed to issue at 16. If it then jumped to 26 on or
slightly after opening, both parties underestimated demand. This happens fairly often.

The Mechanics of Stock Offerings

The Securities Act of 1933, also known as the Full Disclosure Act, the New Issues Act,
the Truth in Securities Act, and the Prospectus Act governs the issue of new issue
corporate securities. The Securities Act of 1933 attempts to protect investors by requiring
full disclosure of all material information in connection with the offering of new
securities. Part of meeting the full disclosure clause of the Act of 1933, requires that
corporate issuers must file a registration statement and preliminary prospectus (also know
as a red herring) with the SEC. The Registration statement must contain the following
information:

1. A description of the issuer's business.

2. The names and addresses of the key company officers, with salary and a 5
year business history on each.
3. The amount of ownership of the key officers.
4. The company's capitalization and description of how the proceeds from the
offering will be used. Any legal proceedings that the company is involved in.

Once the registration statement and preliminary prospectus are filed with the SEC, a 20
day cooling-off period begins. During the cooling-off period the new issue may be
discussed with potential buyers, but the broker is prohibited from sending any materials
(including Value Line and S&P sheets) other than the preliminary prospectus.

Testing receptivity to the new issue is known as gathering "indications of interest." An

indication of interest does not obligate or bind the customer to purchase the issue when it
becomes available, since all sales are prohibited until the security has cleared registration.

A final prospectus is issued when the registration statement becomes effective (when the
registration statement has cleared). The final prospectus contains all of the information in
the preliminary prospectus (plus any amendments), as well as the final price of the issue,
and the underwriting spread.
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

The clearing of a security for distribution does not indicate that the SEC approves of the
issue. The SEC ensures only that all necessary information has been filed, but does not
attest to the accuracy of the information, nor does it pass judgment on the investment
merit of the issue. Any representation that the SEC has approved of the issue is a
violation of federal law.

The Underwriting Process

The underwriting process begins with the decision of what type of offering the company
needs. The company usually consults with an investment banker to determine how best to
structure the offering and how it should be distributed.

Securities are usually offered in either the new issue, or the additional issue market.
Initial Public Offerings (IPOs) are issues from companies first going public, while
additional issues are from companies that are already publicly traded.

In addition to the IPO and additional issue offerings, offerings may be further classified
as:

• Primary Offerings: Proceeds go to the issuing corporation.

• Secondary Offerings: Proceeds go to a major stockholder who is selling all or part of
his/her equity in the corporation.
• Split Offerings: A combination of primary and secondary offerings.
• Shelf Offering: Under SEC Rule 415 - allows the issuer to sell securities over a two
year period as the funds are needed.

The next step in the underwriting process is to form the syndicate (and selling group if
needed). Because most new issues are too large for one underwriter to effectively
manage, the investment banker, also known as the underwriting manager, invites other
investment bankers to participate in a joint distribution of the offering. The group of
investment bankers is known as the syndicate. Members of the syndicate usually make a
firm commitment to distribute a certain percentage of the entire offering and are held
financially responsible for any unsold portions. Selling groups of chosen brokerages, are
often formed to assist the syndicate members meet their obligations to distribute the new
securities. Members of the selling group usually act on a " best efforts" basis and are not
financially responsible for any unsold portions.

Under the most common type of underwriting, firm commitment, the managing
underwriter makes a commitment to the issuing corporation to purchase all shares being
offered. If part of the new issue goes unsold, any losses are distributed among the
members of the syndicate.
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Whenever new shares are issued, there is a spread between what the underwriters buy the
stock from the issuing corporation for and the price at which the shares are offered to the
public (Public Offering Price, POP). The price paid to the issuer is known as the
underwriting proceeds. The spread between the POP and the underwriting proceeds is
split into the following components:

• Manager's Fee: Goes to the managing underwriter for negotiating and managing
the offering.
• Underwriting Fee: Goes to the managing underwriter and syndicate members for
assuming the risk of buying the securities from the issuing corporation.
• Selling Concession - Goes to the managing underwriter, the syndicate members,
and to selling group members for placing the securities with investors.

The underwriting fee is usually distributed to the three groups in the following
percentages:

• Manager's Fee 10% - 20% of the spread

• Underwriting Fee 20% - 30% of the spread
• Selling Concession 50% - 60% of the spread

In most underwritings, the underwriting manager agrees to maintain a secondary market

for the newly issued securities. In the case of "hot issues" there is already a demand in the
secondary market and no stabilization of the stock price is needed. However many times
the managing underwriter will need to stabilize the price to keep it from falling too far
below the POP. SEC Rule 10b-7 outlines what steps are considered stabilization and what
constitutes market manipulation. The managing underwriter may enter bids (offers to
buy) at prices that bear little or no relationship to actual supply and demand, just so as the
bid does not exceed the POP. In addition, the underwriter may not enter a stabilizing bid
higher than the highest bid of an independent market maker, nor may the underwriter buy
stock ahead of an independent market maker.

Managing underwriters may also discourage selling through the use of a syndicate
penalty bid. Although the customer is not penalized, both the broker and the brokerage
firm are required to rebate the selling concession back to the syndicate. Many brokerages
will further penalize the broker by also requiring that the commission from the sell be
rebated back to the brokerage firm.

Market Capitalization

The market capitalization (or "cap") of a stock is simply the market value of all
outstanding shares and is computed by multiplying the market price by the number of
outstanding shares. For example, a publicly held company with 10 million shares
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

outstanding that trade at US$20 each would have a market capitalization of 200 million
US$.

The value for a stock's "cap" is used to segment the universe of stocks into various
chunks, including large-cap, mid-cap, and small-cap, etc. There are no hard-and-fast rules
that define precisely what it means for a company to be in one of these categories, but
there is some general agreement. Generally

• Large-cap: Over $5 billion

• Mid-cap: $500 million to $5 billion
• Small-cap: $150 million to $500 million
• Micro-cap: Below $150 million



Companies may repurchase their own stock on the open market, usually common shares,
for many reasons. In theory, the buyback should not be a short-term fix to the stock price
but a rational use of cash, implying that a company's best investment alternative is to buy
back its stock. Normally these purchases are done with free cash flow, but not always.
What happens is that if earnings stay constant, the reduced number of shares will result in
higher earnings per share, which, all else being equal will result, should result, in a higher
stock price.

But note that there is a difference between announcing a buyback and actually buying
back stock. Just the announcement usually helps the stock price, but what really counts is
that they actually buy back stock. Not all "announced share buybacks" are actually
implemented. Some are announced just for the short-term bounce that usually comes with
the announcement.



Ordinary splits occur when a publicly held company distributes more stock to holders of
existing stock. A stock split, say 2-for-1, is when a company simply issues one additional
share for every one outstanding. After the split, there will be two shares for every one
pre-split share. (So it is called a "2-for-1 split.") If the stock was at $50 per share, after
the split, each share is worth $25, because the company's net assets didn't increase, only
the number of outstanding shares.

Sometimes an ordinary split is referred in terms of percentage. A 2:1 split is a 100%

stock split can also be called 100% stock dividend or 100% stock split. (A 50% split
would be a 3:2 split or 50% stock dividend). Each stockholder will get 1 more share of
stock for every 2 shares owned.
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Reverse splits occur when a company wants to raise the price of their stock, so it no
longer looks like a "penny stock" but looks more like a self-respecting stock. Or they
might want to conduct a massive reverse split to eliminate small holders. If a $1 stock is
split 1:10 the new shares will be worth $10. Holders will have to trade in their 10 Old
Shares to receive 1 New Share.



A warrant is a financial instrument, which was issued with certain conditions. The issuer
of that warrant sets those conditions. Sometimes the warrant and common or preferred
convertible stock are issued by a startup company bundled together as "units" and at
some later date the units will split into warrants and stock. This is a common financing
method for some startup companies.

As an example of a "condition," there may be an exchange privilege which lets you

exchange 1 warrant plus $25 in cash (or even no cash at all) for 100 shares of common
stock in the corporation, any time after some fixed date and before some other designated
date. (And often the issuer can extend the "expiration date.")

So there are some similarities between warrants and call options for common stock.

Both allow holders to exercise the warrant/option before an expiration date, for a certain
number of shares. But independent parties, such as a member of the Chicago Board
Options Exchange, issue the option while the warrant is issued and guaranteed by the
corporate issuer itself. The lifetime of a warrant is often measured in years, while the
lifetime of a call option in months. Sometimes the issuer will try to establish a market for
the warrant, and even try to register it with a listed exchange. The price can then be
obtained from any broker. Other times the warrant will be privately held, or not registered
with an exchange, and the price is less obvious, as is true with non-listed stocks.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS


A bond is just an organization's IOU; i.e., a promise to repay a sum of money at a certain
interest rate and over a certain period of time. In other words, a bond is a debt
instrumentψ. Other common terms for these debt instruments are notes and debentures.
Most bonds pay a fixed rate of interest (variable rate∗ bonds are slowly coming into more
use though) for a fixed period of time.

Why do organizations issue bonds? Let's say a corporation needs to build a new office
building, or needs to purchase manufacturing equipment, or needs to purchase aircraft. Or
maybe a city government needs to construct a new school, repair streets, or renovate the
sewers. Whatever the need, a large sum of money will be needed to get the job done.

One way is to arrange for banks or others to lend the money. But a generally less
expensive way is to issue (sell) bonds. The organization will agree to pay some interest
rate on the bonds and further agree to redeem the bonds (i.e., buy them back) at some
time in the future (the redemption date). This process is nothing but the taking back of the
certificate and returning of the principal.

Companies of all sizes issue corporate bonds. Bondholders are not owners of the
corporation. But if the company gets in financial trouble and needs to dissolve,
bondholders must be paid off in full before stockholders get anything. If the corporation
defaults on any bond payment, any bondholder can go into bankruptcy court and request
the corporation be placed in bankruptcy.

Municipal bonds are issued by cities, states, and other local agencies and may or may not
be as safe as corporate bonds. The taxing authority of the state of town backs some
municipal bonds, while others rely on earning income to pay the bond interest and
principal. Municipal bonds are not taxable by the federal government (some might be
subject to A Minimum Tax, AMT) and so don't have to pay as much interest as
equivalent corporate bonds.

ψ
Debt instruments are nothing but loans taken by either company or the govt. or the municipality. There
are various types of debt instruments like debenture, bond, notes, bills and many more. The name varies
depending upon the issuer or nature of the instrument. But one common characteristic of most of them is
that, they all carry some coupon Interest rate. I say most and not all because Zero coupon bonds do not
carry any coupon rate. We will discuss about these instruments else where in this document.
∗
Variable rate of interest: The interest of these securities are linked to some reference rate, many cases to
LIBOR (London Inter Bank Offer Rate). They may be some basis points above LIBOR, say 200 basis
points. This means LIBOR + 2%. If LIBOR is 5%, then the interest comes to 7%. Depending upon the
LIBOR movement, the interest rate on the bond also varies.
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

U.S. Bonds are issued by the Treasury Department and other government agencies and
are considered to be safer than corporate bonds, so they pay less interest than similar term
corporate bonds. Treasury bonds are not taxable by the state and some states do not tax
bonds of other government agencies. Shorter-term bonds are called notes and much
shorter term bonds (a year or less) are called bills, and these have different minimum
purchase amounts.

In the U.S., corporate bonds are often issued in units of $1,000. When municipalities
issue bonds, they are usually in units of $5,000. Interest payments are usually made every
6 months.

The price of a bond is a function of prevailing interest rates. As rates go up, the price of
the bond goes down, because that particular bond becomes less attractive (i.e., pays less
interest) when compared to current offerings. As rates go down, the price of the bond
goes up, because that particular bond becomes more attractive (i.e., pays more interest)
when compared to current offerings. The price also fluctuates in response to the risk
perceived for the debt of the particular organization. For example, if a company is in
bankruptcy, the price of that company's bonds will be low because there may be
considerable doubt that the company will ever be able to redeem the bonds.

On the redemption date, bonds are usually redeemed at "par", meaning the company pays
back exactly what the bondholders paid it way back when. Most bonds also allow the
bond issuer to redeem the bonds at any time before the redemption date, usually at par
but sometimes at a higher price. This is known as "calling" the bonds and frequently
happens when interest rates fall, because the company can sell new bonds at a lower
interest rate (also called the "coupon") and pay off the older, more expensive bonds with
the proceeds of the new sale. By doing so the company may be able to lower their cost of
funds considerably.

Who buys bonds? Many individuals buy bonds. And of course Investment banks like
Goldman Sachs buy bonds. Banks buy bonds. Money market funds often need short-
term cash equivalents, so they buy bonds expiring in a short time. People who are very
adverse to risk might buy US Treasuries, as they are the standard for safety. Foreign
governments whose own economy is very shaky often buy Treasuries.

In general, bonds pay a bit more interest than federally insured instruments such as
Certificate of Deposit, (CD) because the bond buyer is taking on more risk as compared
to buying a CD. Many rating services (Moody's is probably the largest) help bond buyers
assess the risks of any bond issue by rating them



Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Moody's Bond Ratings are intended to characterize the risk of holding a bond. These
ratings, or risk assessments, in part determine the interest that an issuer must pay to
attract purchasers to the bonds. All information herein was obtained from Moody's Bond
Record. The symbols used are AAA, AA, BAA, etc. They symbolize the risk associated
with that particular instrument as regards to the payment of principle and the interest.
Another rating agency which is not as big, nevertheless famous is Standard & Poor'’
(Popularly known as S&P). They have different symbols for denoting various degrees of
risk associated with the debt instruments.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS



Advance Refunding:
The replacement of debt prior to the original call dateψ via the issuance of refunding
bonds.

Callable Bond:
A bond that can be redeemed by the issuer prior to its maturity. Usually a premium is
paid to the bond owner when the bond is called.

Certificate of Participation (COP):

Financing whereby an investor purchases a share of the lease revenues of a program
rather than the bond being secured by those revenues. Usually issued by authorities
through which capital is raised and lease payments are made. The authority usually uses
the proceeds to construct a facility that is leased to the municipality, releasing the
municipality from restrictions on the amount of debt that they can incur.

Discount Bond:
A bond that is valued at less than its face amount.

Double Barreled:
Bonds secured by the pledge of two or more sources of repayment.

Face Value:
The stated principal amount of a bond. Also called par value. Bond issued below this
price are called below par and the ones which are issued above the face value, are called
above par.

Par Value:
The face value of a bond, generally $1,000.

Premium Bond:
A bond that is valued at more than its face amount.

Principal:
The amount owed; the face value of a debt.

Revenue Bonds:
Bonds secured by the revenues derived from a particular service provided by the issuer.

ψ
See Options Basics for detailed explanation

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Sinking Fund:
A bond with special funds set aside to retire the term bonds of a revenue issued each year
according to a set schedule. Usually takes effect 15 years from date of issuance. Bonds
are retired through calls, open market purchases, or tenders.

Yield:
A measure of the income generated by a bond. The amount of interest paid on a bond
divided by the price.

Yield to Maturity:
The rate of return1ψ (ROR) anticipated on a bond if it is held until the maturity date.



The basic relationship between the price of a bond and prevailing market interest rates is
an inverse relationship. This is actually pretty straightforward. For example, if you have
a 6% bond (this means that it pays $60 annually per $1000 of face value) and interest
rates jump to 8%, wouldn't you agree that your bond should be worth less now if you
were to sell it?



The US Treasury Department periodically borrows money and issues IOUs in the form of
bills, notes, or bonds ("Treasuries"). The differences are in their maturities and
denominations:

Bill Note Bond

Maturity Up to 1 year 1-10 years 10-30/40 years
Denomination $1,000 $1,000 $1,000
Minimum $10,000 $1,000 $1,000



ψ
Rate of return is the amount you get back on the principal and is always in percentage term.
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Not too many years ago every bond had coupons attached to it. Every so often, usually
every 6 months, bond owners would take a scissors to the bond, clip out the coupon, and
present the coupon to the bond issuer or to a bank for payment. Those were "bearer
bonds" meaning the bearer (the person who had physical possession of the bond) owned
it. Today, many bonds are issued as "registered" which means even if you don't get to
touch the actual bond at all, it will be registered in your name and interest will be mailed
to you every 6 months. It is not too common to see such coupons. Registered bonds will
not generally have coupons, but may still pay interest each year. It's sort of like the issuer
is clipping the coupons for you and mailing you a check. But if they pay interest
periodically, they are still called Coupon Bonds, just as if the coupons were attached.

When the bond matures, the issuer redeems the bond and pays you the face amount. You
may have paid $1000 for the bond 20 years ago and you have received interest every 6
months for the last 20 years, and you now redeem the matured bond for $1000.

A Zero-coupon bond has no coupons and there is no interest paid. But at maturity, the
issuer promises to redeem the bond at face value. Obviously, the original cost of a $1000
bond is much less than $1000. The actual price depends on: a) the holding period -- the
number of years to maturity, b) the prevailing interest rates, and c) the risk involved
(with the bond issuer).

The US Treasury also issues Zero Coupon Bonds. The ``Separate Trading of Registered
Interest and Principal of Securities'' (a.k.a. STRIPS) program was introduced in
February 1986. All new T-Bonds and T-notes with maturities greater than 10 years are
eligible. As of 1987, the securities clear through the Federal Reserve's books entry
system. As of December 1988, 65% of the ZERO-COUPON Treasury market consisted of
those created under the STRIPS program.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS


A derivative is a financial instrument that does not constitute ownership, but a promise to
convey ownership. Examples are options and futures. The simplest example is a call
option on a stock. In the case of a call option, the risk is that the person who writes the
call (sells it and assumes the risk) may not be in business to live up to their promise when
the time comes. In standardized options sold through the Options Clearing House, there
are supposed to be sufficient safeguards for the small investor against this.

Before discussing derivatives, it's important to describe their basis. All derivatives are
based on some underlying cash product hence the name derivative. These "cash" products
are:

Spot Foreign Exchange: This is the buying and selling of foreign currency at the
exchange rates that you see quoted on the news. As these rates change relative to your
"home currency" (dollars if you are in the US), so you make or lose money.

Commodities: These include grain, pork bellies, coffee beans, orange juice, etc.

Equities (termed "stocks" in the US): Generally the common shares of various
companies.

Bonds of various different varieties (e.g., they may be Eurobonds, domestic bonds,
fixed interest / floating rate notes, etc.). Bonds are medium to long-term negotiable debt
securities issued by governments, government agencies, federal bodies (states), supra-
national organizations such as the World Bank, and companies. Negotiable means that
they may be freely traded without reference to the issuer of the security. That they are
debt securities means that in the event that the company goes bankrupt. Bondholders will
be repaid their debt in full before the holders of unsecuritised debt get any of their
principal back.

Short term ("money market") negotiable debt securities such as T-Bills (issued by
governments), Commercial Paper (issued by companies) or Bankers Acceptances. These
are much like bonds, differing mainly in their maturity "Short" term is usually defined as
being up to 1 year in maturity. "Medium term" is commonly taken to mean form 1 to 5
years in maturity, and "long term" anything above that.

Over the Counter ("OTC") money market products such as loans / deposits. These
products are based upon borrowing or lending. They are known as "over the counter"
because each trade is an individual contract between the 2 counter parties making the
trade. They are neither negotiable nor securitised. Hence if I lend your company money, I
cannot trade that loan contract to someone else without your prior consent. Additionally
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

if you default, I will not get paid until holders of your company's debt securities are
repaid in full. I will however, be paid in full before the equity holders see a penny.

Derivative products are contracts, which have been constructed, based on one of the
"cash" products described above. Examples of these products include options and futures.
Futures are commonly available in the following flavors (defined by the underlying
"cash" product):

• Commodity futures
• Stock index futures
• Interest rate futures (including deposit futures, bill futures and government bond
futures)



Roughly speaking, a futures contract is an agreement to buy (or sell) some commodity at
a fixed price on a fixed date. Futures are commonly available in the following flavors
(defined by the underlying "cash" product):

Commodity futures
A commodity future, for example an orange-juice future contract, gives you the right to
buy (or sell) some huge amount of orange juice at a fixed price on some date.

Stock index futures

Since you can't really buy an index, these are settled in cash.

Interest rate futures (including deposit futures, bill futures and government bond
futures)
These are usually settled in cash as well.

Futures are explicitly designed to allow the transfer of risk from those who want less risk
to those who want more risk. They do this by offering several features:

1. Liquidity
2. Leverage (a small amount of money controls a much larger amount) A high
degree of correlation between changes in the futures price and changes in price
of the underlying instrument.

This is usually ensured via the mechanism of basis trading. In the case of the commodity
future, if I sell you a commodity future then I am promising to deliver X amount of the
commodity to you at a given price (fixed now) at a given date in the future.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

This means that if the price of the future becomes too high relative to the price of the
commodity today, I can borrow money to buy the commodity now and sell a futures
contract (on margin). If the difference in price between the two is great enough then I
will be able to repay the interest and principal on the loan and still have some risk less
profit i.e. a pure arbitrage.

Conversely, if the price of the future falls too far below that of the commodity, then I can
sell the commodity short and purchase the future. I can (presumably) borrow the
commodity until the futures delivery date and then cover my short when I take delivery of
some of the commodity at the futures delivery date. I say presumably borrow the
commodity since this is the way bond futures are designed to work; I am not certain that
commodities can be borrowed.

Either of these 2 arbitrage trades are known as "basis trades" as you are trading the
"basis" (don't ask me why it's called that) between the future and the underlying "cash
product".



An option is a contract between a buyer and a seller. The option is connected to

something, such as a listed stock, an exchange index, futures contracts, or real estate. For
simplicity, this article will discuss only options connected to listed stocks. An option
gives its owner the right to buy or sell an underlying asset on or before a given date at a
fixed price. For example, you may enjoy the option to buy a certain apartment on or
before 31st Dec of this year for $5,00,000. On that date even if the market price is more
than $500,000 (Say $600,000), the option write will be compelled to sell the house. On
the other hand if the price is less than $500, 000 (say $400,000), the option holder is not
obliged to buy the house. Options represent a special kind of financial contract under
which the option holder enjoys the right, but has no obligation, to do something.

Now let us understand how this instrument originates. The owner of the house may
expect that the price of the house will go down (below $500,000). At the same time some
buyer expects that the price will go up. Since the owner wants $500,000 for the house, he
is willing to write an option. He may sell the option for say $100. Now if the price goes
below $500,000 on the expiry date, the buyer will not exercise the option and instead will
buy another house for the going market price. The loss is only the price of the option i.e.
$100. On the other hand if the price goes up then he will exercise the option and buy the
house for $500,000. If the market price is $600,000 he will make a profit of $99,900
($100,000-100). On the other hand the owner gets lower than the market price. However
remember that he was willing to sell it for $500,000 and was afraid that the price may go
down. Hence this instrument originates due to varying perceptions of the buyers and
sellers. In the real life options are written for shares, index, etc.
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

The key terms and phrases employed in discussing options are as follows.

Option holder and option writer: The option holder is the buyer of the option and the
writer is the seller of the option. (Remember, option is nothing but a contract which binds
both buyer and the seller to do a specific act on a certain date.)

Exercise price and the strike price: The price at which the option holder can buy
and/or sell the underlying asset is called the exercise or the strike price. In the above
example strike price is $5,00,000.

Expiration date or Maturity date: The date when the option expires or matures is
referred to as the expiration date or maturity date. After this date the option is worth less.
In the above example 31st Dec is the expiry date.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Exercising the option: The act of buying or selling the underlying asset as per the
option contract.

European and American option: A European option can be exercised only on the date
of expiry, where as the American option can be exercised on or before the date of expiry.

The option is designated by:

1. Name of the associated stock

2. Strike price
3. Expiration date
4. The premium paid for the option, plus brokers commission.

The two most popular types of options are Calls and Puts.



Example: The Wall Street Journal might list an IBM Oct 90 Call @ $2.00. Translation:
This is a Call Option. The company associated with it is IBM. The strike price is $90.00.
In other words, if you own this option, you can buy IBM at $90.00, even if it is then
trading on the NYSE @ $100.00. The option expires on the third Saturday following the
third Friday1ψ of October in the year it was purchased (an option is worthless and useless
once it expires). If you want to buy the option, it will cost you $2.00 plus brokers
commissions. If you want to sell the option, you will get $2.00 less commission.

In general, options are written on blocks of 100s of shares. So when you buy "1" IBM
Oct 90 Call @ $2.00 you actually are buying a contract to buy 100 shares of IBM @ $90
per share ($9,000) on or before the expiration date in October. You will pay $200 plus
commission to buy the call.

If you wish to exercise your option you call your broker and say you want to exercise
your option. Your broker will arrange for the person who sold you your option (For we
sys guys and girls a financial fiction: A computer matches up buyers with sellers in a
magical way) to sell you 100 shares of IBM for $9,000 plus commission.

If you instead wish to sell (sell=write) that option you instruct your broker that you wish
to write 1 Call IBM Oct 90s, and the very next day your account will be credited with
$200 less commission. If IBM does not reach $90 before the call expires, the option
writer gets to keep that $200 (less commission) If the stock does reach above $90, you

ψ
Generally the day is the third Saturday following the third Friday.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

will probably be "called." If you are called you must deliver the stock. Your broker will
sell IBM stock for $9000 (and charge commission). If you owned the stock, that's OK;
your shares will simply be sold. If you did not own the stock your broker will buy the
stock at market price and immediately sell it at $9000. You pay commissions each way.

If you write a Call option and own the stock that's called "Covered Call Writing." If you
don't own the stock its called "Naked Call Writing." It is quite risky to write naked calls,
since the price of the stock could zoom up and you would have to buy it at the market
price. In fact, some firms will disallow naked calls altogether for some or all customers.
That is, they may require a certain level of experience (or a big pile of cash).

When the strike price of a call is above the current market price of the associated stock,
the call is "out of the money," and when the strike price of a call is below the current
market price of the associated stock, the call is "in the money." Note that not all options
are available at all prices: certain out-of-the-money options might not be able to be
bought or sold. There is no point in writing a “Out of Money Call” as no one in general
will be ready to buy that.

Options traders rarely exercise the option and buy (or sell) the underlying security.
Instead, they buy back the option (if they originally wrote a put) or sell the option (if the
originally bought a call). This saves commissions and all that. For example, you would
buy a Feb 70 call today for $7 and, hopefully, sell it tomorrow for $8, rather than
actually calling the option (giving you the right to buy stock), buying the underlying
stock, then turning around and selling the stock again. Paying commissions on those two
stock trades gets expensiveψ .



The other common option is the PUT. If you buy a put from me, you gain the right to sell
me your stock at the strike price on or before the expiration date. Puts are almost the
mirror-image of calls. Covered puts are a simple means of locking in profits on the
covered security, although there are also some tax implications for this hedging move.

The expiration of options contributes to the once-per-quarter "triple-witching day."

which is a day on which three derivative instruments all expire on the same day. Stock
index futures, stock index options and options on individual stocks all expire on this day,
and because of this, trading volume is usually especially high on the stock exchanges that
day. In 1987, the expiration of key index contracts was changed from the close of trading
ψ
Since the commission is some percentage of the price, the price of the stock being more, you will end up paying a lot
of commission, if you go for exercising of the option and then reversing the process.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

on that day to the open of trading on that day, which helped reduce the volatility of the
markets somewhat by giving specialists more time to match orders.

You will frequently hear about both volume and open interest in reference to options
(really any derivative contract). Volume is quite simply the number of contracts traded on
a given day. The open interest is slightly more complicated. The open interest figure for a
given option is the number of contracts outstanding at a given time. The open interest
increases (you might say that an open interest is created) when trader A opens a new
position by buying an option from trader B who did not previously hold a position in that
option (B wrote the option, or in the lingo, was "short" the option). When trader A closes
out the position by selling the option, the open interest with either
remain the same or go down. If A sells to someone who did not have a position before, or
was already long, the open interest does not change. If A sells to someone who had a
short position, the open interest decreases by one.



A Long-term Equity anticipation Security, or "LEAP", is essentially an option with a

much longer term than traditional stock or index options. Like options, a stock-related
LEAP may be a call or a put, meaning that the owner has the right to purchase or sell
shares of the stock at a given price on or before some set, future date. Unlike options, the
given date may be up to 2.5 years away. LEAP symbols are three alphabetic characters;
those expiring in 1998 begin with W, 1999 with V.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS


Market Makers and Specialists

Both Market Makers (MMs) and Specialists (specs) make market in stocks. MMs are part
of the National Association of Securities Dealers market (NASD), sometimes called Over
The Counter (OTC), and specs work on the New York Stock Exchange (NYSE). These
people serve almost similar function. (The roles of specialists have been explained in
detail in the later sections)

The NASDAQ

NASDAQ is an abbreviation for the National Association of Securities Dealers

Automated Quotation system. It is also commonly, and confusingly, called the OTC
market. The NASDAQ market is an interdealer market represented by over 600 securities
dealers trading more than 15,000 different issues. These dealers are called market makers
(MMs). Unlike the New York Stock Exchange (NYSE), the NASDAQ market does not
operate as an auction market (see the article on the NYSE). Instead, market makers are
expected to compete against each other to post the best quotes (best bid/ask prices).

The New York Stock Exchange

The NYSE uses an agency auction market system, which is designed to allow the public
to meet the public as much as possible. The majority of volume (approx 88%) occurs
with no intervention from the dealer. Specialists (specs) make markets in stocks and work
on the NYSE. The responsibility of a spec is to make a fair and orderly market in the
issues assigned to them. They must yield to public orders which means they may not
trade for their own account when there are public bids and offers. The spec has an
affirmative obligation to eliminate imbalances of supply and demand when they occur.
The exchange has strict guidelines for trading depth and continuity that must be observed.
Specs are subject to fines and censures if they fail to perform this function. NYSE specs
have large capital requirements and are overseen by Market Surveillance at the NYSE.
Specs are required to make a continuous market. Another auction-based exchange is
AMEX (American Stock Exchange), which accounts for 3% of all exchange volume.
NYSE accounts for 85%.

Over The Counter (OTC)

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

The over the counter market (OTC) is not a central physical marketplace but a collection
of broker-dealers scattered across the country. This market is more a way of doing
business than a place. Buying and selling in unlisted stocks are matched not through the
auction process on the floor of an exchange but through negotiated bidding, over a
massive network of telephone and teletype wires that link thousands of securities firms in
the U.S and abroad. Example: NASDAQ

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS


Let us see, as an investor, how you can or will go about investing and once you give the
order for buy or sell, what events happen. Typically, once you instruct your broker about
your order, a chain of events set off. Without going into complete detail on each step, let
us trace the process.

First, let us trace how a round lot order to buy 800 shares of McDonald’s. You call up
your broker and find out what is the going market price. Say, the price is $60. Now if
you put the market order then the chance is that you will get the share for $60. (I am
saying chance because, by the time your order gets executed, the price may actually
change.). Now say you put the order with the broker. Now the written order is wired to
NY office of the brokerage firm. From there it is phoned to a clerk of the firm on the
floor of the NYSE. The clerk notifies a member partner of the firm (only members are
allowed to trade) via an annunciator board system. After collecting the order from the
clerk, the member goes to the specialist who is dealing with MCD and confirms the ask
and bid price. If the price is still $60, he executes the order. The member notes the
transaction and with whom it was made, an exchange reported the transaction for
reporting to the ticker, and the phone clerk phones you saying that the trade has been
executed.

(Please reread the above once again after going through the entire trading chapter to have
a better understanding of the whole process.)

After Hours

After-hours trading is a form of big-block trading that indeed does occur after the market
closes for a period of time. Much of this trading is supported by Instinet, a network
operated by Reuters that helps buyers meet sellers (there's no physical exchange where
someone like a specialist works). Apparently, (I am not too sure!!!), this trading is NOT
part of the reported closing prices you see in the newspapers. The data is apparently
reported separately, at least on professional-level data systems. After-hours trading may
experience significant deviations in price from the day's close, usually due to
announcements made after the markets have closed.

But even the little guy can play after hours. The other markets can also affect a stock's
price between 4PM and 9:30 AM EST. People tend to forget the global view. When the
NYSE closes, the Pacific Exchange in LA opens. Then the Tokyo market opens around
dinnertime in the U.S. Tokyo's closing bell marks the beginning of trading in
Johannesburg, followed 2 hours later by London. Then, 2 hours before London closes,
the NYSE opens back up. All 24 hours are covered by at least one market (the Pacific
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Exchange from 4 to 7 PM is the only exchange open during those three hours, but it
completes the 24 hour day.) With so many multinational companies on many different
markets, stock prices are inevitably going to have some discrepancy between the closing
and opening bells on the Big Board.

Bid, Ask, and Spread

If you want to buy or sell a stock or other security on the open market, you normally
trade via agents on the market scene who specialize in that particular security. These
people stand ready to sell you a security for some asking price (the "ask") if you would
like to buy it. Or, if you own the security already and would like to sell it, they will buy
the security from you for some offer price (the "bid"). The difference between the bid and
ask is called the spread. Stocks that are heavily traded tend to have very narrow spreads
(e.g., 1/8 of a point), but stocks that are lightly traded can have spreads that are
significant, even as high as several dollars.

So why is there a spread? The short answer is "profit." The long answer goes to the heart
of modern markets, namely the question of liquidity. Liquidity basically means that
someone is ready to buy or sell significant quantities of a security at any time. In the
stock market, market makers or specialists (depending on the exchange) buy stocks from
the public at the bid and sell stocks to the public at the ask (called "making a market in
the stock"). At most times (unless the market is crashing, etc.) these people stand ready to
make a market in most stocks and often in substantial quantities, thereby maintaining
market liquidity.

Dealers make their living by taking a large part of the spread on each transaction - they
normally are not long-term investors. In fact, they work a lot like the local supermarket,
raising and lowering prices on their inventory as the market moves, and making a few
cents here and there. And while lettuce eventually spoils, holding a stock that is tailing
off with no buyers is analogous.

Because dealers in a security get to keep much of the spread, they work fairly hard to
keep the spread above zero. This is really quite fair: they provide a valuable service
(making a market in the stock and keeping the markets liquid), so it's only reasonable for
them to get paid for their services. Of course you may not always agree that the price
charged (the spread) is appropriate!

Occasionally you may read that there is no bid-ask spread on the NYSE. This is
nonsense. Stocks traded on the New York exchange have bid and ask prices just like any
other market. However, the NYSE bars the publishing of bid and ask prices by any
delayed quote service. Any decent real-time quote service will show the bid and ask
prices for an issue traded on the NYSE.
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Broker
Only the members of the exchange (brokers) can participate in trading in the listed
securities in the stock exchange. There are various types of brokers depending upon the
type of job they perform.
Commission Brokers: About one half of all the brokers in NYSE are commission brokers.
Their primary function is to buy or sell on behalf of their clients. They charge
commission for this from the clients and hence the name. The prominent ones are Merrill
Lynch, Pierce, Fenner & Smith, Shearson Lehman Hutton, and Prudential-Bache.

Floor Brokers: These are the brokers who actually execute the order on the floor of the
Stock Exchange. The commission brokers pass on the order of their clients to these
brokers and floor brokers execute the order.
Specialists: Specialists are the floor brokers who specialize in particular stock(s). They
give two way quote for the stock in which they are specializing. The difference between
the ask and bid price is the profit margin for the specialists. The main idea behind this is
that the specialists will bring liquidity into the market by giving two-way quotes. There
are around 500 specialists in NYSE. The specialist in IBM is deCordova, Cooper & Co.,
and for General Electric it is Strokes, Hoyt & Co.
Odd-lot Dealers: Trading on the floor of the exchange is conducted in round, or full, lot
of 100 shares. But these brokers deal in lot, which is less than 100, or they deal in odd
lots.

Registered Traders: There are some 30 brokers who trade among themselves and are not
bothered about the public or other members. These are registered brokers. The rule and
regulations of Stock Exchange for these brokers are more stringent than the other brokers.

Bond brokers: Bond brokers handle trades in the bond issues traded on the exchange.

Introducing Broker

An Introducing Broker (IB) is a futures broker who delegates the work of the floor
operation, trade execution, accounting, etc. to a Futures Commission Merchant (FCM).
In this relationship, the FCM maintains the floor operation and the IB maintains the
relationship with retail clients. This is efficient because the work of a floor operation vs.
the work of maintaining relationships and meeting the needs of retail customers have
different requirements.

Another way to think of an IB is that of a segmented firm. The IB is not a middleman, but
is in a partnership with the clearing firm. The clearing firm manages the floor and back
office ops, and the IB is free to concentrate on his/her customers and their trading.
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Several myths concerning IBs need debunking. First of all, the notion that an introducing
broker is a "middleman" or that fees or commissions are necessarily higher is wrong. It's
also wrong to say that an IB is a branch office. Yes, an IB may have branch offices, but
an IB is not a branch office of a FCM. The IB is in a business partnership with an FCM,
each handling their own piece of the work.

When it comes to ordering, if you are trading through an IB, it need not be any less
efficient than trading with a vertically oriented firm that does everything. When you call
an IB with an order, s/he can relay that order directly to the trading floor, or even give
clients direct access to the floor themselves. If you call one of the big, vertically
integrated firms your order is likely to take as many or more steps than it would with an
IB.

In terms of commissions, an IB may maintain a low overhead and that lets him/her
charge reasonable fees while maintaining a lot of support and specialized service that a
big discount firm simply can't provide. There's more to trading than commissions,
although most novices don't understand that.

Discount Brokers

A discount broker offers an execution service for a wide variety of trades. In other words,
you tell them to buy, sell, short, or whatever, they do exactly what you requested, and
nothing more. Their service is primarily a way to save money for people who are looking
out for themselves and who do not require or desire any advice or hand-holding about
their forays into the markets.

However, discount brokering is a highly competitive business. As a result, many of the

discount brokers provide virtually all the services of a full-service broker with the
exception of giving you unsolicited advice on what or when to buy or sell, but some do
provide monthly newsletters with recommendations. Virtually all will execute stock and
option trades, including stop or limit orders and odd lots, on the NYSE, AMEX, or
NASDAQ. Most can trade bonds and U.S. treasuries. Most will not trade futures; talk to
a futures broker. Most have margin accounts available. Most will provide automatic
sweep of (non-margin) cash into a money market account, often with check- writing
capability. All can hold your stock in "street-name", but many can take and deliver stock
certificates physically, sometimes for a fee. Some trade precious metals and can even
deliver them!

The firms can generally be divided into the following categories:

Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

1. "Full-Service Discount": Provides services almost indistinguishable from a

full-service broker such as Merrill Lynch at about 1/2 the cost. These provide
local branch offices for personal service, newsletters, a personal account
representative, and gobs and gobs of literature.

2. "Discount": Same as "Full-Service," but usually don't have local branch

offices and as much literature or research departments. Commissions are
about 1/3 the price of a full-service broker.

3. "Deep Discount": Executes stock and option trades only; other services are
minimal. Often these charge a flat fee (e.g. $25.00) for any trade of any size.

4. Computer: Same as "Deep Discount", but designed mainly for computer users
(either dial-up or via the internet). Some brokers offer an online trading
option that is cheaper than talking to a broker.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Direct Investing and DRIPS

DRIPS offer an easy, low-cost way for buying stocks. Various companies allow you to
purchase shares directly from the company and thereby avoid brokerage commissions.
However, you must purchase the first share through a broker or other conventional
means. In all cases, that first share must be registered in your name, not in street name.
(A practical restriction here is that for some common kinds of accounts like IRAs (Some
retirement benefit fund) you can't participate in a DRIP since the stock has to be held by
the custodian.) Once you have that first share, additional shares can be purchased
through the DRIP either through dividend reinvestments or directly by sending in a
check. Thus the two names for DRIP: Dividend/Direct Re-Investment Plan. The periodic
purchase also allows you to automatically dollar-cost-average the purchase of the stock.

A handful of companies sell their stock directly to the public without going through an
exchange or broker even for the first share. These companies are all exchange listed as
well, and tend to be utilities.

Free Ride Rules

When trading stocks, a "free ride" describes the case when you buy a security at 10 and
sell it a day later (or an hour later) at 12, without having the free funds to cover the
settlement of the trade at 10. This activity is prohibited by the exchanges (e.g., NYSE Rule
431 forbids member organizations from allowing their customers to day-trade in cash
accounts). If you trade in a cash account, you must be able to settle the trade, even if you
would take the profit from it in the same day.

Example:

Buy 1000 XXX at $10 on 7/10

Requires $10,000 free cash available to settle the trade.
Sell 1000 XXX at $15 on 7/11

It's a day later, and you will get $15,000 from the sale, but you still must be able to settle
the original purchase without the proceeds of the sale for the first trade to be legitimate.

The rule on free rides should in no way be interpreted as a prohibition on "day trading"
(i.e., trading very rapidly in and out of a stock). You can "day-trade" as much as you
want, provided that you can settle the trade. The short answer is that you must use a
margin account if you want to day-trade.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Being able to settle the trade means that you either have sufficient cash in your account
to pay for the shares, or sufficient reserve in your margin account to cover the shares.
Note that equity trades settle 3 market days after execution. Therefore, the window on
short-term trading is not one day but rather three; i.e., any close of a position before
settlement occurs would run into the same issue.

If you use cash, note that in a cash account you can spend a dollar only once. In other
words, if you start the day in cash, you can buy stock and sells that stock -- and then are
done trading for the day. If you start in stock you can sell it, spend the cash for another
position, sell that position and then you are done.

If you use margin, keep in mind that your broker is allowed to delay the credit for your
sale until settlement if they so choose, keeping you from using those funds for three days.
If they are a market-making firm or are selling their order flow they will likely obstruct
your intra-day and short term trading since it cuts into their bottom line. Unlike stocks,
options settle the next day, which is both good and bad. Option trading basically requires
that the funds be there before you place the trade, unless you like wiring funds around
(and paying for the privilege of doing so).

Margin Trading

Securities can be bought either by cash or some borrowed funds or some mix of that. The
primary purpose of borrowing and buying the securities is that the investor simply
supplements his/her resources and tries to get more “bang for the buck”. Borrowing
money from bank or the broker for the purpose of securities is called margin. When an
investor buys on margin, he simply buys by borrowed funds. Regulation T of the Federal
Reserve Board determines the amount that an investor can borrow. Regulation T permits
brokers to lend up to fifty percent of the value of the stock or convertible bonds acquired
or short sold by the investor, 70 % of the corporate bonds and about 90% of the U.S govt.
securities. In stock market parlance, the cash paid by the customer (investor) is the
customer’s margin. Thus if an investor buys corporate share worth $10,000 and puts up
$7,000 in cash, his margin is $7,000 or 70%.

Margin (%) = Customer’s equity/Market value of securities.

After the initial transaction takes place, the Federal Reserve no longer concerns itself
with the investor’s margin. The effect of fluctuating market prices on the customer’s
margin is largely regulated by stock exchanges and the generally more restrictive policies
of the brokerage firms themselves. The NYSE requires that customer maintain equity of
30%. Equity is simply the market value of the customer’s portfolio less margin debt, or
the market value of any securities that were sold short. The Federal Reserve requirements

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

are referred to as the initial margin requirement and that of exchange/broker’s guidelines
are called maintenance requirements. Let’s try an example.

Assume that you buy 1000 shares of a $20 stock (net cost = $20,000) and you deposit
$10,000 (50 % of $20,000) to meet the initial requirement. At this point your margin
account shows a market value of $20,000 and a loan balance (called debit balance) of
$10,000. The equity in the account stands at 10,000. With the $20,000 market value, the
exchange requires that the equity must be at least $5,000, or 25% of $20,000. So far so
good; the account more than conforms to the minimum maintenance rule (25%).

Customer’s Account
Stock $20,000 Debt $10,000
Equity $10,000

Margin=10,000/20,000 = 50%

Now suppose that the stock falls to $17. Where are we now?

Customer’s Account
Stock $17,000 Debt $10,000
Equity $7,000

Margin=7,000/17,000 = 41.20%

Note that all the shock of falling price must be absorbed by the customer’s equity since
the debt has not been repaid. Also the lender’s (broker’s) stake is rising since the
borrowed funds represent a larger part of the total value of the shares. The broker’s risk is
rising.

Suppose the stock falls to $13. Let’s see what happens.

Customer’s Account
Stock $13,000 Debt $10,000
Equity $3,000

Margin=3,000/13,000 = 23%

To lift the margin to 30% (As per the exchange requirement) maintenance level requires
equity 30 percent of $13,000 or $3,900. Hence, the broker will call the customer to pay
$900 as the differential.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

The other side of the coin is simple enough. Suppose that the stock rises. Let’s say to $25.

Customer’s Account
Stock $25,000 Debt $10,000
Equity $15,000

Margin=15,000/25,000 = 60%

Now what? Either you can take the extra 10% i.e. 5,000 home (Reg. T requires that
margin should be only 50%) or now you can borrow more to buy more so that the margin
drops to 50%. This is the beauty of margin where in investors play in the market with
little money in their pocket.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Delivery-versus-payment

Delivery-versus-payment (DVP) is a method of settlement in which funds and the

securities are transferred simultaneously, or, more generally where funds transfer is
considered complete only when the securities are delivered and vice versa.

Insiders Trading

Insider trading refers to transactions in the securities of some company executed by a

company insider. Although a company insider might theoretically be anyone who knows
material financial information about the company before it becomes public, in practice,
the list of company insiders (on whom newspapers print information) is normally
restricted to a moderate-sized list of company officers and other senior executives. Smart
companies normally warn all employees to be careful when they trade, "just in case". The
U.S. Securities and Exchange Commission (SEC) has strict rules in place that dictate
when company insiders may execute transactions in their company's securities. All
transactions that do not conform to these rules are, in general, prosecutable offenses
under US securities law.

Jargon and Terminologyψ

Some common jargon that you should understand about trading equities is explained here
briefly.

• AON, "all or none": A buy or sell order with this designation loses normal
order priority if the amount of shares available doesn't match or exceed the
order size. There may be some specialized circumstances where it could be
useful, such as late in the day on a GTC (Good till cancelled) entry (to avoid a
fractional fill such as 100 shares of a 1000 share order, with resulting doubling
of total commissions when the rest of the order fills the following morning).

• blue-chip stock: A valuable stock that has proven itself; i.e., has been around
for many years and has made piles of money. Examples are IBM, GE, Ford,

ψ For more definitions of terms, visit these on-line glossaries of investment and finance-related terms:

InvestorWords: http://www.investorwords.com
The Washington Post's Business Glossary: http://www.washingtonpost.com/wp-
srv/business/longterm/glossary/glossary.htm

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

etc. The name derives from the chips used in poker, blue always being the
most valuable.

• bottom fishing: Purchasing of stock declining in value, or of stocks that have

suffered drastic declines in their prices.

• day order: Order to buy/sell securities at a certain price that expires if not
executed on the day it is placed.

• diluted shares: A way of characterizing the number of outstanding shares that

a publicly held company could have. The diluted shares measure is the sum of
the company's normally outstanding shares, the shares that would be
outstanding if every warrant & stock option were exercised, and the shares
that would be outstanding if every security convertible into the stock (e.g.,
certain preferred shares) were converted. This is sometimes used when
computing earnings per share numbers. A larger number of outstanding shares
means lower earnings per share, rather obviously; this is known as "dilution of
earnings" or computation of "fully diluted" earnings.

• DNR, "do not reduce": This is usually assumed unless you specify otherwise,
but different brokers may have different practices and some may require you
to specify DNR if you want it. What it deals with is how the order is to be/not
adjusted when dividends or other distributions occur. For example a $1/share
dividend on a stock for which you have entered an order DNR brings the price
closer to your bid or takes it further away from your offer. Without the DNR
specification, on the ex-dividend date your order price is reduced by the
amount of the distribution.

• FOK, "fill or kill": This means do it now if the stock is available in the crowd
or from the specialist, otherwise kill the order altogether.

• Going long: Buying and holding stock.

• Going short: selling stock short, i.e., borrowing and selling stock you do not
own with the intention of buying it later for less.

• GTC, "good till cancelled": Order to buy/sell securities at a certain price (a

limit order); the limit order stays in the market until you call specifically to
cancel it. Some brokers restrict the length of time a GTC can remain open to
"end of same month", "no more than 30 days" or some such thing, but with
most it becomes a permanent part of the book until it gets executed or you
cancel.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

• Overbought [Oversold]: Judgmental adjective describing a market or stock

implying That people have been wildly buying [selling] it and that there is
very little chance of it moving upward [downward] in the near term. Usually it
applies to movement momentum rather than what the security should cost.

• Over valued, under valued, fairly valued: Judgmental adjectives describing

that a market or stock is over/under/fairly priced with respect to what people
believe the security is really worth.

• Uptick: Uptick means the next trade is at a higher price than the previous
trade. Meaningful for the NYSE and AMEX; not so meaningful for OTC
markets (NASDAQ). Certain transactions can only be executed on an Uptick
(e.g., shorting).

• Downtick: Downtick means the next trade is at a lower price than the previous
trade. See Uptick.

• Treasury shares: Shares taken from the company treasury (not the US
Treasury!). Often occurs in the context of discussions about how companies
fulfill share purchases within DRIP accounts.

• Plc: An abbreviation of Public Limited Corporation. This means that the

company is not American, where "Inc." is used instead. Companies in many
different countries use PLC, including Great Britain, South Africa, Australia,
Hong Kong, etc.

• Inc: An abbreviation for Incorporated. Mostly used in the United States.

Clearing Process

After a trade has been executed, securities and money must change hands within five
business days of the trade date, on what is called the settlement date (Saturdays, Sundays
and holidays are excluded). For example, a trade on a Wednesday is settled the following
Wednesday. Basically, two tasks are carried out in the clearing process: Trade
comparison and settlement. Trade comparisons are made through the facilities of the
clearing corporation that receives the report of each transaction from the brokers
participating in the transaction. The largest clearing corporation is the National Securities
Clearing Corporation (NSCC).

The first four days of the clearing period are devoted to the trade comparison process and
to resolving any discrepancies in the transaction information provided by parties to a
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

transaction. Unmatched trades are flagged, and advisory notices are sent to the
participants who fail to report a transaction reported by the contra side. Much of the
process is automated.

The second step in the clearing process – the final settlement- is also automated and
usually carried out through computer book entries. The key change permitting the use of
book entries has been the immobilizationψ of securities certificates, which has been made
possible by the increased willingness of brokers and financial institutions to forgo
physical delivery of the certificates. Instead, certificates are immobilized at a securities
depository. The principal depository is the
Depository Trust Company (DTC) owned jointly by NYSE, AMEX, National
Association of securities Dealers (NASD), and its major participants (brokers and banks).
The SEC and the Federal Reserve System as a limited trust company regulate the DTC.

Netting

This is a procedure in which debits (+) and the credit (-) for a particular category are
offset against each other so as to arrive at the outstanding netted position. The actual
transfer of fund and the securities (Remember??? This is also called settlement) is done
on the netted position instead of the all transactions.

Example

Date Broker Transaction Broker Security Amount Price Total

18-06-98 A Buys from B McDonald 100 $30.00 $3,000
19-06-98 A Buys from B McDonald 300 $32.00 $9,600
20-06-98 A Sells to B McDonald 200 $31.00 $6,200

After netting, on the settlement day B has to deliver 200 shares of McDonald for $6,400.
Netting is nothing but the outstanding position of each party on the day of settlement. The

ψ
Immobilization: A basic mechanism to enhance the efficiency and safety of clearing and settlement system in which
the physical securities are stored by a depository/ies (Mostly it is a company) in a fixed place and recording the
ownership details in electronic form. Owner of the securities are assigned separate accounts. Thereafter the trading is
done in electronic form. It entails transfer of shares from the seller’s account to the buyer’s account. (This is very much
like a bank where the is transferred from one account to another). The basic purpose of immobilization is to reduce risk
which is a constant factor in physical handling of the securities.

Dematerialization: A related term to the above. Unlike the above in which the securities are stored in a place, in
dematerialization, the physical securities are destroyed and the details are kept in the electronic form (Read
computers!!). The trading is done very much in the same way as the previous one.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

above is a simple case involving bilateral netting but in reality we see multilateral netting
involving hundreds of parties and thousands of securities.

Portfolio Management

The different types of investment vehicles have different returns and risk associated with
them. For example corporate stocks are more risky than govt. bonds but may pay higher
return. Sometime the bullions are more risky and some times real estates are more risky.
Generally more risk is associated with more return. Portfolio management is mixing
different investment vehicles in different proportion so that the return and the risk of the
portfolio is up to the customer’s requirement. Mind it not all have same return
expectation nor they have same risk taking attitude.

Day, GTC, Limit, and Stop-Loss Orders

Day/GTC orders, limit orders, and stop-loss orders are three different types of orders you
can place in the financial markets. This article concentrates on stocks. Each type of order
has its own purpose and can be combined.

Day and GTC orders:

An order is canceled either when it is executed or at the end of a specific time period. A
day order is canceled if it is not executed before the close of business on the same day it
was placed. You can also leave the specific time period open when you place an order.
This type of order is called a GTC order (good 'til cancelled) and has no set expiration
date.

Limit orders:
Limit orders are placed to guarantee you will not sell a stock for less than the limit price,
or buy for more than the limit price, provided that your order is executed. Of course, you
might never buy or sell, but if you do, you are guaranteed that price or better.

For example, if you want to buy XYZ if it drops down to $30, you can place a limit buy
@ $30. If the price falls to $30 the broker will attempt to buy it for $30. If it goes up
immediately afterwards you might miss out. Similarly you might want to sell your stock
if it goes up to $40, so you place a limit sell @ $40.

Stop-loss orders:
A stop-loss order, as the name suggests, is designed to stop a loss. If you bought a stock
and worry about it falling too low, you might place a stop-loss sell order at $20 to sell
that stock when the price hits $20. If the next trade after it hits $20 is 19 1/2, then you

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

would sell at 19 1/2. In effect the stop loss sell turns into a market order as soon as the
exchange price hits that figure.

Note that the NASDAQ does not officially accept stop loss orders since each market
maker sets his own prices. Which of the several market makers would get to apply the
stop loss? However, many brokers will simulate stop-loss orders on their own internal
systems, often in conjunction with their own market makers. Their internal computers
follow one or perhaps several market makers and if one of them quotes a bid, which trips
the simulated stop order, the broker will enter a real order (perhaps with a limit -
NASDAQ does recognize limits) with that market maker. Of course by that time the price
might have fallen, and if there was a limit it might not get filled. All these simulated stop
orders are doing is pretending they are entering real stops (these are not official stop loss
orders in the sense that a stock exchange stop order is).

If you sell a stock short, you can protect yourself against losses if the price goes too high
using a stop-loss order. In that case you might place a stop-loss buy order on the short
position, which turns into a market order when the price goes up to that figure.

Example:

Let's combine a stop loss with a limit sell and a day order.

XYZ - Stop-Loss Sell Limit @ 30 - Day Order Only

The day order part is simple -- the order expires at the end of the day.

The stop-loss sell portion by itself would convert to a sell at market if the price drops
down to $30. But since it is a stop-loss sell limit order, it converts to a limit order @ $30
if the price drops to $30.

It is possible the price drops to 29 1/2 and doesn't come back to $30 and so you never do
sell the stock. Note the difference between a limit sell @ $30 and a stop-loss sell limit @
$30 -- the first will sell at market if the price is anywhere above $30. The second will not
convert to a sell order (a limit order in this case) until the price drops to $30.

You can also work these same combinations for short sales and for covering losses of
short stock. Note that if you want to use limit orders for the purpose of selling stock
short, there is an exchange Uptick rule that says you cannot short a stock while it is
falling - you have to wait until the next Uptick to sell. This is designed to prevent traders
from forcing the price down too quickly.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Pink Sheet Stocks

A company whose shares are traded on the so-called "pink sheets" is commonly one that
does not meet the minimal criteria for capitalization and number of shareholders that are
required by the NASDAQ and OTC and most exchanges to be listed there. The "pink
sheet" designation is a holdover from the days when the quotes for these stocks were
printed on pink paper.

Process Date

Transaction notices from any broker will generally show a date called the process date.
This is when the trade went through the broker's computer. This date is nearly always the
same as the trade date, but there are exceptions.

One exception is an IPO; the IPO reservation could be made a week in advance and until
a little after the IPO has gone off, the broker might not know how many shares his firm
was allocated so doesn't know how many shares a buyer gets. A day or two after the IPO
has gone off, things might settle down. (The IPO syndicate might be allowed to sell say
10% more shares than obligated to sell - and might sell those even after the IPO date "as
of" the IPO date.) So a confirmation might list a trade date that is two days before the
process date. Other times the broker might have made an error and admit to it, and so
correct it "as of" the correct date. So the confirmation slip might show August 15 as the
process date of a trade "as of" a trade date of August 12. It happens.

Round Lots of Shares

For every stock, the company in consolation with Stock Exchange decides the number of
stocks in which all the trade will be done. Say IBM decides that this number is 100. All
the transactions of IBM stock have to be in 100 stocks or some multiple of this. The lots
of 100 or some multiple it are called round lots. This is done so that junta does not start
buying and selling in 1 or 2 shares as per their whim. This will increase the pressure on
the stock market tremendously. Interestingly there are some certificates which are denote
the number of shares which are not multiple of 100. So how do they get traded? Some
brokers might buy them from you at a discount to the market price and combining them
(They trade with many players), make them round lot and sell in the market. The lots,
which are not round lots, are called odd lotsψ.

ψ
These odd shares are generated mostly because of stock dividends. Otherwise the stocks which are issued by the
company are in round lots.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Shorting Stocks (Also called Short sale)

Shorting means to sell something you don't own. If I do not own shares of IBM stock but
I ask my broker to sell short 100 shares of IBM I have committed shorting. In broker's
lingo, I have established a short position in IBM of 100 shares. Or, to really confuse the
language, I hold 100 shares of IBM short.

One key requirement for short sell is that short sell orders cannot be executed in down
tick. (Please see the section on tick, Uptick, and downtick). An example will make it
clear. Say you want to sell a stock for $42 and the preceding trade price was 41 .75. Then
there is problem. But you cannot do the trade if the trade price was 43. If it were 42, then
you have to go further back and see the preceding different price. You can only go for
short sell if the preceding different price was less than $42. Remember that this rule is
applicable only for the short sell and not for ordinary sell. This is done so as to avoid any
price hammering by the brokers and taking the market for a ride.

Why would you want to short?

Because you believe the price of that stock will go down, and you can soon buy it back at
a lower price than you sold it at. When you buy back your short position, you "close your
short position." The broker will effectively borrow those shares from another client's
account or from the broker's own account, and effectively lend you the shares to sell
short. This is all done with mirrors; no stock certificates are issued, no paper changes
hands, no lender is identified by name.

My account will be credited with the sales price of 100 shares of IBM less broker's
commission. But the broker has actually lent me the stock to sell. No way is he going to
pay interest on the funds from the short sale. This means that the funds will not be swept
into the customary money-market account. Of course there's one exception here: Really
big spenders sometimes negotiate a full or partial payment of interest on short sales
funds provided sufficient collateral exists in the account and the broker doesn't want to
lose the client. People like you and me, who are small fries can not expect to receive any
interest on the funds obtained from the short sale.

If you sell a stock short, not only will you receive no interest, but also expect the broker
to make you put up additional collateral. Why? Well, what happens if the stock price goes
way up? You will have to assure the broker that if he needs to return the shares whence
he got them (see "mirrors" above) you will be able to purchase them and "close your
short position." If the price has doubled, you will have to spend twice as much as you
received. So your broker will insist you have enough collateral in your account, which
can be sold if needed to close your short position. More lingo: Having sufficient

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

collateral in your account that the broker can glom onto at will, means you have "cover"
for your short position. As the price goes up you must provide more cover.

Since you borrowed these shares, if dividends are declared, you will be responsible for
paying those dividends to the fictitious person from whom you borrowed. Too bad.

Even if you hold your short position for over a year, your capital gains are taxed as
short-term gains. A short squeeze can result when the price of the stock goes up. When
the people who have gone short buy the stock to cover their previous short sales, this can
cause the price to rise further. It's a death spiral - as the price goes higher, more shorts
feel driven to cover themselves, and so on.

You can short other securities besides stock. For example, every time I write (sell) an
option I don't already own long, I am establishing a short position in that option. The
collateral position I must hold in my account generally tracks the price of the underlying
stock and not the price of the option itself. So if I write a naked call option on IBM
November 70s and receive a mere $100 after commissions, I may be asked to put up
collateral in my account of $3,500 or more! And if in November IBM has regained
ground and is at $90, I would be forced to buy back (close my short position in the call
option) at a cost of about $2000, for a big loss.

Selling short is seductively simple. Brokers get commissions by showing you how easy it
is to generate short-term funds for your account, but you really can't do much with them.
If you are strongly convinced (and perhaps are out to ruin yourself…after all you are
earning in rupee and a big drop in dollar will make a big hole in your pocket) a stock
will be going down, buy the out-of-the-money put instead, if such a put is available.

A put's value increases as the stock price falls (but decreases sort of linearly over time)
and is strongly leveraged, so a small fall in price of the stock translates to a large
increase in value of the put. Let's return to our IBM, market price of 66 (ok, this article
needs to be updated.) Let's say I strongly believe that IBM will fall to, oh, 58 by mid-
November. I could short-sell IBM stock at 66, buy it back at 58 in mid-November if I'm
right, and make about net $660. If instead it goes to 70, and I have to buy at that price,
then I lose net $500 or so. That's a 10% gain or an 8% loss or so.

Now, I could buy the IBM November 65 put for maybe net $200. If it goes down to 58 in
mid November, I sell (close my position) for about $600, for a 300% gain. If it doesn't go
below 65, I lose my entire 200 investment. But if you strongly believe IBM will go way
down, you should shoot for the 300% gain with the put and not the 10% gain by shorting
the stock itself. Depends on how convinced you are.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Size of the Market

The "size of the market" refers to the number of shares (commonly quoted in round lots)
that a specialist or market maker is ready to buy or sell. The size of the market
information is supplied with a quote on professional data systems.

Tick, Uptick, and Downtick

The term "tick" refers to a change in a stock's price from one trade to the next. Really
what's going on is that a comparison is made between trades reported on the ticker. If the
later trade is at a higher price than the earlier trade, that trade is known as an "Uptick"
trade because the price went up. If the later trade is at a lower price than the earlier trade,
that trade is known as a "downtick" trade because the price went down.

Because this measure can only be calculated based on a reliable feed of stock trade data,
it is probably only close to reality for trades on exchanges where there is a single
specialist for each stock. Trades reported by market makers of the NASDAQ will
possibly be out of strict time sequence; so evaluating the "tick" for shares traded over the
counter is much trickier when compared to a NYSE-based tick.

Something called the "tick indicator" is a market indicator that tries to gauge how many
stocks are moving up or down in price. The tick indicator is computed based on the last
trade in each stock.

Note that certain transactions, namely shorting a stock, can only be executed on an
Uptick, so this measure is not just of academic curiosity, it really is used to regulate the
markets.

Transferring an Account

Transferring an account from one brokerage house to another is a simple, painless

process. The process is supported by the Automated Customer Account Transfer (ACAT)
system. To transfer your account, you fill out an ACAT form in cooperation with your
new broker. The new broker will generally require a copy of your statements from the old
brokerage house, plus some additional proof of identity. The transfer will be made within
about 5-10 business days for regular accounts, and 10-15 business days for IRA and other
types of qualified retirement accounts. The paperwork starts the process, but thereafter
it's all done electronically.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Appnedix-1

Services Provided by Goldman Sachsψ

1) Investment Banking
Planning, structuring and executing diverse financing transactions in the public
and private markets; advising in merger and acquisition transactions and other
corporate restructuring; providing specialized services to, among others, the
communications, energy and power, entertainment, financial services, gaming,
healthcare, high technology, media, retail, telecommunications and transportation
industries; advising governments and government-related entities in major
industrial and emerging-market countries on key privatization programs and other
strategic initiatives relating to financial markets; devising and executing strategies
that enable companies and institutions to capitalize on the value of real estate
assets; and facilitating the firm's principal investment activities.

2) Equities
Executing block trades of equity securities and related derivative products;
assisting investors in planning and implementing strategies to improve investment
returns and manage risk; providing clients with information, perspective and
guidance on equity markets, individual companies and industries as well as
expertise in portfolio strategy and stock selection; assisting companies in raising
capital in public and private equity markets; advising governments on
privatization state-owned companies; developing innovative products that
broaden opportunities for issuers to raise capital; and providing wealthy families
and individuals with comprehensive investment services; serving as a unique,
central resource for sophisticated investment support services.

3) Fixed Income, Currency and Commodities

Making markets in all major fixed income products, foreign exchange and
commodities to provide liquidity to clients; advising corporations, governments
and institutions on raising capital and achieving other financial objectives in fixed
income markets; providing market and product information that enables investors
to implement strategies using a broad and growing range of financial products;
developing innovative techniques and products to assist investors in achieving
varied objectives, including using commodities as investment assets; executing
sophisticated hedging strategies using derivatives such as options, futures and

ψ
Most of the Investment banks provide more or less same kinds of services.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

swaps; and operating the firm's proprietary fixed income, currency and
commodities businesses.

4) Asset Management
Designing and managing customized portfolios for investors using equity and
fixed income securities, money market instruments, currencies and commodities;
designing and managing an expanded group of institutional and retail mutual
funds; providing support for broker-dealers that market the Division's U.S. mutual
fund products; and providing clients with a full range of reporting and accounting
services.

5) Global Investment Research

Analyzing specific companies and industries; developing investment ideas and
strategies that are used by clients in structuring and managing investment
portfolios; providing data and analysis on interest rates, currencies, political
events and other developments that affect economic conditions; and marketing
investment data, opinion, and strategies to the firm's securities sale and trading
professionals and to clients through publications, electronic delivery systems,
investor meetings and telephone contact.

6) Global Operations
Advising sales and trading professionals on procedures for executing, clearing
and settling transactions involving stocks, bonds, currencies, commodities, futures
and options; assisting in setting up new offices and businesses and developing
new products by applying knowledge of tax issues, market rules and regulations
relating to transaction processes; interfacing with securities exchanges, other
firms, central banks and regulators; processing, comparing and ensuring accurate
and timely settlement of transactions; providing a range of integrated operations
services, many of them fee-based, for clients who invest in domestic and
international securities.

7) Treasury
Maintaining close relationships with banks and other credit-providing institutions
worldwide; managing the firm's relationships with rating agencies; developing
funding and capital strategies to ensure proper asset/liability management;
structuring, implementing and overseeing the administration of new financing
transactions and programs to finance the firm's operations in the most cost-
effective manner; providing funds settlement and cash management services in
support of the firm's global treasury requirements.

8) Controllers
Financial analysis and planning, including consulting to partners and managers on
ways to increase the profitability of the firm's businesses; proprietary accounting
Visit our 24x7 Mirror WebSites:
www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

and risk analysis, which monitors the firm's trading positions, produces daily P&L
reports on all products and analyzes risk in the firm's inventories; financial and
regulatory reporting, which monitors compliance with capital requirements of
governmental and securities industry regulators worldwide, compiles financial
statements in accordance with Generally Accepted Accounting Principles
(GAAP) and prepares regulatory reports for the firm; and management reporting,
which monitors the budget and produces monthly P&L statements for the firm
and its businesses.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

9) Credit
Evaluations of the creditworthiness of clients including industrial corporations,
financial institutions, and sovereign governments worldwide; analysis of the
credit rating implications of various financial transactions, including debt and
equity offerings, share restructure, and mergers and acquisitions; advising clients
on the credit rating agency process; assessment of credit risks and setting
exposure limits on a wide range of trading and hedging transactions; monitoring
of the firm's credit exposure to trading counter parties; and assistance in the
solicitation, structuring and review of client commercial paper programs.

10) Tax
Advising the firm's professionals on the tax implications of transactions for the
firm and of new products in development; tax planning for the firm and its
partners; tax compliance work for the firm's partners and business entities;
assisting the Human Resources Department in handling tax-related matters for
international employees.

11) Legal
Advising management on the impact of legislative, judicial and regulatory
developments worldwide that affect the firm's businesses and operations; handling
the legal aspects of major financing and contractual commitments; advising the
firm with respect to the development of new products; coordinating the work of
outside counsel; representing the firm in litigation brought by or against the firm
and in investigations by governmental and self-regulatory authorities worldwide.

12) Compliance
A variety of services to ensure that the supervisory authority and responsibilities
assigned to individuals throughout the firm are properly exercised: training and
education programs, as well as planning, coordinating, maintaining, and
monitoring certain surveillance mechanisms to support the firm's supervision and
compliance functions.

Most of the above have been taken from the home page of Goldman Sachs,
http://WWW.gs.com

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Appendix - 2

Investment Process

Investor Investor
(Seller) (Buyer)

Investment Bank
2 7 1 7

Commission Broker Commission Broker 1

2

4 3

6 6
Floor
Broker
5
8
Custodian/Depos Clearing
itory House STOCK EXCHANGE

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Company

1,2 – The buyer gives written order for buying some particular scrip in some particular
quantity. On the other hand the seller gives the order for sell of his securities. (Here for
simplicity let us assume that the amounts are equal. In the actual market place there are
many brokers and many investors. The brokers and Stock Exchange are conduits in
which the buyers’ and sellers’ requirement are met.

3 – The broker of buyer contacts some floor broker who is specialist in that scrip in Stock
Exchange and puts the order for buying.

4 – The broker of the seller goes to the floor broker and puts the sell order. The floor
broker confirms the transaction to both the parties i.e. brokers who in turn inform the
same to their clients. This transaction is noted by Stock Exchange for clearing process.

5 – The details of the transaction (who is buying and who is selling, what stock, how
much and at what price) are sent to the clearinghouse.

6,7 – On the payment day, the seller has to give the stocks and take payment. Similarly
the buyer has to pay and take delivery of the stocks. Need less to say that all these are
done through the broker.

8 – In case the stock is dematerialized or immobilized, the details of the trade is made
known to the depository. And the number of shares sold debits the account of the seller
and the number of shares he has bought credits that of the buyer. However the payment
part is still handled by the clearinghouse.

9 – The depository lets the company know of the changes in the holding and the company
updates its book so that buyer can be given the dividend.

The right hand corner shows the box indicating investment banks. The investment banks
invest for their clients who put their money with the investment banks. The trading
procedure however remains the same.

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

Appnedix-3

Balance Sheet Format

December 31, 2000, and December 31, 2001

Assets Liabilities and Equity

Current Assets: Current Liabilities:

Cash and Securities Account Payable
Receivables Accrued Wages
Inventories Taxes Payable
Prepaid Expenses Long Term Liabilities:
Permanent Investments: Long Term notes
Investment in other companies Bonds
Realty held for investment Stock Holder’s Equity:
Fixed tangible assets: Capital Stock
Buildings Additional paid-in capital
Land Retained earnings
Machinery and Equipments
Furniture and Fixtures
Fixed Intangible Assets:
Goodwill
Patents
Deferred Charges to Expense:
Organization Costs

Total Assets Total Liabilities and Equity

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )
 QUANTEXPERT – STOCKS TERMS

References
1. Security Analysis and Portfolio Management by Donald E. Fischer, Ronald J. Jordan
(5th Edition, Prentice Hall India)

2. Security Analysis by Graham and Dodd

3. Financial Management by Prasanna Chandra (3rd Edition, Tata McGraw-Hill)

4. Global Financial System: A compilation of Harvard Business School

Visit our 24x7 Mirror WebSites:

www.quantexpert.tk www.quantexpert.co.nr www.quantexpert.co.cc
www.quantexpert.c-o.in
QUANTEXPERT 2009 (For any queries mail to: [email protected] )