General Terms of Stock Markets

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General Terms of Stock Markets :
Stock market index :A stock market index is a listing of stocks and a statistic reflecting the composite value of its components. It is used as a tool to represent the characteristics of its component stocks, all of which bear some commonality such as trading on the same stock market exchange, belonging to the same industry, or having similar market capitalization. Many indices compiled by news or financial services firms are used to benchmark the performance of portfolios such as mutual funds

Types of indices : Stock market indices may be classed in many ways. A broad-base index represents the performance of a whole stock market— and by proxy, reflects investor sentiment on the state of the economy. The most regularly quoted market indices are broad-base indices including the largest listed companies on a nation's largest stock exchange, such as the American Dow Jones Industrial Average and S&P 500 Index, the British FTSE 100, the French CAC 40, the German DAX and the Japanese Nikkei 225.
The concept may be extended well beyond an exchange. The Dow Jones Wilshire 5000 Total Stock Market Index, as its name implies, represents the stocks of nearly every publicly traded company in the United States, including all stocks traded on the New York Stock Exchange and most traded on the NASDAQ and American Stock Exchange. The Europe, Australia, and Far East Index (EAFE), published by Morgan Stanley Capital International, is a listing of large companies in developed economies in the Eastern Hemisphere.
More specialised indices exist tracking the performance of specific sectors of the market. The Morgan Stanley Biotech Index, for example, consists of 36 American firms in the biotechnology industry.
Other indices may track companies of a certain size, a certain type of management, or even more specialized criteria— one index published by Linux Weekly News tracks stocks of companies that sell products and services based on the Linux operating environment.

Secular trend :A secular market trend is a long-term trend that lasts 5 to 20 years, and consists of sequential primary trends. In a secular bull market the bear markets are smaller than the bull markets. Typically, each bear market does not wipe out the gains of the previous bull market, and the next bull market makes up the losses of the bear market. Conversely, in a secular bear market, the bull markets are smaller than the bear markets and do not wipe out the losses of the previous bear market.
An example of a secular bear market was seen in gold over the period between January 1980 to June 1999, over which the gold price fell from a high of $850/oz to a low of $253/oz , which formed part of the Great Commodities Depression.
Conversely, the S&P 500 experienced a secular bull market over a similar time period .These secular bull and bear market trends are also termed "super cycles". "Grand super cycles" of 50 to 300 years have also been proposed by Nikolai Kondratiev and Ralph Nelson Elliott.

-Market capitalisation : Market capitalization, often abbreviated to market cap, is a measurement of corporate size that refers to the current stock price times the number of outstanding shares. This measure differs from equity value to the extent that a firm has outstanding stock options or other securities convertible to common shares. The size and growth of a firm's market capitalization is often one of the critical measurements of a public company's success or failure. However, market capitalization may increase or decrease for reasons unrelated to performance such as acquisitions, divestitures and stock repurchases.
Market capitalization is the number of common shares multiplied by the current price of those shares.
The term capitalization is sometimes used as a synonym of market capitalization; more often, it denotes the total amount of funds used to finance a firm's balance sheet and is calculated as market capitalization plus debt (book or market value) plus preferred stock

-Earnings :Earnings per share (EPS) are the earnings returned on the initial investment amount.
The FASB requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations, discontinued operations, extraordinary items, and net income.
The EPS formula does not include preferred dividends for categories outside of continuing operations and net income as shown here. This formula also shows the most basic formula for earnings per share.
The EPS formula is shown here for Net Income and Continuing Operations (substitute income from continuing operations for net income).
Note: Only dividends actually declared in the current year are subtracted. The exception is when preferred shares are cumulative, in which case annual dividends are deducted regardless of whether they have been declared or not. Dividends in arrears are not relevant when calculating EPS.
Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS. Remember that preferred stock rights have precedence over common stock. If preferred dividends total $100,000, then that is money not available to distribute to each share of common stock.
The value used for company earnings can either be the last twelve months' Net income (referred to as trailing twelve months, or ttm), or analysts' predictions for the next twelve months' net income (referred to as forward).
The number of shares used for the calculation can either be basic (only shares that are currently outstanding) or diluted (includes all shares that could potentially enter the market).
Companies often use a weighted average of shares outstanding over the reporting term. (The weight refers to the time period covered by each share level)
EPS can be calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming year ("forward EPS").
Note that last year's EPS would be actual, while current year and forward year EPS would be estimates

-P/E ratio:The P/E ratio of a stock (also called its "earnings multiple", or simply "multiple", "P/E", or "PE") is used to measure how cheap or expensive its share prices is. The lower the P/E, the less you have to pay for the stock, relative to what you can expect to earn from it. It is a valuation ratio included in other financial ratios.
The price per share (numerator) is the market price of a single share of the stock. The earnings per share (denominator) is the net income of the company for the most recent 12 month period, divided by number of shares outstanding. The EPS used can also be the "diluted EPS" or the "comprehensive EPS"
For example, if stock A is trading at $24 and the Earnings per share for the most recent 12 month period is $3, then the P/E ratio is 24/3=8. Stock A said to have a P/E of 8 (or a multiple of 8). Put another way, you are paying $8 for every one dollar of earnings.
It is probably the single most consistent red flag to excessive optimism and over-investment. It also serves, regularly, as a marker of business problems and opportunities. By relating price and earnings per share for a company, one can analyze the market's valuation of a company's shares relative to the wealth the company is actually creating.
One reason to calculate P/Es is for investors to compare the value of stocks, one stock with another. If one stock has a P/E twice that of another stock, it is probably a less attractive investment. But comparisons between industries, between countries, and between time periods may be dangerous. To have faith in a comparison of P/E ratios, one should compare comparable stocks.

-Liquidity :Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. The term is usually shortened to liquidity.
A liquid asset has four features. It can be sold (1) rapidly, (2) without advertising costs, (3) at a very low transaction cost, (4) anywhere. The supremely liquid asset is a national currency certificate in the country of its origin, assuming that the currency is not depreciating extremely rapidly.
The essential characteristic of a liquid market is that there are ready and willing buyers and sellers at all times. An elegant definition of liquidity is also the probability that the next trade is executed at a price equal to the last one.
A market is considered deeply liquid if there are ready and willing buyers and sellers in large quantities.
This is related to a deep market, where orders can not strongly influence prices.
The liquidity of a product can be measured as how often it's bought and sold. For stocks this is known as the volume of trades
Often investments in liquid markets such as the stock exchange are considered to be more desirable than investments that are considered relatively illiquid, like real estate. This is because the forced sale or purchase of an item in an illiquid market may be at a disadvantageous price. Because assets that have liquid secondary markets are more advantageous to their owners, buyers of such assets are willing to pay a higher price for the asset than for comparable assets without a liquid secondary market. This liquidity discount is the reduced promised yield or expected return for such assets, like the difference between newly issued U.S. Treasury bonds compared to off-the-run Treasuries with the same term remaining until maturity. Buyers know that other investors are not willing to buy off-the-run so the newly issued bonds have a lower yield and higher price.
Speculators and market makers contribute to the liquidity of a market

-Paid up capital : The amount of money paid by shareholders in excess of the par value of the sharePaid-up capital is essentially the portion of authorized stock that the company has issued and received payment for.

-Return on investment :Return on Investment (ROI) is the ratio of money gained or lost on an
investment to the amount of money invested. The amount of money gained or lost may be referred to as interest, profit/loss, gain/loss, or net income/loss. The money invested may be referred to as the asset, capital, principal, or the cost basis of the investment.
ROI is also known as rate of profit, rate of return or return. Return can also refer to the dollar amount of gain or loss.
ROI is the return on a past or current investment, or the estimated return on a future investment. ROI is usually given as a percent rather than decimal value.
ROI does not indicate how long an investment is held. However, ROI is most often stated as an
annual or annualized rate of return, and it is most often stated for a calendar or fiscal year. In this article, “ROI” indicates an annual or annualized rate of return, unless otherwise noted.
ROI is used to compare returns on investments where the money gained or lost -- or the money invested – are not easily compared using dollar values.
For instance, a $1,000 investment that earns $50 in interest obviously generates more cash than a $100 investment that earns $20 in interest, but the $100 investment earns a higher return on investment.
$50/$1,000 = 5% ROI
$20/$100 = 20% ROI

-Return on capital :Return on Capital Employed (ROCE) is used in finance as a measure of the returns that a company is realizing from its capital employed. The ratio can also be seen as representing the efficiency with which capital is being utilized to generate revenue. It is commonly used as a measure for comparing the performance between companies and for assessing whether a company generates enough returns to pay for its cost of capital.
The formula Return on Capital Employed (%) =
(Operating Profit / Net assets) * 100
Return on net assets is also sometimes known as return on capital employed

-Stop Loss :A stop order (sometimes known as a stop loss order) is an order to buy or sell a security once the price of the security reaches a specified price, known as the stop price. When the specified price is reached, the stop order is entered as a market order. Stop orders are used to try to limit an investor's exposure in the market.
A sell stop order is an instruction to sell at the best available price after the price goes below the stop price. A sell stop price is always below the current market price.
For example, if an investor holds a stock currently valued at $50 and is worried that the value may drop, he/she can place a sell stop order with the broker at $40. If the share price drops to $40 for whatever reason, the broker will sell the stock at the next available price. This can limit the investor's losses (if the stop price is at or below the
purchase price) or lock in at least some of the investor's profits (if the value of the security has risen between when the security was purchased and the stop order placed).
A buy stop order is typically used to limit a loss (or to protect an existing profit) on a short sale. A buy stop price is always above the current market price.
For example, if an investor sells a stock short (borrows stock and sells it immediately at current market price (Shorting), and the investor hopes the stock price goes down in order to give the borrowed shares back at a lower price (Covering) while pocketing the difference), the investor may try to protect himself against losses if the price goes too high using a buy stop order.
With a stop order, the customer does not have to actively monitor how a stock is performing. However because the order is triggered automatically when the stop price is reached, the stop price could be activated by a short-term fluctuation in a security's price. Once the stop price is reached, the stop order becomes a market order. In a fast-moving market, the price at which the trade is executed may be much different from the stop price.
The use of stop orders is much more frequent for stocks, and futures, that trade on an exchange than in the over-the-counter (OTC) market.

-Price target :The price at which a stockholder is willing to sell his/her stock

-Profit taking :The unwinding of a position to realize profits. The action taken by investors to sell when prices are rising in order to secure gains. Profit-taking often results in a subsequent decrease in price

-Face value :In the case of stock certificates, face value is the par value of the stock. In the case of common stock, par value is largely symbolic. In the case of preferred stock, dividends may be expressed as a percentage of par value.

-Book value :Book Value is the shareholders' equity of a business (assets - liabilities) as measured by the accounting 'books'. The term is used in the context where the speaker is trying to distinguish between the accounting measures (usually historical cost) and the market value. While it can be used to refer to the business' total equity, it is most used
as a 'per share' value':
The balance sheet Equity value is divided by the number of shares outstanding at
the date of the balance sheet (not the average o/s in the period). as a 'diluted per share value': The Equity is bumped up by the exercise price of the options, warrants or preferred shares. Then it is divided by the number of shares that has been increased by those added.

-Bonus share :Free shares of stock given to current shareholders, based upon the number of shares that a shareholder owns. While this stock action increases the number of shares owned, it does not increase the total value. This is due to the fact that since the total number of shares increases, the ratio of number of shares held to number of shares outstanding remains constant.

-Premium :An amount of money paid above the regular price of the share.For example if the face value /par value of the share is $1 and if it trades at $20 then the premium on
that share is given by Premium = (20-1) = $19.

-Punters : Someone who bets on the stocks is called a Punter .That is he doesn't invest in them after research but just blindly buys stocks like a gambler and hopes that they fetch him a profit .
securities

-Transaction Tax :A tax on the sale of a security. A securities transaction tax can limit
speculative activity while generating public revenues

-Stock Market Boom : Relatively very large absolute in the value of the stocks is called stock Market boom. However sometimes it may lead to the formation of a stock market bubble .

-Stock market bubble: A stock market bubble is a type of economic bubble taking place in stock markets, in which a wave of public enthusiasm causes an exaggerated bull market. When such a bubble takes place, market prices of listed stocks rise dramatically, making them significantly overvalued by any measure of stock valuation. Generally stock market bubbles are followed by stock market crashes.
The existence of stock market bubbles has been disputed by strict followers of the Efficient market hypothesis.

-Stock market scam : It is the manipulation of stock prices by using illegal means like for example buying and selling between a closed group of people such that with each trade the share price is artificially made to increase.
One of the most common scams is insider trading

-Insider Trading :The buying or selling of a security by someone who has access to material, nonpublic information about the security. Insider trading can be illegal or legal depending on when the insider makes the trade: it is illegal when the material information is still nonpublic--trading while having special knowledge is unfair to other investors who don't have access to such knowledge.
Illegal insider trading therefore includes tipping others when you have any sort of nonpublic information.
Directors are not the only ones who have the potential to be convicted of insider trading.
People such as brokers and even family members can be guilty.
Insider trading is legal once the material information has been made public, at which time the insider has no direct advantage over other investors. The SEC, however, still requires all insiders to report all their transactions. So, as insiders have an insight into the workings of their company, it may be wise for an investor to look at these reports to see how insiders are legally trading their stock.