The Business and Commercial Knowledge (BCK) vocabulary is always changing and expanding. Hence, it is important that firms understand certain basic terminologies to analyze different facets of their business. These terminologies also help managers and employees achieve organisational goals. In this article, we have collated some terminologies pertaining to the finance and stock markets.
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Finance, Commodity, and Stock Markets Terminologies
Agent
A brokerage firm is an agent when it purchases or sells shares on behalf of the client. The agent does not own the shares at any point during the transaction.
Annuity
It is a series of payments of equal amounts made at fixed intervals for a specified number of periods.
Asset
An asset is an economic resource which benefits the owner in the future. Assets are also the probable economic benefits that a firm derives from its past transactions or events. Also, it is anything of value which the firm can legally claim. Assets include all objects, tangible or intangible, that the firm owns and have economic value. Further, assets are broadly classified into three types:
- Current Assets: Assets like cash, marketable securities, accounts receivables, etc. which can be turned into cash within a year.
- Fixed Assets: Assets like land, buildings, machinery, long-term investments, etc. which cannot be turned into cash easily. Also, liquidating these assets requires interfering with business operations.
- Intangible Assets: Items that are valuable to the company but not physical objects like patents, copyrights, trademarks, etc. are intangible assets. Also, these assets usually do not appear on the financial reports.
Book Value
Book Value means total assets minus total liabilities. Further, it also means the value of an asset as mentioned in the firm’s financial reports. Usually, the book value of an asset is either more or less than its true value.
Budget
Budget is a quantitative term representing the detailed plan for the future. Also, it is a plan for acquiring and using financial and other resources over a specified period of time.
Business Day
A business day is a day on which the stock markets are open. These are usually Monday to Friday and exclude public holidays.
Call
The demand that a company or an issuer of shares makes for payment. A call is either for the full payment on the due date (e.g. rights issue) or instalment payment.
Call Option
This is different from the call for payment. A call option is an option available to an investor to buy a particular stock at a specified price within a specified period. Remember, this is a right and NOT an obligation.
Commodities
Commodities are products used for commerce which are traded on a separate platform. These include agricultural and natural resources.
Debentures
Debentures are a kind of debt instruments which do not have collateral. The general creditworthiness and reputation of the issuer back these instruments.
Depreciation
Depreciation is a method of spreading the cost of an asset over its entire useful economic life. This is an allowance made for the wear and tear on an asset. It is an expense which reflects the loss in value of a fixed asset.
For example, if you have a machine which has a useful economic life of 10 years, then you will charge the cost of the machine as an expense over the ten-year period rather than all at once.
This is an accounting expense and is of two broad types:
- Straight line depreciation – the same amount is charged to expense every year
- Accelerated depreciation – a higher amount is charged in the early years and lower in later years
Derivatives
These are securities whose price is derived from one or more underlying assets. Also, these assets include stocks, bonds, commodities, market indices, currencies, etc.
Dividend
This is a portion of the earnings that a company pays to its shareholders in return for their investments. Usually, the board of directors of a company decides the dividend. Further, it is a percentage of the current share price or a specified rupee value.
Financial Instrument
A written or authenticated document that shows the evidence of a transaction or agreement is a financial instrument. Further, it includes cash, deed, negotiable instrument, etc.
Government bonds
A government bond or government security is any security that the government holds. Also, these securities usually have the highest possible rate of interest.
Index
An index is a measure of change in the economy or the security market. It has its own method of calculation. Further, it is usually expressed as a percentage change in the base value over time.
Initial Public Offering (IPO)
An IPO is a company’s first issue of shares to the general public. Usually, smaller or younger companies issue IPOs to avail funds for growth and expansion. However, large companies also issue them to become publicly traded companies.
Limit Order
You can pre-determine the price at which you want to buy or sell a share and place an order. This order is a Limit Order. It is executed only when the price reaches the specified value. Therefore, it sets the minimum price that a seller is willing to accept or the maximum price that a buyer is willing to pay.
Market Capitalization
Market capitalization is the total Rupee value of a company’s outstanding shares. The calculation is simple –
Market Capitalization = Number of outstanding shares x Current market price of one share
Further, it determines a company’s size in terms of its wealth.
Portfolio
A portfolio is a set of holdings of any individual or institution. Further, It can include different types of securities of different companies and from different sectors of the market.
Put Option
A Put Option is an option available to an investor to sell a particular stock at a pre-determined price within a specified period of time. Also, investors who believe that a particular stock’s price will fall usually purchase a put option.
Return on Investment (ROI)
An ROI is a measure of the effectiveness and efficiency with which the managers use the available resources. Also, this is expressed as a percentage.
Usually,
- The return on equity is; \( \frac {\text {Net profit post taxes}}{\text {Shareholder’s Equity}} \).
- Further, the return on invested capital is: \( \frac {\text {Net profit post taxes + Interest paid on long-term debt}}{\text {Shareholder’s Equity + long-term debt}} \).
- The return on assets is:Â \( \frac {\text {Operating Profit}}{\text {Assets used to produce the profit}} \)
Securities
Securities are transferrable certificates of ownership of individual investments. These investments include products like stocks, bonds, options, futures contracts, etc.
Stock
A stock is a certificate or an electronic record indicating the ownership of a part of a corporation. Also, stocks are of two broad types – preference stocks and common stocks.
In preference stocks, the owner receives a dividend (either a fixed amount or a percentage). Further, a preferred stock owner is the first to receive payments out of any profits. Common stocks have no preference and no fixed returns.
On the other hand, stock can also mean the inventory of a company. We keep hearing the news on stock markets all the time. And now that we have gone through the marketing terminologies let’s try to understand it better with the help of an example of stock markets.
Solved Question on Stock Markets
Q1. In a Call and Put Option, the investor gets an option (respectively) to do the following transactions at a pre-determined price and within a pre-defined period of time.
- Sell and Buy
- Buy and Sell
- Sell only
- Buy only
Answer: As per their definitions, in a Call Option, an investor gets an option to buy a particular stock at a specified price within a specified period. On the other hand, in a Put Option, the investor gets an option to sell a particular stock at a pre-determined price within a specified period of time. Therefore, the correct answer is Option b – Buy and Sell. Thus, this concludes our discussion on ‘Finance, Stock Markets & Commodity Market Terminology’.
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