Terms you need to know when trading at the CSE

Last week we spoke about Listing and how to buy shares from an Initial Public Offering. This week, we discuss the technical jargon often used by the CSE and Stockbrokers.

Securities Traded at the CSE:

Ordinary Shares - The most common security, which can be either voting or non-voting shares. Holders of ordinary shares are part-owners of a company. An ordinary share represents equity ownership in a company and entitles the owner to a vote in matters put before shareholders in proportion to their percentage ownership in the company.

Ordinary shareholders are entitled to receive dividends if any are available after dividends on preferred shares are paid. They are also entitled to their share of the residual economic value of the company should the business unwind; however, they are last in line after bondholders and preferred shareholders for receiving business proceeds. As such, ordinary shareholders are considered unsecured creditors.

Voting Shares: Shares come with a right to vote at the company's Annual General Meeting and an entitlement to a share of dividends declared.

Non-Voting Shares: Shares that don't have a right to vote at the company's Annual General Meeting.

Preference Shares - A preference share gives limited ownership rights to the holder. However this is a class of share in which the holder has a claim on the company's earnings before payment is made on the ordinary shares and is entitled to priority over ordinary shares if the company liquidates. Most preference shares have a pre-determined dividend rate which the holders are entitled to receive.

Share Warrants - A certificate giving you the right to buy shares at a stipulated price at a future date.

Government Securities (Treasury Bills and Bonds) - The government borrows money by issuing interest paying Treasury bills and bonds through the Central Bank. The Debt securities have zero default risk since timely repayment is guaranteed by the government.

Corporate Debentures - A security that is issued by a company to raise debt capital.

What are the Different Types and Characteristics of Debentures:

There are four types of bonds.

1. Secured debentures - a secured debenture is backed by collateral, meaning it has the money or physical assets that a debentures issuer must give to investors if the debenture defaults. Securing ensure that the capital will be available to pay the principal on the debenture.

2. Unsecured debentures - corporate debentures that are not secured by specific assets are called unsecured debentures. They are backed only by the general credit worthiness of the issuer.

3. Guaranteed Debentures - A third party guaranteed debenture where the third party guarantees to pay back the principal amount and the interest to the debenture holder in the case of the issuer defaults.

4. Convertible Debenture - Debentures, which gives the debenture holder, the right to convert his debentures into ordinary shares before the redemption date.

Debentures could also defer depending upon the redemption period and the interest.

Market Capitalization

This is the total market value of all voting ordinary shares of all listed companies.

This is also calculated company wise and indicates a company's size in relation to the total Market. It is used to conduct market valuation. Market capitalization is calculated by multiplying the issued quantity of shares by the market price. For example, if XYZ company has 15,000,000 shares outstanding (total issued shares) and a share price of Rs. 20.00 per share then the market capitalization is 15,000,000 x 20.00 = Rs. 300,000,000.

Although the market capitalization of a company is an indication of the value of the company, it is only a temporary metric based on the current stock market. The true value of the company (its profits, product positioning, balance sheet, etc.) many not be reflected in the market capitalization.

The summation of Market capitalization of all listed companies is the total market capitalization of the CSE. In other words the total value of the CSE.

Automated Trading System:

The trading mechanism for equity listed on the CSE is known as the Automated Trading System (ATS). It is a system whereby stock brokers are electronically connected to a central computer located at the CSE. ATS is an online, real time system which is efficient, fault tolerant and transparent, and provides for the secondary trading of equity.

The ATS provides

. High speed execution of transactions

. Order matching on Price - Time priority

. Information of price & volumes of securities being traded

. Online reporting of trades being executed & price indices

. Corporate announcements

. Information on status of pending orders

. Information on Client Holdings.

DEX Trading System:

The debt Securities Trading System (DEX) facilitates the trading of corporate and government debt trading.

The system has been instrumental in facilitating the secondary trading of the beneficial interest in government treasury bills and bonds. All corporate debentures listed on the CSE are also traded through the DEX.

What are the Indices used to Measure the Movement of Share Prices?

The CSE publishes two main price indices, twenty sector indices, two main Total Return Indexes and twenty Total Return Sector Indices. An index can be used to understand the direction or the movement of the market and also to calculate returns.

All Share Price Index (ASPI):

All Share Price Index is used to measure the movement of share prices of all the listed companies. The ASPI is based on market capitalization. Weighing of shares is conducted in proportion to the issued ordinary capital of the listed companies, valued at current market price (i.e. market capitalization). The base year for this index is 1985.

ASPI = Market Capitalization of all listed companies x 100

Base market Capitalization

Milanka Price Index (MPI):

The Milanka Price Index is used to measure the movement of share prices of 25 selected companies. These companies have been selected on the basis of liquidity (number of shares traded) and market capitalization (size).

This index is revised bi-annually. The base year for this index is 1998.

MPI = Market Capitalization of 25 selected listed companies x 1000

Base market Capitalization of selected 25 companies.

Market Day:

This is a day on which the Stock Exchange is open for trading. Trading is open from 9.30 a.m. to 2.30 p.m. on all weekdays other than public holidays.

Turnover:

The turnover is the total value of shares traded on that date. The turnover of each company is determined by summing up the value of each transaction.

Stated Capital:

Stated Capital in relation to a company means the total of all amounts received by the company or due and payable to the company in respect of the issue of shares and calls on shares.

Portfolio:

A collection of investments all owned by the same individual or organization. These investments often include stocks, which are investments in individual businesses; bonds, which are investments in debt that are designed to earn interest; and mutual funds, which are essentially pools of money from many investors that are invested by professionals or according to indices. A portfolio is a mix of investments.

Diversification

Diversification is spreading investment across different assets in order to reduce the overall risk of the portfolio. It is the concept of spreading, your money among a number of different investments in order to reduce risk. It's the idea that you should'nt put all of your eggs in one basket.

Short selling:

Borrowing a security from a broker and selling it, with the understanding that it must later be bought back (hopefully at a lower price) and returned to the broker. Short selling (or "selling short") is a technique used by investors who try to profit from the falling price of a stock. Short selling is the sale of shares that the investor does not own. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short.

Margin trading:

Margin trading is the practice of buying stock with money borrowed from the broker. In this arrangement, the investor makes a cash down payment (called the margin) with the broker and can purchase stocks worth about twice the cash amount.

The broker charges interest on this loan (in addition to the commission on each buy/sell trade) and the investor has to keep the entire stockholding with the broker as collateral. Also, the investor has to put up additional cash in case the value of the stockholding falls below a certain amount.

Margin trading is a double-edged sword - it cuts both ways. If the stock price rises, the investor makes twice as much profit as with his own cash only. Similarly, if the stock price falls, the investor loses twice the amount.

Odd Lots:

Shares are normally traded in lots of 100 shares. Any lot of less than 100 shares, are considered odd lots. Any trades of less than 100 shares are traded on a separate order book and Odd lots do not affect the Market Indices or the last traded price.

Block Transactions

To facilitate the processing of large blocks of securities without causing a substantial effect on price, the CSE provides special procedures for block transactions. There are two types of block transactions.

Crossings

A crossing is a block of shares which is more than 5% of the issued number of shares of the security or has a value greater than Rs. 10 Mn. A crossing will be entered by both parties specifying the security, client, contra broker ID and price. Crossings will not update the indices and closing price.

All or none (AON) Blocks

AON is a block of shares which has a value greater than Rs. 10 Mn. AON trades will update only the turnover and the number of securities traded.

Source:CSE