Stock market terms and definitions
Stock
A stock is a share of a company. It is the unit of ownership. When you buy a share in a company, you own a part of the capital of the capital and you become one of the owners of the company to the extent of the number of shares you hold in the company.
Market capitalization
Market capitalization is simply the market value of a listed company. It is also commonly shortened to ‘market cap’. It is arrived at by multiplying the total number of shares forming the capital of a company by the current market price. It changes often as the market price changes. When the price of a stock is rising, market cap also rises and hence the value of the company rises. Companies are compared in the stock market by their market cap. Big cap companies are large and small cap companies are small.
Bid
A bid is a quoted by a stockbroker and is the price at which a buyer is willing to pay for a security he or she is looking for. There are usually several bids per price competing for one lot of shares or securities. The highest bidder is the one that ends up buying a security. The higher the better.
Offer/ Ask
The offer or the “ask” price is the price at which the seller is willing to sell the security he or she is offering in the market. There may be several offer prices by different sellers. The lowest offer is usually the best price and always ends up being the seller. The lower the better.
CDS
CDS is short for Central Depository System. It is an electronic register of shareholders or bondholders of a company. It is usually used for clearing or settling secondary market transactions instead of the use of the physical paper certificates. When one buys shares where CDS is used, the shares are put in an electronic account instead of being issued with a paper certificate and when they sell the shares are transferred only through an electronic entry. This makes trading faster and less risky. The CDS accounts are hosted by an independent company as a service provider.
Stockbroker
A stockbroker is an agent of investors in the stock market. They are authorized individuals who can buy or sell securities on behalf of investors. Stockbrokers are usually representatives of companies that are members of a stock exchange. They act on behalf of investors as well as on their own behalf. When acting on their own, they are referred to as dealers. They earn their income by charging a fee called a commission.
Commission
Commission is the fees charged by stockbrokers for their services. Whenever they buy for a client they charge a fee and whenever they sell for a client they charge a fee.
IPO
IPO stands for initial public offer. This is when a company sells shares to the public for the first time. IPO prices are usually fixed and offered in the primary market where investors apply for the shares directly from the company or vender but through all available intermediaries.
Dividend
A dividend is a distribution or payment of profits to the shareholders.
Interest
Interest is income earned on a debt. It is sometime referred to as a coupon.
Rights Issue
Is an offer of new shares to existing shareholders in a company. Rights issues are usually done to increase the capital base of a company by offering the shares to the existing shareholders.
Share split
Share split is a division of shares of a company into smaller affordable prices. Companies usually prefer o have their shares well spread and when the prices rise too high in the secondary market, some companies do a share split of the par value thereby increasing the number of shares while bringing down the price of the share.
Par value
A par value of a share is the nominal registered value of the company’s capital. The par never changes unless it is slit or consolidated.
Unit Trust
A unit trust is an investment fund created or sponsored by an institution to allow members of the public to collectively invest in the capital market. Unit Trusts is the term used in the United Kingdom while in the United states they are referred to as mutual funds. Insurance companies and fund managers are the key sponsors of unit trusts. By sponsoring here we mean creators.
Custodian
A custodian is an institution that is approved by the central bank and the capital markets regulators to keep safe the assets of investors. Custodial services are usually offered by banks of subsidiaries of banks. Custodial services are available to any investor whether individual or institutional. However, unit trusts are mandatory required to use the services of a custodian.
Index
An index is a statistical measure of the market performance. It is an average of the movement of prices in the market. An index summarizes the direction of the market. When an index goes up, in general it means that more prices in the stock market have gone up than those that dropped. Equally when the stock market index or indices drop, it means share prices have reduced in the market. The indices usually constitute a basket of selected companies that are a representative of the market. Most stock markets have indices. Indices provide indicators of how the stock market and therefore the economy is performing at any point in time. It is like the barometer of the stock market.
Bonus issue
A bonus issue is a distribution of new shares by a company to existing shareholders. A bonus is usually distributed at a given standard ratio to all shareholders of a company. Bonus issues involve a company converting accumulated profit reserves into capital of the company. Bonuses increase the value of the capital wealth of the shareholders in a company.
Cum dividend (cd)
Cum dividend means with dividend. Whenever a company announces a dividend its shares start trading cum dividend immediately and the company announces the date of payment. When shares of a company are traded cum dividend it means that whichever investor buys the shares qualifies to receive that particular dividend for that particular period when it is distributed. After the dividend is paid out, the shares start trading ex div (excluding dividend).
Buy or Sell order
This is a written instruction by a client or an investor to a stockbroker to buy or to sell some security, either shares or bonds.
Registrar or Fiscal agent
In the stock market, registrars are companies that offer the services of maintaining the share register of a listed company. Every transaction in the secondary market implies a change of ownership of the shares or the bonds. There has to be some to keep updating the register of companies whose securities are listed as trading continues. Whenever the company requires to pay a dividend or any other corporate action, the Registrar will provide the latest or most updated register.
Sponsoring stockbroker
These are stockbrokers who have been appointed by an issuer or a company to assist them in the process or listing on the stock or capital market.
Transfer Form
A transfer form is a legal instrument that is used to effect a transfer of ownership of title in the shares or bonds of a company. A transfer form is clearly described in the Companies Act as a requirement for executing a legal transfer.
Transaction advisor
A transaction is a firm or individual professionals retained by an issuer or vender of shares to the public to advise on the whole process of selling the shares and eventually listing on the stock market.
OTC
OTC is short for Over the Counter market and in capital markets it refers to a practice where buyers and sellers of securities negotiate directly and transact without necessarily going through a centralized trading environment. Most money market transactions are transacted in the informal OTC Market. The Rwanda OTC market is an organized market.
Prospectus
A prospectus is a document produced by a company when raising capital in the stock market. A prospectus introduces the company or the issuer to the public by providing such information as; who they are, what business they are in, who directors of the company are, business trends and history, how much funds they are raising and the purpose of the funds. It is sometime referred to as information memorandum.
AGM
AGM refers to annual General meeting of a company. It is during the annual general meetings that all shareholders are invited and participate in the key decisions and resolutions of their company. It is a legal requirement for all companies to conduct an AGM when they also present their annual reports and accounts. At AGMs shareholders may pose questions to the management of the company on any affairs of the business.
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