Monday, June 1, 2009

Terms you need to know when trading at CSE

When trading in the Stock Market there is a lot of technical jargon often used by the CSE and Stockbrokers.
It is worthwhile for an investor to familiarise oneself with such terms in order to engage in a well informed investing experience.

Thus our article this week would focus on some of these terms.

Market Capitalisation:

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 valuations.

The market capitalisation 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 capitalisation is 15,000,000 x Rs 20.00 = Rs 300,000,000.

Although the market capitalisation 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 and balance sheet) may not be reflected in the market capitalisation.

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): The All Share Price Index is used to measure the movement of share prices of all the listed companies.

The ASPI is based on market capitalisation. Weighting 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.

* 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 capitalisation (size). This index is revised bi-annually.

The base year for this index is 1998.

Market Day: This is a day on which the Stock Exchange is open for trading. Trading is open from 9.30 am to 2.30 pm, 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.

Portfolio: A portfolio is a collection of investments, all owned by the same individual or organisation.

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 is the idea that you shouldn't put all of your eggs in one basket.

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 stock holding 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 at the CSE.

Any lot of less than 100 shares is considered an odd lot.

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 of a share.

Courtesy CSE