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ICWAI Group- III Final (New Syllabus) June 2011 Examination Capital Market Analysis
Topic: Important Terms in Capital Market

Accounting beta: A related measure of the sensitivity of a firm's accounting earnings to the changes in the earnings of market portfolio. Adjusted beta: An estimate of a security's future beta, derived initially from historical data, but modified by the assumption that the security's true beta has a tendency over time to move toward the market average of 1.0. ADRs: American Depository Receipts (ADRs) are negotiable receipts issued to investors by an authorised depository, normally a US bank or depository, in lieu of shares of the foreign company which are actually held by the depository. ADRs can be listed and traded in a US-based stock exchange and help the Indian company to be known in the highly liquid US stock exchanges. ADRs also help the US-based and other foreign investors to have the twin benefits of having shareholding in a high growth Indian company and the convenience of trading in a highly liquid and well-known stock market. Two Indian companies Infosys and ICICI have gone in for ADRs. Arbitrage: Simultaneous purchase and sale of the same or essentially similar security in two different markets for advantageously different prices. Arbitrage portfolio: A portfolio that requires no investment, has no sensitivity to any factor, and has a positive Expected Return. A portfolio that provides inflows in some circumstances and requires no outflows under any circumstances. Arbitrage pricing: An equilibrium model of asset pricing that states that the Expected Return on a security is linear function of the security's sensitivity to various common factors. Beta: It is a percentage change in the scrip return divided by the percentage change in market return. Betas of well-traded companies are published and are available in the Finance Journals. If Beta is 1, it means the scrip risk is same as market risk. Beta coefficient: A relative measure of the sensitivity of an asset's return to changes in the return on the market portfolio. Mathematically beta coefficient of a security is the security's covariance with the market portfolio divided by the variance of the market portfolio. Blue Chip Company: It is a growth-oriented company showing signs of expansion, diversification, modernisation of technology expansion, and maintains a sustained growth in assets, sales turnover and profits- and reputation for consistent profitability and profit margins to sustain the consistent dividend distribution, growing profits and expanding net worth. The management of such a company has got a dynamic and growth-oriented policy and has the reputation for a vision for future growth. Book Building: Book building is a process used for marketing a public offer of equity shares of a company and is a common practice in most developed countries. Book building is called so because it refers to the collection of bids from investors, which is based on an indicative price range. The issue price is fixed after the bid closing date. Call or put option: The right to buy is called a call option while the right to sell is called a put option. The buyer of the call option can call upon the seller of the option and buy from him, the underlying instrument, at any point in time on or before the expiry date by exercising his option at the agreed price. The seller of the option has to fulfill the obligation on exercise of the option. The right to sell is called the put option where the buyer of the option can exercise his right to sell the underlying instrument to the seller of the option, at the agreed price. Capital Asset Pricing Model: An equilibrium model of asset pricing that states that the expected rate of return on a security is a positive linear function of the security's sensitivity to changes in the market portfolios return. Capital Market Line: Set of portfolio obtainable by combining the market portfolios with risk free borrowing or lending, assuming homogeneous expectations and perfect markets, the CML represents the efficient set. Cash settlement and an auction: In a cash settlement, the buyer is required to take the delivery of shares and the seller is required to give delivery of shares at the end of the settlement period. If the seller fails to deliver, the exchange authorities resort to auction on his behalf, and the resultant loss is payable by the defaulting seller. Correlation coefficient: A statistical measure similar to co-variance, in that it measures the degree of mutual variation between two random variables. The correlation coefficient rescales covariance to facilitate comparison among the pairs of random variables. The correlation is bounded by the variance of -1 or +1. Covariance: A statistical measure of the relationship between two random variables, it measures the extent of mutual variation between two random variables. Cross-rate: In inter-bank transactions, all currencies are normally traded against the US dollar, which becomes a frame of reference. So if one is buying with rupees a currency X which is not normally traded, one can arrive at a rupee-X exchange rate by relating the rupee-$ rate to the $-X rate. This is known as a cross-rate.

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Dedicated portfolio: A portfolio bonds that provides its owner with cash influence that is matched against a specific stream of cash flows. Depository: A depository is an organisation where share certificates of a shareholder are held in electronic form. This is done at the request of the shareholder through a depository participant (DP). If an investor wants to use services offered by a depository, he/she has to open an account with the depository through a DP, much like opening an account with any branch of a bank to utilise its services. In fact, in many ways, a depository is similar to a bank. Dematerialisation: Dematerialisation (a euphemism for shredding) is a process by which an investor's physical share certificates are taken back by the company/registrar and destroyed. Then an equivalent number of securities are credited in the electronic holdings of that investor. Efficient portfolio: A portfolio with the feasible set that offers investors both maximum Expected Return for varying levels of risk and minimum risk for varying levels of Expected Returns. Efficient set: The set of efficient portfolios. Equity funds: These are funds which invest in equity shares of companies. Equity funds are recommended by most fund houses because equities, as an asset class, have historically delivered higher returns compared to debt funds over a long term. Equity funds, by their very nature, tend to be volatile, that is, in the short term their value can go up or down. Therefore, they are not meant for those investors who need a regular and stable stream of easily predictable income. ESOP: An Employee Stock Option Plan (ESOP) is an employee benefit plan which makes the employees of a company owners of stock in that company. Several features make ESOPs unique as compared to other employee benefit plans. Most companies, both domestic and worldwide, are utilising this scheme as an essential tool to reward and retain their employees. Currently, this form of re-structuring is most prevalent in IT companies where manpower is the main asset. Ex-Ante: Before the fact, future. Ex-post: After the fact, historical. Expected Return: Return on a security or portfolio that an investor anticipates receiving over a holding period. Feasible set: The set of all portfolios that can be formed from the group of securities being considered by an investor. Forward Premium and Forward Discount: Normally, the forward price and the spot price of a currency differ. If the forward price is higher than the spot price, we speak of a forward premium, and if it is lower, of a forward discount. The premiums and discounts reflect the interest rates in that particular country, which is, in turn, linked to the inflation rates. So, high forward premiums are seen in countries where inflation rate is high. Forward Transaction: A forward transaction consists of a commitment to buy or sell a specific amount of foreign currency at a later date or within a specific time period at an exchange rate stipulated at the time the deal is struck. The delivery or receipt of the currency takes place on the agreed upon value date. In contrast to spot transactions, the commitment (conclusion of the agreement) of a forward transaction and the fulfillment (delivery and payment) are clearly separate in terms of time. The maximum period for most currencies is 12 months, though a maximum of five years may be granted for principal currencies. Fundamental Analysis: It relates to an examination of the intrinsic worth of a company to find out whether the current market price is fair or not, whether it is over-priced or underpriced, in the background of the company's performance and in the background of the performance of the industry to which the company belongs and also the general sociopolitical scenario of the country. Futures contract: A futures contract is an agreement between a buyer and a seller for the purchase and sale of a particular asset at a specific future date. The asset in the case of index futures is an index -it could be the S&P CNX Nifty index or the BSE30 sensex. Growth Company: It is a Company in which investors like to have long-term investment since return to equity shareholders an such a company continuously expands due to dividends, growth in dividends, in net worth, Bonus, Rights etc. It is a good hedge against inflation and rising costs. Growth Share: A share in a Growth Company is called a Growth Share which has experienced or is expected to experience rapidly increasing Earning per Share (EPS). Historical Beta: An estimate of security's beta derived solely from historical returns, equivalently the slope of the market model or the Expost characteristic line. Index Futures: Index futures are nothing but betting on market indexes. For ex. you buy or sell an index future, you take a view on what the index (say the sensex) will be at some point in the future. Inefficient portfolio: A portfolio that does not satisfy the criteria of an efficient portfolio and hence does not lie on the efficient set. Market capitalisation: Aggregate market value of a security equal to the market price per unit of the security multiplied by the total number of outstanding units of the security. Market Index: A collection of securities whose prices are averaged to reflect the overall investment performance of a particular market for financial assets. Market Portfolio: A portfolio consisting of an investment in all securities. Market Risk: The portion of security's total risk that is related to moves in the market portfolio hence cannot be diversified away.

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Mutual Funds: Mutual funds are collective savings and investment vehicles where savings of small (or sometimes big) investors are pooled together to invest for their mutual benefit and returns distributed proportionately. Pooling of monies ensures that small investors get the benefit of advice and expertise that is normally available only to very large investors. NASDAQ: National association of securities dealers automated quotations. Opportunity Set: Set of all portfolios that can be formed from the group of securities being considered by an investor. Optimal portfolio: Feasible portfolio that offers an investor the maximum level of satisfaction, this portfolio represents the tangency between the efficient set and an indifference curve of the investor. Options: Options are contracts which go a step further than futures contracts in the sense that they provide the buyer of the option the right, without the obligation, to buy or sell a specified asset at an agreed price on or upto a particular date. For acquiring this right, the buyer has to pay a premium to the seller. The seller on the other hand, has the obligation to buy or sell that specified asset at that agreed price. This makes options more of an insurance product where the downside risk is covered for the payment of a certain fixed premium. So the loss would be minimised to the extent of the premium paid, like in an insurance product. Par value: Nominal value of shares of common stock as legally carried on the books of a corporation. Portfolio construction: A component of the investment process that involves identifying which assets to invest in and determining the proportion of funds to invest in each of the assets. Portfolio Diversification: The process of adding securities to a portfolio in order to reduce the portfolio unique risk and thereby, the portfolio total risk. Portfolio manager: An individual who utilises the information provided by financial analysts to construct a portfolio of financial assets. Portfolio performance Evaluation: A component of investment process involving periodic analysis of how a portfolio performed in term of both return earned and risk incurred. Portfolio revision: A component of investment process involving periodically repeating the process of setting investment policy conducting security's analysis and constructing portfolio. Repo rate: Rate of interest involved in a repurchase agreement. Risk: Uncertainty associated with the end of period value of an asset. Risk- free asset: An asset whose return over a given holding period is certain and known at the beginning period. Security: Financial asset, a legal representation of the right to receive prospective future benefits under stated conditions. Security analysis: A component of the investment process that involves in determining the prospective future benefits of a security, the conditions under which such benefits will be received, and likelihood that such conditions will occur. Security market line: Derived from capital asset pricing model, a linear relationship between the Expected Returns and securities, and risk of those securities, with risk expressed as the security's beta. Spot Transaction: A spot transaction is the purchase or sale of foreign currency at a fixed price, with delivery and payment to take place on the second business day after the day of the transaction. Transactions with value dates (dates when payment and delivery are made) up to and including seven business days from the date of trading are also considered spot transactions, subject to agreement between the parties at the time of the deal. In such cases, the buyer has to pay slightly more an amount worked into the exchange rate for the facility. Most spot transactions are concluded over the telephone. Subsequent confirmation by the customer is not necessary if the transaction is conducted via foreign currency accounts at the bank. Stock market Index: A stock market index is like a good thermometer which accurately captures the overall changes in the stock market. Movements of the index represent the returns obtained by typical share portfolios in the country. Stock split: When a company splits its stock, it means that it will issue additional shares to the existing investors by reducing the face value of a stock. For example, if a stock has a face value of Rs 10, a two-for-one stock split will mean that mere will be twice the number of shares as before with a face value of Rs 5 each for the new share. So if an investor owns 100 shares, he will have 200 shares after the split. In case of a five-for-one split, there will be five times the number of shares and the investor will own 500 shares for every 100 shares. Systematic risk: Same as market risk -The portion of security's total risk that is related to moves in the market portfolio hence cannot be diversified away. Technical Analysis: It is an Analysis of the Market. Total risk: Standard Deviation of the return on a security or portfolio. Turn-around Company: It is an emerging Blue Chip Company which exhibits potentialities of growth and expansion in gross Block, Sales and Net profit. Unique risk: A portion of security's total risk that is not related to moves in the market portfolio. Unsystematic Risk: A Company specific risk is called an Unsystematic Risk. Variance: Square value of the Standard Deviation.

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Yield-To-Maturity (YTM): Yield-to-maturity is the annualised rate of return in percentage terms on a fixed income instrument such as bond or debenture, taking into account coupon rates, frequency of payouts and capital gains or losses. It is the composite rate of return of all payouts, coupon and capital gains. Suppose, there is a choice of investing in two bonds issued by two companies one where an interest warrant annually at 16 per cent is receivable and the other where the interest payout is spread out over 12 monthly installments at a rate of 15.5 per cent. On the face of it, the first instrument offers you a higher return. But the coupon payments alone (payouts through interest warrants) do not give a correct picture about the yield of the instrument. This is because the yield on an instrument will rise with the frequency of payouts. Because, the yield to maturity also takes into account the capital gain (or loss) at the time of maturity.