Playing in the capital market either as operator or an investor requires that you understand the language of the market by taking note of the terminologies that goes on in there. Here experts at the Nigerian Stock Exchange explain some of the terminologies.
‘Admitted to trading’ – The official term for when a security is listed and tradable; same as ‘admitted to the Daily Official List’.
Analyst – A financial professional who has expertise in evaluating investments and puts together “buy”, “sell” or “hold” recommendations for securities. They may be also known as a “financial analyst” or a “security analyst”. Analysts are typically employed by broking firms, investment advisors or mutual funds. They do the leg work for brokers, preparing the research they use for trading. Analysts usually specialize in specific industries or sectors to allow for comprehensive and specialized research capacity.
Asset – There are multiple definitions of an asset: 1. Something valuable that an individual or entity owns, benefits from or has use of, in generating income. 2. An item with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. 3. Property (not only real estate) owned by a person or company, regarded as having value and available to meet debts, commitments or legacies.
Asset allocation – An investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance and investment horizon (timeline). The three main asset classes—equities, fixed-income and cash/cash equivalents—have different levels of risk and return, and each will behave differently over time. Asset allocation is the single most important thing an investor should practice.
Auditor – An individual who is qualified to perform financial and accounting audits. An auditor is appointed to examine, correct and verify the accuracy of records and financial accounts, and to form an opinion about the authenticity and correctness of such records, by verifying the accuracy and reliability of the recorded transactions from the evidence available. They are expected to perform an unbiased evaluation. An auditor can be an internal employee or an external consultant.
Bid/Ask prices – The “bid” is the highest price a buyer will pay to buy a share of stock from at any given time. The “ask” is the lowest price at which the seller will sell the stock. The bid price is almost always lower than the ask price. This information is only seen by brokers and investors who have access to a trading screen. These prices fluctuate throughout a trading day as shares are bought and sold.
Bonds – Debt investments in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, states and federal governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash/cash equivalents. The indebted entity (issuer) issues a bond that states the interest rate (coupon) that will be paid and when the loaned funds (principal) are to be returned (maturity date). Interest is usually paid every six months (semi-annually) and in some cases, annually. The main categories of bonds are corporate bonds, federal bonds and state bonds, notes and bills, commonly referred to as “Treasuries”. Two features of a bond—credit quality and duration—are the principal determinants of a bond’s interest rate. Bond maturities range from a 90-day treasury bill (T-bill) to a 30+ year government bond; corporate and states are typically in the three (3) to 10-year range.
Bonus issue (or scrip issue or stock split or capitalization issue) – A corporate action in which a company’s existing shares are divided into multiple shares. The issue of shares to shareholders is in proportion to their existing holdings. A company may decide to distribute such shares as an alternative to increasing the dividend payout. Although the number of shares outstanding increases by a specific multiple, the total naira value of the shares remains the same. In this process, fractions of shares may arise; they are often aggregated and sold, after which a cash payment, in respect of the fraction sold, is made to the appropriate shareholder.
Book building – The process by which an underwriter attempts to determine at what price to offer an IPO based on demand from institutional investors. An underwriter “builds a book” by accepting orders from fund managers indicating the number of shares they desire and the price they are willing to pay.
Broker (or stock broker or dealing clerk) – An individual that executes buy and sell orders submitted by an investor. They are the only persons permitted to transact business on the floor of the stock exchange or in the OTC market. A broker must be employed by a dealing member, and must pass both the Chartered Institute of Stockbrokers Exam and the Nigerian Stock Exchange Authorised Clerkship Exam to be licensed to trade on the NSE floor. Stock brokers provide advice and make recommendations to their clients, but must have a client instruction before executing a trade behalf of that client. They usually charge a commission for the service they render their clients.
Broker-Dealer (or dealing member) – Company or individual that is both a broker and a dealer.
Capital stock – Shares authorized by a firm’s charter and having par value, stated value or no par value. Capital stock is any of various shares of ownership in a business. They include common stock of various classes and any preference stock that is outstanding. If a firm has only a single class of capital stock outstanding, the terms common stock and capital stock are often used interchangeably. The number and the value of issued shares are usually shown, together with the number of shares authorized, in the capital accounts section of the balance sheet.
Central Securities Depository (CSD) – A specialist institution or financial institution that holds securities such as shares in a physical (certificated) or dematerialized (existing solely as electronic records) so that ownership can be easily transferred via a book entry rather than physically. A CSD may provide other services such as electronic clearing and settlement of securities, as well as services such as securities borrowing and lending. See CSCS.
Clearing and settlement – The clearing and settlement of market transactions are described as follows: a. Clearing relates to identifying the obligations of both parties on either side of a transaction. b. Settlement is when the final transfer of securities and funds occur.
Clearing house (or central counter party clearing house) – A financial institution that helps facilitate trading done in futures markets. A clearing house acts as a third party to futures and options contracts – i.e., as a buyer to every clearing member seller, and a seller to every clearing member buyer. While clearing houses are responsible for settling trading accounts, clearing trades, collecting and maintaining margin monies, regulating delivery, and reporting trading data, their prime responsibility is to provide efficiency and stability to the financial markets they operate in. Clearing houses benefit both parties in a transaction, because they bear most of the credit risk. If two individuals deal with one another directly, the buyer bears the credit risk of the seller, and vice versa. When a clearing house is used, the credit risk that is held against both buyer and seller is held by the house.
Closed-end fund (or closed-end investment or closed-end company) – A collective investment with a limited number of shares. It is a publicly traded investment company that raises a prescribed amount of capital only once through an initial public offering (IPO). The shares are listed and traded on an exchange. Stocks of a closed-end fund represent an interest in a specialized portfolio of securities. The portfolio is managed by an investment adviser. The securities in the portfolio typically concentrate on a specific industry, geographic market or sector. The stock price of the fund fluctuates with the changing values of the securities in the fund’s holding, and as shares of the fund are bought and sold.
Common stock – See Stock.
Corporate bond (or corporate loan or corporate note or debenture) – A bond issued by a company. It is a bond that the company sells to “borrow” money in order to expand its business. The company promises to pay the investor (the lender) back on a future maturity date and pay interest in the meantime. There are different kinds of corporate bonds. In some cases, repayment may be secured by specific assets (e.g., cash, securities, real estate or equipment) which can be seized if the company fails to pay interest or return the original principal when the bond matures. Others that are not secured (debentures) are merely a promise to pay the investor back, as documented in an agreement called an indenture. Corporate bonds do not give investors an ownership interest in the issuing company, but they often have added features, including giving investors the option to convert their bonds into the company’s stock, or the company may have the right to buy back the bonds before they mature in order to refinance their debt. Typically, globally, there are five main classes of issuers of corporate bonds: public utilities; transportation companies; industrial corporations; financial services companies; and conglomerates.
Coupon – The interest rate stated on a bond when it’s issued. The coupon is typically paid semi-annually. This is also referred to as the “coupon rate” or “coupon
percent rate”.
Central Securities Clearing System Plc (CSCS) – CSCS is licensed by the SEC as a central securities depository (CSD). A CSD facilitates the delivery (transfer from seller to buyer) and settlement (payment) of traded securities. The CSCS enables securities transactions to be processed electronically. The company’s primary functions include: Central depository for electronic share certificates of companies listed on the Exchange; Sub-registry for all listed securities (in conjunction with registrars of listed companies); Issuer of central securities identification numbers to shareholders; Custodianship (in conjunction with custodians of local and foreign instruments)
CSCS offers investors online account access to view their securities portfolios. Investors must first select a broker before an account can be opened with the CSCS.
Custodian – Agent, such as a bank, a trust company or other organization, which holds and safeguards an individual’s, a mutual fund’s, or an investment company’s assets for them. They have the legal responsibility for their customers’ securities, which implies management and safekeeping. Custodians usually charge a fee for the service they provide.
Data vendor – Firms that provide data to financial market operators and investors. Distributed data is collected from an exchange’s live feeds, broker and dealer desks, and regulatory bodies. The types of data offered varies by vendor and most typically, covers information about entities (companies) and instruments (shares, bonds, etc.) which companies might issue.
Dealer – An individual or firm that buys and sells securities or “takes positions” for itself, or for its own account. Securities bought for the firm’s own account may be sold to clients or other firms, or become a part of the firm’s holdings.
Dealing member – Institution (stock broking firm) that is licensed by The Nigerian Stock Exchange and charges a fee or commission to buy or sell securities listed on the NSE’s platform (the exchange) on behalf of investors. The institution must be incorporated and registered under the Companies and Allied Matters Act, and must meet specific requirements set by the NSE to receive a dealing member license. As foreign investors are legally qualified to participate in the ownership of Nigerian stock broking firms, dealing members can also enter into any form of partnership with foreign stock broking firms.
Debenture – A medium- to long-term debt instrument used by large companies to borrow money. The term may be used interchangeably with bond, loan or note. A debenture is generally freely transferable by the holder who has no rights to vote in the company’s general meetings of shareholders, but who may have separate meetings; or votes, for example, on changes to the rights attached to the debentures. The interest paid to holders is a charge against profit in the company’s financial statements. A debenture may be convertible into equity shares of the issuing company after a predetermined period of time; it may also be non-convertible, and would usually carry a higher interest rate than a convertible debenture.
Debt security – A debt instrument that can be bought or sold between two parties and has basic terms defined, such as amount borrowed (nominal or notional amount), interest rate, and maturity/renewal date. Debt securities include government bonds, corporate bonds, certificates of deposit (CD), state and local bonds, collateralized securities (such as CDOs, CMOs, GNMAs) and zero-coupon securities. Most debt securities are traded over-the-counter. Debt securities get their measure of safety by having a principal amount that is returned to the lender (investor) at the maturity date or upon the sale of the security. They are typically classified and grouped by their level of default risk, the type of issuer and their income payment cycles.
Delisting – The removal of a listed security from the exchange on which it trades. Stock may be removed from an exchange because the company for which the stock is issued may (1) voluntarily or involuntarily not be in compliance with the listing requirements of the exchange; (2) choose, with the approval of its shareholders, to voluntarily delist; or (3) be acquired by another company. Delisting of a debt product such as a bond occurs on the maturity date (day of repayment) of the principal (loan amount) to investors.
Dematerialization – Indicates the conversion of shares/securities from a physical certificate to an electronic form. This allows for paperless trading via state-of-the-art technology, and these transactions of shares are done electronically, without relying on the traditional route of share certificates and transfer deeds. Electronic share certificates offer potential investors a way to get around the time-consuming task of transferring shares in their names; it also bypasses problems like delays in processing, bad deliveries via post or other conventional sources.
Demutualization – The process by which a member-owned organization (a mutual) changes its legal structure to a stock company. A mutual is a company created to provide a specific service at a low cost to benefit its members. Traditionally, a mutual raises capital from its members in order to provide them services, while a stock company raises capital from shareholders and other financial sources in order to provide services to its customers. Depending on the organization’s profit structure, a mutual may redistribute some profits to its members, whereas a stock company distributes profits to equity or debt investors. In a mutual, the legal roles of customer and owner are joined (members), and in a stock company the roles are distinctively divided. In demutualization, ownership of the company is separated from the exclusive right to use the services provided by the company.
Derivatives – A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties, and its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indices. Most derivatives are characterized by high leverage. Futures contracts, forward contracts, options and swaps are the most common types of derivatives.
Dividend – A distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the naira amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.
Dividend per share (DPS) – The the sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued. Source: Nigerian Stock Exchange
