The experts of Centras Securities are glad to offer useful information that can be necessary to clients inexperienced in the financial market. Many financial definitions are constantly heard; however people often confuse and frequently do not know details of financial terms.
First, we offer some key definitions of the financial instruments offered by our company:
Stock – Plain and simple, stock is a share in the ownership of a company. Stock represents a claim on the company's assets and earnings. As you acquire more stock, your ownership stake in the company becomes greater. Whether you say shares, equity, or stock, it all means the same thing.
Being an Owner
Holding a company's stock means that you are one of the owners (shareholders) of a company, and, as such, you have a claim to everything the company owns. Yes, this means that technically you own tiny sliver of every piece of furniture, every trademark, and every contract of the company. As an owner, you are entitled to your share of the company's earnings as well as any voting rights attached to the stock.
Being a shareholder of a public company does not mean you have a say in the day-to-day running of the business. Instead, one vote per share to elect the board of directors at annual meetings is the extent to which you have a say in the company. There are two main types of stocks: common stock and preferred stock.
Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management.
Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders, and preferred shareholders are paid. While common shareholders might be at the bottom of the ladder when it comes to liquidation, this is balanced by other opportunities. As a shareholder, you have the right and the obligation to make sure the company's management is looking out for your best interests
Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). Some people consider preferred stock to be more like debt than equity.
Joint-stock company (JSC) –is a company that has some features of a corporation and some features of a partnership. This type of company has access to the liquidity and financial reserves of stock markets as a corporation, however, as in a partnership; the stockholders are liable for company debts and have additional restrictions of a partnership.
Bonds – Usually a fixed interest security under which the issuer contracts to pay the lender a fixed principal amount at a stated date in the future, and a series of interest payments, either semi-annually or annually. The main types of bonds are the corporate bond, the municipal bond, the Treasury bond, the, Treasury note, Treasury bill, and the zero-coupon bonds. The classification of a bond depends on its type of issuer, priority, coupon rate, and redemption features. The higher rate of return the bond offers, the more risky the investment. The bond rating system helps investors distinguish a company's credit risk. Blue-chip firms, which are safer investments, have a high rating while risky companies have a low rating.
Eurobonds – A bond that is denominated in a different currency than the one of the country in which the bond is issued. Eurobonds are attractive methods of financing as they give issuers the flexibility to choose the country in which to offer their bond according to the country's regulatory constraints. In addition, they may denominate their Eurobond in their preferred currency. Eurobonds are attractive to investors as they have small par values and high liquidity. Eurobond is normally payable to the bearer and is free of tax.
Bill of exchange – A non-interest-bearing written order that binds one party to pay a fixed sum of money to another party at a predetermined future date. Bills of exchange are similar to checks and promissory notes. They can be drawn by individuals or banks and are generally transferable by endorsements. The difference between a promissory note and a bill of exchange is that this product is transferable and can bind one party to pay a third party that was not involved in its creation. If these bills are issued by a bank, they can be referred to as bank drafts. If they are issued by individuals, they can be referred to as trade drafts.
Promissory Note - A written, dated, and signed two-party instrument containing an unconditional promise by the maker to pay a definite sum of money to a payee on demand or at a specified future date.
The only difference between a promissory note and a bill of exchange is that the maker of a note promises to pay the payee personally, rather than ordering a third party to do so.
When a bank is the maker promising to repay money it has received, plus interest, the promissory note is called a certificate of deposit (CD).
Non-documentary security – a form of issued securities when a holder is determined according to a record in a system registering holders of securities or in case of depositing securities according to a record at deposit account.
Broker – A company that charges a fee or commission for executing buy and sell orders submitted by an investor. The role of a firm when it acts as an agent for a customer and charges the customer a commission for its services. A licensed real estate professional that typically represents the seller of a property. A broker's duties may include: determining market values, advertising properties for sale, showing properties to prospective buyers, and advising clients with regard to offers and related matters.
Brokerage activity – conclusion of civil legal transactions with securities as assigned or commission agent acting on the basis of contract of assignment or commission and by attorney for concluding such transactions in case such powers of assigned or commission agent are not indicated in an agreement.
Dealer – A legal entity willing to buy or sell securities for their own account. One who purchases goods or services for resale to consumers. A dealer differs from an agent in that a dealer acts as a principal in a transaction. That is, a dealer takes ownership of assets and is exposed to inventory risk, while an agent only facilitates a transaction on behalf of a client.
What really sets brokers apart is whether they are full-service or discount:
Volatility – change of course (price) of a certain financial instrument during a certain period of time.
- A statistical measure of the tendency of a market or security to rise or fall sharply within a period of time.
- A variable in opinion pricing formulas that denotes the extent to which the return of the underlying asset will fluctuate between now and the expiration of the option. Volatility is typically calculated by using variance or annualized standard deviation of the price or return. A measure of the relative volatility of a stock to the market is its beta. A highly volatile market means that prices have huge swings in very short periods of time.
Kazakh Stock Exchange – organization carrying out its activity of public trading at a certain place under preliminarily agreed conditions.
Exchange transactions – aggregate actions of participants of exchange trading directed at making transactions.
Over-the-counter market – market where exchange goods are purchased and sold and when pricing process takes place out of an exchange.
Portfolio – The group of assets--such as stocks, bonds and mutuals--held by an investor. Portfolio consists of several sections: bonds, common shares, preferred shares, etc. Portfolio content depends on an investor’s goals and character (conservative, aggressive, etc.). Portfolio is considered balanced if it is made so that an investor gets an optimal combination of security, profitability, capital growth and liquidity.
Forfeiting– a special form of trade operations. Under forfeiting conditions a seller reassigns its receivables from a buyer to a credit organization. The seller is paid the whole amount of receivables less interest, and the debtor (the buyer of goods) pays its debt in regular semi-annual installments.
Factoring – purchase by banks and other financial organizations of a company’s debt, in particular, payment liabilities for delivered goods and services or works.
Factoring is a version of trading-commission operation combined with crediting of working capital of a client; factoring company buys clients’ bills under the condition of 90% payment for factored deliveries and payment of the rest part less credit interest within agreed terms not depending on receipt of payments from debtors; as a rule factoring is used by small and middle entrepreneurs.
Mortgage – mortgage credit, debt instrument, secured by the right for real estate, usually freely circulating; a borrower preserves the right of using property within the credit term.
Also mortgage is a pledge of an entity, construction, building or other objects directly connected to land, i.e. together with an appropriate land plot or the right of using it.
Underwriting – placement of securities by means of public subscription through mediators which functions are often carried out by investment banks. The latter buy securities from companies that issued them at preliminarily set price and then place them among private or institutional investors at a higher price.
Credit rating – a qualified assessment of probability of a debtor's default on its liabilities, i.e. a debtor’s ability to meet it’s financial or bond liabilities.
The meaning of credit rating is to give investors comparable information about credit risk on a standard rating scale not depending on peculiarities of companies, separate industry and a country.
Credit rating proved to be an effective tool of risk assessment in developed countries. Credit rating reflects financial, industrial, operational, legal and organizational sides of companies that characterize ability and readiness to meet fully and timely financial liabilities.
Credit rating is also given to sovereign governments, regional and local authorities, corporations, financial organizations, etc.
Investment companies may give internal ratings for their internal use and for supplying such information to clients.
International rating agencies give short-term and long-term credit ratings.
Short-term rating reflects a debtor’s possibility of default during a year.
Long-term rating assesses default possibility for a longer period of time.
All credit ratings are necessarily reconsidered and constantly monitored by a rating agency. According to monitoring results an agency can decrease, increase or confirm a given credit rating.
Liquidity – an entity’s ability to meet all its current liabilities. Liquidity determines the quality of current assets of a company, their ability of covering a company’s debt. The main parameters of determining liquidity are trading volume, number of concluded transactions and spreads.
Liquidity increase presupposes decrease of profitability of a banking organization related to increase of liquid assets share. Liquid assets are easily sold resources such as short-term government securities, current accounts, cash, etc., which do not bring income in the form of interest. However during periods of crisis or depression credit organizations for meeting their liabilities have to accumulate liquid assets by means of selling highly profitable and long-term securities.
Spread – difference between the best purchase proposal and best sale proposal.
Diversification – dispersion of investments and casual risks by means of investing into different companies, securities, funds having portfolios of various securities.
Profitability – percentage value determining relation of total annual income of a security to its current market price. It is determined as yearly profit of a security in percentage relation to market price of an asset. It lets compare real profitability of securities which prices fluctuate with the level of market rates and make right investment decisions.
Dividend– income received by a shareholder (participant) from a company at distribution of earnings after taxation (including interest from preferred shares) according to the number of shares (share) belonging to a shareholder (participant).
Margin– a term used in banking, stock exchange, trading, and insurance practice; it is difference between purchase and sale prices of goods, securities, etc.
Margin is value expressing difference between two certain indicators. In banking it is difference between credit interest rates and rates of deposits. It is difference between market price of securities and loan secured by them. In marketing margin is a trading increase of price determined by industrial enterprises. At a stock exchange it is a sum of money paid by a broker to a clearing house or by clients to a broker for covering unfavorable cost fluctuations of futures contract after its registration.
Listing– access of security (share or bond) to official quotation (trade) at stock exchange after a thorough evaluation of its investment qualities. If issued securities are registered at stock exchange then transactions of purchase and sale with them can be conclude. Unlisted shares are traded in the over-the-counter market. A security’s category is determined during the listing process depending on the correspondence of an issuer’s financial position to necessary requirements (size of capital, its structure, profitability, number of shareholders, etc.). Listing is carried out by a special Listing department of KASE.
Forward instruments – general name of futures, forward and options contracts.
Futures contract – a document determining rights and obligations for transfer of goods or information with the indication of the order of such transfer.
Hedging – conclusion of transactions of purchase and sale of futures in order to decrease risk of financial losses when carrying out common commercial activity. Hedging is minimization of a price risk in cash position by opening the opposite (forward or option) position of the same good or financial instrument with its subsequent offset. Ideal hedging fully eliminates future losses or profit in a position; hedging includes forward, futures, option operations, interest swaps, «short» selling of securities.
Issuer – a legal person or executive authorities or local self-managing authorities having obligations on their own behalf to fulfill before holders of securities.
