Knowledge is Power. Everybody has heard of this saying or at least about the video game of the same name and it is nowhere as applicable as in the field of market transactions. At the stock exchange, information decides about success and failure and therefore ultimately about your profit.
To make sure you are ready for your next stock market adventure, we composed a compact dictionary, including the most relevant terminology.
Assessment – Whether a share is under- or overvalued is constituted by the assessment ratios of a company. which can be measured up with competitors. Indicators are the price-earnings ratio and the price sales ratio. You can therefore evaluate whether a bond is worth the money or not.
Bear Market – A bear market describes a period of significant price drops. Events like that are, for example, the financial crisis of 2012, the Dotcom crisis and the global economic crisis of the 1930s.
The opposite of that is the Bull Market. From a statistical perspective, the Bull Market usually lasts for a longer time, while a Bear Market is often more violent
Bid-Ask-Spread – The Bid-Ask-Spread or just Spread is the difference between the offered Bid- and Selling rates. The Selling Rate is the rate at which a Share is to be sold and the Bid-Price is the price at which an interested party is ready to buy.
Blue Chips – The term originates from the USA. In the old days, Blue Chips in a Casino had the highest value. Nowadays, huge listed companies are called Blue Chips.
Bond Issues – A bond issue is an interest-bearing bond. In exchange for interest, the investor provides cash to a company or government. The company is therefore borrowing external capital. The investor becomes a creditor and expects punctual interest payment and reimbursement. In contrast to shares, here we have a focus on external capital and not on equity capital. Thus the shareholder is much more exposed to the positive or negative development of a business ,compared to a Bond Issue Investor.
Broker – A broker is a trader of shares and organises the buying and selling of them. He is paid in the form of brokerage fees.
Certificates – Certificates can be used to spread risk and appear in the form of Indices, Segments or share pots. In contrast to funds, certificates are no share of a portfolio, but an obligation.
Class of Investment – Classes of Investment are clusters of similar investments. Important classes of Investments are, for instance, shares, bonds, raw materials, real estate and cash.
Dividend – The dividend is a share of the annual company profit, paid out to the shareholders. In Germany most dividends are distributed annually. The expected profits are determined by the annual general meeting.
Free Float – Free Float is a proportion of Shares of a limited company which is not in a state of fixed ownership and can be traded freely at the stock exchange. In an ideal Situation, 100 percent of shares of a limited company are traded at the stock exchange. If that is not the case, what remains is in the hands of big investors.
Fund – At the end of the day, a fund is nothing but a big pot, which is filled with money by Investors. This pot is administered by Funds managers who invest the collected money in Shares, Bond Issues, Real Estate and other securities.
There are different types of Funds:
– Investment funds are limited to one class of Investment.
– Balanced Funds consist of Shares and Bond issues, thus different classes of Investment.
In contrast to a traditional Share, a Fund does not invest in only one specific share, but in several different ones. The big advantage is the spread of risk.
Fungibility – Fungibility is the Interchangeability of securities. All issued securities need to retain the same value and need to be fully interchangeable with different securities. The Fungibility of securities thus guarantees a lossless Interchange of Shares, as well a quick stock exchange trading.
IPO (Initial Public Offering) – Initial Public Offerings are the first to publicly offer shares of a company to interested parties.These new shares usually originate from the portfolio of current shareholders or from capital increase.
Issuer – The issuer is a publisher of securities, such as Bonds or Shares. The most active Issuers are, for example, Companies, Banks, Corporations and the Government.
Market Capitalization – The Market Capitalization, also known by the term Stock Market Value, is the number of outstanding shares of a Company multiplied by the rate. This key figure is often a criteria for whether a share is to be integrated in an Index and is an indicator for the size of a company.
Maximum Drawdown – This key figure indicates the maximum loss of an Investment at the most unfavourable period of purchase or sale.
Mortgage Bond – These Bonds are issued by mortgage banks and are needed in order to finance building loans. Due to the special safety rules, Mortgage bonds are particular low risk forms of investment.
Pennystocks – Pennystocks are shares whose value in the local currency is lower than one. These shares usually stem from even smaller, still unknown companies.
Share – A share is a bond, representing the assets of a company, listed at the stock exchange, the so-called public limited company. The equity capital of a limited company is therefore shared via the number of bonds. There are two types of shares: Ordinary shares and preference shares. Ordinary shares entail a right to vote at the general meeting, while preference shares usually generate higher yield.
Share index – The share index is a measured value which constitutes for share price development. Also known by the name key figure or index figure, there are various different types of indices. Germany‘s most famous index of stocks would be DAX, which is a performance Index representing Germany‘s 30 most famous shares.
The various indices are an important indicator when observing, comparing or measuring the developments of various segments of different markets, industries or individual segments.
Share repurchase – Share repurchase is a term that refers to the buyback of shares by the very company that issued them in the first place. The main reason for this action is an undervalued share. Companies seek to increase this value by buying their own shares. Market value increases when less shares are available.
Shareholder – A shareholder is a person who owns one or several shares. Therefore he becomes a co-owner of the company and also partly owns the equity capital.
Short sales – Short sales are mostly about speculation. That means an Investor is selling a share, that he is currently not owning, at a higher rate than his own purchasing price. He is hoping for a price drop of that particular share in the future, when he is actually paying for it.
Stock split – In the case of a stock split, existing shares of a listed company are being split and the price is therefore shared. Many companies perform such a split in order to gain new shareholders.
A share that is priced at 50.000 Euro is unlikely to be purchased. When those shares are split, the cost is reduced and therefore more attractive for potential buyers. A single share is becoming more affordable while the equity capital of the company and the value of the share portfolio, of an individual shareholder, remains the same. The opposite of that is a share merger.
Stop-Loss-Order – A Stop-Loss-Order is an automatically generated sales order. This sales order is triggered as soon as a rate is moving beneath a certain threshold in order to take action before a significant price loss is happening.
VaR (Value-at-Risk) – The Value-at-Risk is a measure of risk and indicates which loss amount is unlikely to be exceeded within a certain period of time. If VaR is, for example, at 15 percent, Investors have a 95 percent likelihood that losses will not exceed 15 percent within one year.
Volatility – Volatility indicates the rate fluctuations of a share. Higher volatility always indicates a stronger share price fluctuation. That means, an investment can either be very risky or very promising.
Yield – Yield is a way to measure the overall success of an investment. If, for example, an Investor is putting 100 Euro into an investment and receives 120 Euro when the Investment is finished, he has generated a yield of 20 percent or 0,2 respectively. Yield, therefore, is the relationship between profit and invested capital.
Zerobonds – Zerobonds are a special category of bonds which exclude the payment of accured interest. Thus, they are bonds with a fixed interest rate and a high fungibility and volatility.