GENERAL STOCK MARKET TERMS

1. Stock split and reverse spilt: Stock split involves splitting up of a stock into smaller units that reduces the stock price keeping market capitalisation remains the same. The reason why companies split their stock is to make them more affordable to investors because stock price reduces after it is split. Likewise, reverse split increases the stock price while reducing number of outstanding shares.
2. Spin-offs: Spin off means a company breaking up itself into smaller units. The reason for such action is to maintain a focus on core competencies.

3. Buyback: Buyback is an action in which company offers to buys back its stock from the current share holders at an attractive price. The reason is to reduce the shares outstanding in the market or to reduce the stake of shareholders in company.
4. Dividend payouts: Dividend is the payment made to the investor for sharing the profits a company has made. It can be cash dividend or stock dividend where company offers stock as a dividend to the current shareholders.
5. Mergers and acquisitions: Mergers is a event where two or more companies merge into one aiming to be more competitive and for more profitability. Likewise Acquisition means a bigger company acquiring a smaller one for further expansion.
6. Bonus issue: It is an additional dividend given to the shareholders that can be in cash or in the form of stock. When companies have outstanding performance with surplus profit, they may decide to issue bonus to the shareholders.
7. Rights issue: It refers to offering additional shares to the current shareholders of the stock. This is done by companies to raise capital for further expansion which provide its existing shareholders the right to buy the stock at discounted rates than price making it more lucrative.
8. Quarterly Results: Many a times we hear about companies coming up with quarterly results that tend to create either euphoria or a silent shock in the market. Quarterly results are the announcement by corporate, of the operational results at the end of each quarter. About a decade ago, only annual results were declared by the companies but later on stock market regulators mandated the declaration of half yearly results and then subsequently to quarterly results to bring in more transparency in the system. The figures representing huge profits, losses, increase in revenues, percentages hike in annual growth are no doubt important for the corporate business, but how much it is important for you as an investor is what we would discuss here.

Significance to the Share Holder

Long term investors: It is important to note that long term objectives of a company do not change every quarter. There might be many reasons due to which quarterly results of a company are not good. In short, a long term investor with investment period of 3-4 years is hardly affected by the quarterly results and it might prove mere wastage of time to keep analysing the results every three months. So a prudent long term investor will at least not get panicked with poor quarterly results but tend to find out the reasons behind it. Long term investment can be considered as a long tunnel and there is always light at the end of tunnel.

Short term investors: A short term investor might get affected by quarterly results in real sense. It has been seen over time that the markets are very sensitive to news of corporate results. The day blue chip companies like infosys declare its quarterly results; the BSE and NSE indices turn red or green depending on their results. These cause volatile sessions in the markets and hence short term investor or intra day traders may land up in huge losses or end up making huge profits.

9. Short selling

is selling the shares which you do not own. The term “short” here signifies that you do not hold the shares being sold. The first thought popping up in your mind would be – where do these shares come from which you are selling without possessing them in your portfolio of stocks. These come from your broker/brokerage firm that lends you the shares in lieu of your investment as collateral. You short sell these shares but subsequently you have to close the short by buying back the shares from market and then return it to your broker/brokerage firm. You are also charged some interest for the loan of shares you have taken. Below diagram describes the flow of shares involved in short selling

Short Selling

Looking at the flow of shares in above flowchart, one would ponder why to borrow shares for selling in market and then transfer them back to the lender? The logic behind shorting is very simple; earning profit margin. Let’s see how??

If you think a stock is overvalued and expect that the price would come down in future for sure; you would wish to sell the shares at current levels at higher price. So you borrow the shares and sell them at higher price. And when the stock actually falls as you had speculated; you buy it from market at lower price and return it to the lender and the difference between the selling price (higher) and buy price (lower) is what you earned in the deal. So at the end you must close the short by paying back the shares and this is called as “covering the short”. Concluding this, investors who anticipate fall in the stock price go short to take advantage of market fall. An investor can hold the short for as long as he wants but he is charged an interest as it is similar to a loan taken in the form of shares. Also if during the course of loan, the company declares dividend or rights issue, it must be paid to the lender who is the actual owner of shares because you are just a borrower.

Short selling is considered to destabilize markets directly or indirectly. In 2001, the stock prices crashed heavily owing to short selling by big operators after which SEBI banned it. After a gap of 6 years in December 2007 SEBI came up with updated norms of short selling to cover the loopholes and ultimately institutional investor were also permitted to short sell.

Concluding this, short selling no doubt gives you an opportunity to earn profit by taking advantage of downturn of markets, it might bring in huge loss to your investment if stock price moves up. Because in real sense, shorting is a bet against the current market trend. When stock is at current higher levels, you are expecting it to fall down and entering the arena. Speculation is what makes shorting a riskier job. So beware of the dark side of shorting before you actually go for it!