Basic Terminologies Used in Stock Market

Terminologies Used in Stock Market

When I was in primary school my English teacher used to make us byheart difficult words in any chapter even before teaching that chapter. Though we used to be reluctant, that helped us understand the chapter really well and that is what I am trying to do now. Before getting into any analysis part I want you to know a few important terminologies related to the stock market and hopefully, that will help you understand further topics well. So let us get into the terms.

Dematerialization

Dematerialization is the process of converting share in physical form to electronic form. As we know a share is nothing but a partnership. Now the partnership can be in the form physical document (partnership deed) or electronic form in Demat account. As holding shares in Demat account found to be a more secure option from 1996 India started using the dematerialization process for holding shares.

Rematerialization

Rematerialization is a reverse process of dematerialization where shares in electronic form can be converted into physical form. This can be done at the request of the investor, but presently hardly anyone does it.

Face Value (FV)

Face value is the nominal price of a share. The FV remains constant until the company decides to split or consolidate the shares. The trading price of a share is not related to its face value. FV in itself does not give any indication but it can be used for calculating equity capital and dividend per share values. Which helps in the analysis of the company.

Book Value

Book Value of a company is the net worth of the company. In simple terms, if the company stops its operations; sells all its assets at the current market price, and pays off all loans then the cash company will have in its hand is called book value. Book value is a very important metric in finding the fair value of a company.

Market Value

The Market value of a share is the current price at which share is trading. The market value keeps changing continuously. The current market price of the company can be found by multiplying the market value of the share by the total number of shares.      

Replacement Value

The replacement value of a company is a theoretical cost of setting up another company with all the assets similar to the existing company.

Intrinsic Value

The intrinsic value of a company a term that got popular because of great investor Warren Buffet. According to him, "Intrinsic value of a company is discounted value of free cash flow the company can generate in its remaining life." 

Market Capitalization

The market capitalization of a company is the amount of money required to buy the whole company at the current market price. In mathematical terms, it is the multiplication of the price of one share and the total number of shares. 

Enterprise value

The Enterprise Value is a term that was derived because of the limitation of market capitalization to interpret the right buying cost of the company. As this is a very important but usually neglected parameter we will discuss it in detail. 

Whenever one buys a company he does not just buy its assets but also liabilities. E.g. XYZ ltd. is a company which owns a factory costing 1cr rupees. Ram buys all shares of the company to become the sole owner of the company at 75 lakh rupees. At first, he thinks he got a great deal at a 25% discount but as he goes through company accounts he founds, the company has a payment liability of 50 lakh rupees. As Ram has bought the company now he has to pay off this 50 lakh rupee debenture. After paying debenture the company costed 1.25 cr rupees to Ram. This 1.25 cr rupee is called enterprise value.

So the enterprise value is the real cost of cost to buy a company after considering debentures and cash.

Enterprise value= Market Capitalization + Debenture - Cash 

Earning Per Share (EPS)

Earning per share of a company is very descriptive from its name itself. It is the amount of earning by the company divided by the total number of shares.

Earning Before Interest, Tax, Depreciation, and Amortization(EBITDA)

EBITDA is the profit of a company after paying costs related to operations only. EBITDA is not final earning as other expenses like interest payments, taxes, depreciation, and amortization are yet to be considered.      

Differential Voting Rights (DVR)

DVR is nothing but shares of the company only difference here is about voting rights. In normal shares, one share counts for one voting right in DVR shares one share counts for less than one voting right while ownership share is the same for both. 

E.g. If XYZ ltd. has 90 normal shares and 10 DVR shares. If Ram owns 1 normal share and Sham owns 1 DVR share then,

• Ram and Sham both have 1% ownership in the company.
• Ram has 1 voting right while Sham may have half voting right.  

 Whenever a big decision has to be taken, something like the selection of CEO, Ram's vote will have more weightage than Sham's vote. Normally DVR shares trade at a discount price to normal shares. 

Promoter

A Promoter is an individual or an organization that helps raise money for some investment activity. Popular examples of the Indian promoters are: 

Mukesh Ambani: Reliance Industries, Ratan Tata: Tata group, Radhakishan Damani: Dmart, etc.

Knowing promoters and their values is an important part of the qualitative analysis. We will discuss it in detail in some future posts. 

For now, I hope you understood all the terms discussed here. If you have any queries or expect more terms to be explained please feel free to comment.

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