Investment
Stock Market
Investors;
Retail Investor: low quantum, people investing their savings.
Institutional Investors: High quantum, Government, Banks and corporates, Mutual Funds, Insurance companies, Pension Funds.
Share: A way to hold equity in a company.
Num shares/total shares * 100 is your share in the company
Markets.
Primary or new issue: When security is issued by the business itself, Going public or IPO
Secondary market: To buy and sell already issued securities by investors, no funds are gained by the company.
A security is a tradable financial asset.
Equity securities (stocks) represent ownership in a company. When you buy a stock
Debt securities (bonds) represent a loan made by an investor to a borrower, typically a corporation or government,
Fresh issue: New shares.
Offer for sale: Investor selling its share, the company capital stays the same.
FPO: may happen through offer for sale, to get additional funds.
Trade
Broker
is an individual or firm that acts as an intermediary between an investor (buyer or seller) and the stock exchange.
Clearing house
A clearing house is a financial intermediary that facilitates the settlement of transactions, particularly in securities, derivatives, and other financial markets. Its primary role is to ensure that trades are executed smoothly, accurately, and with minimal risk between buyers and sellers.
Depository
A depository is a financial institution or entity that holds and safeguards securities such as stocks, bonds, and other financial instruments on behalf of investors. it. maintains the record of all the securities that you hold.
You are required to hold a demat account with the depository, settlement is done in this demat account.
Stock Index: Leading measure to represent entire stock market.
Alpha = Fund managers return - index return
Index can be created sector wise, Banking, Pharma, Real estate etc.
Price index: Sum total of all stock prices divided by number of stocks.
Market weighted index: takes weighted value of stocks
Life Cycle
Initiation: Place order at the price for security, and number of stocks
A market order is an instruction to buy or sell a stock immediately at the best available current price.
Market Order: Prioritizes speed of execution over price control.
A limit order sets a specific price at which you are willing to buy or sell a stock.
Prioritizes price control over speed of execution.
Risk management and order routing
Broker to verify cash/security.
Lock the cash.security and pass on the trade to the exchange.
Excution
Exchange collates and performs order matching. Informs broker which in turn informs investor
Clearing and settlement
Stop loss order, to limit losses on your order. In case price falls below a specified price.
Cover order: Like stop loss order you can mention the price at which to get out of trade.
OCO: One cancels other: set points limit.
derivatives are financial contracts whose value is derived from the price or performance of an underlying asset, index, or rate.
These are used to hedge risk
Futures: A contract to buy or sell an asset at a predetermined price at a future date.
Options: Gives the holder the right, but not the obligation, to buy or sell an asset at a set price before or on a particular date.
Swaps: Exchange of one security for another
Forwards: Customized contracts to buy or sell an asset at a specified price at a future date, but unlike futures, they are not traded on exchanges.
Margin Trading: This is the most common form of leverage, where investors borrow funds from brokers to buy stocks
Call option gives the option holder the option to buy, and puy options gives the option holder the option to sell.
Statements
Bid price and offer price
Bid price: price at which buyer is willing to buy.
offer price: price at which seller is willing to sell.
balance sheet
Owner's equity = Assents(Resources controlled by the company) - Liabilities(How resources were financed)
Current:
Assets:To be sold of, or used up in one year.
Liabilities: To be settled within one year.
Retained Earnings=Beginning Retained Earnings+Net Income−Dividends Paid
Income statement P&L
Summarizes the revenues, costs, and expenses over a specific period (e.g., a month, quarter, or year), showing the company's financial performance. It shows whether the company is making a profit or loss.
Cash flow statement
source and use of cash
Ananlysis
Liquidity: Ability to meet short term obligations.
Convert trade receivables to cash.
Solvency: Ability to meet long term obligations.
Ability to manage assets and liabilities.
Common Size analysis
helps normalize financial data, making it easier to compare companies of different sizes or from different industries.
It allows companies to track trends in financial statement items (like revenue, expenses, assets, and liabilities) over time as a percentage of a base figure
Common Size Income Statement: All items (e.g., revenue, cost of goods sold, operating expenses) are expressed as a percentage of total revenue.
Common Size Balance Sheet: All items (e.g., assets, liabilities, equity) are expressed as a percentage of total assets.
Financial ratios
Efficiency/Activity Ratios: These ratios measure how well a company uses its resources (assets, equity, and inventory) to generate sales or profit.
Liquidity Ratios: assess a company's ability to meet its short-term obligations
Solvency Ratios: assess a company's ability to meet its long-term obligations
Profitability Ratios: how well a company generates profits relative to its sales, assets, or equity
Valuation Ratios: assess whether a company's stock is overvalued, undervalued, or fairly valued in the market, relative to its earnings, book value, or sales.
P/E ratio = Earnings per Share (EPS) /
Market Price per Share
P/B Ratio = Market Price per Share / Book value per share.
Book Value per Share is the company’s total assets minus liabilities, divided by the number of outstanding shares.
Used for finance companies