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Terminology

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Beta: The Beta is a measure of the systematic risk of a security that cannot be avoided through diversification. Therefore, Beta measures non-diversifiable risk. It is a relative measure of risk: the risk of an individual stock relative to the market portfolio of all stocks. Higher-beta stocks mean greater volatility and are therefore considered to be riskier but are in turn supposed to provide a potential for higher returns; low-beta stocks pose less risk but also lower returns. The market itself has a beta value of 1; in other words, its movement is exactly equal to itself (a 1:1 ratio). Stocks may have a beta value of less than, equal to, or greater than one.

For Example: Consider the stock of Company A which has a beta of 0.8. This essentially points to the fact that, Company A as a whole has been relatively less volatile as compared to the market as a whole. Its price moves less than the market movement. Suppose Nifty index moves by 1% (up or down), Company A’s price would move 0.80% (up or down). If Company A has a Beta of 1.2, it is theoretically 20% more volatile than the market.


 Buy Back: Buy back of shares means repurchase of securities by a company from its shareholders. In the case of stocks, this reduces the number of shares outstanding. The share buyback can increase the share price of a company by reducing the supply of shares available in the market. The investor can benefit from this in two ways: (1) The stock price goes up; (2) The investor’s percentage share in the company’s earnings increases. Reasons for buybacks include putting unused cash to use, raising earnings per share, and increasing internal control of the company.


Cash Reserve Ratio: CRR is the minimum amount of cash that commercial banks have to keep with the RBI at any given point in time. Banks are required to hold a certain proportion of their deposits in the form of cash with RBI. RBI uses CRR either to drain excess liquidity from the economy or to release additional funds needed for the growth of the economy.

For example, if the RBI reduces the CRR from 5% to 4%, it means that banks will now have to keep a lesser proportion of their deposits with the RBI making more money available for business. Similarly, if RBI decides to increase the CRR, the amount available with the banks goes down. 


 Earnings per Share (EPS): EPS is a measure of the profit available to the equity shareholders on a per share basis. It is calculated by dividing the Profit / (Loss) after Tax, by the Number of Shares Outstanding.

A high EPS indicates high profitability. If the profitability goes down, so does the EPS. On the other hand if the number of outstanding shares increases, it negatively impacts the EPS unless the profitability rises proportionately. For this reason, companies carefully plan the issuance of fresh equity.  

Basic vs. Diluted EPS: In calculating Basic EPS, the denominator is comprised of the total number of equity shares actually issued by a company. For calculating diluted EPS, the denominator is made up of the total number of equity shares which would be outstanding considering all instruments which are convertible into equity shares such as convertible debt instruments, Employee Stock Option Plans (ESOPs) etc.


Enterprise value: Enterprise value represents a company’s economic value – the minimum amount someone would have to pay to buy it outright. Enterprise value is calculated by adding Company’s market capitalization, minority interest, preferred stock, and outstanding debt together and then subtracting out the cash and cash equivalents found on the balance sheet. Enterprise value is a more accurate estimate of takeover cost than market capitalization as market cap ignores debt, and with some companies, debt is substantial enough to change the picture significantly. Enterprise value is calculated as follows:

Enterprise Value = Market Capitalization (Current market price × No. of shares outstanding) + Total Debt + Notes Payable + Book Value of Preferred Stock + Book Value of Minority Interest – Cash & Cash equivalents.


 Intrinsic Value: The actual value of a company or an asset, based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Value investors use a variety of analytical techniques in order to estimate the intrinsic value of securities in hopes of finding investments where the true value of the investment exceeds its current market value


 Margin of Safety: Coined by Benjamin Graham and David Dodd, in their 1934 book “Security Analysis”, the term ‘Margin of Safety’ can be defined as “the difference between the intrinsic value of a stock and its market price”. One may spend days trying to come up with a definition of ‘intrinsic value’. For our part, we believe that it is the value of a business which is determined by the facts. It is the true value as opposed to the market price.


Net Interest Margin: For banks, interest expenses are their main costs and interest income is their main revenue source. The difference between interest income and expense is known as net interest income. It is the income, which the bank earns from its core business of lending. Net interest margin is the net interest income earned by the bank on its average earning assets. These assets comprises of advances, investments, balance with the RBI and money at call.


Price Earnings Ratio (PE Ratio): PE Ratio is the most commonly used method of valuing companies. It is arrived at by dividing the Current Market Price of the equity share by its EPS.

Since EPS is reported quarterly, PE Ratio can be calculated by dividing the current share price by the trailing 12 months EPS i.e. reported EPS of the last 4 quarters. A high PE ratio indicates that the investors are expecting the earnings (and accordingly the price of the company’s shares) to grow at a faster rate and vice versa.

Also read – Valuations: A closer look at the P/E Ratio 


Price Earnings Growth Ratio (PEG Ratio): PEG Ratio is used to determine a stock’s value while taking into account earnings growth. It is arrived at by dividing the PE by its Expected Growth Rate in Earnings.

A high PEG ratio indicates that the investors are expecting the earnings (and accordingly the price of the company’s shares) to grow at a faster rate and vice versa. By dividing the P/E ratio by the EPS growth rate, the resulting ratio is better for comparing companies with different growth rates.

Peter Lynch argued in his 1989 book One Up on Wall Street that “The P/E ratio of any company that’s fairly priced will equal its (EPS) growth rate”. This means that a fairly-valued company should have its PEG equal to 1. So, a PEG ratio greater than 1 means the stock is relatively expensive, whereas PEG ratios lower than 1 means a stock is below its “fair value.”


Qualified Institutional Buyer (QIB): Qualified Institutional Buyers are those institutional investors who are generally perceived to possess expertise and the financial muscle to evaluate and invest in the capital markets and who are sophisticated enough to understand market risks (i.e. who may not need the protection of SEBI). QIBs encompass a wide range of entities, including banks, mutual funds, savings and loans associations, insurance companies, investment companies or employee benefit plans.


Repo Rate: The rate at which the RBI is willing to lend to commercial banks is called Repo Rate. Whenever banks have any shortage of funds they can borrow from the RBI. If the RBI increases the Repo Rate, it makes borrowing expensive for banks and vice versa. As a tool to control inflation, RBI increases the Repo Rate, making it more expensive for the banks to borrow from the RBI with a view to restrict the availability of money. Similarly, the RBI will do the exact opposite in a deflationary environment.


Reverse Repo Rate: The rate at which the RBI is willing to borrow from the commercial banks is called reverse repo rate. If the RBI increases the reverse repo rate, it means that the RBI is willing to offer lucrative interest rate to banks to park their money with the RBI. This results in a decrease in the amount of money available for banks customers as banks prefer to park their money with the RBI as it involves higher safety.  This naturally leads to a higher rate of interest which the banks will demand from their customers for lending money to them.


Right Issues: A rights issue is a way in which a company can sell new shares in order to raise capital. Shares are offered to the existing shareholders in proportion to their current shareholding. In other word, whenever an existing company makes fresh issue of equity capital, the existing shareholders have the first right to subscribe to the issue in proportion to their existing shareholding. What is not subscribed by the existing shareholders can be issued to the public. The price at which the new shares are issued is usually much less than the current market price of the shares.


Risk free rate: The risk-free interest rate is the theoretical rate of return of an investment with zero risk, including default risk. Default risk is the risk that an individual or company would be unable to pay its debt obligations. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a given period of time. The risk-free interest rate for the Indian investors would be the yield on Indian government bonds denominated in Indian Rupee of appropriate maturity.


Statutory Liquidity Ratio (SLR): SLR is the amount that commercial banks are required to maintain in the form of gold or government approved securities before providing credit to the customers. SLR is stated in terms of a percentage of total deposits available with the bank and is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. For example, currently, commercial banks have to keep gold or government approved securities for a value equal to 23% of their total deposits.


Value Investing: Value investing is the practice of purchasing securities or assets for less than what they are worth. Simply put, you are a value investor if you have a habit of finding and purchasing things when they are available at a discount and when you know that the price of those things will soon rise again.