Glossary

Investment

The placing of funds at risk in the hope of gain. Generally viewed in the following way:

• Long term: An investment made on the basis of a company’s prospects over a period of two years or more.
• Medium term: Six months to two years.
• Short term: Six months or less.

In-the-money

A ‘call’ option in which the strike price is below that of the underlying security; a ‘put’ option in which the strike price is above that of the underlying security.

Intrinsic value

The difference between the strike price and the price of the underlying security in an “in-the-money option”.

Investment trusts

Companies, the nature of whose business is that of investing in other companies. They do so by purchasing shares in these companies through the stock market. Their capital is fixed, and shares in these investment trust companies are listed on the Stock Exchange. Investors can buy or sell shares in such companies like they do with any other listed company. Also known as ‘closed-ended trusts’.

Island

A top reversal formation ‘isolated’ because of gaps appearing in the final phase of the preceding up trend, and also in the downtrend immediately after the down side breakout. Occasionally seen in bottom reversals patterns.

Issue share capital

The amount of share capital actually issued by a company.

Junior Boards

This term dates back to the time when share prices were written up on boards for traders to see. Companies that were written up on those boards were listed in sectors of the JSE where they weren’t required to meet the same stringent requirements needed to qualify for the main board. Examples of the junior board are the Venture Capital Market, Development Capital Market, Development Stage and Financial Redevelopment.

Key reversal

This important reversal pattern climaxes, for example, a prolonged up trend; on a given day the market rises to a new intra-day high, followed by unusually high-volume selling that depresses the price to below the previous day’s close, that is, at a loss for the day as a whole. A similar phenomenon is sometimes seen in respect of bear-to-bull reversals.

Leverage

See Gearing.

Limit buyer

A buyer who places an order with his broker stipulating a limit to the price at which shares are to be bought.

Line chart

The simplest type of stock market chart in which only one price (usually the close) is recorded for each traded period, and these points are connected by a continuous line.

Long

This term refers to the purchase of a commodity, currency or financial security in expectation of a price rise.

Margin

On the securities markets this term refers to the initial ‘down-payment’ or ‘deposit’ required when buying or selling short.

Marginal mine

A mine whose profit falls below some predetermined level - in other words, one that is only just paying its way.

Marketability

A share which is frequently traded and can therefore be bought and sold easily.

Market Capitalisation

The market capitalisation of a company is calculated by multiplying the number of shares in issue by the price of the share. “Big market cap” companies tend to be more stable in tough times whereas ‘small market cap” companies are usually riskier but can show spectacular profits.

Marketable Securities Tax

Government imposed tax on the purchase of all marketable securities, except listed debentures. The rate of tax is payable on the consideration for which such securities are purchased. An exemption applies in respect of the purchase of marketable securities issued by the government, local authorities, and quasi-government institutions.

Micro-fundamentals

Those fundamentals influencing individual shares, for example, earnings, net asset value, debt/equity ratio.

Middle market price

The average price of a share extracted from the highest and lowest sale prices on a particular day.

Minority shareholders

Shareholders who, individually or collectively, own fewer shares than the controlling group.

Momentum

A type of chart showing the rate at which a price is rising or declining. Changes in momentum frequently precede changes in the price trend itself.

Money Market

The market in which Negotiable Certificates of Deposit (NCD’s) and Treasury Bills are bought and sold.

Moving average

Calculated by adding the closing prices for a number of consecutive trading sessions and dividing this total by the number of sessions. Connecting these points on a chart produces a line in which minor fluctuations are eliminated. Chartists glean important information from the relationship between the closing price and its moving average.

Naked option

The sale of a ‘put’ or ‘call’ option by someone not owning the underlying asset.

Neckline

A line connecting the lows of the head in a head and shoulders top, or the highs in a head and shoulders bottom.

Net Asset Value (NAV)

The value per share arrived at by dividing the net assets of the company, after deduction of all prior charges, by the number of ordinary shares issued.

New issue

Initial issue of shares in a company by a public offer, a private placing, a tender bid, or an exchange of shares for those of one or more other companies.

NCD’s

Negotiable Certificates of Deposit (NCD’s) are fixed deposit receipts that are issued by commercial banks.

Nil Paid Letters (NPL’s)

These are tradeable shares that are listed for just a short time. Owners of NPL’s have the right to buy the share associated with them on a certain date at a certain price.

Non-confirmation

Failure of one technical indicator to confirm the signal of another.

Nominal or par value of shares

The value given to shares when they are created. It has nothing to do with the true value of shares and usually has no relationship to the market price.

Offer

The price a potential seller is willing to accept for an asset.

On-balance volume (OBV)

A cumulative volume line computed by adding the volume for a given trading session if prices rise, and subtracting it if prices decline. Changes in trend of the OBV are said to precede changes in price.

Options

Financial instruments conferring on the holder the right, but not the obligation, to buy or sell an underlying security at a fixed price on a predetermined date.

Ordinary shares

Shares that give the shareholder part ownership of the company in proportion to the number of shares held, and entitle him to share, by way of dividends, in the profits.

Ordinary share capital

The capital of a company represented by the number of its ordinary shares.

Oscillator

A type of chart in which the parameter concerned moves up and down in relation to a zero-value base line.

Out-of-the-money

A ‘call’ option in which the strike price is above that of the underlying security; a ‘put’ option in which the strike price is below that of the underlying security.

Overbought

Refers to a market in which prices have moved up too rapidly in relation to the underlying fundamentals, and may therefore be vulnerable to a downward correction.

Oversold

Refers to a market in which prices have moved down too rapidly in relation to the underlying fundamentals, and may therefore be vulnerable to an upward correction.

Par value

See Nominal value.

Payability

The percentage of a reef sampled which, in the light of current cost levels, is payable to the mine.

Pennant

A chart formation shaped like a pennant, the breakout from which is likely to be in the same direction as the preceding trend.

Portfolio

All the securities owned by an investor.

Preference Shares

Shares that bear a fixed annual rate of dividend with a prior right over all ordinary shares in the distribution of dividends from annual profits; and a prior claim to repayment of capital on a winding-up of the company. Unless such shares are specifically defined as non-cumulative, the company is liable for any arrears of preference dividends.

Preference shares are often converted into ordinary shares at some future date. They can also be redeemable so that shareholders can get their capital repaid at a stipulated date.

• Cumlative - Shares entitled to receive their fixed dividend for each financial year, regardless of whether or not the company has made a profit. When no profits are made, the dividend must be paid out of the profits of a subsequent year, before any dividend is paid to ordinary shareholders.
• Participating - Shares with an additional inherent right to participate in further profits after all shares have been satisfied as to their dividend allocations.
• Redeemable - Shares that can be redeemed by the company either at fixed dates and prices, or on certain specified terms at the discretion of the board.

Price Earnings Ratio

A measure of value of a share, computed by dividing the share price in cents by the earnings per share, in cents. For example, if the earnings per share are 10 cents and price 100 cents, then the price earnings ratio is 10:1. The ratio is, in fact, the reciprocal of the earnings yield.

Primary Trend

A Dow Theory concept referring to the major trend of the market, either up or down, which often lasts several years.

Prime Rate

The Prime overdraft rate (or prime lending rate) is the rate at which banks will lend to their best customers. “Riskier” customers will be lent money at Prime plus 4, 5 or more percent.

Point and Figure Chart

A system of charting in which price rises and falls are denoted by successive vertical columns of X’s and O’s. This method is unique in that it takes no account of time.

Prospectus

A company must issue a prospectus before listing for the first time on the JSE. This document will contain specified information on a range of subjects including its history, profit forecasts, share ownership and directors.

Put

A type of option giving the holder the right, but not the obligation, to sell a security or commodity at a specified price on or before a specified date.

Rally

An upward movement when the primary trend is down.

Rand Hedges

These are shares in companies which, because they are strong exporters or have operations overseas, are protected to an extent from the effects of a drop in value of the Rand.

Reaction

A secondary downward movement of prices when the primary trend is up.

Relative Strength Chart

A line chart computed by dividing the closing price of one share or index by another.

Repro Rate

This is the rate at which the Reserve Bank lends money to the banking sector. Varying this rate is one of the methods the Reserve Bank uses to control the economy.

Resistance Level

A price level at which sellers may be expected to prevent a further rise in prices.

Reverse Take-over

Injection of assets into a company greater than its existing resources, in exchange for new shares, thus placing the control in the hands of the vendor of such assets.

Reverse Yield Gap

A situation where the yield on equities is lower than that on bonds. Traditionally, yields on equities are higher than on bonds. The differential is called the ‘yield gap’.

Rights Issue

A method employed by listed companies to raise more capital through the sale of additional shares to shareholders at a price usually below that of the current market. Existing shareholders will be offered the opportunity to buy these shares before they are listed on the market.

Saucer Top or Bottom

A gently rounded reversal pattern on a chart.

Secondary Trend

A Dow Theory concept referring to a movement, often lasting several months, in the opposite direction to the primary trend.

Scrip

Share certificates

Securities

In a market context, this is a general term covering all forms of tradable instruments, such as shares, gilts, and debentures.

Sell Signal

An indication on a chart strongly suggesting that selling action is required.

Selling Short or “Bear Transaction”

The selling of shares that you do not actually own in the hope that you can buy them for a lower price before they are due for delivery. All such ‘bear transactions’ have to be disclosed, and sufficient funds lodged with the broker.

Sentiment

This can best be described as the ‘mood’ on the exchange at any given time. Hence, any information released about interest rates, inflation, or movements on Wall Street is said to affect the ‘mood’ or ‘sentiment’ on the JSE.

Share Buyback

This is when a company (which is a legal entity) purchases its own shares.

Share Capital

Capital of a Company represented by different types of shares.

Share Certificate

The document issued to a shareholder by the company certifying ownership of a specific number of shares in the company.

Share Split

Refers to the process of breaking down high-priced shares into multiple smaller units with a lower price to render them more marketable and affordable.

Short

In the futures market, to be short implies holding a contract to sell a commodity, currency, or financial instrument. On the stock market, however, to be short implies that a speculator has sold shares he does not own, borrowing the stock to deliver to the buyer. He hopes to buy these shares back at a lower price before they must be returned.

Sideways Movement

A slight, continuing, up and down movement in the share price, without any definite trend becoming apparent.

Signal

An indication on a chart that buy or sell action should be taken.

Speculation

Refers to the buying or selling of securities to realize a profit in the short term.

Spot Price

A term used by derivative traders to denote the price of the underlying security, currency, or commodity available for immediate delivery.

Spread

The difference between the bid and offer price.

Stag

A person who applies for shares in a new company with the intention of selling them immediately dealing commences, normally at a profit.

Stale Bull

A person who holds onto shares longer than he expected to because they have not reached the price at which he hoped to sell them.

Stochastic

An oscillator that measures the position of the closing price compared with its high and low over a chosen period.

Stocks

Ordinary share capital can be reflected as units, stock, or as shares, all three terms being synonymous with each other.

Stocks and Shares

The capital of a company reflected in two distinct ways; either as a fixed dividend (preference) share, or as a fluctuating (ordinary) share.

Stop-loss Order

A standing instruction to a broker to close out a position should a certain price level be breached.

Straddle

An options trading strategy involving the simultaneous purchase of both a call and a put on the same underlying security with the same strike price and exercise date.

Strike Price

The predetermined price at which an option may be exercised (also known as the ‘exercise price’).

Support Level

A price level at which buyers may be expected to prevent a further decline in prices.

Technical Analysis

The study of past price behaviour on the market in an attempt to gauge future prospects. The procedure is also called charting.

Time Value

The amount by which an option’s premium exceeds its intrinsic value.

Total Profits or ‘Consolidated’ Profit

The total or consolidated profits divided by the total capital employed and shown as a percentage. This reflects the return earned by a company on its resources.

Trading Range

A more or less horizontal chart formation with prices locked between support and resistance levels.

Trend Line

A line on a chart connecting three or more high points, or three or more low points.

Treasury Bills

These are fixed deposit receipts that are issued by the government and are usually for short maturity periods (e.g. 3 months).

Triangle

A chart formation characterized by declining tops and rising bottoms.

Underlying Security

The index, share, commodity, or currency on which derivatives trading is based.

V-bottom or Top

A reversal pattern characterized by an abrupt change of trend without an intervening area of distribution or accumulation.

Volatility

Refers to the range of the swings from peak to trough on a chart.

Volume

Refers to the total number of shares or other securities traded during a given period.

Volume Price Trend (VPT)

A cumulative line computed by adding the volume multiplied by the percentage price change if the price rose, and subtracting it in the case of a price decline, during a given trading session. The VPT may be regarded as a measure of the ‘enthusiasm’ behind a price move.

Wedge

A type of triangular formation on a chart in which both the upper and lower borders slope in the same direction, but the one more so than the other.

Writer

One who sells a ‘put’ or ‘call’ option.

Yield

Reflected in the following ways:

Dividend Yield

The ratio of the annual dividend to the market price of a share expressed as a percentage. This is a vital factor to be considered in evaluating shares. The lower the yield the more expensive the share generally is.

Earnings Yield

The ratio of net earnings per share to the market price expressed as a percentage.

Gold Yield

The running average amount of actual metal produced from the rock that is blasted out underground and crushed in the surface mills. It is expressed in grams per ton milled.

Income Yield

The ratio of annual dividend or interest paid on preference shares, debentures, or notes to the market price expressed as a percentage.

Zero Sum Game

Refers to the phenomenon on the futures market by which all long positions are matched by equivalent short ones, so that the total profits earned by ‘winners’ exactly equal total losses suffered by ‘losers’ (ignoring brokers’ commissions).