Financial Terms

May 1, 2019 by  
Filed under Nigeria Stock Exchange

Market capitalization (or market cap) – The total market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s outstanding shares by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures.

Market intermediary – A business entity that acts as the middleman between two parties in a financial transaction. Commercial banks and other financial institutions, such as investment bank, broker-dealers, mutual funds and pension funds, are all examples of intermediaries. Market intermediaries offer a number of services to the buy side and the sell side, and charge investors advisory fees, broking commissions, proprietary trading fees, etc. while providing other benefits such as safety, liquidity and economies of scale.

Market maker – A broker-dealer firm that accepts the risk of holding a certain quantity of a particular security, in order to facilitate trading in that security. Each market maker competes for customer order flow by displaying buy and sell quotations for a guaranteed number of securities. If these prices are met, they will immediately buy for or sell from their own accounts. This process takes place in mere seconds. Market makers are very important for maintaining liquidity and efficiency for the securities they make markets in. Market makers are required to maintain a strict separation of the market-making side and the brokerage side of their business, to prevent their brokers from recommending a specific security simply because the firm makes a market in that security. A market maker makes money by buying stock at a lower rice than the price at which they sell it, or selling the stock at a higher price than they buy it back. Ordinarily they can make money in rising or falling markets, by taking advantage of the difference between “bid” and “offer” prices. There are different types of market makers:

  1. Supplementary market maker – In the Nigerian capital market, supplementary market makers encourage competition among equity market makers, and further enhance the market maker liquidity provision. A supplemental market maker is required to provide a quote for securities in which they make markets for 60% of the trading day
  2. Liquidity provider – Serve the same purpose as market makers, primarily for the secondary debt (bond) market.

Market operator – Professional intermediaries that offer specialized capital market services in various forms, including buying and selling securities, providing investment advice, making a market, auditing accounts of companies who have raised capital from the market, providing legal advice to investors and issuers, managing investment portfolios, and underwriting securities, among others.

Market participant – In finance, market participants are investors that regularly purchase equity and debt securities, either coming from the supply side (supplying excess money in the form of investments) or from the demand side (demanding excess money in the form of borrowed equity). These investors are categorized into (a) investor versus speculator, and (b) institutional versus retail. The term may be used loosely to include all investors in the market.

Market trend – The general direction of a market – typically up/rising (bullish), down/falling (bearish) or steady. Trends can vary in length from short, to intermediate, to long term.

Markets – A stock exchange has the ability to trade different investment products (securities). As a result, a stock exchange can create different markets in which different securities trade. These markets are usually an electronic platform that can accommodate the rules for trading a specific security. The Nigerian Stock Exchange currently lists three (3) types of products on three (3) boards—equities (stock, preference stock, structured products), bonds (corporate, federal and state/local) and ETFs—that are traded on three (3) different boards.

Mutual fund (or memorandum quotation) – A professionally managed type of collective investment scheme that pools money from many investors and invests typically in investment securities (stocks, bonds, short-term money market instruments, other mutual funds, other securities, and/or commodities). A mutual fund is usually an open-ended fund and has a fund manager that trades (buys and sells) the fund’s investments in accordance with the fund’s investment objective. A fund’s investment objectives (and or its names) define the type of investments in which the fund invests. In return for one’s investment, shareholders receive an equity position in the fund, and in effect, in each of the fund’s underlying securities. A fund’s net asset value (NAV) is calculated every day. While funds offer a choice of liquidity and convenience, they charge fees and often require a minimum investment. A contractual investment advisory fee is charged for the management of the fund’s investments, along with other fees. Some of the more significant (in terms of amount) are a transfer agent expense, custodian expense, legal/audit expense, fund accounting expense, registration expense, board of directors/trustees expense, etc. Shareholders are free to sell their shares at any time, although the price of a share of the fund will fluctuate daily, depending upon the performance of the securities held.

Net asset value (NAV) – Used to calculate the ‘per share’ Naira amount of a fund. NAV represents the fund’s market price. It is derived by taking the total value of all the securities in the fund (or portfolio) minus any liabilities divided by the number of shares outstanding. NAV = Total Value of Securities -Liabilities / Shares Outstanding Nominal value (or face value or par value or notional amount) – The value of a security that is set by the company issuing it; unrelated to market value. For stocks it is the original cost of the stocks; for bonds it is the amount paid to the holder at maturity.

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