English for Banking and Finance: Topic 4: Stock and Bond

"Long ago, Ben Graham taught me that 'Price is what you pay; value is what you get.' Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down."
- Warren Buffett -

Refference: EPS - IB&F, FTU

businessinsider.com

A. TERMS, THEORIES AND DEFINITIONS

1. What are stocks?

When you buy a stock you are buying a percentage of the company. The stock goes up and down based on how the company grows and is expected to grow in the future.

If you buy a stock on a company that doubles their sales then you should see an increase in the price of the stock that you bought. This is not always so simple, but that is the general idea.

In addition to benefiting from appreciation some stocks also pay dividends to their shareholders. This is basically a percentage of the company’s earnings which gets spread out to all the shareholders of the company. This provides a great way off making a somewhat steady income from your investment.

2. What are bonds?

When a large company or government needs to raise money they can issue a bond. This is similar to people going to the bank to take out a loan. The only difference is that when a bond is issued it goes to the free market where anyone can buy a share.

So when you buy a bond you are essentially giving the government or individual company a loan. The company agrees to pay interest payments on the loan and agrees to pay the full price of the bond when it matures.

3. Financial ratios

ratios	fomula
current ratio or worrking capital	current assets / current liabilities
quick ratio or acid test ratio	(current assets – inventory) / current liabilities
profit margin or return on sales	pre – tax profit / sales
productivity	sales volume / number (or wages) of employees
ernings per share (EPS)	distributable profit / number of shares
P/E	market value of stock per share / past year’s earnings per share
P/B	(market valuenumber of shares)/ (nominal valuenumber of shares)
debt / equity ratio or gearing	(long – term) loan capital / shareholders’ equity or net assets
interest cover or times interest earned	pre – tax profit / interest charges
dividend cover or dividend payout ratio (DPR)	common stock dividend / net income
return on equity (ROE)	pre – tax profit / owners’ equity
return on total assets	pre – tax profit / total assets

B. READING

COMPANIES

Individuals, and groups of people doing business as a partnership, have unlimited liability for debts, unless they form a limited company. If the business does badly and cannot pay its debts, any creditor can have it declared bankrupt. The unsuccessful business people may have to sell nearly all their possessions in order to pay their debts. This is why most people doing business form limited companies. A limited company is a legal entity separate from its owners, and is only liable for the amount of capital that has been invested in it. If a limited company goes bankrupt, it is wound up and its assets are liquidated (i.e. sold) to pay the debts. If the assets don’t cover the liabilities or the debts, they remain unpaid. The creditors simply do not get all their money back.

Most companies begin as private limited companies. Their owners have to put up the capital themselves, or borrow form their friends or a bank, perhaps a bank specializing in venture capital. The founders have to write a Memorandum of Association (GB) or a Certificate of Incorporation (US), which states the company’s name, its purpose, its registered office or premises, and the amount of authorized share capital. They also write Articles of Association (GB) or Bylaws (US), which set out the duties of directors and the right of shareholders (GB) or stockholders (US). They send these documents to te registrar of companies.

A successful growing company can apply to a stock exchange to become a public limited company (GB) or a limited company (US). Newer and smaller companies usually join ‘over – the – counter’ market, such as the Alternative Investment Market in London or Nasdaq in New York. Very successful businesses can apply to be quoted or listed (i.e. to have their shares traded) on major stock exchanges. Publicly quoted companies have to fulfill a large number of requirements, including sending their shareholders an independently audited report every year, containing the year’s trading results and a statement of their financial postion.

The act of issuing share (GB) or stocks (US) for the first time is known as floating a company (making a flotation). Companies generally use an investment bank to underwrite the issue, i.e. to guarantee to purchase all the securities at an agreed price on a certain day if they cannot be sold to the public.

Companies wishing to raise more money for expansion can sometimes issue new shares, which are normally offered first to existing shareholders at less than their market price. This is known as a rights issue. Companies sometimes also choose to capitalize part of their profit, i.e. turn it into capital, by issuing new shares to shareholders instead of paying dividends. This is known as a bonus issue.

Buying a share gives its holder part of the ownership of a company. Shares generally entitle their owners to vote at a company’s Annual General Meeting (GB) or Annual Meeting of Stockolders (US), and to receive a proportion of distributed profits in the form of a dividend – or to receive part of company’s residual value if it goes into liquidation. Shareholders can sell their shares on the secondary market at any time, but the market price of a share – the price quoted at any given time on the stock exchange, which reflects (more or less) how well or badly the company is doing – may fiffer radically form its nominal value.

C. READING COMPREHENSION EXERCISES

1. Find words in the text which mean the following:

a, ......................: having a responsibility or an obligation to do something, e.g. to pay a debt

b,...................... : a person or organization to whom money is owed (for goods or services rendered, or as repayment of a loan)

c, ...................... : to be insolvent, unalbe to pay debts

d,...................... : everything of value owned by a business that can be used to produce goods, pay liabilities and so on.

e,....................... : to sell all the possessions of a bankrupt business

f,....................... : money that a company will have to pay to someone else (bills, taxes, debts, interest and mortgage payments, etc)

g,....................... : to provide money for a company or other project

h,...................... : money invested in a possibly risky new business

i,....................... : the people who begin a new company

k,...................... : the place in which the company does business: an office, shop, workshop, factory, warehouse, and so on.

l,....................... : to guarantee to buy an entire new share issue, if no one else wants it.

m,..................... : a proportion of the annual profits of a limited company, paid to shareholders.

2. Find suitble word(s) to complete the following:

a. Offering shares to the public for the first time is called................. a company.

b. A company offering shares usually uses a merchant bank to....................... the issue.

c. The major British companies are...................on the London Stock Exchange.

d. In London, share transactions have to be.........................every two weeks.

e. The value written on a share is its ...............................

f. The value listed in the newspapers is its ................................

3. Complete the following using the phrases in the box:

barometer stocks blue chips defensive stocks

deferred shares equities growth stock mutual fund

ordinary shares participation certificates

preference shares or preferred stocks

a. Another name for stocks and shares is ........................., because all the stocks or shares of a company – or all those of a particular category – have an equal nominal value.

b. ................................. (US: common stocks) are often the only kind of shares with voting rights.

c. Some companies issue ......................................... which, like shares, grant their holders part of the ownership of a company, but usually without voting rights.

d. ....................................as the name suggests, receive a fixed dividend, which must be paid in full before any dividend is paid on other shares. But because interest payments are tax deductible, and dividends are not, many companies now issue bonds instead.

e. ..............................., again as their name suggests, do not receive a dividend until other categories of shares have had a dividend paid on them, but might earn a higher dividend if the company does well.

f. Securities in companies that are considered to be without risk are known as ..............................

g. Widely – held stocks (e.g. blue chips or 20 – year Treasure Bonds) that can be considered as indicators of present and future market performance, are known as ..................................... (GB) or bellwether stocks (US).

h. A .................................. or share is one that is expected to appreciate in capital value; it usally has a high purchasing price and a low current rate of return.

i. A .......................... or income stock or share is one that offers a dood yield but only a limited chance of rise or decrease in price (in an industry that is not much affected by cyclical trends).

k. A way of spreading risks is to invest in a unit trust (in Britain) or a ......................... (in the US), organizations that invest small investors’ money in a wide portfolio of securities.

4. Match the British expressions to the appropriate US ones.

1. shareholder

2. Annual General Meeting

3. ordinary share

4. barometer stock

5. preference share

a. prefered stock

b. common stock

c. bellweather stock

d. stockholder

e. Annual Meeting of Stockholders

D. GUIDE

1. a. liability b. creditor c. bankrupt d. assets e. liquidate f. liabilities g. invest h. venture capital i. founders k. premise l. underwrite m. dividend	3. a. equities b. ordinary shares c. participation certificates d. preference shares e. deferred shares f. blue chips g. barometer stocks h. growth stock i. defensive stock k. mutual fund
2. a. floating b. underwrite c. quoted / listed d. settled e. nominal/face/par value f. market price	4. 1 – d 2 – e 3 – b 4 – companies 5 – a