Introduction:

In the first two parts of this online exercise on shares & stock market terminology, we looked at the essential vocabulary used for understanding stocks/shares and the stock market. In this third of three online exercises, we will look at more advanced terminology and vocabulary about the stock market. We will look at the different ways that stocks/shares are first sold on the stock market by companies and how this can affect their share price. In this part, we will also be looking at and explaining some commonly used vocabulary and terms which are confusing to understand.

Click here to go to the second part of this 'Shares & stock market vocabulary exercise'


Exercise: Explaining the stock market continued

In the following conversation between two work colleagues, Peter explains more to Juan about how the stock market works and the meaning of some different words and terms used in it.

From the context, try to guess what the meaning of the words/phrases in bold are. Then do the quiz at the end to check if you are right.

Juan:'Anymore advice on what stock/shares I should or shouldn't buy?'

Peter:'From my experience, I would say you shouldn't try to buy shares or stock in companies when they first go public, when they first start to sell their shares on the stock market. This is called an IPO which stands for Initial Public Offering. Normally, the price of the shares in these companies will decrease a few days after they have started being traded (bought and sold) on the stock market.'

Juan:'What can I do if the price of the shares I have in a company falls a lot in a single day. Should I sell them even if it's a lot below the exit point I previously decided that I would sell them at?'

Peter:'You can't do a lot apart from selling them or keeping them. Often, if the share price of a company falls a lot during one day, the company will ask the stock exchange to suspend trading its shares. This means that no one can buy or sell the company's shares, so the price of the shares won't change or fall further.'

Juan:'There seems to be a lot of risk in buying stocks and shares. Maybe, I should buy financial securities instead?'

Peter:'You do know that stocks and shares are a type of financial securities?'

Juan:'To be honest, I don't know what financial securities mean.'

Peter:'Financial securities are normally just called securities. Bank notes, stocks and shares, bonds etc... are all different types of securities. Securities are financial contracts which can be bought and sold by different people. So, with a share, it is a financial contract where the company says you are a part owner of the company. You can buy the share and then sell it to anybody you like.'

Juan:'I've read something about stock split, where a company reduced the value and price of their shares. Does that mean that the people who own shares in that company will lose money?'

Peter:'No, it doesn't mean that. When companies think that their stock or share price is too expensive for people/investors to buy (for example, $120 a share), they may decide to reduce the price of the shares by 50%, so they are easier for people to buy. But the shareholders who own that company's shares will be given double the amount of shares that they had before, so they don't lose any money.'

Juan:'So the company increases the number of shares it has, but the value of the total number of shares doesn't change. But isn't that the same thing as a rights issue?'

Peter:'It's similar, but the purpose is different. A rights issue is when a company decides to create completely new shares in the company and then offers them to its existing shareholders to buy at a reduced/discounted price. The company does this to directly make/raise money to invest in the company. The result will be that the average share price will fall, but anybody who bought the shares will have made a profit because they bought them at a reduced price.'

Juan:'So what is a secondary offering?'

Peter:'A secondary offering is when some shareholders (normally part-owners of the company before it went public) who own a large stake in the company (e.g. their stake in a company is 10% of the company's shares), decide to sell a large amount of their existing shares (not newly created ones) to the public on the stock market. When a company goes public, normally the majority of shares are kept by these original part owners. And only a part of the ownership of the company is sold to public investors on the stock market (for example, 30% of the ownership of the company). This percentage/amount of shares of a company which are traded (bought and sold) on the stock market is called the public float, shares that anybody can buy. The rest of the shares are normally still kept by the original owners and the company's employees or by very large investors who have some control over the company. So with a secondary offering, the percentage of the company's shares which are part of the public float increases (for example, from 30% to 45%).'

Juan:'I thought that the name for all the shares of a company that could be bought by the public on the stock market was outstanding shares? But you said they were called the public float.'

Peter:'Outstanding shares, is different. As I said before, the public float is the shares owned by the public and that are traded on the stock market. But there are other shares which are owned by employees of the company and owners of the company before it went public. These shares have restrictions on when or how they can be sold to other people and are called restrictive shares. So, the outstanding shares is a combination of both all the shares in the public float and all the shares which are restrictive.'

Juan:'One of my friends from university works in a multinational military manufacturer and he told me they have just won a $2 billion contract, but nobody outside the company knows about it. Should I buy shares in the company?'

Peter:'If nobody outside the company knows about this contract, then it is illegal to use this information to buy shares, because you know that the price of the shares will increase. This is called insider trading and if the authorities or police find out, you can go to prison.'


Now do the QUIZ below to make sure you understand the meaning of this vocabulary.



Quiz: Shares & stock market vocabulary part 3

Below is a definition/description of each of the words/phrases in bold from the above text. Now fill in the blanks with one of these words/phrases in bold. Only use one word/phrase once and write it as it is in the text. Click on the "Check Answers" button at the bottom of the quiz to check your answers.

When the answer is correct, two icons will appear next to the question. The first is an Additional Information Icon "". Click on this for extra information on the word/phrase and for a translation. The second is a Pronunciation Icon "". Click on this to listen to the pronunciation of the word/phrase and to do a pronunciation speaking test.

1. A word which is used to say what percentage of a company's shares/stock a person or company owns, is    

         

Stake:
(noun) This commonly used word means what percentage of a company that somebody owns. For example, 'she has a 5% stake in the company' is just a different way of saying 'she owns 5% of the company'. 'stake' is normally used with percentages. In addition, it is normally only used when somebody owns a lot of shares in a company (1% or above). In Spanish: "participación/intereses".

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Stake:

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2. When a company thinks its share price is too high and it reduces its price and increases the number of its shares, is a    

         

Stock split:
(noun) This is done when a company believes that the price of its share is too high/expensive for normal investors to buy. With a 'stock split', the company decides to reduce/decrease the price of their shares to encourage more people to buy them. They do this by increasing the number of their shares in the stock market. Both before and after a 'stock split', the total value of all the shares a company has in the stock market stays the same, its just the number of their shares have increased. Any current/existing owner of their shares with receive additional shares when the 'stock split' happens, so they don't lose any money. For example, if a company has a share price of $90 and it decides to do a 'stock split' where they reduce their share price by two thirds (to $30 a share), an existing owner of its shares who has 100 shares, will receive 200 additional shares after the 'stock split' takes place. In Spanish: "división de acciones/split".

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Stock split:

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3. One way where stocks and shares are bought or sold illegally on the stock market, is called    

         

Insider trading:
(noun) 'insider trading' basically means 'cheating'. It is when a person uses information about a company or a country to trade (buy or sell) in stocks and shares before this information is made public. For example, if your brother works in a company who has just made a very large profit, but nobody else apart from you and some people who work in the company know about this, it is illegal to buy shares in this company before the news of the very large profit is made public. The reason why, is that this information will give you an unfair advantage over other people who don't know about the company's very large profit. If you do buy shares in the company, you will benefit financially as the share price of the company will increase when the news of the very large profit is made public. This is called 'insider trading', which is using privileged information for your own financial benefit. 'insider trading' not only happens in the stock market, but with the sale of any type of financial securities (e.g. bonds, currencies etc...). In Spanish: "transacciones que aprovechan información privilegiada".

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Insider trading:

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4. When a company first sells shares on the stock market, is called an    

         

IPO:
(noun) 'IPO' stands for 'Initial Public Offering'. This is when a company first sells its shares on the stock market (so, anybody can buy them). The company changes from being a Private Limited Company (Private Corporation) to a Public Limited Company (Public Corporation). Normally, companies do an 'IPO' to raise money to help the company expand/grow. Often, the price of the shares falls after 'IPO'. An 'IPO' is also called a 'flotation' or a 'public offering'. In Spanish: "oferta pública inicial".

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IPO:

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5. When a company wants to make more money by selling new shares to its existing shareholders, is called a    

         

Rights issue:
(noun) A 'rights issue' is when a company creates completely new shares in the company and then tries to sell them to its shareholders. The reason it does this is to make/raise money (it is often done when they need extra money to make a large investment like to buy another company). Because a 'rights issue' increases the total number of shares for a company, but the total value of the company doesn't change, the price of each company share will decrease/fall as a consequence (this is called to 'dilute the stock'). With a 'rights issue', the company has to offer the new shares to their existing shareholders first. They normally offer the new shares at both a lower price than the current share price and with an additional discount/reduction in price (so when the share price falls the shareholders who have bought the new shares should make a profit). For example, the price of a company's share before a 'rights issue' is $4. The company offers the new shares in the 'rights issue' at a price of $3.50, but to existing shareholders it adds a discount of 30 cent per share, so the shareholders only have to pay $3.20 per share. After the 'rights issue', the share price on the stock market falls to $3.70 because of the new shares that have been added. In Spanish: "emisión de derechos de suscripción".

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Rights issue:

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6. Stocks, shares, bonds and currency are all different types of    

         

Financial securities:
(noun) 'financial securities' are commonly called just 'securities'. Basically, they are 'financial contracts' whose ownership can be traded (bought and sold) between people. One common type of 'securities' are stocks and shares. A share, is basically a financial contract between the company and the shareholder, which says that the shareholder owns a part of the company. The share can then be sold by the shareholder to another person, who can then sell it to another person if they want. Another type of 'securities' are bonds (a type of loan which a government or company issues when it borrows money from investors). This is a financial contract where the company/government promises to pay the person who owns the bond the value of what the bond was issued or originally sold at (e.g. €10,000) at a fixed date in the future (e.g. 02/10/2018) plus pay the bond owner a fixed interest rate per year (e.g. 5%). Like shares, the ownership of the bond can be traded between people. Other types of 'financial securities' are currencies (e.g. bank notes) and derivatives. In Spanish: "valores financieros".

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Financial securities:

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7. The proportion/percentage of shares/stock in a company that is owned by public investors on the stock market, is called the    

         

Public float:
(noun) The 'public float' or 'float' means the proportion/percentage of all of a company's shares (with is commonly called 'outstanding shares') that are owned by the general public/small investors and are traded (bought and sold) on the stock market. The 'public float' doesn't include shares that are owned by company employees and are restrictive (you are restricted to how and when they can be sold and are not traded on the stock market) or investors who own a large quantity of shares in the company and use them to direct/influence how the company is run/managed (who are often called 'controlling interest investors' and are often the owners of the company before it became a Public Limited Company). For example, the 'public float' in Apple is over 99% of all the 'outstanding shares', but in Facebook the 'public float' is only a little over 50%. In Spanish: "flotante público de acciones".

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Public float:

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8. When the owner(s) of a large number of shares in a company sells all or a large part of them on the stock market for the first time, is a    

         

Secondary offering:
(noun) Basically, this means when a large number of shares in a company are sold for the first time on the stock market for the public to buy. A 'secondary offering' normally happens months or years after a company goes public and first sells its shares in the 'IPO'/'flotation'. Normally, only a part of a company's shares are sold to the public in the 'IPO'/'flotation'. The rest of the shares are kept by the original owners and employees. With a 'secondary offering', normally some or one of these original owners sell part or all of their shares to the public through the stock market. All the money earned from the sale of shares in a 'secondary offering' goes to the previous owner of the shares and not to the company. In Spanish: "ofrecimiento secundario".

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Secondary offering:

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9. When the trading (selling and buying) of the shares of a company are stopped on a stock exchange, is called    

         

Suspend trading:
(phrase) This basically means that no shares of a company can be bought or sold on a stock exchange. There are several reasons why the trading of shares is suspended. A company can ask for trading of its shares to be 'suspended' because its about to announce some important news to the stock market (e.g. a merger or takeover) or because the price of its shares has fallen dramatically and they fear they will fall a lot more (e.g. 'when there are rumours of big problems at the company'). The stock exchange can also suspend the trading of a company's shares. This normally happens when the company has broken stock exchange rules/regulations or is being investigated for doing serious illegal activities (e.g. fraud). In Spanish: "transacciones bursátiles suspendidas".

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Suspend trading:

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10. All the shares in a company which are owned by investors (both inside and outside of the company), are called    

         

Outstanding shares:
(noun) All the shares/stocks in a Public Limited Company (Public Corporation) that are owned by investors or employees are called 'outstanding shares'. This includes all the shares which are owned by public investors and traded on the stock market (which is called the 'public float') and all the shares owned by the employees which are restrictive (you are restricted to how and when they can be sold and are not traded on the stock market) or investors who own a large quantity of shares in the company and use them to direct/influence how the company is run/managed (who are often called 'controlling interest investors' and are often the owners of the company before it became a Public Limited Company). Any shares that the actual company has bought and owns (called a 'share repurchase'), are not included in 'outstanding shares', because the shares are part of the company. In Spanish: "acciones en circulación".

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Outstanding shares:

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Practice

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