Finance Glossary

FINANCE GLOSSARY BY NEERAJ AGRAWAL, MBA(FINANCE)
Working Capital Management

A managerial accounting strategy focusing on maintaining efficient levels of
both components of working capital, current assets and current liabilities, in
respect to each other. Working capital management ensures a company has
sufficient cash flow in order to meet its short-term debt obligations and
operating expenses.
Implementing an effective working capital management system is an excellent

way for many companies to improve their earnings. The two main aspects of
working capital management are ratio analysis and management of individual
components of working capital.
A few key performance ratios of a working capital management system are the
working capital ratio, inventory turnover and the collection ratio. Ratio
analysis will lead management to identify areas of focus such as inventory
management, cash management, accounts receivable and payable
management.
Ratio Analysis
A tool used by individuals to conduct a quantitative analysis of information in
a company's financial statements. Ratios are calculated from current year
numbers and are then compared to previous years, other companies, the
industry, or even the economy to judge the performance of the
company. Ratio analysis is predominately used by proponents of fundamental
analysis.
There are many ratios that can be calculated from the financial statements
pertaining to a company's performance, activity, financing and liquidity. Some
common ratios include the price-earnings ratio, debt-equity ratio, earnings
per share, asset turnover and working capital
Inventory Turnover
A ratio showing how many times a company's inventory is sold and replaced
over a period.
COPYRIGHT@RESERVED 2007-08 1
PH:9890939673,
EMAIL ME 4 FOR MORE FINANCIAL TERMS AT:neeraj2885@gmail.com
Although the first calculation is more frequently used, COGS (cost of goods
sold) may be substituted because sales are recorded at market value, while
inventories are usually recorded at cost. Also, average inventory may be used
instead of the ending inventory level to minimize seasonal factors This ratio
should be compared against industry averages. A low turnover implies poor
sales and, therefore, excess inventory. A high ratio implies either strong sales
or ineffective buying.High inventory levels are unhealthy because they
represent an investment with a rate of return of zero. It also opens the
company up to trouble should prices begin to fall.
Capital Budgeting
The process of determining whether or not projects such as building a new
plant or investing in a long-term venture are worthwhile.
Also known as "investment appraisal".

Popular methods of capital budgeting include net present value (NPV),
internal rate of return (IRR), discounted cash flow (DCF) and payback period.
Internal Rate Of Return (IRR)
The discount rate often used in capital budgeting that makes the net present
value of all cash flows from a particular project equal to zero. Generally
speaking, the higher a project's internal rate of return, the more desirable it is
to undertake the project. As such, IRR can be used to rank several
prospective projects a firm is considering. Assuming all other factors are
equal among the various projects, the project with the highest IRR would
probably be considered the best and undertaken first.
IRR is sometimes referred to as "economic rate of return (ERR)".
You can think of IRR as the rate of growth a project is expected to generate.
While the actual rate of return that a given project ends up generating will
often differ from its estimated IRR rate, a project with a substantially higher
IRR value than other available options would still provide a much better
chance of strong growth.
IRRs can also be compared against prevailing rates of return in the securities
market. If a firm can't find any projects with IRRs greater than the returns
that can be generated in the financial markets, it may simply choose to invest
its retained earnings into the market.
Supply Chain Management (SCM)

The management and coordination of a product's supply chain for the
purpose of increasing efficiency and profitability.
Typically, SCM will attempt to centrally control or link the production,
shipment and distribution of a product. By managing the supply chain,
PH:9890939673,
companies are able to cut excess fat and provide products faster. This is done
by keeping tighter control of internal inventories, internal production,
distribution, sales and the inventories of the company's product purchasers.
Cash Flow
1. A revenue or expense stream that changes a cash account over a given
period. Cash in-flows usually arise from one of three activities -
financing, operations or investing - though they also occur as a result
of donations or gifts in the case of personal finance. Cash out-flows
result from expenses or investments. This holds true for both business
and personal finance.
2. An accounting statement - the statement of cash flows - that shows

the amount of cash generated and used by a company in a given
period, calculated by adding non-cash charges (such as depreciation) to
net income after taxes. Cash flow can be attributed to a specific project,
or to a business as a whole. Cash flow can be used as an indication of a
company's financial strength.
1. In business as in personal finance, cash flows are essential to solvency.
They can be presented as a record of something that has happened in
the past, such as the sale of a particular product, or forecasted into the
future, representing what a business or a person expects to take in and
to spend. Cash flow is crucial to an entity's survival. Having ample cash
on hand will ensure that creditors, employees and others can be paid
on time. If a business or person does not have enough cash to support
its operations, it is said to be insolvent, and a likely candidate for
bankruptcy should the insolvency continue.
2. The statement of a business's cash flows is often used by analysts to

gauge financial performance. Companies with ample cash on hand are
able to invest the cash back into the business in order to generate more
cash and profit
Inventory
The raw materials, work-in-process goods and completely finished goods
that are considered to be the portion of a business's assets that are ready
or will be ready for selling. Inventory represents one of the most important
assets that most businesses possess, because the turnover of
inventory represents one of the primary sources of revenue generation and
subsequent earnings for the companies' shareholders/owners
Possessing a high amount of inventory for long periods of time is not

usually good for a business, because there are inventory storage,
obsolescence and spoilage costs. However, possessing not enough
PH:9890939673,
inventory isn't good either, because the business runs the risk of losing
out on potential sales and potential market share as well.
Inventory management forecasts and strategies, such as a just-in-time

inventory system, can help minimize inventory costs because goods are
created or received as inventory only when needed.
Free Cash Flow (FCF)

A measure of financial performance calculated as operating cash flow minus
capital expenditures. In other words, free cash flow (FCF) represents the cash
that a company is able to generate after laying out the money required to
maintain or expand its asset base. Free cash flow is important because
it allows a company to pursue opportunities that enhance shareholder value.
Without cash, it's tough to develop new products, make acquisitions, pay
dividends and reduce debt.
It can also be calculated by taking operating cash flow and subtracting

capital expenditures.
Economic Order Quantity (EOQ)

An inventory-related equation that determines the optimum order quantity
that a company should hold in its inventory given a set cost of production,
demand rate and other variables. This is done to minimize variable inventory
costs. The full equation is as follows:
where :
S = Setup costs
D = Demand rate
P = Production cost
I = Interest rate (considered an opportunity cost, so the risk-free rate can
be used)
PH:9890939673,
The EOQ formula can be modified to determine production levels or order

interval lengths, and is used by large corporations around the world,
especially those with large supply chains and high variable costs per unit
of production.
Despite the equation's relative simplicity by today's standards, it is still a

core algorithm in the software packages that are sold to the largest
companies in the world
Capital Expenditure (CAPEX)

Funds used by a company to acquire or upgrade physical assets such as
property, industrial buildings or equipment. This type of outlay is made by
companies to maintain or increase the scope of their operations. These
expenditures can include everything from repairing a roof to building a
brand new factory
The amount of capital expenditures a company is likely to have depends
on the industry it occupies. Some of the most capital intensive industries
include oil, telecom and utilities.
In terms of accounting, an expense is considered to be a capital

expenditure when the asset is a newly purchased capital asset or an
investment that improves the useful life of an existing capital asset. If an
expense is a capital expenditure, it needs to be capitalized; this requires
the company to spread the cost of the expenditure over the useful life of
the asset. If, however, the expense is one that maintains the asset at its
current condition, the cost is deducted fully in the year of the expense
Variable Cost
A cost that changes in proportion to a change in a company's activity or
business
A good example of variable cost is the fuel for an airline. This cost changes
with the number of flights and how long the trips are.
Fixed Cost
A cost that remains constant, regardless of any change in a company's
activity
A good example is a lease payment. If you are leasing a building at $2,000
per month, then you will pay that amount each month, no matter how well
or how poorly the business is doing
Capital Reserve
A type of account on a municipality's or company's balance sheet that is
reserved for long-term capital investment projects or any other large and
anticipated expense(s) that will be incurred in the future. This type of
PH:9890939673,
reserve fund is set aside to ensure that the company or municipality has
adequate funding to at least partially finance the project
Contributions to the capital reserve account can be made from government
subsidies, donated funds, or can be set aside from the firm's or
municipality's regular revenue-generating operations. Once recorded on
the reporting entity's balance sheet, these funds are only to be spent on
the capital expenditure projects for which they were initially
intended, excluding any unforeseen circumstances
Cost-Benefit Analysis
A process by which business decisions are analyzed. The benefits of a
given situation or business-related action are summed and then the costs
associated with taking that action are subtracted. Some consultants or
analysts also build the model to put a dollar value on intangible items,
such as the benefits and costs associated with living in a certain town.
Most analysts will also factor opportunity cost into such equations.
Prior to erecting a new plant or taking on a new project, prudent managers
will conduct a cost-benefit analysis as a means of evaluating all of the
potential costs and revenues that may be generated if the project is
completed. The outcome of the analysis will determine whether the project
is financially feasible, or if another project should be pursued
Balance Sheet
A financial statement that summarizes a company's assets, liabilities
and shareholders' equity at a specific point in time. These three balance
sheet segments give investors an idea as to what the company owns
and owes, as well as the amount invested by the shareholders.
The balance sheet must follow the following formula:
Assets = Liabilities + Shareholders' Equity
Each of the three segments of the balance sheet will have many accounts
within it that document the value of each. Accounts such as cash,
inventory and property are on the asset side of the balance sheet, while on
the liability side there are accounts such as accounts payable or long-term
debt. The exact accounts on a balance sheet will differ by company and by
industry, as there is no one set template that accurately accommodates for
the differences between different types of businesses.
It's called a balance sheet because the two sides balance out. This makes
sense: a company has to pay for all the things it has (assets) by either
borrowing money (liabilities) or getting it from shareholders (shareholders'
equity).
PH:9890939673,
The balance sheet is one of the most important pieces of financial

information issued by a company. It is a snapshot of what a company
owns and owes at that point in time. The income statement, on the other
hand, shows how much revenue and profit a company has generated over
a certain period. Neither statement is better than the other - rather, the
financial statements are built to be used together to present a complete
picture of a company's finances.
Financial Asset
An asset that derives value because of a contractual claim. Stocks, bonds,
bank deposits, and the like are all examples of financial assets.
Unlike land and property--which are tangible, physical assets--financial
assets do not necessarily have physical worth.
Asset
1. A resource having economic value that an individual, corporation or
country owns or controls with the expectation that it will provide future
benefit.
2. A balance sheet item representing what a firm owns.

1. Assets are bought to increase the value of a firm or benefit the firm's
operations. You can think of an asset as something that can generate
cash flow, regardless of whether it's a company's manufacturing
equipment or an individual's rental apartment.
2. In the context of accounting, assets are either current or fixed (non-

current). Current means that the asset will be consumed within one
year. Generally this includes things like cash, accounts receivable and
inventory. Fixed assets are those that are expected to keep on providing
benefit for more than one year, such as equipment, buildings, real
estate, etc
Contingent Asset
An asset in which the possibility of an economic benefit depends solely
upon future events that can't be controlled by the company. Due to the
uncertainty of the future events, these assets are not placed on the
balance sheet. However, they can be found in the company's financial
statement notes
These assets, which are often simply rights to a future potential claim, are
based on past events. An example might be a potential settlement from
a lawsuit. The company does not have enough certainty to place the
settlement value on the balance sheet, so it can only talk about the
PH:9890939673,
potential in the notes. This improves the accuracy of financial statements

and removes potential abuses
Liability
A company's legal debts or obligations that arise during the course of
business operations. These are settled over time through the transfer of
economic benefits including money, goods or services.
Recorded on the balance sheet (right side), liabilities include loans,
accounts payable, mortgages, deferred revenues and accrued
expenses. Liabilities are a vital aspect of a company's operations because
they are used to finance operations and pay for large expansions. They can
also make transactions between businesses more efficient. For
example, the outstanding money that a company owes to its suppliers
would be considered a liability.
Outside of accounting and finance this term simply refers to any money or
service that is currently owed to another party. One form of liability, for
example, would be the property taxes that a homeowner owes to the
municipal government.
Current liabilities are debts payable within one year, while long-term
liabilities are debts payable over a longer period.
Income Statement
A financial statement that measures a company's financial performance
over a specific accounting period. Financial performance is assessed by
giving a summary of how the business incurred its revenues and expenses
- due to both operating and non-operating activities. It also shows the net
profit or loss incurred over a specific accounting period, typically over a
fiscal quarter or year.
Also known as the "profit and loss statement" or "statement of revenue and
expense".
The income statement is the one of the three major financial statements,
the other two being the balance sheet and the statement of cash flows. The
income statement is divided into two parts: the operating and non-
operating sections.
The portion of the income statement that deals with operating items is
interesting to investors and analysts alike because this section discloses
information about revenues and expenses that are a direct result of the
regular business operations. For example, if a business creates sports
equipment, then the operating items section would talk about the
revenues and expenses involved with the production of sports equipment.
PH:9890939673,
The non-operating items section discloses revenue and expense

information about activities that are not tied directly to a company's
regular operations. For example, if the sport equipment company
sold a factory and some old plant equipment, then this information would
be in the non-operating items section
Tangible Asset
An asset that has a physical form such as machinery, buildings and land
This is the opposite of an intangible asset such as a patent or trademark.
Whether an asset is tangible or intangible isn't inherently good or bad. For
example, a well-known brand name can be very valuable to a company. On
the other hand, if you produce a product solely for a trademark, at some
point you need to have "real" physical assets to produce it.
Profit
The same as net income: total earnings less expenses
In other words, profit is the money a business makes after accounting for
all the expenses. Profit is the goal of every company.
Loan
When a lender gives money or property to a borrower, and the borrower
agrees to return the property or repay the borrowed money, along with
interest, at a predetermined date in the future
Borrowing money to buy a new car is a loan, as is borrowing money for
home improvements
Profitability Ratios
A class of financial metrics that are used to assess a business's ability to
generate earnings as compared to its expenses and other relevant costs
incurred during a specific period of time. For most of these ratios, having a
higher value relative to a competitor's ratio or the same ratio from a
previous period is indicative that the company is doing well
Some examples of profitability ratios are profit margin, return on assets
and return on equity. It is important to note that a little bit of background
knowledge is necessary in order to make relevant comparisons when
analyzing these ratios.
For instances, some industries experience seasonality in their operations.

The retail industry, for example, typically experiences higher revenues
and earnings for the Christmas season. Therefore, it would not be too
useful to compare a retailer's 4th quarter profit margin with its 1st quarter
profit margin. On the other hand, comparing a retailer's 4th quarter profit
margin with the profit margin from the same period a year before would be
far more informative
PH:9890939673,
Mortgage
A debt instrument that is secured by the collateral of specified real estate
property and that the borrower is obliged to pay back with
a predetermined set of payments. Mortgages are used by individuals and
businesses to make large purchases of real estate without paying the
entire value of the purchase up front.
Mortgages are also known as "liens against property", or "claims on

property".
In a residential mortgage, a homebuyer pledges his or her house to the
bank. The bank has a claim on the house should the homebuyer default
on paying the mortgage. In the case of a foreclosure, the bank may evict
the home's tenants and sell the house, using the income from the sale to
clear the mortgage debt
Opportunity Cost
1. The cost of an alternative that must be forgone in order to pursue a
certain action. Put another way, the benefits you could have received by
taking an alternative action.
2. The difference in return between a chosen investment and one that is

necessarily passed up. Say you invest in a stock and it returns a paltry
2% over the year. In placing your money in the stock, you gave up the
opportunity of another investment - say, a risk-free government bond
yielding 6%. In this situation, your opportunity costs are 4% (6%-2%)
1. The opportunity cost of going to college is the money you would have
earned if you worked instead. On the one hand, you lose four years of
salary while getting your degree; on the other hand, you hope to earn
more during your career, thanks to your education, to offset the lost
wages.
Here's another example: if a gardener decides to grow carrots, his or

her opportunity cost is the alternative crop that might have been grown
instead (potatoes, tomatoes, pumpkins, etc.).
In both cases, a choice between two options must be made. It would be

an easy decision if you knew the end outcome; however, the risk that
you could achieve greater "benefits" (be they monetary or
Profit and Loss Statement (P&L)
A financial statement that summarizes the revenues, costs and expenses
incurred during a specific period of time - usually a fiscal quarter or year.
These records provide information that shows the ability of a company to
generate profit by increasing revenue and reducing costs. The P&L
PH:9890939673,
statement is also known as a "statement of profit and loss", an "income

statement" or an "income and expense statement".
The statement of profit and loss follows a general format that begins
with an entry for revenue and subtracts from revenue the costs of running
the business, including cost of goods sold, operating expenses,
tax expense and interest expense. The bottom line (literally and
figuratively) is net income (profit).
The balance sheet, income statement and statement of cash flows are the
most important financial statements produced by a company. While each
is important in its own right, they are meant to be analyzed together.
Economics
A social science that studies how individuals, governments, firms and
nations make choices on allocating scarce resources to satisfy their
unlimited wants. Economics can generally be broken down into
macroeconomics, which concentrates on the behavior of the aggregate
economy, and microeconomics, which focuses on individual consumers.
Economics is often referred to as "the dismal science".

Two of the major approaches in economics are named the classical and
Keynesian approaches. Classical economists believe that markets function
very well, will quickly react to any changes in equilibrium and that a
"laissez faire" government policy works best.
On the other hand, Keynesian economists believe that markets react very
slowly to changes in equilibrium (especial to changes in prices) and that
active government intervention is sometimes the best method to get the
economy back into equilibrium
Annual Report
1. An annual publication that public corporations must provide to
shareholders to describe their operations and financial
conditions. The front part of the report often contains an
impressive combination of graphics, photos and an accompanying
narrative, all of which chronicle the company's activities over the
past year. The back part of the report contains detailed financial
and operational information.
2. In the case of mutual funds, an annual report is a required

document that is made available to fund shareholders on a fiscal
year basis. It discloses certain aspects of a fund's operations and
financial condition. In contrast to corporate annual reports,
mutual fund annual reports are best described as "plain vanilla"
PH:9890939673,
in terms of their presentation.
1. It was not until legislation was enacted after the stock market
crash in 1929 that the annual report became a regular
component of corporate financial reporting. Typically, an annual
report will contain the following sections:
-Financial Highlights
-Letter to the Shareholders
-Narrative Text, Graphics and
Photos
-Management's Discussion and
Analysis
-Financial Statements
-Notes to Financial Statements
-Auditor's Report
-Summary Financial Data
-Corporate Information
2. A mutual fund annual report, along with a fund's prospectus

and statement of additional information, is a source of multi-year
fund data and performance, which is made available to fund
shareholders as well as to prospective fund investors.
Unfortunately, most of the information is quantitative rather than
qualitative, which addresses the mandatory accounting
disclosures required of mutual funds.
Premium
1. The total cost of an option.
2. The difference between the higher price paid for a fixed-income

security and the security's face amount at issue.
3. The specified amount of payment required periodically by an

insurer to provide coverage under a given insurance plan for a
defined period of time. The premium is paid by the insured party
to the insurer, and primarily compensates the insurer for bearing
the risk of a payout should the insurance agreement's coverage
be required.
1. The premium of an option is basically the sum of the option's

PH:9890939673,
intrinsic and time value. It is important to note that volatility also

affects the premium.
2. If a fixed-income security (bond) is purchased at a premium,

existing interest rates are lower than the coupon rate. Investors
pay a premium for an investment that will return an amount
greater than existing interest rates.
3. A common example of an insurance premium comes from auto

insurance. A vehicle owner can insure the value of his or
her vehicle against loss resulting from accident, theft and other
potential problems. The owner usually pays a fixed premium
amount in exchange for the insurance company's guarantee to
cover any economic losses incurred under the scope of the
agreement.
Fundamental Analysis
A method of evaluating a security by attempting to measure its

intrinsic value by examining related economic, financial and
other qualitative and quantitative factors. Fundamental analysts
attempt to study everything that can affect the security's value,
including macroeconomic factors (like the overall economy and
industry conditions) and individually specific factors (like the
financial condition and management of companies).
The end goal of performing fundamental analysis is to produce a

value that an investor can compare with the security's current
price in hopes of figuring out what sort of position to take with
that security (underpriced = buy, overpriced = sell or short).
This method of security analysis is considered to be the opposite

of technical analysis.
Fundamental analysis is about using real data to evaluate a

security's value. Although most analysts use fundamental
analysis to value stocks, this method of valuation can be used
for just about any type of security.
For example, an investor can perform fundamental analysis on a

bond's value by looking at economic factors, such as interest
rates and the overall state of the economy, and information about
the bond issuer, such as potential changes in credit ratings. For
PH:9890939673,
assessing stocks, this method uses revenues, earnings, future

growth, return on equity, profit margins and other data to
determine a company's underlying value and potential for future
growth. In terms of stocks, fundamental analysis focuses on the
financial statements of a the company being evaluated.
One of the most famous and successful users of fundamental

analysis is the Oracle of Omaha, Warren Buffett, who has been
well known for successfully employing fundamental analysis to
pick securities. His abilities have turned him into a billionaire.
Intrinsic Value
1. 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.
2. For call options, this is the difference between the underlying

stock's price and the strike price. For put options, it is the
difference between the strike price and the underlying stock's
price. In the case of both puts and calls, if the respective
difference value is negative, the instrinsic value is given as zero.
1. For example, value investors that follow fundamental analysis

look at both qualitative (business model, governance, target
market factors etc.) and quantitative (ratios, financial statement
analysis, etc.) aspects of a business to see if the business is
currently out of favor with the market and is really worth much
more than its current valuation.
2. Intrinsic value in options is the in-the-money portion of the

option's premium. For example, If a call options strike price is
$15 and the underlying stock's market price is at $25, then the
intrinsic value of the call option is $10. An option is usually
never worth less than what an option holder can receive if the
option is exercised.
Book Value
PH:9890939673,
1. The value at which an asset is carried on a balance sheet. In

other words, the cost of an asset minus accumulated
depreciation.
2. The net asset value of a company, calculated by total assets

minus intangible assets (patents, goodwill) and liabilities.
3. The initial outlay for an investment. This number may be net

or gross of expenses such as trading costs, sales taxes, service
charges and so on.
In the U.K., book value is known as "net asset value".
Book value is the accounting value of a firm. It has two main

uses:
1. It is the total value of the company's assets that shareholders

would theoretically receive if a company were liquidated.
2. By being compared to the company's market value, the book

value can indicate whether a stock is under- or overpriced.
3. In personal finance, the book value of an investment is the

price paid for a security or debt investment. When a stock is sold,
the selling price less the book value is the capital gain (or loss)
from the investment.
Depreciation
1. In accounting, an expense recorded to allocate a tangible

asset's cost over its useful life. Because depreciation is a non-
cash expense, it increases free cash flow while decreasing
reported earnings.
2. A decrease in the value of a particular currency relative to

other currencies.
1. Depreciation is used in accounting to try to match the expense

of an asset to the income that the asset helps the company earn.
For example, if a company buys a piece of equipment for $1
million and expects it to have a useful life of 10 years, it will be
depreciated over 10 years. Every accounting year, the company
PH:9890939673,
will expense $100,000 (assuming straight-line

depreciation), which will be matched with the money that the
equipment helps to make each year.
2. Examples of currency depreciation are the infamous Russian

ruble crisis in 1998, which saw the ruble lose 25% of its value in
one day.
Share Capital
Funds raised by issuing shares in return for cash or other

considerations. The amount of share capital a company has can
change over time because each time a business sells new shares
to the public in exchange for cash, the amount of share capital
will increase. Share capital can be composed of both common
and preferred shares.
Also known as "equity financing".
The amount of share capital a company reports on its balance

sheet only accounts for the initial amount for which the original
shareholders purchased the shares from the issuing company.
Any price differences arising from price appreciation/depreciation
as a result of transactions in the secondary market are not
included.
For example, suppose ABC Inc. raised $2 billion from its initial
public offering. Over the next year, the total value of its shares
increases to $5 billion. In this case, the value of the share capital
is still only $2 billion because ABC Inc. had received only $2
billion from the sale of its securities to the investing public.
Shares
A unit of ownership interest in a corporation or

financial asset. While owning shares in a business does not mean
that the shareholder has direct control over the business''''''''''''''''s
day-to-day operations, being a shareholder does entitle the
possessor to an equal distribution in any profits, if any are
declared in the form of dividends. The two main types of shares
are common shares and preferred shares.
PH:9890939673,
In the past, shareholders received a physical paper stock

certificate that indicated that they owned "x" shares in a
company. Today, brokerages have electronic records that show
ownership details. Owning a "paperless" share makes conducting
trades a simpler and more streamlined process, which is a far cry
from the days were stock certificates needed to be taken to a
brokerage before a trade could be conducted.
While shares are often used to refer to the stock of a corporation,

shares can also represent ownership of other classes of financial
assets, such as mutual funds.
Stock
A type of security that signifies ownership in a corporation and

represents a claim on part of the corporation's assets and
earnings.
There are two main types of stock: common and

preferred. Common stock usually entitles the owner to vote at
shareholders' meetings and to receive dividends. Preferred stock
generally does not have voting rights, but has a higher claim on
assets and earnings than the common shares. For example,
owners of preferred stock receive dividends before common
shareholders and have priority in the event that a company goes
bankrupt and is liquidated.
Also known as "shares" or "equity".
A holder of stock (a shareholder) has a claim to a part of the

corporation's assets and earnings. In other words, a shareholder
is an owner of a company. Ownership is determined by the
number of shares a person owns relative to the number of
outstanding shares. For example, if a company has 1,000 shares
of stock outstanding and one person owns 100 shares, that
person would own and have claim to 10% of the company's
assets.
Stocks are the foundation of nearly every portfolio. Historically,

they have outperformed most other investments over the long
run.
Sensex
PH:9890939673,
An abbreviation of the Bombay Exchange Sensitive Index

(Sensex) - the benchmark index of the Bombay Stock Exchange
(BSE). It is composed of 30 of the largest and most actively-
traded stocks on the BSE. Initially compiled in 1986, the Sensex
is the oldest stock index in India.
The index is calculated based on a free-float capitalization

method when weighting the effect of a company on the index.
This is a variation of the market cap method, but instead of using
a company's outstanding shares it uses its float, or shares that
are readily available for trading. The free-float method, therefore,
does not include restricted stocks, such as those held by
company insiders that can't be readily sold.
To find the free-float capitalization of a company, first find its

market cap (number of outstanding shares x share price) then
multiply its free-float factor. The free-float factor is determined by
the percentage of floated shares to outstanding. For example, if a
company has a float of 10 million shares and outstanding shares
of 12 million, the percent of float to outstanding is 83%. A
company with an 83% free float falls in the 80-85% free-float
factor, or 0.85, which is then multiplied by its market cap (e.g.,
$120 million (12 million shares x .$10/share) x 0.85 = $102
million free-float capitalization).
Shareholder
Any person, company, or other institution that owns at least 1

share in a company. A shareholder may also be referred to as a
stockholder.
Shareholders are the owners of a company. They have the

potential to profit if the company does well, but that comes with
the potential to lose if the company does poorly.
Market Capitalization
The total dollar market value of all of a company's outstanding

shares. Market capitalization is calculated by multiplying a
company's shares outstanding by the current market price of one
share. The investment community uses this figure to determining
PH:9890939673,
a company's size, as opposed to sales or total asset figures.
Frequently referred to as "market cap".
If a company has 35 million shares outstanding, each with a

market value of $100, the company's market capitalization is
$3.5 billion (35,000,000 x $100 per share).
Company size is a basic determinant of asset allocation and risk-

return parameters for stocks and stock mutual funds. The term
should not be confused with a company's "capitalization," which
is a financial statement term that refers to the sum of a
company's shareholders' equity plus long-term debt.
The stocks of large, medium and small companies are referred to

as large-cap, mid-cap, and small-cap, respectively. Investment
professionals differ on their exact definitions, but the current
approximate categories of market capitalization are:
Large Cap: $10 billion plus

Mid Cap: $2 billion to $10 billion
Small Cap: Less than $2 billion
Nifty 50
The 50 stocks that were most favored by institutional investors in

the 1960s and 1970s. Companies in this group were usually
characterized by consistent earnings growth and high P/E ratios.
The nifty-50 stocks got their notoriety in the bull markets of the
1960s and early 1970s. They became known as "one-decision"
stocks because investors were told they could buy and hold
forever.
Examples of nifty-50 stocks included General Electric, Coca-Cola,

and IBM. However, part of this list included companies that have
been troubled in the last decade, such as Xerox and Polaroid.
General Ledger
PH:9890939673,
A company's accounting records. This formal ledger contains all

the financial accounts and statements of a business.
The ledger uses two columns: one records debits, the other has
offsetting credits
Bond
A debt investment in which an investor loans money to an entity

(corporate or governmental) that borrows the funds for a defined
period of time at a fixed interest rate. Bonds are used by
companies, municipalities, states and U.S. and foreign
governments to finance a variety of projects and activities. Bonds
are commonly referred to as fixed-income securities and are one
of the three main asset classes, along with stocks and cash
equivalents..
The indebted entity (issuer) issues a bond that states the interest
rate (coupon) that will be paid and when the loaned funds (bond
principal) are to be returned (maturity date). Interest on bonds is
usually paid every six months (semi-annually). The main
categories of bonds are corporate bonds, municipal bonds,
and U.S. Treasury bonds, notes and bills, which are collectively
referred to as simply "Treasuries."
Two features of a bond - credit quality and duration - are the

principal determinants of a bond's interest rate. Bond maturities
range from a 90-day Treasury bill to a 30-year government
bond. Corporate and municipals are typically in the 3-10-year
range.
Trial Balance
A bookkeeping worksheet in which the balances of all ledgers are

compiled into debit and credit columns. A company prepares a
trial balance periodically, usually at the end of every reporting
period. The general purpose of producing a trial balance is to
ensure the entries in a company's bookkeeping system are
mathematically correct.
PH:9890939673,
Preparing a trial balance for a company serves to detect any

mathematical errors that have occurred in the double-entry
accounting system. Provided the total debts equal the total
credits, the trial balance is considered to be balanced, and there
should be no mathematical errors in the ledgers.
However, this does not mean there are no errors in a company's

accounting system. For example, transactions classified
improperly or those simply missing from the system could still be
material accounting errors that would not be detected by the trial
balance procedure
Stagflation
A condition of slow economic growth and relatively high

unemployment - a time of stagnation - accompanied by a rise in
prices, or inflation.
Stagflation occurs when the economy isn't growing but prices are,
which is not a good situation for a country to be in. This
happened to a great extent during the 1970s, when world oil
prices rose dramatically, fueling sharp inflation in developed
countries. For these countries, including the U.S., stagnation
increased the inflationary effects.
Zero-Coupon Bond
A debt security that doesn't pay interest (a coupon) but is traded

at a deep discount, rendering profit at maturity when the bond is
redeemed for its full face value.
Also known as an "accrual bond".
Some zero-coupon bonds are issued as such, while others are

bonds that have been stripped of their coupons by a financial
institution and then repackaged as zero-coupon bonds. Because
they offer the entire payment at maturity, zero-coupon
bonds tend to fluctuate in price much more than coupon bonds.
Consumer Price Index (CPI)
PH:9890939673,
A measure that examines the weighted average of prices of a

basket of consumer goods and services, such as transportation,
food and medical care. The CPI is calculated by taking price
changes for each item in the predetermined basket of goods and
averaging them; the goods are weighted according to their
importance. Changes in CPI are used to assess price changes
associated with the cost of living.
Sometimes referred to as "headline inflation".
The U.S. Bureau of Labor Statistics measures two kinds of CPI

statistics: CPI for urban wage earners and clerical workers (CPI-
W), and the chained CPI for all urban consumers (C-CPI-U). Of
the two types of CPI, the C-CPI-U is a better representation of the
general public, because it accounts for about 87% of the
population.
CPI is one of the most frequently used statistics for identifying

periods of inflation or deflation. This is because large rises in CPI
during a short period of time typically denote periods of inflation
and large drops in CPI during a short period of time
usually mark periods of deflation.
Discount
The condition of the price of a bond that is lower than par. The
discount equals the difference between the price paid for a
security and the security's par value.
For example, if a bond with a par value of $1,000 is currently

selling for $990 dollars, it is selling at a discount.
Business
1. An organization or enterprising entity engaged in commercial,

industrial or professional activities. A business can be a for-profit
entity, such as a publicly-traded corporation, or a non-
profit organization engaged in business activities, such as an
agricultural cooperative.
PH:9890939673,
2. Any commercial, industrial or professional activity

undertaken by an individual or a group.
3. A reference to a specific area or type of economic activity.
1. Businesses include everything from a small owner-operated

company such as a family restaurant, to a multinational
conglomerate such as General Electric.
2. To "do business" with another company, a business must

engage in some kind of transaction or exchange of value with that
company.
3. In this sense, the word "business" can be used to refer to a

specific industry or activity, such as the "real estate business" or
the "advertising business
Entrepreneur
An individual who, rather than working as an employee, runs a

small business and assumes all the risk and reward of a given
business venture, idea, or good or service offered for sale. The
entrepreneur is commonly seen as a business leader and
innovator of new ideas and business processes.
Entrepreneurs play a key role in any economy. These are the

people who have the skills and initiative necessary to take good
new ideas to market and make the right decisions to make
the idea profitable. The reward for the risks taken is the potential
economic profits the entrepreneur could earn
Retail Banking
Retail banking is typical mass-market banking where individual

customers use local branches of larger commercial banks.
Services offered include: savings and checking accounts,
mortgages, personal loans, debit cards, credit cards, and so forth.
This is very different from wholesale banking
Small And Midsize Enterprises (SME)
PH:9890939673,
A business that maintains revenues or a number of employees

below a certain standard. Every country has its own definition of
what is considered a small and medium-sized enterprise. In the
United States, there is no distinct way to identify SME; it typically
it depends on the industry in which the company competes.
In the European Union, a small-sized enterprise is a company

with fewer than 50 employees, while a medium-sized enterprise is
one with fewer than 250 employees.
SME firms tend to spend a lot of money on IT and, as a result,

these businesses are strongest in the area of innovation. The
need to attract capital to fund projects is therefore essential for
small and medium-sized enterprises. To be competitive SME
firms require "out of the box" solutions, even if they involve
surrendering some functionality.
Bank
A commercial institution licensed as a receiver of deposits. Banks

are mainly concerned with making and receiving payments as
well as supplying short-term loans to individuals.
In most countries banks are supervised by the national

government or central bank.
Capital
1. Financial assets or the financial value of assets such as cash.
2. The factories, machinery and equipment owned by a business.
Capital is an extremely vague term whose specific definition

depends on the context in which it is used. In general, it refers to
financial resources available for use.
Security
An instrument representing ownership (stocks), a debt agreement

(bonds), or the rights to ownership (derivatives).
PH:9890939673,
A security is essentially a contract that can be assigned a value

and traded.
Examples of a security include a note, stock, preferred share,

bond, debenture, option, future, swap, right, warrant, or virtually
any other financial asset.
Derivative
In finance, a security whose price is dependent upon or derived

from one or more underlying assets. The derivative itself is merely
a contract between two or more parties. Its value is
determined by fluctuations in the underlying asset. The most
common underlying assets include stocks,
bonds, commodities, currencies, interest rates and market
indexes. Most derivatives are characterized by high leverage.
Futures contracts, forward contracts, options and swaps are the

most common types of derivatives. Because derivatives are just
contracts, just about anything can be used as an underlying
asset. There are even derivatives based on weather data, such as
the amount of rain or the number of sunny days in a particular
region.
Derivatives are generally used to hedge risk, but can also be used
for speculative purposes. For example, a European investor
purchasing shares of an American company off of an American
exchange (using American dollars to do so) would be exposed to
exchange-rate risk while holding that stock. To hedge this risk,
the investor could purchase currency futures to lock in a
specified exchange rate for the future stock sale and currency
conversion back into euros.
Portfolio Management
The art and science of making decisions about investment mix

and policy, matching investments to objectives, asset allocation
for individuals and institutions, and balancing risk against.
performance.
Portfolio management is all about strengths, weaknesses,
PH:9890939673,
opportunities, and threats in the choice of debt vs. equity,

domestic vs. international, growth vs. safety, and many other
tradeoffs encountered in the attempt to maximize return at a
given appetite for risk.
In the case of mutual and exchange-traded funds, there are two

forms of portfolio management: passive and active. Passive
management simply tracks a market index, commonly referred to
as indexing or index investing. Active management involves a
single manager, co-managers, or a team of managers who
attempt to beat the market return by actively managing a fund's
portfolio through investment decisions based on research and
decisions on individual holdings. Closed-end funds are generally
actively managed.
Equity
1. A stock or any other security representing an ownership

interest.
2. On a company's balance sheet, the amount of the funds

contributed by the owners (the stockholders) plus the retained
earnings (or losses). Also referred to as "shareholders' equity".
3. In the context of margin trading, the value of securities in a

margin account minus what has been borrowed from the
brokerage.
4. In the context of real estate, the difference between the current

market value of the property and the amount the owner still owes
on the mortgage. It is the amount that the owner would receive
after selling a property and paying off the mortgage.
5. In terms of investment strategies, equity (stocks) is one of the

principal asset classes. The other two are fixed-income (bonds)
and cash/cash-equivalents. These are used in asset allocation
planning to structure a desired risk and return profile for an
investor's portfolio.
The term's meaning depends very much on the context. In

general, you can think of equity as ownership in any asset after
all debts associated with that asset are paid off. For example, a
PH:9890939673,
car or house with no outstanding debt is considered the owner's

equity because he or she can readily sell the item for
cash. Stocks are equity because they represent ownership in a
company.
Assets Under Management (AUM)
In general, the market value of assets an investment company

manages on behalf of investors.
There are widely differing views on what the term means. Some
financial institutions include bank deposits, mutual funds and
institutional money in their calculations. Others limit it to funds
under discretionary management where the client delegates
responsibility to the company
Repurchase Agreement (Repo)
A form of short-term borrowing for dealers in government

securities. The dealer sells the government securities to investors,
usually on an overnight basis, and buys them back the following
day.
For the party selling the security (and agreeing to repurchase it in

the future) it is a repo; for the party on the other end of the
transaction, (buying the security and agreeing to sell in the
future) it is a reverse repurchase agreement.
Repos are classified as a money-market instrument. They are

usually used to raise short-term capital.
Participatory Notes
Financial instruments used by investors or hedge funds that are

not registered with the Securities and Exchange Board of India
to invest in Indian securities. Indian-based brokerages
buy India-based securities and then issue participatory notes to
foreign investors. Any dividends or capital gains collected from
the underlying securities go back to the investors.
PH:9890939673,
In many ways, this is similar to an informal ADR process, where

brokerages hold on to stocks for foreign investors. However,
Indian regulators are not very happy about participatory notes
because they have no way to know who owns the underlying
securities. Regulators fear that hedge funds acting through
participatory notes will cause economic volatility in India's
exchanges.
Broker
1. An individual or firm that charges a fee or commission for

executing buy and sell orders submitted by an investor.
2. The role of a firm when it acts as an agent for a customer and

charges the customer a commission for its services.
3. A licensed real estate professional who typically represents the

seller of a property. A broker's duties may include: determining
market values, advertising properties for sale, showing properties
to prospective buyers, and advising clients with regard to offers
and related matters.
Traditionally, only the wealthy could afford a broker and access

the stock market. The Internet triggered an explosion of discount
brokers; brokers that let you trade at a smaller fee, but don't
provide personalized advice. Because of discount brokers, almost
anybody can afford to invest in the market
Dividend
1. A distribution of a portion of a company's earnings, decided by

the board of directors, to a class of its shareholders. The dividend
is most often quoted in terms of the dollar amount each share
receives (dividends per share). It can also be quoted in terms of a
percent of the current market price, referred to as dividend yield.
2. Mandatory distributions of income and realized capital gains

made to mutual fund investors.
1. Dividends may be in the form of cash, stock or property. Most

secure and stable companies offer dividends to their
stockholders. Their share prices might not move much, but the
PH:9890939673,
dividend attempts to make up for this.
High-growth companies rarely offer dividends because all of their

profits are reinvested to help sustain higher-than-average growth.
2. Mutual funds pay out interest and dividend income received

from their portfolio holdings as dividends to fund shareholders.
In addition, realized capital gains from the portfolio's trading
activities are generally paid out (capital gains distribution) as a
year-end dividend.
Foreign Direct Investment (FDI)
An investment abroad, usually where the company being invested

in is controlled by the foreign corporation.
An example of FDI is an American company taking a majority

stake in a company in China
Foreign Institutional Investor (FII)
An investor or investment fund that is from or registered in a

country outside of the one in which it is currently investing.
Institutional investors include hedge funds, insurance
companies, pension funds and mutual funds.
The term is used most commonly in India to refer to outside

companies investing in the financial markets of India.
International institutional investors must register with the
Securities and Exchange Board of India to participate in the
market. One of the major market regulations pertaining to FIIs
involves placing limits on FII ownership in Indian companies.
Special Economic Zone (SEZ)
Designated areas in countries that possess special economic

regulations that are different from other areas in the same
country. Moreover, these regulations tend to contain measures
that are conducive to foreign direct investment. Conducting
business in a SEZ usually means that a company will receive tax
incentives and the opportunity to pay lower tariffs.
PH:9890939673,
While many countries have set up special economic zones,

China has been the most successful in using SEZ to attract
foreign capital. In fact, China has even declared an entire
province (Hainan) to be an SEZ, which is quite distinct, as most
SEZs are cities.
Securities And Exchange Board Of India (SEBI)
The regulatory body for the investment market in India. The

purpose of this board is to maintain stable and efficient markets
by creating and enforcing regulations in the marketplace.
The Securities and Exchange Board of India is similar to the U.S.

SEC. The SEBI is relatively new (1992) but is a vital component
in improving the quality of the financial markets in India, both by
attracting foreign investors and protecting Indian investors.
Dalal Street
A term that refers to the Bombay Stock Exchange, the major

stock exchange in India. The street is home not only the Bombay
Stock Exchange but also a large number of other financial
institutions.
The term "Dalal Street" is used in the same way as "Wall Street"
in the U.S., referring to the country's major stock exchanges and
overall financial system. These terms are often seen in the
financial media.
International Monetary Fund (IMF)
An international organization created for the purpose of:
1. Promoting global monetary and exchange stability.
2. Facilitating the expansion and balanced growth of

international trade.
3. Assisting in the establishment of a multilateral system of

payments for current transactions.
PH:9890939673,
The IMF plays three major roles in the global monetary system.
The Fund surveys and monitors economic and financial
developments, lends funds to countries with balance-of-payment
difficulties, and provides technical assistance and training for
countries requesting it
Balance Of Payments (BOP)
A record of all transactions made between one particular country

and all other countries during a specified period of time.
BOP compares the dollar difference of the amount of exports and
imports, including all financial exports and imports. A negative
balance of payments means that more money is flowing out of the
country than coming in, and vice versa.
Balance of payments may be used as an indicator of economic

and political stability. For example, if a country has a
consistently positive BOP, this could mean that there is
significant foreign investment within that country. It may
also mean that the country does not export much of its currency.
This is just another economic indicator of a country's relative

value and, along with all other indicators, should be used with
caution. The BOP includes the trade balance, foreign investments
and investments by foreigners.
Balance Of Trade - BOT
The largest component of a country's balance of payments. It is

the difference between exports and imports. Debit items include
imports, foreign aid, domestic spending abroad and domestic
investments abroad. Credit items include exports, foreign
spending in the domestic economy and foreign investments in the
domestic economy. A country has a trade deficit if it imports
more than it exports; the opposite scenario is a trade surplus.
The balance of trade is one of the most misunderstood indicators

of the U.S. economy. For example, many people believe that a
trade deficit is a bad thing. However, whether a trade deficit is
bad thing or not is relative to the business cycle and economy. In
a recession, countries like to export more, creating jobs and
demand. In a strong expansion, countries like to import more,
PH:9890939673,
providing price competition, which limits inflation and, without

increasing prices, provides goods beyond the economy's ability to
meet supply. Thus, a trade deficit is not a good thing during a
recession but may help during an expansion.
Special Drawing Rights (SDR)
An international type of monetary reserve currency, created by

the International Monetary Fund (IMF) in 1969, which operates
as a supplement to the existing reserves of member countries.
Created in response to concerns about the limitations of gold and
dollars as the sole means of settling international accounts, SDRs
are designed to augment international liquidity by supplementing
the standard reserve currencies.
You can think of SDRs as an artificial currency used by the IMF

and defined as a "basket of national currencies". The IMF uses
SDRs for internal accounting purposes. SDRs are allocated by
the IMF to its member countries and are backed by the full faith
and credit of the member countries' governments.
Dumping
1. In international trade, this occurs when one country exports a

significant amount of goods to another country at prices much
lower than in the domestic market.
2. A slang term for selling a stock with little regard for price.
1. Dumping is fought through the use of tariffs and quotas
Quota
In the context of international trade, this is a limit put on the

amount of a specific good that can be imported.
Quotas are used to prevent other countries from "dumping."
Tariff
PH:9890939673,
A taxation imposed on goods and services imported into a

country. Also known as a duty tax.
Governments generally impose tariffs to raise revenue and

protect domestic industries from foreign competition caused by
factors like government subsidies, or lower priced goods and
services
Reserve Bank Of India (RBI)
The central bank of India, which was established on April 1,

1935, under the Reserve Bank of India Act. The RBI uses
monetary policy to create financial stability in India and is
charged with regulating the country's currency and credit
systems.
Located in Mumbai, the Reserve Bank of India serves the

financial market in many ways. One of its most important
functions is establishing an overnight interbank lending rate. The
Mumbai Interbank Offer Rate, or MIBOR, serves as a benchmark
for interest rate related financial instruments in India
Interbank Rate
The rate of interest charged on short-term loans made between

banks. Banks borrow and lend money in the interbank market in
order to manage liquidity and meet the requirements placed on
them. The interest rate charged depends on the availability of
money in the market, on prevailing rates and on the specific
terms of the contract, such as term length.
\ Banks are required to hold an adequate amount of liquid assets,

such as cash, to manage any potential withdrawals from clients.
If a bank can't meet these liquidity requirements, it will need to
borrow money in the interbank market to cover the shortfall.
Some banks, on the other hand, have excess liquid assets above
and beyond the liquidity requirements. These banks will lend
money in the interbank market, receiving interest on the assets.
There is a wide range of published interbank rates, including the

LIBOR, which is set daily based on the average rates on loans
made within the London interbank market
PH:9890939673,
Money Market
The securities market dealing in short-term debt and monetary

instruments. Money market instruments are forms of debt that
mature in less than one year and are very liquid.
Treasury bills make up the bulk of the money market

instruments. Securities in the money market are relatively risk-
free
Certificate Of Deposit (CD)
A savings certificate entitling the bearer to receive interest. A CD

bears a maturity date, a specified fixed interest rate and can be
issued in any denomination. CDs are generally issued by
commercial banks and are insured by the FDIC. The term of a
CD generally ranges from one month to five years.
A certificate of deposit is a promissory note issued by a bank. It is

a time deposit that restricts holders from withdrawing funds on
demand. Although it is still possible to withdraw the money, this
action will often incur a penalty.
For example, let's say that you purchase a $10,000 CD with an

interest rate of 5% compounded annually and a term of one year.
At year's end, the CD will have grown to $10,500 ($10,000 *
1.05).
CDs of less than $100,000 are called "small CDs"; CDs for more
than $100,000 are called "large CDs" or "jumbo CDs". Almost all
large CDs, as well as some small CDs, are negotiable.
Commercial Paper
An unsecured, short-term debt instrument issued by a

corporation, typically for the financing of accounts
receivable, inventories and meeting short-term liabilities.
Maturities on commercial paper rarely range any longer than 270
days. The debt is usually issued at a discount, reflecting
prevailing market interest rates.
PH:9890939673,
Commercial paper is not usually backed by any form of collateral,

so only firms with high-quality debt ratings will easily find buyers
without having to offer a substantial discount (higher cost) for the
debt issue.
A major benefit of commercial paper is that it does not need to be

registered with the Securities and Exchange Commission (SEC)
as long as it matures before nine months (270 days), making it
a very cost-effective means of financing. The proceeds from this
type of financing can only be used on current assets (inventories)
and are not allowed to be used on fixed assets, such as a new
plant, without SEC involvement.
Hypothecation
When a person pledges a mortgage as collateral for a loan, it

refers to the right that a banker has to liquidate goods if you fail
to service a loan. The term also applies to securities in a margin
account used as collateral for money loaned from a brokerage.
\ You are said to "hypothecate" the mortgage when you pledge it as

collateral for a loan
Pledged Asset
An asset that is transferred to a lender for the purpose of

securing debt. The lender of the debt maintains possession of the
pledged asset, but does not have ownership unless default
occurs.
\ A pledged asset is returned to the borrower when all conditions of

the debt have be satisfied.
Home buyers can sometimes pledge assets, such as securities, to

lending institutions in order to reduce the necessary down
payment. Thus, these securities would not have to be sold in
order to meet the down-payment requirements, allowing for any
capital appreciation while maintaining the associate mortgage
benefits
Capital Appreciation
PH:9890939673,
A rise in the market price of an asset.
Capital appreciation is one of two major ways for investors to

profit from an investment in a company. The other is through
dividend income
Capital Gain
1. An increase in the value of a capital asset (investment or real

estate) that gives it a higher worth than the purchase price. The
gain is not realized until the asset is sold. A capital gain may be
short term (one year or less) or long term (more than one year)
and must be claimed on income taxes. A capital loss is incurred
when there is a decrease in the capital asset value compared to
its purchase price.
2. Profit that results when the price of a security held by a

mutual fund rises above its purchase price and the security is
sold (realized gain). If the security continues to be held, the gain
is unrealized. A capital loss would occur when the opposite takes
place
\ 1. Long-term capital gains are usually taxed at a lower rate than

regular income. This is done to encourage entrepreneurship and
investment in the economy.
2. Tax conscious mutual fund investors should determine a

mutual fund's unrealized accumulated capital gains, which are
expressed as a percentage of its net assets, before investing in a
fund with a significant unrealized capital gain component. This
circumstance is referred to as a fund's capital gains
exposure. When distributed by a fund, capital gains are a taxable
obligation for the fund's investors
Gross Domestic Product (GDP)
The monetary value of all the finished goods and services

produced within a country's borders in a specific time period,
though GDP is usually calculated on an annual basis. It includes
all of private and public consumption, government outlays,
investments and exports less imports that occur within a defined
territory.
PH:9890939673,
GDP = C + G + I + NX
where:
"C" is equal to all private consumption, or consumer spending, in

a nation's economy
"G" is the sum of government spending
"I" is the sum of all the country's businesses spending on capital
"NX" is the nation's total net exports, calculated as total exports
minus total imports. (NX = Exports - Imports)
GDP is commonly used as an indicator of the economic health of

a country, as well as to gauge a country's standard of living.
Critics of using GDP as an economic measure say the statistic
does not take into account the underground economy -
transactions that, for whatever reason, are not reported to the
government. Others say that GDP is not intended to gauge
material well-being, but serves as a measure of a nation's
productivity, which is unrelated.
Inflation
The rate at which the general level of prices for goods and
services is rising, and, subsequently, purchasing power is falling.
As inflation rises, every dollar will buy a smaller percentage of a

good. For example, if the inflation rate is 2%, then a $1 pack of
gum will cost $1.02 in a year.
Most countries' central banks will try to sustain an inflation rate

of 2-3%.
What is the relationship between oil prices and inflation?
PH:9890939673,
The price of oil and inflation are

often seen as being connected in
a cause and effect
relationship. As oil prices
move up or down, inflation
follows in the same direction. The
reason why this happens is that
oil is a major input in the
economy - it is used in critical
activities such as fueling
transportation and heating homes
- and if input costs rise, so
should the cost of end products.
For example, if the price of oil
rises, then it will cost more to
make plastic, and a plastics company will then pass on some or all of
this cost to the consumer, which raises prices and thus inflation.
The direct relationship between oil and inflation was evident in the
1970s, when the cost of oil rose from a nominal price of $3 before the
1973 oil crisis to around $40 during the 1979 oil crisis. This
helped cause the consumer price index (CPI), a key measure of inflation,
to more than double from 41.20 in early 1972 to 86.30 by the end of
1980. Let's put this into perspective: while it had previously taken 24
years (1947-1971) for the CPI to double, during the 1970s it took about
eight years.
However, this relationship between oil and inflation started to deteriorate

after the 1980s. During the 1990's Gulf War oil crisis, crude prices
doubled in six months from around $20 to around $40, but CPI
remained relatively stable, growing from 134.6 in January 1991 to 137.9
in December 1991. This detachment in the relationship was even more
apparent during the oil price run-up from 1999 to 2005, in which the
annual average nominal price of oil rose from $16.56 to $50.04. During
this same period, the CPI rose from 164.30 in January 1999 to 196.80 in
December 2005. Judging by this data, it appears that the strong
correlation between oil prices and inflation that was seen in the 1970s
has weakened significantly.
For more information, see our Inflation tutorial and The Consumer Price
Index: A Friend To Investors.
Get A FREE Options Investing Kit
PH:9890939673,
Portfolio
A grouping of financial assets such as stocks, bonds and cash

equivalents, as well as their mutual, exchange-traded and closed-
fund counterparts. Portfolios are held directly by investors
and/or managed by financial professionals.
Prudence suggests that investors should construct an investment

portfolio in accordance with risk tolerance and investing
objectives. Think of an investment portfolio as a pie that
is divided into into pieces of varying sizes representing a variety
of asset classes and/or types of investments to accomplish an
appropriate risk-return portfolio allocation.
For example, a conservative investor might favor a portfolio with

large cap value stocks, broad-based market index funds,
investment-grade bonds and a position in liquid, high-grade cash
equivalents. In contrast, a risk loving investor might add some
small cap growth stocks to an aggressive, large cap growth stock
position, assume some high-yield bond exposure, and look to real
estate, international, and alternative investment opportunities for
his or her portfolio.
Diversification
A risk management technique that mixes a wide variety of

investments within a portfolio. The rationale behind this
technique contends that a portfolio of different kinds of
investments will, on average, yield higher returns and pose a
lower risk than any individual investment found within the
portfolio.
Diversification strives to smooth out unsystematic risk events in

a portfolio so that the positive performance of some investments
will neutralize the negative performance of others. Therefore, the
benefits of diversification will hold only if the securities in the
portfolio are not perfectly correlated.
Studies and mathematical models have shown that

maintaining a well-diversified portfolio of 25 to 30 stocks will
PH:9890939673,
yield the most cost-effective level of risk reduction. Investing in

more securities will still yield further diversification benefits,
albeit at a drastically smaller rate.
Further diversification benefits can be gained by investing in

foreign securities because they tend be less closely correlated
with domestic investments. For example, an economic downturn
in the U.S. economy may not affect Japan's economy in the same
way; therefore, having Japanese investments would allow an
investor to have a small cushion of protection against losses due
to an American economic downturn.
Most non-institutional investors have a limited investment

budget, and may find it difficult to create an adequately
diversified portfolio. This fact alone can explain why mutual
funds have been increasing in popularity. Buying shares in a
mutual fund can provide investors with an inexpensive source
of diversification.
Mutual Fund
An investment vehicle that is made up of a pool of funds collected

from many investors for the purpose of investing in securities
such as stocks, bonds, money market instruments and similar
assets. Mutual funds are operated by money mangers, who invest
the fund's capital and attempt to produce capital gains and
income for the fund's investors. A mutual fund's portfolio is
structured and maintained to match the investment objectives
stated in its prospectus.
One of the main advantages of mutual funds is that they

give small investors access to professionally managed, diversified
portfolios of equities, bonds and other securities, which would be
quite difficult (if not impossible) to create with a small amount of
capital. Each shareholder participates proportionally in the gain
or loss of the fund. Mutual fund units, or shares, are issued and
can typically be purchased or redeemed as needed at the fund's
current net asset value (NAV) per share, which is sometimes
expressed as NAVPS
Prospectus
PH:9890939673,
A formal legal document, which is required by and filed with the

Securities and Exchange Commission, that provides details about
an investment offering for sale to the public. A prospectus should
contain the facts that an investor needs to make an informed
investment decision.
Also known as an "offer document".
There are two types of prospectuses for stocks and bonds:

preliminary and final. The preliminary prospectus is the first
offering document provided by a securities issuer and includes
most of the details of the business and transaction in question.
Some lettering on the front cover is printed in red, which results
in the use of the nickname "red herring" for this document. The
final prospectus is printed after the deal has been made effective
and can be offered for sale, and supersedes the preliminary
prospectus. It contains finalized background information
including such details as the exact number of shares/certificates
issued and the precise offering price.
In the case of mutual funds, which, apart from their initial share
offering, continuously offer shares for sale to the public, the
prospectus used is a final prospectus. A fund prospectus
contains details on its objectives, investment strategies, risks,
performance, distribution policy, fees and expenses, and fund
management.
Beta
A measure of the volatility, or systematic risk, of a security or a

portfolio in comparison to the market as a whole.
Also known as "beta coefficient".
Beta is calculated using regression analysis, and you can think of

beta as the tendency of a security's returns to respond to swings
in the market. A beta of 1 indicates that the security's price will
move with the market. A beta of less than 1 means that the
security will be less volatile than the market. A beta of greater
than 1 indicates that the security's price will be more volatile
than the market. For example, if a stock's beta is 1.2, it's
PH:9890939673,
theoretically 20% more volatile than the market.
Many utilities stocks have a beta of less than 1. Conversely, most

high-tech Nasdaq-based stocks have a beta of greater than 1,
offering the possibility of a higher rate of return, but also
posing more risk.
Alpha
1. A measure of performance on a risk-adjusted basis. Alpha

takes the volatility (price risk) of a mutual fund and compares its
risk-adjusted performance to a benchmark index. The excess
return of the fund relative to the return of the benchmark index
is a fund's alpha.
2. The abnormal rate of return on a security or portfolio in excess

of what would be predicted by an equilibrium model like the
capital asset pricing model (CAPM).
1. Alpha is one of five technical risk ratios; the others are beta,
standard deviation, R-squared, and the Sharpe ratio. These are
all statistical measurements used in modern portfolio theory
(MPT). All of these indicators are intended to help investors
determine the risk-reward profile of a mutual fund. Simply
stated, alpha is often considered to represent the value that a
portfolio manager adds to or subtracts from a fund's return.
A positive alpha of 1.0 means the fund has outperformed its

benchmark index by 1%. Correspondingly, a similar negative
alpha would indicate an underperformance of 1%.
2. If a CAPM analysis estimates that a portfolio should earn 10%

based on the risk of the portfolio but the portfolio actually earns
15%, the portfolio's alpha would be 5%. This 5% is the excess
return over what was predicted in the CAPM model.
Standard Deviation
1. A measure of the dispersion of a set of data from its mean. The

more spread apart the data, the higher the deviation. Standard
deviation is calculated as the square root of variance.
PH:9890939673,
2. In finance, standard deviation is applied to the annual rate of

return of an investment to measure the investment's volatility.
Standard deviation is also known as historical volatility and is
used by investors as a gauge for the amount of expected
volatility.
Standard deviation is a statistical measurement that sheds light

on historical volatility. For example, a volatile stock will have a
high standard deviation while the deviation of a stable blue chip
stock will be lower. A large dispersion tells us how much the
return on the fund is deviating from the expected normal
returns.
Volatility
1. A statistical measure of the dispersion of returns for a given

security or market index. Volatility can either be measured by
using the standard deviation or variance between returns from
that same security or market index. Commonly, the higher the
volatility, the riskier the security.
2. A variable in option pricing formulas showing the extent to

which the return of the underlying asset will fluctuate between
now and the option's expiration. Volatility, as expressed as a
percentage coefficient within option-pricing formulas,
arises from daily trading activities. How volatility is
measured will affect the value of the coefficient used.
In other words, volatility refers to the amount of uncertainty or

risk about the size of changes in a security's value. A higher
volatility means that a security's value can potentially be spread
out over a larger range of values. This means that the price of the
security can change dramatically over a short time period in
either direction. A lower volatility means that a security's value
does not fluctuate dramatically, but changes in value at a steady
pace over a period of time.
One measure of the relative volatility of a particular stock to the

market is its beta. A beta approximates the overall volatility of a
security's returns against the returns of a relevant benchmark
(usually the S&P 500 is used). For example, a stock with a beta
PH:9890939673,
value of 1.1 has historically moved 110% for every 100% move in
the benchmark, based on price level. Conversely, a stock with a
beta of .9 has historically moved 90% for every 100% move in the
underlying index.
Hedge
Making an investment to reduce the risk of adverse price

movements in an asset. Normally, a hedge consists of taking an
offsetting position in a related security, such as a futures
contract.
An example of a hedge would be if you owned a stock, then sold a

futures contract stating that you will sell your stock at a set
price, therefore avoiding market fluctuations.
Investors use this strategy when they are unsure of what the
market will do. A perfect hedge reduces your risk to nothing
(except for the cost of the hedge).
Index
A statistical measure of change in an economy or a securities

market. In the case of financial markets, an index is an
imaginary portfolio of securities representing a particular market
or a portion of it. Each index has its own calculation methodology
and is usually expressed in terms of a change from a base value.
Thus, the percentage change is more important than the actual
numeric value.
Stock and bond market indexes are used to construct index

mutual funds and exchange-traded funds (ETFs) whose portfolios
mirror the components of the index.
The Standard & Poor's 500 is one of the world's best known
indexes, and is the most commonly used benchmark for the
stock market. Other prominent indexes include the DJ Wilshire
5000 (total stock market), the MSCI EAFE (foreign stocks in
Europe, Australasia, Far East) and the Lehman Brothers
Aggregate Bond Index (total bond market).
PH:9890939673,
Because, technically, you can't actually invest in an index, index

mutual funds and exchange-traded funds (based on indexes)
allow investors to invest in securities representing broad market
segments and/or the total market.
Capital Asset Pricing Model (CAPM)
A model that describes the relationship between risk and

expected return and that is used in the pricing of risky securities.
The general idea behind CAPM is that investors need to be

compensated in two ways: time value of money and risk. The time
value of money is represented by the risk-free (rf) rate in the
formula and compensates the investors for placing money in any
investment over a period of time. The other half of the formula
represents risk and calculates the amount of compensation the
investor needs for taking on additional risk. This is calculated by
taking a risk measure (beta) that compares the returns of the
asset to the market over a period of time and to the market
premium (Rm-rf).
PH:9890939673,
The CAPM says that the expected return of a security or a

portfolio equals the rate on a risk-free security plus a risk
premium. If this expected return does not meet or beat the
required return, then the investment should not be undertaken.
The security market line plots the results of the CAPM for all
different risks (betas).
Using the CAPM model and the following assumptions, we can

compute the expected return of a stock: if the risk-free rate is 3%,
the beta (risk measure) of the stock is 2 and the expected market
return over the period is 10%, the stock is expected to return
17% (3%+2(10%-3%)).
Savings Account
A deposit account held at a bank or other financial

institution that provides principal security and a modest interest
rate. Depending on the specific type of savings account, the
account holder may not be able to write checks from the account
(without incurring extra fees or expenses) and the account is
likely to have a limited number of free transfers/transactions.
Savings account funds are considered one of the most liquid
investments outside of demand accounts and cash.
Because savings accounts almost always pay lower interest rates

than Treasury bills and certificates of deposit, they should not be
used for long-term holding periods. Their main advantages are
liquidity and superior rates compared to checking accounts. Most
modern savings accounts offer access to funds through visits to a
local branch, over the internet and through automated teller
machines.
Bank
A commercial institution licensed as a receiver of deposits. Banks

are mainly concerned with making and receiving payments as
well as supplying short-term loans to individuals.
In most countries banks are supervised by the national

government or central bank.
Investment Bank (IB)

PH:9890939673,
A financial intermediary that performs a variety of services. This

includes underwriting, acting as an intermediary between an
issuer of securities and the investing public, facilitating mergers
and other corporate reorganizations, and also acting as a broker
for institutional clients.
The role of the investment bank begins with pre-underwriting

counseling and continues after the distribution of securities in
the form of advice.
Exchange-Traded Fund (ETF)
A security that tracks an index, a commodity or a basket of

assets like an index fund, but trades like a stock on an exchange,
thus experiencing price changes throughout the day as it is
bought and sold.
Because it trades like a stock whose price fluctuates daily, an

ETF does not have its net asset value (NAV) calculated every day
like a mutual fund does.
By owning an ETF, you get the diversification of an index fund as

well as the ability to sell short, buy on margin and purchase as
little as one share. Another advantage is that the expense ratios
for most ETFs are lower than those of the average mutual fund.
When buying and selling ETFs, you have to pay the same
commission to your broker that you'd pay on any regular order.
One of the most widely known ETFs is called the SPDR (Spider),
which tracks the S&P 500 index and trades under the symbol
SPY.
Earnings Per Share (EPS)

A company's earnings, also known as net income or net profit, divided by
the number of shares outstanding.
Equities
Shares of stock in a company. Because they represent a proportional
share in the business, they are "equitable claims" on the business itself.
PH:9890939673,
Gilt Funds
Funds that invest in government securities, which may be short or long-term

in nature. Higher the maturity of the portfolio, greater will be the volatility
when interest rates change.
Index Fund
A passively managed mutual fund that seeks to match the performance of a

particular market index. Partially due to lower expenses, index funds
outperform the majority of actively managed mutual funds.
Liquidity
A measure of how quickly a stock can be sold at a fair price and converted to
cash. Illiquid stocks are stocks that don't trade in high volume. Thus, having
too many shares of a stock that doesn't trade frequently would make for a
position that cannot necessarily be sold.
MIBOR (Mumbai Interbank Offer Rate)
This is the rate of interest at which banks borrow funds from other banks, in
marketable size, in the Mumbai interbank market.
Money Market Fund
Mutual fund that invests typically in short-term government instruments

(treasury bills) and commercial paper (CPs) and Certificates of Deposit (CDs).
These funds tend to be lower-yielding, but less risky than most other types of
funds.
Option
A call option is a contract in which a seller gives a buyer the right, but not the
obligation, to buy the optioned shares of a company at a set price (the strike
price) for a certain period of time. If the stock fails to exceed the strike price
before the expiration date, the option expires worthless. A put option is a
contract that gives the buyer the right, but not the obligation, to sell the stock
underlying the contract at a predetermined price (the strike price). The seller
(or writer) of the put option is obligated to buy the stock at the strike price.
PH:9890939673,
Preferred Stock
Preferred stock pays a dividend on a regular schedule and is given preference

over common stock in regard to the payment of dividends or -- heaven forbid -
- any liquidation of the company. Their share prices tend to remain stable,
and will generally not carry the voting rights that common stock does.
Risk Tolerance
The measurement of an investor's willingness to suffer a decline (or repeated

declines) in the value of investments while waiting and hoping for them to
increase in value. Generally investors are risk averse.
Rupee Cost Averaging
Strategy of making regular investments into a mutual fund and having

earnings automatically reinvested. This way, when the share price drops,
more shares are bought at lower prices.
Time Value Of Money (TVM)
The basic principle that money can earn interest, and so something that is
worth Rs. 1 today will be worth more in the future if invested. This is also
referred to as future value
Total Return
The rate of return on an investment, including reinvestment of distributions.
Tracking Error
A divergence between the price behavior of a position or portfolio and the

price behavior of a benchmark.
Trustee
An individual who holds or manages assets for the benefit of another.
Cyclical Stock
Stock of a company whose performance is generally related (or thought to be
PH:9890939673,
related) to the performance of the economy as a whole. Paper, steel, and the
automotive stocks are thought to be cyclical because their earnings tend to be
hurt when the economy slows and are strong when the economy turns up.
Food and drug stocks, on the other hand, are not considered "cyclicals," as
consumers pretty much need to eat and care for their health regardless of the
performance of the economy.
PH:9890939673,

Finance Glossary

Загружено:

Сведения о документе

Исходное описание:

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Finance Glossary

Загружено:

Авторское право:

Доступные форматы

FINANCE GLOSSARY BY NEERAJ AGRAWAL, MBA(FINANCE)

Working Capital Management

Implementing an effective working capital management system is an excellent

Also known as "investment appraisal".

IRR is sometimes referred to as "economic rate of return (ERR)".

Supply Chain Management (SCM)

2. An accounting statement - the statement of cash flows - that shows

2. The statement of a business's cash flows is often used by analysts to

Possessing a high amount of inventory for long periods of time is not

Inventory management forecasts and strategies, such as a just-in-time

Free Cash Flow (FCF)

It can also be calculated by taking operating cash flow and subtracting

Economic Order Quantity (EOQ)

The EOQ formula can be modified to determine production levels or order

Despite the equation's relative simplicity by today's standards, it is still a

Capital Expenditure (CAPEX)

In terms of accounting, an expense is considered to be a capital

The balance sheet must follow the following formula:

Assets = Liabilities + Shareholders' Equity

The balance sheet is one of the most important pieces of financial

2. A balance sheet item representing what a firm owns.

2. In the context of accounting, assets are either current or fixed (non-

potential in the notes. This improves the accuracy of financial statements

The non-operating items section discloses revenue and expense

For instances, some industries experience seasonality in their operations.

Mortgages are also known as "liens against property", or "claims on

2. The difference in return between a chosen investment and one that is

Here's another example: if a gardener decides to grow carrots, his or

In both cases, a choice between two options must be made. It would be

statement is also known as a "statement of profit and loss", an "income

Economics is often referred to as "the dismal science".

2. In the case of mutual funds, an annual report is a required

in terms of their presentation.

2. A mutual fund annual report, along with a fund's prospectus

1. The total cost of an option.

2. The difference between the higher price paid for a fixed-income

3. The specified amount of payment required periodically by an

1. The premium of an option is basically the sum of the option's

intrinsic and time value. It is important to note that volatility also

2. If a fixed-income security (bond) is purchased at a premium,

3. A common example of an insurance premium comes from auto

A method of evaluating a security by attempting to measure its

The end goal of performing fundamental analysis is to produce a

This method of security analysis is considered to be the opposite

Fundamental analysis is about using real data to evaluate a

For example, an investor can perform fundamental analysis on a

assessing stocks, this method uses revenues, earnings, future

One of the most famous and successful users of fundamental

1. The actual value of a company or an asset based on an

2. For call options, this is the difference between the underlying

1. For example, value investors that follow fundamental analysis

2. Intrinsic value in options is the in-the-money portion of the

1. The value at which an asset is carried on a balance sheet. In

2. The net asset value of a company, calculated by total assets

3. The initial outlay for an investment. This number may be net

In the U.K., book value is known as "net asset value".

Book value is the accounting value of a firm. It has two main

1. It is the total value of the company's assets that shareholders

2. By being compared to the company's market value, the book

3. In personal finance, the book value of an investment is the

1. In accounting, an expense recorded to allocate a tangible

2. A decrease in the value of a particular currency relative to

1. Depreciation is used in accounting to try to match the expense