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Monetary policy
The actions of a central bank, currency board or other regulatory committee that
determine the size and rate of growth of the money supply, which in turn affects interest
rates. Monetary policy is maintained through actions such as increasing the interest
rate, or changing the amount of money banks need to keep in the vault (bank
reserves).

In the United States, the Federal Reserve is in charge of monetary policy. The monetary
policy is one of the ways the government attempts to control the economy. If the money
supply grows too fast inflation will be too high if it is too slow economic growth slows
which affects the gross domestic product GDP. In general the US attempts to maintain a
steady inflation of between 2% to 3%.

OBJECTIVES of MONETARY POLICY

Price stability

Economic growth

Balance of payments

Balance Of Payments -
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.

HOW RBI CONTROLS MONEY SUPPLY

REPO RATE
Banks must keep a part of its money as reserve money, a part of which is kept as vault
cash and the rest is deposited with The Reserve Bank of India. When commercial banks
fall short of funds, they can borrow from RBI at a rate called REPO RATE. In a
monetary policy where the Bank rate is high will discourage commercial banks from
borrowing from The RBI REDUCES MONEY SUPPLY

CRR & SLR

Another instrument that is frequently used by RBI for this purpose is called Cash Reserve
Ratio or CRR, which represents the fraction of deposit which commercial banks must
keep with The RBI to regulate the money supply. Similar to CRR, Statutory Liquidity
Ratio is the portion of deposits that a bank has to keep with RBI in term of gold, bullion
or Government Securities. Any modification in the levels of CRR or, SLR therefore, will
have significant impact on the economy. For example, increasing either the SLR or CRR
or, both means a decrease in liquidity of the commercial banks.

OPEN MARKET OPERATION

The RBI can purchase government bonds from or sell the same to the public. When RBI
buys them, excess money is infused in the economy thereby increase the money supply.
The reverse, that is, selling the bonds will suck out excess liquidity from the market. This
operation is called the open market operation

Interest rate policy :Interest rate policy High interest rate in an underdeveloped
country acts as an incentive to higher savings develops banking habits and speeds up the
monetization of the economy which are essential for capital formation and economic
growth. a high interest rate policy is anti inflationary in nature, for it discourages
borrowing and investment for speculative purpose, and in foreign currencies

Inflation
Inflation is defined as the rate (%) at which the general price level of goods and services
is rising, causing purchasing power to fall. This is different from a rise and fall in the
price of a particular good or service. Individual prices rise and fall all the time in a market
economy, reflecting consumer choices or preferences and changing costs.

Cost-Push Inflation
Cost-push inflation basically means that prices have been “pushed up” by increases in
costs of any of the four factors of production (labor, capital, land or entrepreneurship)
when companies are already running at full production capacity

Demand-Pull Inflation
Demand-pull inflation occurs when there is an increase in aggregate demand, categorized
by the four sections of the macroeconomy: households, businesses, governments and
foreign buyers. This excessive demand, also referred to as “too much money chasing too
few goods”, usually occurs in an expanding economy.

prime lending rate(PLR)

The interest rate that commercial banks charge their best, most credit-worthy customers.
Generally a bank's best customers consist of large corporations. The rate is determined by
the Federal Reserve's decision to raise or lower prevailing interest rates for short-term
borrowing. Though some banks charge their best customers more and some less than the
official prime rate, the rate tends to become standard across the banking industry when a
major bank moves its prime up or down. The rate is a key interest rate, since loans to
less-creditworthy customers are often tied to the prime rate. For example, a Blue Chip
company may borrow at a prime rate of 5%, but a less-well-established small business
may borrow from the same bank at prime plus 2, or 7%. Many consumer loans, such as
home equity, automobile, mortgage, and credit card loans, are tied to the prime rate.
Although the major bank prime rate is the definitive "best rate" reference point, many
banks, particularly those in outlying regions, have a two-tier system, whereby smaller
companies of top credit standing may borrow at an even lower rate.
CRR
CRR or the Cash Reserve Ratio is the proportion of Bank’s reserves that they have to
hold with the RBI. It is mandatory under law for the banks to hold such reserves with the
central bank and the RBI is under law, empowered to stipulate this ratio. This amount of
reserves that are held with the RBI is known as Required Reserves

Bank rate is the rate of interest which RBI charges on the loans and advances that it
extends to commercial banks and other financial intermediaries.

Repo Rate
Repo or Repurchase rate is the rate at which banks borrow funds from the RBI to meet
the gap between the demand they are facing for money (loans) and how much they have
on hand to lend.

Both bank rate and repo rate are interest rates at which commercial banks borrow from
the RBI. The essential difference is that bank rate is what is used for what is called
“clean borrowing” and this is generally for a bit longer-term

“Reverse Repo”
rate is just what the name suggests. It’s the reverse of the repo. A reverse repurchase
agreement or a ‘reverse repo’ is something like a switch between the buyer and the seller
in a repurchase agreement. More specifically it’s a switch in the perspective. For example
in the case of reverse repo, the RBI would be the one selling the security to the
commercial bank and telling it….if you give me Rs. 100 for 3 months today, I’ll pay you
Rs. 3 as interest on it after 3 months and you give me back this security. So it is actually a
‘repo’ from RBI’s perspective but a ‘reverse’ repo from the commercial bank’s
perspective

Call money rate

Call money rate is simply another name for ‘inter-bank borrowing’ rate. We need to
realise that banks don’t just lend to corporates and individuals like us. They lend to one
another. Call money rate generally refers to overnight borrowing and lending among
bank

Prime Lending Rate

Prime Lending Rate: is a rate fixed by a particular bank which acts as a benchmark for
various rates it will charge its customers onvarious loans.

Now a bank borrows funds from various sources and this borrowing has a cost. Now for
example the average of this cost works out to be 6%. Now it gives funds to borrowers
through many forms: personal loan, car loan, home loan, business loan, term loan etc.
every kind of loan has its own risks and returns, some higher and some lower. The bank
decides interest rate it will charge on these loans depending upon the risk involved in that
particular type of loan

BASE RATE
base rate—their benchmark rate below which they can't lend. The base rate replaces the
opaque benchmark prime lending rate (BPLR). This base rate will include the bank's cost
of funds and cost of running the bank.
Banks in India tend to charge their biggest corporate borrowers less than published prime
rates, which they would no longer be able to do on new loans from July 1.

Banking Overview
The major participants of the Indian financial system are the commercial banks, the
financial institutions (FIs), encompassing term-lending institutions, investment
institutions, specialized financial institutions and the state-level development banks, Non-
Bank Financial Companies (NBFCs) and other market intermediaries such as the stock
brokers and money-lenders. The commercial banks and certain variants of NBFCs are
among the oldest of the market participants. The FIs, on the other hand, are relatively
new entities in the financial market place.

commercial banking
The commercial banking structure in India consists of:

Scheduled Commercial Banks

Unscheduled Banks

Scheduled commercial Banks constitute those banks which have been included in the
Second Schedule of Reserve Bank of India(RBI) Act

Being a part of the second schedule confers some benefits to the bank in terms of access
to accomodation by RBI during the times of liquidity constraints. At the same time,
however, this status also subjects the bank certain conditions and obligation towards the
reserve regulations of RBI.

For the purpose of assessment of performance of banks, the Reserve Bank of India
categorise them as public sector banks, old private sector banks, new private sector banks
and foreign banks.
This sub sector can broadly be classified into:

1. Public sector
2. Private sector
3. Foreign banks

co-operative banks.

There are two main categories of the co-operative banks.

(a) short term lending oriented co-operative Banks - within this category there are
three sub categories of banks viz state co-operative banks, District co-operative banks
and Primary Agricultural co-operative societies.

(b) long term lending oriented co-operative Banks - within the second category there
are land development banks at three levels state level, district level and village level.
Banking Basics
Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of
lending or investment of deposits of money from the public, repayable on demand or
otherwise and withdrawable by cheques, draft, order or otherwise."

Another activity which is assuming increasing importance is transfer of money - both

domestic and foreign - from one place to another. This activity is generally known as
"remittance business" in banking parlance. The so called forex (foreign exchange)
business is largely a part of remittance albeit it involves buying and selling of foreign
currencies.

The banking activities can be classified as :

Accepting Deposits from public/others (Deposits)

Lending money to public (Loans)
Transferring money from one place to another (Remittances)
Acting as trustees
Acting as intermediaries
Keeping valuables in safe custody
Collection Business
Government business

Bank Account
A Bank Account is the record of financial relationship a customer has with the Bank. It
contains details of all the moneys deposited with the Bank and withdrawn from it. There
are many Bank accounts, but basically there are two types:

DEPOSITS
LOANS

Accepting deposits is one of the two major activities of the Banks.

Banks are also called custodians of public money. Basically, the money is accepted as
deposit for safe keeping. But since the Banks use this money to earn interest from people
who need money, Banks share a part of this interest with the depositors.

interest depends upon

1. length of time for which the depositor wishes to keep the money with the Bank
2. ease of withdrawal.

Type of deposit accounts (Domestic Customers)

1. Fixed Deposit Accounts

2. Demand Deposits
o Savings Account
o Current account

Lending money to the public

Lending money is one of the two major activities of any Bank. Banks accept deposit from
public for safe-keeping and pay interest to them. They then lend this money to earn
interest on this money. In a way, the Banks act as intermediaries between the people who
have the money to lend and those who have the need for money to carry out business
transactions. The difference between the rate at which the interest is paid on deposits and
is charged on loans, is called the "spread".

Banks lend money in various forms and they lend for practically every activity. Let us
first look at the lending activity from the point of view of security. Loans are given
against or in exchange of the ownership (physical or constructive) of various type of
tangible items. Some of the securities against which the Banks lend are :

1. Commodities
2. Debts
3. Financial Instruments
4. Real Estate
5. Automobiles
6. Consumer durable goods
7. Documents of title

Cash credit Account

This account is the primary method in which Banks lend money against the security of
commodities and debt. It runs like a current account except that the money that can
be withdrawn from this account is not restricted to the amount deposited in the
account. Instead, the account holder is permitted to withdraw a certain sum called
"limit" or "credit facility" in excess of the amount deposited in the account.
Cash Credits are, in theory, payable on demand. These are, therefore, counter part of
demand deposits of the Bank.

Overdraft
The word overdraft means the act of overdrawing from a Bank account. In other words,
the account holder withdraws more money from a Bank Account than has been deposited
in it.

Remittance Business

Apart from accepting deposits and lending money, Banks also carry out, on behalf of
their customers the act of transfer of money - both domestic and foreign.- from one place
to another. This activity is known as "remittance business" . Banks issue Demand Drafts,
Banker's Cheques, Money Orders etc. for transferring the money. Banks also have the
facility of quick transfer of money also know as Telegraphic Transfer or Tele Cash
Orders.

TRUStee BUSINESS

Banks also act as trustees for various requirements of the corporates, Government and
General Public. For example, whenever a company wishes to issue secured
debentures, it has to appoint a financial intermediary as trustee who takes charge of
the security for the debenture and looks after the interests of the debenture holders.
Such entity necessarily have to have expertise in financial matters and also be of
sufficient standing in the market/society to generate confidence in the minds of potential
subscribers to the debenture. Banks are the natural choice. For general public also the
Banks normally have a facility called "safe custody" where Banks act as trustees.

LOCKERS

Bankers are in the business of providing security to the money and valuables of the
general public. While security of money is taken care of through offering various type of
deposit schemes, security of valuables is provided through making secured space
available to general public for keeping these valuables. These spaces are available in the
shape of LOCKERS.

COLLECTION BUSINESS

Apart from transferring money from one place to another, Banks are also in the business
of "collecting" your money from other places. For instance, if you have received a
payment by way of a cheque or DD drawn or payable at any station other than your own,
you can deposit it in your account with your local banker and request for collection of the
amount.

FUNDING

Fund requirements of a corporate are of two types.

Short Term Finance: STF is required to meet daily, seasonal and temporary working
capital needs. These are also called cash cycle needs.

Long Term Finance: LTF is required for medium to long-term purposes to meet the cost
of acquisition of fixed assets for diversification, expansion. Modernisation as also to meet
the permanent working capital requirements.
Institutional debt is available from FIs and Banks. Owing to their nature of operations,
corporates have tapped FIs for long term finance and Banks for short term funding.
However, lately the roles are getting juxtaposed with FIs making forays into short end of
the debt market and Banks also pursuing the long end of the debt market.

Types of BANK ACCOUNTS

CURRENT DEPOSITS /ACCOUNTS:

These accounts are used mainly by businessmen and are not generally used for the
purpose of investment. These deposits are the most liquid deposits and there are no
limits for number of transactions or the amount of transactions in a day. Most of the
current account are firm / company accounts. No interest is paid by banks on these
accounts. On the other hand, banks charge service charges, on such accounts.

SAVING DEPOSITS / ACCOUNTS

These deposits / accounts are one of the most popular deposits for individual
accounts. Most of the banks have rules for the maximum number of withdrawals
in a period and the maximum amount of withdrawal, but hardly any bank enforces
these. Banks in India at present offer 3.50% p.a. interest rate on such deposits.

RECURRING DEPOSITS / ACCOUNTS

These kind of deposits are most suitable for people who do not have lump sum
amount of savings, but are ready to save a small amount every month. Normally,
such deposits earn interest on the amount already deposited (through monthly
installments) at the same rates as are applicable for Fixed Deposits / Term Deposits.
SOMETIMES person is allowed to deposit even higher amount of installments, with an
upper limit fixed for the same e.g. 10 times of the minimum amount agreed upon.

FIXED DEPOSIT ACCOUNTS / TERM DEPOSITS

The depositors are supposed to continue such Fixed Deposits for the length of time
for which the depositor decides to keep the money with the bank. FORECLOSURE
PEANLTY UPTO 1%. (Soon some banks have even introduced variable interest fixed
deposits)Certificate of Deposit IS ISSUED FOR THIS A/C
FACILITIES OF INTERNET BANKING A/C

1. Query Mode

2. Fund Transfer Mode:

3. Payment Mode:

PAY ORDER VS DD

Payment order and DD's are issued by the banks. Payment order is issued for the same
city to pay some one in another city Demand Draft issued.
Payment order is non negotiable and DD is negotiable

FLEXI DEPOSIT

This all-new Deposit Scheme has integrated features of the Savings Deposit and Fixed
Deposit, namely liquidity with higher interest returns on surplus funds.INTEREST =
FIXED DEPOSIT RATE

NRI BANKING BENEFITS

--- REMMITANCE, BILLL PAYMENT,LOAN ALL IN THE FOREIGN CURRENCY

Real Time Gross Settlement - RTGS

What Does Real Time Gross Settlement - RTGS Mean?

The continuous settlement of payments on an individual order basis without netting
debits with credits across the books of a central bank.

Basically, this is a system for large-value interbank funds transfers. This system lessens
settlement risk because interbank settlement happens throughout the day, rather than just
at the end of the day.
variable interest rate loan is a loan in which the interest rate charged on the outstanding
balance varies as market interest rates change. As a result, your payments will vary as
well (as long as your payments are blended with principal and interest).

Fixed interest rate loans are loans in which the interest rate charged on the loan will
remain fixed for that loan's entire term, no matter what market interest rates do. This will
result in your payments being the same over the entire term. Whether a fixed-rate loan is
better for you will depend on the interest rate environment when the loan is taken out
and on the duration of the loan.

HISTORICALL Y PROVED THAT VARIABLE RATES ARE BETTAR THAN

FIXED RATES

Secured loan
If a loan is ‘secured’, it means it is secured against something you own (an ‘asset’) – and
failing to repay the loan could result in the lender taking possession of that asset, and
selling it to cover their losses.

The asset in a secured loan will normally be your home, but it can also be your car or
another item of a high value.

Advantages of a secured loan

It’s usually possible to borrow more than with an unsecured loan.
For the same reason, interest rates are often lower.
Even if you have a bad credit history, you may be able to get a secured loan.

Unsecured loan
An unsecured loan does not require you to secure anything against the loan – the lender
relies on your contractual obligation to pay it back.

Bridge Loan Mean?

A short-term loan that is used until a person or company secures permanent financing or
removes an existing obligation. This type of financing allows the user to meet current
obligations by providing immediate cash flow. The loans are short-term (up to one year)
with relatively high interest rates and are backed by some form of collateral such as real
estate or inventory.
ALso known as "interim financing", "gap financing"

Lien
When a creditor or bank has the right to sell the mortgaged or collateral property of those
who fail to meet the obligations of a loan contract.

hypothecation, the possession of property remains with borrower and he uses it as

usual, where as in case of pledge, the delivery of property remains with the lender and
physically comes in the hand of borrower only after repaying the borrowed funds

 an asset is mortgaged to the bank for a loan.

 securities and certificates are pledged (submitted) for loan.
 a vehicle is Hypothecated to a bank which finances it.

Moratorium
Suspension of a specific activity for certain period.

For example, if a company is going through rough times it might have a moratorium on
advertising spending. In other words, to cut costs, it won't spend any money on
advertising.

Letter Of Credit vs BANK GUARANTEE

A bank guarantee and a letter of credit are similar in many ways but they're two
different things. Letters of credit ensure that a transaction proceeds as planned, while
bank guarantees reduce the loss if the transaction doesn't go as planned.

A letter of credit is an obligation taken on by a bank to make a payment once certain

criteria are met. Once these terms are completed and confirmed, the bank will transfer
the funds. This ensures the payment will be made as long as the services are
performed.

A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary.

Unlike a line of credit, the sum is only paid if the opposing party does not fulfill the
stipulated obligations under the contract. This can be used to essentially insure a buyer
or seller from loss or damage due to nonperformance by the other party in a contract.

Trade Finance
The science that describes the management of money, banking, credit, investments and
assets for international trade transactions.

Companies involved with trade finance include importers and exporters, financiers,
insurers and other service providers.

CERTIFICATE OF DEPOSIT

Certificate issued by the bank which certifies that the investor has certain amount of cash
deposited with it

Hire Purchase
In cases where a buyer cannot afford to pay the asked price for an item of property as a
lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows
the buyer to hire the goods for a monthly rent. When a sum equal to the original full price
plus interest has been paid in equal installments, the buyer may then exercise an option to
buy the goods at a predetermined price (usually a nominal sum) or return the goods to the
owner.

Hire purchase differs from a mortgage and similar forms of lien-secured credit in that the
so-called buyer who has the use of the goods is not the legal owner during the term of the
hire-purchase contract.
Reverse Mortgage

A reverse mortgage is a loan available to seniors, and is used to release the home
equity in the property as one lump sum or multiple payments. The homeowner's
obligation to repay the loan is deferred until the owner dies, the home is sold, or the
owner leaves (e.g., into aged care).

In a conventional mortgage the homeowner makes a monthly amortized payment to

thelender; after each payment the equity increases within his or her property, and
typically after the end of the term the mortgage has been paid in full and the property is
released from the lender. In a reverse mortgage, the home owner makes no payments and
all interest is added to the lien on the property. If the owner receives monthly payments,
or a bulk payment of the available equity percentage for their age, then the debt on the
property increases each month.
• Accrued interest: Interest due from issue date or from the last coupon payment
date to the settlement date. Accrued interest on bonds must be added to their purchase
price.
• Arbitrage: Buying a financial instrument in one market in order to sell the same
instrument at a higher price in another market.
• Ask Price: The lowest price at which a dealer is willing to sell a given security.
• Asset-Backed Securities (ABS): A type of security that is backed by a pool of
bank loans, leases, and other assets. Most ABS are backed by auto loans and credit cards
– these issues are very similar to mortgage-backed securities.
• At-the-money: The exercise price of a derivative that is closest to the market price
of the underlying instrument.
• Basis Point: One hundredth of 1%. A measure normally used in the statement of
interest rate e.g., a change from 5.75% to 5.81% is a change of 6 basis points.
• Bear Markets: Unfavorable markets associated with falling prices and investor
pessimism.
• Bid-ask Spread: The difference between a dealer’s bid and ask price.
• Bid Price: The highest price offered by a dealer to purchase a given security.
• Blue Chips: Blue chips are unsurpassed in quality and have a long and stable
record of earnings and dividends. They are issued by large and well-established firms that
have impeccable financial credentials.
• Bond: Publicly traded long-term debt securities, issued by corporations and
governments, whereby the issuer agrees to pay a fixed amount of interest over a specified
period of time and to repay a fixed amount of principal at maturity.
• Book Value: The amount of stockholders’ equity in a firm equals the amount of
the firm’s assets minus the firm’s liabilities and preferred stock. /p>
• Broker: Individuals licensed by stock exchanges to enable investors to buy and
sell securities.
• Brokerage Fee: The commission charged by a broker.
• Bull Markets: Favorable markets associated with rising prices and investor
optimism.
• Call Option: The right to buy the underlying securities at a specified exercise price
on or before a specified expiration date.
• Callable Bonds: Bonds that give the issuer the right to redeem the bonds before
their stated maturity.
• Capital Gain: The amount by which the proceeds from the sale of a capital asset
exceed its original purchase price.
• Capital Markets: The market in which long-term securities such as stocks and
bonds are bought and sold.
• Certificate of Deposits (CDs): Savings instrument in which funds must remain on
deposit for a specified period, and premature withdrawals incur interest penalties.
• Closed-end (Mutual) Fund: A fund with a fixed number of shares issued, and all
trading is done between investors in the open market. The share prices are determined by
market prices instead of their net asset value.
• Collateral: A specific asset pledged against possible default on a bond. Mortgage
bonds are backed by claims on property. Collateral trusts bonds are backed by claims on
other securities. Equipment obligation bonds are backed by claims on equipment.
• Commercial Paper: Short-term and unsecured promissory notes issued by
corporations with very high credit standings.
• Common Stock: Equity investment representing ownership in a corporation; each
share represents a fractional ownership interest in the firm.
• Compound Interest: Interest paid not only on the initial deposit but also on any
interest accumulated from one period to the next.
• Contract Note: A note which must accompany every security transaction which
contains information such as the dealer’s name (whether he is acting as principal or
agent) and the date of contract.
• Controlling Shareholder: Any person who is, or group of persons who together
are, entitled to exercise or control the exercise of a certain amount of shares in a company
at a level (which differs by jurisdiction) that triggers a mandatory general offer, or more
of the voting power at general meetings of the issuer, or who is or are in a position to
control the composition of a majority of the board of directors of the issuer.
• Convertible Bond: A bond with an option, allowing the bondholder to exchange
the bond for a specified number of shares of common stock in the firm. A conversion
price is the specified value of the shares for which the bond may be exchanged. The
conversion premium is the excess of the bond’s value over the conversion price.
• Corporate Bond: Long-term debt issued by private corporations.
• Coupon: The feature on a bond that defines the amount of annual interest income.
• Coupon Frequency: The number of coupon payments per year.
• Coupon Rate: The annual rate of interest on the bond’s face value that a bond’s
issuer promises to pay the bondholder. It is the bond’s interest payment per dollar of par
value.
• Covered Warrants: Derivative call warrants on shares which have been
separately deposited by the issuer so that they are available for delivery upon exercise.
• Credit Rating: An assessment of the likelihood of an individual or business being
able to meet its financial obligations. Credit ratings are provided by credit agencies or
rating agencies to verify the financial strength of the issuer for investors.
• Currency Board: A monetary system in which the monetary base is fully backed
by foreign reserves. Any changes in the size of the monetary base has to be fully matched
by corresponding changes in the foreign reserves.
• Current Yield: A return measure that indicates the amount of current income a
bond provides relative to its market price. It is shown as: Coupon Rate divided by Price
multiplied by 100%.
• Custody of Securities: Registration of securities in the name of the person to
whom a bank is accountable, or in the name of the bank’s nominee; plus deposition of
securities in a designated account with the bank’s bankers or with any other institution
providing custodial services.
• Default Risk: The possibility that a bond issuer will default ie, fail to repay
principal and interest in a timely manner.
• Derivative Call (Put) Warrants: Warrants issued by a third party which grant the
holder the right to buy (sell) the shares of a listed company at a specified price.
• Derivative Instrument: Financial instrument whose value depends on the value of
another asset.
• Discount Bond: A bond selling below par, as interest in-lieu to the bondholders.
• Diversification: The inclusion of a number of different investment vehicles in a
portfolio in order to increase returns or be exposed to less risk.
• Duration: A measure of bond price volatility, it captures both price and
reinvestment risks to indicate how a bond will react to different interest rate
environments.
• Earnings: The total profits of a company after taxation and interest.
• Earnings per Share (EPS): The amount of annual earnings available to common
stockholders as stated on a per share basis.
• Earnings Yield: The ratio of earnings to price (E/P). The reciprocal is price
earnings ratio (P/E).
• Equity: Ownership of the company in the form of shares of common stock.
• Equity Call Warrants: Warrants issued by a company which give the holder the
right to acquire new shares in that company at a specified price and for a specified period
of time.
• Ex-dividend (XD): A security which no longer carries the right to the most
recently declared dividend or the period of time between the announcement of the
dividend and the payment (usually two days before the record date). For transactions
during the ex-dividend period, the seller will receive the dividend, not the buyer. Ex-
dividend status is usually indicated in newspapers with an (x) next to the stock’s or unit
trust’s name.
• Face Value/ Nominal Value: The value of a financial instrument as stated on the
instrument. Interest is calculated on face/nominal value.
• Fixed-income Securities: Investment vehicles that offer a fixed periodic return.
• Fixed Rate Bonds: Bonds bearing fixed interest payments until maturity date.
• Floating Rate Bonds: Bonds bearing interest payments that are tied to current
interest rates.
• Fundamental Analysis: Research to predict stock value that focuses on such
determinants as earnings and dividends prospects, expectations for future interest rates
and risk evaluation of the firm.
• Future Value: The amount to which a current deposit will grow over a period of
time when it is placed in an account paying compound interest.
• Future Value of an Annuity: The amount to which a stream of equal cash flows
that occur in equal intervals will grow over a period of time when it is placed in an
account paying compound interest.
• Futures Contract: A commitment to deliver a certain amount of some specified
item at some specified date in the future.
• Hedge: A combination of two or more securities into a single investment position
for the purpose of reducing or eliminating risk.
• Income: The amount of money an individual receives in a particular time period.
• Index Fund: A mutual fund that holds shares in proportion to their representation
in a market index, such as the S&P 500.
• Initial Public Offering (IPO): An event where a company sells its shares to the
public for the first time. The company can be referred to as an IPO for a period of time
after the event.
• Inside Information: Non-public knowledge about a company possessed by its
officers, major owners, or other individuals with privileged access to information.
• Insider Trading: The illegal use of non-public information about a company to
make profitable securities transactions
• Intrinsic Value: The difference of the exercise price over the market price of the
underlying asset.
• Investment: A vehicle for funds expected to increase its value and/or generate
positive returns.
• Investment Adviser: A person who carries on a business which provides
investment advice with respect to securities and is registered with the relevant regulator
as an investment adviser.
• IPO price: The price of share set before being traded on the stock exchange. Once
the company has gone Initial Public Offering, the stock price is determined by supply and
demand.
• Junk Bond: High-risk securities that have received low ratings (i.e. Standard &
Poor’s BBB rating or below; or Moody’s BBB rating or below) and as such, produce high
yields, so long as they do not go into default.
• Leverage Ratio: Financial ratios that measure the amount of debt being used to
support operations and the ability of the firm to service its debt.
• Libor: The London Interbank Offered Rate (or LIBOR) is a daily reference rate
based on the interest rates at which banks offer to lend unsecured funds to other banks in
the London wholesale money market (or interbank market). The LIBOR rate is published
daily by the British Banker’s Association and will be slightly higher than the London
Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept deposits.
• Limit Order: An order to buy (sell) securities which specifies the highest (lowest)
price at which the order is to be transacted.
• Limited Company: The passive investors in a partnership, who supply most of the
capital and have liability limited to the amount of their capital contributions.
• Liquidity: The ability to convert an investment into cash quickly and with little or
no loss in value.
• Listing: Quotation of the Initial Public Offering company’s shares on the stock
exchange for public trading.
• Listing Date: The date on which Initial Public Offering stocks are first traded on
the stock exchange by the public
• Margin Call: A notice to a client that it must provide money to satisfy a minimum
margin requirement set by an Exchange or by a bank / broking firm.
• Market Capitalization: The product of the number of the company’s outstanding
ordinary shares and the market price of each share.
• Market Maker: A dealer who maintains an inventory in one or more stocks and
undertakes to make continuous two-sided quotes.
• Market Order: An order to buy or an order to sell securities which is to be
executed at the prevailing market price.
• Money Market: Market in which short-term securities are bought and sold.
• Mutual Fund: A company that invests in and professionally manages a diversified
portfolio of securities and sells shares of the portfolio to investors.
• Net Asset Value: The underlying value of a share of stock in a particular mutual
fund; also used with preferred stock.
• Offer for Sale: An offer to the public by, or on behalf of, the holders of securities
already in issue.
• Offer for Subscription: The offer of new securities to the public by the issuer or
by someone on behalf of the issuer.
• Open-end (Mutual) Fund: There is no limit to the number of shares the fund can
issue. The fund issues new shares of stock and fills the purchase order with those new
shares. Investors buy their shares from, and sell them back to, the mutual fund itself. The
share prices are determined by their net asset value.
• Open Offer: An offer to current holders of securities to subscribe for securities
whether or not in proportion to their existing holdings.
• Option: A security that gives the holder the right to buy or sell a certain amount of
an underlying financial asset at a specified price for a specified period of time.
• Oversubscribed: When an Initial Public Offering has more applications than
actual shares available. Investors will often apply for more shares than required in
anticipation of only receiving a fraction of the requested number. Investors and
underwriters will often look to see if an IPO is oversubscribed as an indication of the
public’s perception of the business potential of the IPO company.
• Par Bond: A bond selling at par (i.e. at its face value).
• Par Value: The face value of a security.
• Perpetual Bonds: Bonds which have no maturity date.
• Placing: Obtaining subscriptions for, or the sale of, primary market, where the new
securities of issuing companies are initially sold.
• Portfolio: A collection of investment vehicles assembled to meet one or more
investment goals.
• Preference Shares: A corporate security that pays a fixed dividend each period. It
is senior to ordinary shares but junior to bonds in its claims on corporate income and
assets in case of bankruptcy.
• Premium (Warrants): The difference of the market price of a warrant over its
intrinsic value.
• Premium Bond: Bond selling above par.
• Present Value: The amount to which a future deposit will discount back to present
when it is depreciated in an account paying compound interest.
• Present Value of an Annuity: The amount to which a stream of equal cash flows
that occur in equal intervals will discount back to present when it is depreciated in an
account paying compound interest.
• Price/Earnings Ratio (P/E): The measure to determine how the market is pricing
the company’s common stock. The price/earnings (P/E) ratio relates the company’s
earnings per share (EPS) to the market price of its stock.
• Privatization: The sale of government-owned equity in nationalized industry or
other commercial enterprises to private investors.
• Prospectus: A detailed report published by the Initial Public Offering company,
which includes all terms and conditions, application procedures, IPO prices etc, for the
IPO
• Put Option: The right to sell the underlying securities at a specified exercise price
on of before a specified expiration date.
• Rate of Return: A percentage showing the amount of investment gain or loss
against the initial investment.
• Real Interest Rate: The net interest rate over the inflation rate. The growth rate of
purchasing power derived from an investment.
• Redemption Value: The value of a bond when redeemed.
• Reinvestment Value: The rate at which an investor assumes interest payments
made on a bond which can be reinvested over the life of that security.
• Relative Strength Index (RSI): A stock’s price that changes over a period of time
relative to that of a market index such as the Standard & Poor’s 500, usually measured on
a scale from 1 to 100, 1 being the worst and 100 being the best.
• Repurchase Agreement: An arrangement in which a security is sold and later
bought back at an agreed price and time.
• Resistance Level: A price at which sellers consistently outnumber buyers,
preventing further price rises.
• Return: Amount of investment gain or loss.
• Rights Issue: An offer by way of rights to current holders of securities that allows
them to subscribe for securities in proportion to their existing holdings.
• Risk-Averse, Risk-Neutral, Risk-Taking:
Risk-averse describes an investor who requires greater return in exchange for greater risk.
Risk-neutral describes an investor who does not require greater return in exchange for
greater risk.
Risk-taking describes an investor who will accept a lower return in exchange for greater
risk.
• Senior Bond: A bond that has priority over other bonds in claiming assets and
dividends.
• Short Hedge: A transaction that protects the value of an asset held by taking a
short position in a futures contract.
• Settlement: Conclusion of a securities transaction when a customer pays a
broker/dealer for securities purchased or delivered, securities sold, and receives from the
broker the proceeds of a sale.
• Short Position: Investors sell securities in the hope that they will decrease in value
and can be bought at a later date for profit.
• Short Selling: The sale of borrowed securities, their eventual repurchase by the
short seller at a lower price and their return to the lender.
• Speculation: The process of buying investment vehicles in which the future value
and level of expected earnings are highly uncertain.
• Stock Splits: Wholesale changes in the number of shares. For example, a two for
one split doubles the number of shares but does not change the share capital.
• Subordinated Bond: An issue that ranks after secured debt, debenture, and other
bonds, and after some general creditors in its claim on assets and earnings. Owners of this
kind of bond stand last in line among creditors, but before equity holders, when an issuer
fails financially.
• Substantial Shareholder: A person acquires an interest in relevant share capital
equal to, or exceeding, 10% of the share capital.
• Support Level: A price at which buyers consistently outnumber sellers, preventing
further price falls.
• Technical Analysis: A method of evaluating securities by relying on the
assumption that market data, such as charts of price, volume, and open interest, can help
predict future (usually short-term) market trends. Contrasted with fundamental analysis
which involves the study of financial accounts and other information about the company.
(It is an attempt to predict movements in security prices from their trading volume
history.)
• Time Horizon: The duration of time an investment is intended for.
• Trading Rules: Stipulation of parameters for opening and intra-day quotations,
permissible spreads according to the prices of securities available for trading and board
lot sizes for each security.
• Trust Deed: A formal document that creates a trust. It states the purpose and terms
of the name of the trustees and beneficiaries.
• Underlying Security: The security subject to being purchased or sold upon
exercise of the option contract.
• Valuation: Process by which an investor determines the worth of a security using
risk and return concept.
• Warrant: An option for a longer period of time giving the buyer the right to buy a
number of shares of common stock in company at a specified price for a specified period
of time.
• Window Dressing: Financial adjustments made solely for the purpose of
accounting presentation, normally at the time of auditing of company accounts.
• Yield (Internal rate of Return): The compound annual rate of return earned by an
investment
• Yield to Maturity: The rate of return yield by a bond held to maturity when both
compound interest payments and the investor’s capital gain or loss on the security are
taken into account.
• Zero Coupon Bond: A bond with no coupon that is sold at a deep discount from
par value.