Key financial terms

R 

ROI - Rate on investment is return divided by value of investment

Redemption - Maturity date of a security or a bond

Recession - An economic situation of negative growth

Repo rate - Rate at which Central bank (RBI in case of India) lends money to commercial banks

Reverse repo rate - Rate at which commercial banks lends to central bank

Right issue - Issue of shares in which existing shareholders gets right to buy shares in proportion of their existing holding

Risk free return - Rate of return, normally it is 90 days bills issued by a national government

S

Stagnation - An economic situation of slow economic growth, high rate unemployment and inflation.

Shorting - Selling securities which an investors don't have in expectation of price drop

U 

Underwriters - In case of an IPO, new companies makes contracts with underwriter where underwriters promises to purchase unsubscribe shares.

W

Working capital - Money required by a business to run its day to day business.

Working capital = Current assets / Current liabilities

Warrants - A document which gives right to holder to get shares at stated price

Ponzi schemes,Monetary policy,Margin call

M

Monopoly - A situation in market where there are many buyers but a single seller exist.

Money market - Market dealing in short term lending and borrowing of funds. Also know as Cash market.

Monetary policy - Set of actions by Central bank of a country ( RBI in case of India) to control the supply of money. These actions included increase in interest rate, open market purchases, changing commercial bank's reserve funds ratio (SLR) etc.

Marginal cost - Additional cost to produce an extra unit of product. 

Margin - Amount of profit added to cost price of each unit of a product

Margin call - Margin call term is used in two situations. First - Whenever a lender gives a secured loan and loan value is a fixed percentage of loan then whenever the value of security decrease below the decided ratio then lender given a margin call to borrower to bring loan to security ratio to decided level. Secondly in stock exchanges traders trades in various securities by paying 20-30% of the value of securities. Whenever the value of security goes below that margin, broker gives margin call to trader to bring the margin to desired level. 

Mark-to-market - As explained above while defining margin call, value of assets in case of securities is measured on daily basis. If the trader's asset value increased, increased value is transferred to his account. In case the value of assets decreased margin call is made to adjust the margin.

N 

NPV - Net Present Value is aggregate of future cash flows from a

project minus total costs. NPV is a capital budgeting technique used to check feasibility of projects.

Net profit - Net profit is Gross profit minus indirect cost. See indirect costs

Net worth - Net assets - Total liabilities

Nationalization - When Government takes control of a business, this is known as nationalization.

NAV - Net Assets Value is mutual fund's per unit exchange traded price

O

Opportunity cost - Additional cost in production of an addition unit of product.

Options - Option is right to buy at pre-determined price at a future date. Option is used for hedging. Options safeguards option-holder from future price fluctuations.

Banking Awareness Guide

G 

Gearing - It is the ratio of debt to equity

Goodwill - Intangible assets that defines firm's reputation in monetary terms.

Gross profit = Net sales - Net purchases - Direct expenses

GDP - Gross domestic product is the aggregate value of goods and services produced by every person of a nation.

GST - Goods and services tax is the same tax system for everything. It is proposed that GST will replace the multi tax system in India by 2015.

H

Hedging - Hedging is a technique used by investors to protect themselves from adverse price movements. Derivatives are used for hedging in which hedgers takes the risk of price fluctuations.

Hedge funds - Mutual funds which invests in derivatives

I

Index - It is statistical measure used to find price variations in market. In stock markets most dominating stocks are grouped to make an index. For example - Sensex.

Income statement A statement that represents both income and expenditure of a business during a specific period of time.

IPO - Initial public offer is issue of stocks for the first time in the market.

Intangible assets – Assets which can’t be seen but have value for business. For example – Goodwill.

Indemnity – A legal contract under which one party promises to pay another for any loses incurred to them by their acts.

Interest rate risk – Risk that value of financial assets will deteriorate because of fall in interest rate. For example value of bonds decreases with decrease in interest rate.

Irredeemable stocks – Stocks which can’t be exchanged for cash in future.

Indirect Costs - Indirect cost is a cost incurred on product that is not directly related to its production.

Some Important Banking Terms

C 

Capital - Wealth invested by an entrepreneur on his business. Capital =Assets -Liabilities

Capital gain - Gain by selling a capital asset in which a person is not doing business.

Income by selling a house by a bank employee is a capital gain whereas when a builder do the same thing it is Income from business and professional.

Current asset - An asset that can be converted into cash with 12 months. For example - debtors, stock etc.

Credit rating - A ranking applied to an individual, business or a nation based upon its credit history and current financial position. There are various credit rating companies in India such as Crisil.

CPI - Consumer price index is measure to find price of a bundle of commodities. CPI is used to measure the inflation in a country.

D

 Debt consolidation - Debt consolidation is a process by which various loans and converted into a single loan to reduce interest rate and installment value.

Depreciation - Depreciation is reduction in value of an asset due wear and tear over a period of time. For example a company purchased a machine in 2005 and planned to charge 20% depreciation. In 2010 the machine will be written off from the books of account.

Dividend - Dividend is the amount per share paid by a company to its shareholders.

Dividend value is based upon company's profitability.

Dividend payout ratio - It is the ratio of dividend paid per share and EPS ( Earning per share )

Double entry bookkeeping - It is a method of bookkeeping in which every transaction is recorded two accounts. Once in debit side and once in credit side.

E

Earning per share - Earnings made by a company in a financial year divided by number of issued shares.

Equity - Value of a business. 

Equity = Total assets - Total liabilities

Ex-divided - Ex-dividend means without dividend. When a seller makes a exdividend sales contract then he is entitled to get dividend or interest payment.

EBIT - Earning before interest and taxes

EBT - Earning before tax

EAT - Earning after tax

Basic Financial Terms

A AGM -

Annual General Meeting, it is the year meeting held by every registered company. Agenda is to explain the performance during the year, presentation of annual financial statements, voting on important financial decisions. Any shareholder can participate in AGM.

Asset turnover ratio - This ratio can be explained as Net assets / Total turnover or sales. This ratio measures the operational efficiency of business assets. In simple terms this measures how many time total assets turned in a year and how efficiently the assets are used in a business.

Acid test ratio - This is one of the important ratio to measure business liquidity.

Business liquidity is defined as ability of a business to pay it;s short term debts. Acid test ratio = Highly liquid assets / current liabilities

American Depository Receipts - This is the way non-US companies raises money from US investors. These shares can be traded in US stock exchanges and denominated in US $.

Amortization - It is an accounting technique by which intangible assets are written off over a period of time. For example provision for doubtful debts or preliminary expenses are written off over a certain period of time.

Annuity - It is an investment scheme under which investor makes recurring investments and lump sum payment is made to him at the end. Common example is Recurring deposit account at a post office where people makes small monthly deposits and gets their money back at the end of period. Benefit of Annuity is investor gets compound interest over a period of time. 

Asset Management Company - AMC is a company that pools and invests investor money in pre-determined goals. Pool of funds is known as Mutual fund.

Audit - Financial statement and physical stock is checked annually by professional auditor ( Chartered Accountant affiliated by ICAI in India )

Commercial Banks

Normal banks are known as commercial banks, their main function is to accept deposits from the customer and on the basis of that they grant loans. (Loans could be short-term, medium-term and long-term loans.) Commercial banks are further classified into three types.

(a) Public sector banks

(b) Private sector banks

(c) Foreign banks

(a) Public Sector Banks (PSB): Government banks are known as PSB. Since the majority of their stakes are held by the Government of India. (For example: Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharastra, Canara Bank, Central Bank of India etc).

(b) Private Sector Banks: In these banks, the majority of stakes are held by the individual or group of persons. (For example: Bank of Punjab, Bank of Rajasthan, Catholic Syrian Bank, Centurion Bank etc).

(c) Foreign Banks: These banks have their headquarters in a foreign country but they operate their branches in India. For e.g. HSBC, Standard Chartered Bank, ABN Amro Bank.

Indian Banking Structure

EMI: Equated Monthly Installment. It is nothing but a repayment of the loan taken. A loan could be a home loan, car loan or personal loan. The monthly payment is in the form of post dated cheques drawn in favour of the lender. EMI is directly proportional to the loan taken and inversely proportional to time period. That is, if the loan amount increases the EMI amount also increases and if the time period increases the EMI amount decreases.

Basis points (bps): A basis point is a unit equal to 1/100th of a percentage point. i.e. 1 bps = 0.01%. Basis points are often used to measure changes in or differences between yields on fixed income securities, since these often change by very small amounts.

Liquidity: It refers to how quickly and cheaply an asset can be converted into cash. Money (in the form of cash) is the most liquid asset.

Certificate of Deposit (CD) is a negotiable money market instrument and issued in dematerialised form for funds deposited at a bank or other eligible financial institution for a specified time period.

Commercial Paper (CP) is an unsecured money market instrument issued in the form of a promissory note. It was introduced in India in 1990. Corporates and the All- India Financial Institutions are eligible to issue CP.

Types of banks in India

• Central Bank (RBI)
• Specialised banks
• Commercial banks
• Development banks
• Co-operative banks

Central Bank:

As its name signifies, a bank which manages and regulates the banking system of a particular country. It provides guidance to other banks whenever they face any problem (that is why the Central Bank is also known as a banker’s bank) and maintains the deposit accounts of all other banks. Central Banks of different

countries: Reserve Bank of India (INDIA), Federal Reserve System (USA), Swiss National Bank (SWITZERLAND), Reserve Bank of Australia (AUSTRALIA), State Bank of Pakistan (PAKISTAN).

Specialised Banks:

Those banks which are meant for special purposes. For examples: NABARD, EXIM bank, SIDBI, IDBI.

FINANCIAL REGULATORS IN INDIA

RBI, SEBI, FMCI (Forward Market Commission of India), IRDA etc

ASBA: Application Supported by Blocked Amount. It is a process developed by the SEBI for applying to IPO. In ASBA, an IPO applicant’s account doesn’t get debited until shares are allotted to him.

DEPB Scheme: Duty Entitlement Pass Book. It is a scheme which is offered by the Indian government to encourage exports from the country. DEPB means Duty Entitlement Pass Book to neutralise the incidence of basic and special customs duty on import content of export product.

LLP: Limited Liability Partnership, is a partnership in which some or all partners (depending on the jurisdiction) have limited liability.

Balance sheet: A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a specific point in time.

TAN: Tax Account Number, is a unique 10-digit alphanumeric code allotted by the Income Tax Department to all those persons who are required to deduct tax at the source of income.

PAN: Permanent Account Number, as per section 139A of the Act obtaining PAN is a must for the following persons:-

1. Any person whose total income or the total income of any other person in respect of which he is assessable under the Act exceeds the maximum amount which is not chargeable to tax.

2. Any person who is carrying on any business or profession whose total sales, turnover or gross receipts are or are likely to exceed Rs. 5 lakh in any previous year.

3. Any person who is required to furnish a return of income under section 139(4) of the Act.

JLG: Joint Liability Group, when two or more persons are both responsible for a debt, claim or judgment.

REER: Real Effective Exchange Rate.

NEER: Nominal Effective Exchange Rate.

Contingent Liability: A liability that a company may have to pay, but only if a certain future event occurs.

IRR: Internal Rate of Return, is a rate of return used in capital budgeting to measure and compare the profitability of investments.

MICR: Magnetic Ink Character Recognition. A 9-digit code which actually shows whether the cheque is real or fake.

UTR Number: Unique Transaction Reference number. A unique number which is generated for every transaction in RTGS system. UTR is a 16-digit alphanumeric code. The first 4 digits are a bank code in alphabets, the 5th one is the message code, the 6th and 7th mention the year, the 8th to 10th mentions the date and the last 6 digits mention the day’s serial number of the message.

RRBs: Regional Rural Banks. As its name signifies, RRBs are specially meant for rural areas, capital share being 50% by the central government, 15% by the state government and 35% by the scheduled bank.