Basic Terminology-Finance A Must Know for all MBA

Basic Terminology-Finance A Must. Know for all MBA Aspirants

What is FINANCE n n n Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. The term finance may thus incorporate any of the following: The study of money and other assets The management and control of those assets Profiling and managing project risks As a verb, "to finance" is to provide funds for business.

Assets & Liabilities o In business and accounting by asset is meant economic resources controlled by an entity as a result of past transactions or events and from which future economic benefits may be obtained. Types of Assets o Current Assets e. g. Cash, Short Term Investments, Inventory, Prepaid Expenses. o Fixed Assets e. g. Land, Building, Machinery, Furniture, Tools etc. o Intangible Assets e. g. Patents, Copyrights, Franchises, Goodwill etc

What is Liability o In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future. Types of Liabilities o Current liabilities: e. g. Wages, Accounts, Taxes etc. o Long Term Liabilities: e. g. Pensions, Long-Term Bonds, Warranties

BONDS § In finance, a bond is a debt security, in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. § Bonds are generally issued for a fixed term (the maturity) longer than ten years. U. S Treasury securities issued debt with life of ten years or more is a bond. New debt between one year and ten years is a note, and new debt less than a year-bill § A bond is simply a loan, but in the form of a security, although terminology used is rather different. The issuer is equivalent to the borrower, the bond holder to the lender, and the coupon to the interest. Bonds enable the issuer to finance long-term investments

STOCK MARKETS • A stock market is a market for the trading of company stock, and derivatives of same; both of these are securities listed on a stock exchange as well as those only traded privately. • A shareholder (or stockholder) is an individual or company (including a corporation) that legally owns one or more shares of stock in a joint stock company. Companies listed at the stock market strive to enhance shareholder value • Financing a company through the sale of stock in a company is known as equity financing. Alternatively, debt financing (for example issuing bonds) can be done to avoid giving up shares of ownership of the company. • Equity and debt financing are usually used for longer-term investment projects such as investments in a new factory or a new foreign market. Customer provided financing exists when a customer pays for services before they are delivered, e. g. subscriptions and insurance.

Liquidity o Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. The term is usually shortened to liquidity. o Liquidity: the ease of converting an asset to cash. E. g. Real estate has low liquidity compared to stocks. o Liquidity also refers to a firm’s ability to generate positive cash flows to meet short-term financial obligations.

Features of Liquid Assets It can be sold: RAPIDLY l Without any ADVERTISING COST. l At a very LOW TRANSACTION COST. l ANYWHERE l

FAQs on LIQUIDITY n n n The essential characteristic of a liquid market is that there are ready and willing buyers and sellers at all times. A market is considered deeply liquid if there are ready and willing buyers and sellers in large quantities. The liquidity of a product can be measured as how often it is bought and sold. For stocks this is known as the volume of trades. When a central bank tries to influence the liquidity (supply) of money, this process is known as open market operations. In business, merchants often have liquidation sales, in which inventories are sold at discount to raise cash or to get rid of inventory more quickly. In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses.

Equity Capital n n Equity capital is the amount of capital made available by the company's (owners) to finance its assets at the end of the accounting year. In business accounting, ownership equity is the owners' interest in all assets after all liabilities are paid. There is a greater discussion at shareholders' equity (when the owners are shareholders). In a bankruptcy court, creditors have the first claim on assets, and ownership equity is the last or residual claim against assets, paid only after all other creditors are paid Ownership equity is also known as equity, risk capital, and liable capital.

FAQs on EQUITY n Financing a company through the sale of stock in a company is known as equity financing. n Equity value is a market-based measure of the equity value of a firm. It includes the value of unexercised stock options and securities convertible to equity. n Equity value differs from market capitalization in that it incorporates all equity interests in a firm whereas market capitalization only reflects those common shares currently outstanding.

How the MARKET Moves……. . p Trading: A stock exchange is an organization that provides a marketplace (either physical or virtual) for trading shares, where investors (represented by stock brokers) may buy and sell shares in a wide range of companies. A given company will usually list its shares by meeting and maintaining the listing requirements of a particular stock exchange. p Buying: There are various methods of buying and financing stocks. The most common means is through a stock broker. Whether they are a full service or discount broker, they arrange the transfer of stock from a seller to a buyer. p Selling: Selling stock is procedurally similar to buying stock. Generally, the investor wants to buy low and sell high, if not in that order (short selling); although a number of reasons may induce an investor to sell at a loss, e. g. , to avoid further loss

Stock Market Index n n stock market index is a listing of stocks and a statistic reflecting the composite value of its components. It is used as a tool to represent the characteristics of its component stocks, all of which bear some commonality such as trading on the same stock market exchange, belonging to the same industry, or having similar market capitalizations.

MUTUAL Funds n A mutual fund is a form of collective investment that pools money from many investors and invests the money in stocks, bonds, short-term money market instruments, and/or other securities.

What does Mutual Fund do? l In a mutual fund, the fund manager trades the fund's underlying securities, realizing capital gains or loss, and collects the dividend or interest income. The investment proceeds are then passed along to the individual investors.

NET ASSET VALUE n The value of a share of the mutual fund, known as the NET ASSET VALUE (NAV), is calculated daily based on the total value of the fund divided by the number of shares purchased by investors.

Hedge Fund l A hedge fund is a lightly regulated private investment fund charging a performance fee and typically open to only a limited number of investors. l Because of the substantial risks involved in unregulated, complex and leveraged investments, hedge funds are normally open only to professional, institutional or otherwise accredited investors. This restriction is often implemented though limits on investor numbers or minimum investment amounts.

BSE-Dalal Street • The BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index composed of 30 stocks with the base April 1979 = 100. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. These companies account for around one-fifth of the market capitalization of the BSE. • The abbreviated form "Sensex" was coined by Deepak Mohoni around 1990 while writing market analysis columns for some of the business newspapers and magazines. It gained popularity over the next year or two. • The stock market has grown by over ten times from June 1990 to today. Using information from April 1979 onwards, the long-run rate of return on the BSE Sensex can be estimated to be 0. 52% per week (continuously compounded) with a standard deviation of 3. 67%. This translates to 27% per annum, which translates to roughly 18% per annum after compensating for inflation.

INFLATION In mainstream economics, inflation is a rise in the general level of prices, as measured against some baseline of purchasing power.

Commonly used Measures Of INFLATION n consumer price indexes (CPIs) which measure the price of a selection of goods purchased by a typical consumer. n n producer price indexes (PPIs) which measure the price received by a producer. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. wholesale price indexes, which measure the change in price of a selection of goods at wholesale, prior to retail mark ups and sales taxes. These are very similar to the Producer Price Indexes.

Deflation ¢ Deflation is a decrease in the general price level, over a period of time. ¢ Also refers to a decrease in the size of the money supply.

What happens in Deflation? n During deflation the demand for liquidity goes up, in preference to goods or interest. n During deflation the purchasing power of money increases

GDP n Gross Domestic Product or GDP, is one of several measures of the size of economy. n The GDP of a country is defined as the market value of all final goods and services produced within a country in a given period of time. n The most common approach to measuring and understanding GDP is the expenditure method: n GDP = consumption + investment + government spending + (exports – imports)

Foreign Direct Investment(FDI) n Foreign direct investment (FDI) is defined as a long-term investment by a foreign direct investor in an enterprise resident in an economy other than that in which the foreign direct investor is based.

Foreign Institutional investor • FII: is used to denote an investor - mostly of the form of an institution or entity, which invests money in the financial markets of a country different from the one where in the institution or entity was originally incorporated.

Gold Standard • The gold standard is a monetary system in which the standard economic unit of account is a weight of gold, ideally fixed and not subject to change, with all currency issuance is to one degree or another regulated by the gold supply. • Under the gold standard, currency is either in coins struck with a known amount of gold or in notes that the issuers guarantee to redeem in gold, ideally for an amount fixed in

Gold Reserves n If the monetary authority holds sufficient gold to convert all circulating money, then this is known as a 100% reserve gold standard, or a full gold standard.

Purpose of GOLD Standard n n n to prevent inflationary expansion of the money supply to maintain a fixed value against which other prices can be measured to allow wider circulation, including clearing of transactions, with a greater degree of trust in the stability of both the quantity and quality of money

Purchasing Price Parity o Purchasing power parity (PPP) is in economics the method of using the long-run equilibrium exchange rate of two currencies to equalize the currencies' purchasing power. o It is based on the law of one price, the idea that, in an efficient market, identical goods must have only one price

Explanation n n For a U. S. dollar to buy as much in the India as in the U. S. , as is assumed under the law of one price, the price of a basket of goods in Rupees in India (denoted as: Rs/-) times the spot exchange rate (denoted as: $/Rs) should equal the price of the same basket in the U. S. priced in dollars (denoted as: $P). n n This implies that the exchange rate that equalizes the value of a dollar of purchasing power (the PPP exchange rate) is: n n Rs($/Rs) = $P ($/Rs)= $P/Rs If the actual spot rate is greater, it suggests that the Rs is over-valued against the $. If the actual spot rate is less, it suggest that the $ is over-valued against the Rs.

Special Economic Zone A Special Economic Zone (SEZ) is a geographical region that has economic laws that are more liberal than a country's typical economic laws. Usually the goal is an increase in foreign investment. Considering the need to enhance foreign investment and promote exports from the country and realizing the need that a level playing field must be made available to the domestic enterprises and manufacturers to be competitive globally, The Government of India had in April 2000 announced the introduction of Special Economic Zones policy in the country, deemed to be foreign territory for the purposes of trade operations, duties and tariffs. As of 2007, more than 500 SEZs have been proposed, 220 of which have been created. This has raised the concern of the World Bank, which questions the sustainability of such a large number of SEZs

Some Famous SEZs l Ones of the earliest and the most famous Special Economic Zones were founded by the government of the People's Republic of China under Deng Xiaoping in the early 1980 s. l The most successful Special Economic Zone in China, Shenzhen, has developed from a small village into a city with a population over 10 million within 20 years. l l l l Kandla and Surat (Gujarat) Cochin (Kerala) Santa Cruz (Mumbai–Maharashtra) Falta (West Bengal) Chennai (Tamil Nadu) Visakhapatnam (Andhra Pradesh) NOIDA (Uttar Pradesh) Nanguneri, Tirunelveli(Tamil Nadu)

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