Bank Rate The rate of interest charged by the Reserve Bank of India (RBI) on financial accommodation extended to banks and FINANCIAL INSTITUTIONS
Bear A person who expects share prices in general to decline and who is likely to indulge in SHORT SALES
Beta (b) A measure of the volatility of a stock in relation to the market. More specifically, it is the index of SYSTEMATIC RISK, indicating the sensitivity of return on a security or a PORTFOLIO to return from the market. It is the slope of the regression line, known as the CHARACTERISTIC LINE, which shows the relationship of an ASSET with the market. For measuring market returns, a proxy such as a broad-based index is used. Thus, if b exceeds 1, the security is more volatile than the market, and is termed an 'Aggressive Security'.
Blue Chip A share of a company that is financially very sound, with an impressive track record of earnings and DIVIDENDS, and which is highly regarded for its competent management, quality products and/or services. Examples in India are Hindustan Lever, Gujarat Ambuja Cements, and ReckittS
Bond A long-term debt instrument on which the issuer pays interest periodically, known as 'Coupon'. Bonds are secured by COLLATERAL in the form of immovable property.
Bull A person who expects share prices in general to move up and who is likely to take a long position in the stock market.
Business Risk The risk of business failure, which stems from factors such as the cost structure of a venture (i.e., FIXED COST versus VARIABLE COST), intra-industry competition, and government policies. It is reflected in the variability of profits before interest and taxes.
Capital Adequacy Ratio A requirement imposed on banks to have a certain amount of capital in relation to their ASSETS, i.e., loans and investments as a cushion against probable losses in investments and loans.
Capital is classified into Tier I or Tier II. Tier I comprises share capital and disclosed reserves, whereas Tier II includes revaluation reserves, hybrid capital and subordinated debt. Further, Tier II capital should not exceed Tier I capital.
Capital Market Line This is a graphical line which represents a linear relationship between the expected return and the total risk (standard deviation) for efficient PORTFOLIOS of risky and riskless securities. When lending and borrowing possibilities are considered, the capital market line becomes the EFFICIENT FRONTIER starting from the riskless rate for the point of tangency on the efficient frontier of portfolios.
Commercial Paper (CP) A short-term, unsecured PROMISSORY NOTE issued by BLUE CHIP companies. Like other MONEY MARKET instruments, it is issued at a DISCOUNT on the FACE VALUE and is freely marketable. Commercial Paper may be issued to any person including individuals, banks and companies.
Debt-Equity Ratio This ratio is used to analyze FINANCIAL LEVERAGE. It is a structural ratio that gauges the level of debt financing, and is worked out by dividing total debt, short-term and long-term, by NET WORTH. The denominator would comprise total equity of common stockholders and PREFERENCE capital.
Dow Theory A theory to ascertain the emergence of a primary trend (a trend which indicates either a bullish or bearish phase) in the stock market. It seeks confirmation of whether a long-term market advance or decline is under way, by examining the movement of the Dow Jones Industrial Average in conjunction with the Dow Jones Transportation Average. These averages are summary measures of stock prices in the U.S.
Forward Contract A transaction which binds a seller to deliver at a future date and the buyer to correspondingly accept a certain quantity of a specified commodity at the price agreed upon, which is known as the 'Forward Rate'. A forward contract is distinct from a futures contract because the terms of the former can be tailored to one's needs whereas, the latter is standardized in terms of quantity, quality and delivery month for different commodities. In other words, forward contracts are customized contracts that enable the parties to choose delivery dates and trading units to suit their requirements
Futures Market A market in which contracts for future delivery of certain commodities or securities are traded. (See also COMMODITY FUTURES and FINANCIAL FUTURES.)
Hedging The action of combining two or more transactions so as to achieve a risk-reducing position. The objective, generally, is to protect a profit or minimize a loss that may result on a transaction.
For instance, a SHORT SALE could be employed to lock in a price gain on a LONG TRANSACTION.As demonstrated in Appendix II, hedging is useful with futures contracts too. A disadvantage withhedging, however, is that it results in less than the maximum profit that could have accrued
Financial Lease A lease with no cancellation clause and no provision for maintenance; here, the lease covers the useful life of an ASSET and its cost is fully AMORTIZED. The rentals may be so structured as to enable the lessor to recoup the investment with a return in the early part of the term, known as the 'Primary Lease Period'. Thus, only a nominal rent is payable during the 'Secondary Lease Period', which comprises the remainder of the asset's life.
Letter of Credit A financial instrument issued by a bank on behalf of a purchaser of goods, undertaking responsibility to pay a certain amount during a specified period, for goods delivered.
LIBOR An abbreviation for London Inter Bank Offer Rate, which is an average of the interest rates at which leading international banks are prepared to offer term EURODOLLAR DEPOSITS to each other. The interest rate differs according to the deposit MATURITY and the soundness of borrowing banks. Libor is also used as a reference rate in quoting interest rates on various other loans.
NASDAQ An acronym for National Association of Security Dealers Automated Quotations System, which is a nationwide network of computers and other electronic equipment that connects dealers in the over-the-counter market across the U.S. The system provides the latest BID and ASKING PRICES quoted for any security by different dealers. This enables an investor to have his or her transaction done at the best price. Due to NASDAQ, the over-the-counter market in the U.S. is like a vast but convenient trading floor on which several thousand stocks are traded.
National Stock Exchange (NSE) It is a nationwide screen-based trading network using computers, satellite link and electronic media that facilitate transactions in securities by investors across India. The idea of this model exchange (traced to the Pherwani Committee recommendations) was an answer to the deficiencies of the older stock exchanges as reflected in settlement delays, price rigging and a lack of transparency
Non-performing Asset (NPA) A credit facility which ceases to generate income for a bank. Generally, it is one on which interest or any amount to be received has remained 'past due' for a period of two quarters as on March 31, 1995. An amount under a credit facility is past due when it has not been paid within 30 days from the due date. For CASH CREDIT and OVERDRAFT facilities, there are some specified criteria for identifying NPAs. Income from NPAs cannot be taken to the profit and loss accounts of banks, as per Reserve Bank of India's directive.
Option A contract that gives the holder the right to buy ('Call Option') or sell ('Put Option') a certain number of shares of a company at a specified price known as the 'Striking Price' or 'Exercise Price'
Prime Lending Rate (PLR) The rate of interest charged by banks on WORKING CAPITAL and short term loans to their most credit-worthy borrowers. The prime rate serves as a benchmark for deciding on the interest rate to be charged to other borrowers. Accordingly, major banks and also FINANCIAL INSTITUTIONS in India periodically announce their PLRs depending on their cost of funds and competitive lending rates. From October 1997, the Reserve Bank of India has decided to permit banks to announce separate Prime Term Lending Rates on term loans of three years and beyond. More recently, banks have been given the freedom to have different PLRs for different maturities.
Private Placement The sale, by a company, of its securities to one or a few FINANCIAL INSTITUTIONS through a process of direct negotiations, or to a limited number of individual investors. In contrast, the conventional method of PUBLIC ISSUE invites subscription from investors in general. The advantage of a private placement is the substantial saving in marketing expenses that a public issue entails. A recent trend has been the placement of EQUITY SHARES with foreign financial institutions for sourcing foreign exchange.
Profitability Index (PI) A DISCOUNTED cash flow method used in capital budgeting to evaluate the financial viability of investment proposals.
Random Walk Theory A proposition that describes the movement of share prices as being random, i.e., devoid of any definite pattern. This assertion, therefore, challenges the very basis of TECHNICAL ANALYSIS, especially CHARTING which rests on the idea of trends in share prices. (See also EFFICIENT MARKETS HYPOTHESIS.)
Ratio Analysis The use of financial ratios for assessing the financial ratios for assessing the financial performance and financial position of a company by means of various ratios that relate to the LIQUIDITY, turnover, profitability, etc., of a company
Systematic Risk The portion of risk or variability that is caused by factors, which affect the returns on all securities. Major political, economic and social phenomena, for instance, would affect all stocks, which implies that systematic risk cannot be eliminated by DIVERSIFICATION. Therefore, it is also termed 'Undiversifiable RISK'. However, by diversifying internationally, an investor can reduce the level of systematic risk of a PORTFOLIO; the lack of coincidence between economic cycles of different countries helps to achieve this. Systematic risk of a financial ASSET is indicated by the BETA coefficient. It shows the sensitivity of return on a security or a portfolio to return from the market. (See BETA).
Sweat Equity Equity shares allotted to certain employees of company either on discount or for consideration other than cash, as a reward for providing know-how or sharing intellectual rights or some other value addition to the company.
Spot Market The transactions in which securities and foreign exchange get traded for immediate delivery. Since the exchange of securities and cash is virtually immediate (to be precise, the settlement would take place within two working days), the term cash market has also been used to refer to spot
Statutory Liquidity Ratio (SLR) The portion of net demand and time LIABILITIES that SCHEDULED commercial banks (excluding REGIONAL RURAL BANKS) must invest in specified financial ASSETS such as TREASURY BILLS and GOVERNMENT SECURITIES. The SLR indirectly serves as an instrument of credit control, by reducing the monetization of the DEFICIT that would have taken place if funds from the banking system were not statutorily pre-empted by the government sector.
Security Market Line A linear relationship between the expected rate of return on a security and its SYSTEMATIC RISK indicated by BETA.
SEBI An abbreviation for Securities and Exchange Board of India, which is a regulatory body established under the Securities and Exchange Board of India Act, 1992. Its role is to protect the interests of investors in securities, to promote the development of securities markets and to regulate the same.
Towards the achievement of these goals, SEBI is empowered to adopt various measures which include :
Registration of stock brokers, sub-brokers, transfer agents, registrars to issues, MERCHANT BANKERS, UNDERWIRTERS and others.
Secondary Market The segment of FINANCIAL MARKETS in which securities that have already been issued are traded. Thus the secondary market comprises security exchanges and also transactions taking place elsewhere, as e.g., KERB DEALS, (See also FINANCIAL MARKETS.)
Treasury Bill (T-Bill) A short-term debt instrument of the Government of India. This security bears no DEFAULT RISK and has a high degree of LIQUIDITY and low INTEREST RATE RISK in view of its short term. The instrument is negotiable and is issued at a discount from the FACE VALUE. At MATURITY, the investor receives the face value and hence the increment constitutes the interest earned. Two types of T-Bills were issued in India, by the Reserve Bank of India (RBI), on behalf of the government :
Ad-hoc T-Bills (or Ad-hocs) of 91 days maturity (which were non-marketable) to the RBI to replenish the Central Government's cash balance.
Ordinary T-Bills "on tap" that are taken up mainly by banks, for short-term investment or to comply with statutory requirements.
Unsystematic Risk A risk that is unique to a firm or industry. The returns on an ASSET can be affected by occurrences such as a labour strike, changes in consumer preferences, or even wrong management decisions. The adverse impact of any such occurrence would be confined to one or a few firms. Therefore, these unsystematic variations occur independently of broad price movements in the market. By having a diversified PORTFOLIO, it is possible to neutralize unsystematic risk, which is also therefore termed, 'Diversifiable Risk'. Generally, firms which are less vulnerable to macroeconomic changes, as e.g., those manufacturing consumer non-durables (e.g., Hindustan Lever and Colgate) would have less SYSTEMATIC RISK and a higher degree of unsystematic risk.
Venture Capital The long-term financial assistance to projects being set up to introduce new products/ inventions/innovations or to employ or commercialize new technologies. Thus, venture capital entails high risk but has the promise of attractive returns. It is, therefore, also known as 'Risk Capital'. The role of venture capital institutions is very important to the economic growth of a nation. Because of their assistance, new entrepreneurs and businesses spring up and contribute significantly to the total wealth of a nation. In India, such institutions have been set up at the national and state levels. Examples include Technology Development and Information Company of India Limited (TDICI), Risk Capital and Technology Finance Corporation Limited (RCTFC) and Gujarat Venture Finance Limited (GVFL).
Working Capital The funds deployed by a company in the form of cash, INVENTORIES, CCOUNTS RECEIVABLE and other CURRENT ASSETS. The sum total of the funds so employed is termed 'Gross Working Capital'. The term 'working capital' generally means 'Net Working Capital', i.e. the excess of CURRENT ASSETS over CURRENT LIABILITIES.
Net Working Capital = Current Assets – Current Liabilities.
Zero-base Budgeting A rigorous method of drawing up BUDGETS in which the premise is that expenditures will be zero, and so allocations are made thereafter, only upon a justification of the true requirements. Thus, this method does not consider the previous year's allocation, but instead, imposes an onerous burden of justifying any expenditure whose approval is sought. In the process, it forces administrators or managers to critically appraise ongoing programmes and activities; this review could lead to considerable economy in inessential expenditure.
Zero-coupon Bond A BOND that bears a zero COUPON RATE and hence is issued at a price substantially below its FACE VALUE.
At MATURITY, an investor receives the face value. So, the return consists of the DISCOUNT, i.e., the excess of face value over the issue price. Thus, zero-coupon bonds are a sub-set of the group of DEEP DISCOUNT BONDS. The advantage with this security to an investor is that, he does not have to worry about reinvestment, since there are no periodic inflows. Similarly, a company need not bother about meeting interest obligations at regular intervals, and yet would obtain tax deduction.
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