Basic Financial Terms A-Z
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 )
B
Book-keeping - Recording of financial transactions in
books of account.
Bear market - A market situation in which most of the
investors thinks that markets will fall.
Balance of Payment - BOP is the difference between a
country's exports and imports.
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 instalment 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 ex-dividend 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
F
Face value - The amount mentioned on face of a bond
certificate.
Fixed assets - Assets which can be seen such as
machinery
Financial year - A period of 12 months from 1st April
to 31st march
Fundamental analysis - Analysis of a company
based upon financial and operational performance.
Fiscal policy - Income and expenses management by
Government.
Flat rate - Rate of interest in a contract which
remains same irrespective of market rate in future.
Floating rate - Rate of interest which changes with
change in market rate.
Fund manager - A person who manages a mutual fund and
tries to maximize fund's returns while sticking to fund's objectives.
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.
J
Junk fund
– A fund which
invests investor’s money in junk investments means high risk investments which
high returns.
K
KYC – Know Your Customer policy is
mandatory in India and every investor irrespective of his investment volume
needs to furnish his identity and residence details.
L
Libor – London
Liquidity
– Ability of a
business to pay off its short term debts with current assets. Currently NISL is
facing liquidity crunch.
Liquid
assets – Assets
which can be readily converted into cash
Liquid
ratio – Liquid
assets/Current liabilities
Limited
liability – Liability
of an individual or a business up to the value of investment made in a business
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.
Overdraft - Facility given by a bank which
allows its customers to withdraw more money than account balance. Overdraft
generally have high rate of interest as borrower can demand and return the loan
anytime.
P
Preference shares - A type of shares having no voting
rights and have higher rate of dividend.
Ponzi schemes - It is a kind of fraud scheme which
use Network marketing as a tool. Investors are paid out of new
investments. These schemes end when new investments stop coming and large
number of investors wants to withdraw their money. Latest Ponzi scheme in India
was "Speak Asia".
PLR - Prime lending rate is the minimum rate of
interest that is to be charged by a bank. Each bank decides its own PLR.
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
Y
Yield - Yield is the return on investment which may
in form dividend or interest
No comments:
Post a Comment