FINANCIAL

TERMS (effective Jan 2015)

1.

Capital markets Markets where long-term debt/equity backed securities are bought or sold. These markets could be
primary (where new securities are bought and sold for the first time) or secondary (where previously issued financial
securities are subsequently bought or sold). The Securities and Exchange Board of India (SEBI) is the regulator for the
securities market in India. It was established on 12 April 1992 through the SEBI Act, 1992. The current chairman is Mr.
Upendra Kumar Sinha.

2.

Money markets Markets where there is borrowing / lending or buying / selling of short-term securities i.e. with maturities
of less than a year. They provide liquidity to a financial system. The RBI is the regulator of the money market, but its
influence remains limited to the organized sector as the unorganized sector has not been properly integrated with the
organized sector.

3.

DebtA debt is an obligation owed by one party (the debtor) to a second party (the creditor). A debt can be secured or
unsecured. A secured debt is secured because of the collateral (an asset pledged for the loan).

4.

EquityA stock or any other security representing an ownership interest. The terms meaning depends very much on the
context. In finance, in general, you can think of equity as ownership in any asset after all debts associated with that asset
are paid off. For example, a car or house with no outstanding debt is considered the owners equity because he or she can
readily sell the item for cash. Stocks are equity because they represent ownership in a company.

5.

CRR Cash Reserve Ratio is the portion (expressed as a percent) of depositors balances that banks must have on hand as
cash. This is a requirement determined by the countrys central bank. Current CRR is 4 w.e.f Jan 2015.

6.

SLR Statutory Liquidity Ratio is the amount a commercial bank needs to maintain in the form of cash, or gold or govt.
approved securities (bonds) i.e. liquid assets (which can be very quickly and conveniently converted to cash) before
providing credit to its customers. SLR rate is determined and maintained by the RBI in order to control the expansion of
bank credit. Current SLR is 22% w.e.f Jan 2015.

7.

Bank rate Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans
and advances to a commercial bank. Current bank rate is 9% w.e.f Jan 2015. Whenever a bank has a shortage of funds, they
can typically borrow them from the central bank based on the monetary policy of the country.

8.

Repo rate - Whenever a bank has a shortage of funds they can typically borrow it from the central bank based on the
monetary policy of the country. The borrowing is commonly done via repos (repurchase agreements) where the repo rate
is the rate at which the central bank lends short-term money to the banks against securities. A reduction in the repo rate
will help banks get money at a cheaper rate. When the repo rate increases, borrowing from the central bank becomes
more expensive. The reverse repo rate is the rate at which the banks can park surplus funds with the reserve bank of India,
while the repo rate is the rate at which the banks borrow from the central bank. It is mostly done when there is surplus
liquidity in the market. Current repo rate is 8% w.e.f & reverse repo rate is 7% w.e.f Jan 2015.

9.

Underwriting - The process by which investment bankers raise investment capital from investors, on behalf of corporations
and governments that are issuing securities (both equity and debt). New issues are usually brought to market by an
underwriting syndicate, in which each firm takes the responsibility (and risk) of selling its specific allotment.

10.

Merchant banking According to SEBI, a merchant banker means any person who is engaged in the business of issue
management either by making arrangements regarding selling, buying or subscribing to securities as a manager, a
consultant, an adviser or rendering corporate advisory service in relation to such issue management. Merchant Banking is a
combination of banking and consultancy services. It provides consultancy to its clients for financial, marketing, managerial
and legal matters. Merchant banking was first started in India in 1967 by Grindlays Bank. It has made rapid progress since
1970.

11.

Venture capital Money provided by investors to startup firms and small businesses with perceived long-term growth
potential. This is a very important source of funding for startups that do not have access to capital markets. It typically
entails high risk for the investor, but it has the potential for above-average returns.

12.

Market capitalization - The value found by multiplying the number of outstanding common stock shares by the current
market share price; indicates firm size and total value held in stock. The investment community uses this figure to
determine a companys size, as opposed to sales or total asset figures.

13.

Portfolio manager A portfolio is a group of financial assets such as shares, stocks, bonds, debt instruments, mutual funds,

cash equivalents, etc. A portfolio is planned to stabilize the risk of non-performance of various pools of investment.
Portfolio Management (PM) guides the investor towards selecting the best available securities that will provide the
expected rate of return for any given degree of risk and also mitigate the risks. It is a strategic decision that is addressed by
the top-level managers.
14.

Speculation - The act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or
all of the initial outlay, in expectation of a substantial gain. With speculation, the risk of loss is more than offset by the
possibility of a huge gain; otherwise, there would be very little motivation to speculate. While it is often confused with
gambling, the key difference is that speculation is generally tantamount to taking a calculated risk and is not dependent on
pure chance, whereas gambling depends on totally random outcomes or chance.

15.

Hedging A type of transaction that limits investment risk with the use of derivatives such as options and futures contracts.
Hedging transactions purchase opposite positions in the market in order to ensure a certain amount of gain or loss on a
trade. They are employed by portfolio managers to reduce portfolio risk and volatility or lock in profits. Hedging involves
taking an offsetting position in a derivative in order to balance any gains and losses to the underlying asset.

16.

Derivatives A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself
is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most
common under- lying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most
derivatives are characterized by high leverage. Derivatives are generally used as an instrument to hedge risk, but can also
be used for speculative purposes.

17.

Futures A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical
commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and
quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts
may call for physical delivery of the asset, while others are settled in cash. The primary difference between options and
futures is that options give the holder the right to buy or sell the underlying asset at expiration, while the holder of a
futures contract is obligated to fulfill the terms of his/her contract.

18.

Options A financial derivative that represents a contract sold by one party (option writer) to another party (option
holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial
asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). Call
options give the option to buy at certain price, so the buyer would want the stock to go up. Put options give the option to
sell at a certain price, so the buyer would want the stock to go down.

19.

G-SECS - The Government securities comprise dated securities issued by the Government of India and state governments
and treasury bills issued by the Government of India. The Reserve Bank of India, as an agent of the Government, manages
and services these securities through its public debt offices located in various places. Also called Gilt edged securities,
they are not only free from default risk but also provide reasonable returns and, therefore, offer the most suitable
investment opportunity.

20.

Yield The income return on an investment. This refers to the interest (or dividends) received from a security and is usually
expressed annually as a percentage based on the investments cost, its current market value or its face value.

21.

Exchange rate, Appreciation, Depreciation - The rate at which one currency can be exchanged for another is called the
exchange rate. For example, the higher the exchange rate for one euro in terms of one yen, the lower the relative value of
the yen. Currency depreciation is the loss of value of a countrys currency with respect to one or more foreign reference
currencies, typically in a floating exchange rate system. Its opposite is an increase of value of a currency i.e. currency
appreciation. In appreciation, a downward movement takes place. For instance, if the exchange rate earlier was Rs. 50 to
one US dollar, and now Rs. 40 can get you one dollar, then the rupee is said to have appreciated.

22.

Insider trading The buying or selling of a security by someone who has access to material, nonpublic information about
the security. Insider trading can be illegal or legal depending on when the insider makes the trade: it is illegal when the
material information is still nonpublictrading while having special knowledge is unfair to other investors who dont have
access to such knowledge. Illegal insider trading therefore includes tipping others when you have any sort of nonpublic
information. Directors are not the only ones who have the potential to be convicted of insider trading. People such as
brokers and even family members can be guilty. Insider trading is legal once the material information has been made
public, at which time the insider has no direct advantage over other investors.

23.

Top line / Bottom line The term Top Line is a reference to the gross sales or revenues of a company. The top reference
relates to the fact that on a companys income statement, the first line at the top of the page is generally reserved for gross
sales or revenue. A company that increases its revenues is said to be growing its top line, or generating top-line growth.

This contrasts with net income (or net earnings per share), which is usually the bottom line of the companys income
statement.
24.

Non-performing assets Commercial Banks assets are of various types. All those assets which generate periodical income
are called performing assets (PA). All those assets which do not generate periodical income are called non-performing
assets (NPA).
If the customers do not repay the principal amount and interest for a certain period of time, then such loans become non-
performing assets (NPA). Thus, non-performing assets are basically non-performing loans.
In India, the time frame given for classifying an asset as a NPA has been made 90 days since 31 March 2004, with a view to
move towards international best practices and to ensure greater transparency.

25.

Budget deficit When the government expenditure exceeds revenues, the government has a budget deficit. Thus, the
budget deficit is the excess of government expenditures over government receipts (income). When the government is
running a deficit, it is spending more than its receipts.

26.

Revenue deficit it takes place when the revenue expenditure is more than revenue receipts. The revenue receipts come
from direct & indirect taxes and also by way of non-tax revenue. The revenue expenditure takes place on account of
administrative expenses, interest payment, defense expenditure & subsidies.

27.

Budgetary deficit it is the difference between all receipts and expenditure of the government, both revenue and capital.
This difference is met by the net addition of the treasury bills issued by the RBI and drawing down of cash balances kept
with the RBI. The budgetary deficit was called deficit financing by the government of India. This deficit adds to money
supply in the economy and, therefore, it can be a major cause of inflationary rise in prices.

28.

Fiscal deficit it is a difference between total expenditure (both revenue and capital) and revenue receipts plus certain
non-debt capital receipts like recovery of loans and proceeds from disinvestment. In other words, fiscal deficit is equal to
budgetary deficit plus governments market borrowings and liabilities. This concept fully reflects the indebtedness of the
government and throws light on the extent to which the government has gone beyond its means and the ways in which it
has done so.
Indias current fiscal deficit for 2014 stands at 4.1 percent of GDP. That comes to approx. Rs.5.31 trillion.

29.

Bancassurance - An arrangement in which a bank and an insurance company form a partnership so that the insurance
company can sell its products to the banks client base. This partnership arrangement can be profitable for both companies.
Banks can earn additional revenue by selling the insurance products, while insurance companies are able to expand their
customer base without having to expand their sales forces or pay commissions to insurance agents or brokers.

30.

GAAP - Generally Accepted Accounting Principles (GAAP) refer to the standard frame- work of guidelines for financial
accounting used in any given jurisdiction; generally known as accounting standards. GAAP includes the standards,
conventions, and rules accountants follow in recording and summarizing, and in the preparation of financial statements.
GAAP is slowly being phased out in favor of the International Financial Reporting Standards (IFRS) as global business
becomes more pervasive.

31.

GAAR - Tax avoidance reduces government revenue and brings the tax system into disrepute, so governments need to
prevent tax avoidance or keep it within limits. The obvious way to do this is to frame tax rules so that there is no scope for
avoidance. In practice this has not proved achievable and has led to an ongoing battle between governments amending
legislation and tax advisors finding new scope for tax avoidance in the amended rules.

32.

Risk-return trade off - The principle that potential return rises with an increase in risk. Low levels of uncertainty (low-risk)
are associated with low potential returns, whereas high levels of uncertainty (high-risk) are associated with high potential
returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility
of being lost. Because of the risk-return tradeoff, you must be aware of your personal risk tolerance when choosing
investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money,
you cant cut out all risk. The goal instead is to find an appropriate balance - one that generates some profit, but still allows
you to sleep at night.

33.

Amortization - Amortization is the process of decreasing or accounting for an amount, over a period. When used in the
context of a home purchase, amortization is the process by which loan principal decreases over the life of a loan. With each
mortgage payment that is made, a portion of the payment is applied towards reducing the principal, and another portion of

the payment is applied towards paying the interest on the loan. An amortization table shows this ratio of principal and
interest and demonstrates how a loans principal amount decreases over time. Amortization is generally known as
depreciation of intangible assets of a firm.
34.

Arbitrage - The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that
profits by exploiting price differences of identical or similar financial instruments, on different markets or in different
forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate
substantially from fair value for long periods of time.

35.

Bull/ Bear A bull is an investor who thinks the market or a specific security or an industry will rise. Investors who take a
bull approach will purchase securities under the assumption that they can be sold later at a higher price. A bear is
considered to be the opposite of a bull. Bear investors believe that the value of a specific security or an industry is likely to
decline in the future.

36.

Dow Jones - The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New
York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896. Often referred to as the Dow,
the DJIA is one of the oldest and single most watched indexes in the world. The DJIA includes companies like General
Electric, Disney, Exxon and Microsoft. When the TV networks say the market is up today, they are generally referring to
the Dow.
OTHER TERMINOLOGY IN NEWS

37.

Banana republic A banana republic is a politically unstable country that economically depends upon the exports of a
limited resource (fruits, minerals), and usually features a society composed of stratified social classes such as a great,
impoverished working class and a ruling plutocracy composed of the lites of business, politics, and the military. In
practice, a banana republic is a country operated as a commercial enterprise for private profit, made possible by the
collusion between the state and favored monopolies, whereby the profits derived from private exploitation of public lands
are private property, and the debts incurred are public responsibility. Such an imbalanced economy reduces the national
currency to devalued paper-money; hence, the country is ineligible for international development-credit, and remains
limited by the uneven economic development of town and country.

38.

Mango people translates to aam aadmi. It is the name of an Indian political party founded by anti-corruption activist
Arvind Kejriwal, which was launched on November 26, 2012 at Jantar Mantar. It is also a term used by the Indian National
Congress as their political agenda in the 2004 and 2009 elections and as its guiding principle in running its coalition
government. It refers to the average Indian or average Joe. The idea of aam aadmi is to address three essential things:
food, clothing and shelter.

39.

Creative destruction At its most basic, creative destruction describes the way in which capitalist economic development
arises out of the destruction of some prior economic order. Sometimes known as Schumpeters gale, it is a term in
economics which has, since the 1950s, become most readily identified with the AustrianAmerican economist Joseph
Schumpeter who adapted it from the work of Karl Marx and popularized it as a theory of economic innovation and business
cycle.

40.

Carbon footprint & Carbon credits A carbon footprint has historically been defined as the total set of greenhouse gas
(GHG) emissions caused by an organization, event, product or person. A carbon credit is a generic term for any tradable
certificate or permit representing the right to emit one ton of carbon dioxide or the mass of another greenhouse gas with a
carbon dioxide equivalent to one ton of carbon dioxide. The goal is to allow market mechanisms to drive industrial and
commercial processes in the direction of low emissions or less carbon intensive approaches than those used when there is
no cost to emitting carbon dioxide and other GHGs into the atmosphere.