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Zero Based Budgeting - ZBB
A method of budgeting in which all expenditures must be justified each new
period, as opposed to only explaining the amounts requested in excess of the
previous period's funding.
Supply Chain Management - SCM
The management and coordination of a product's supply chain for the
purpose of increasing efficiency and profitability.
Just In Time - JIT
An inventory strategy companies employ to increase efficiency and decrease
waste by receiving goods only as they are needed in the production process,
thereby reducing investory costs.
Inventory
Inventory can be either raw materials, finished items already available for
sale, or goods in the process of being manufactured. Inventory is recorded as
an asset on a company'sbalance sheet.
Balance Sheet
A company's financial statement that reports the assets, liabilities and net
worth at a specific time.
Activity Based Budgeting - ABBA method of budgeting in which activities that incur costs in each function
of an organization are established and relationships are defined between
activities. This information is then used to decide how much resource should
be allocated to each activity.
Accounting
To provide a record such as funds paid or received for a person or business.
Accounting summarizes and submits this information in reports and
statements. The reports are intended both for the firm itself and outside
parties.
Annual Report
A corporation's annual statement of financial operations. Annual reports
include a balance sheet, income statement, auditor's report, and a description
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of the company's operations.
Cook the Books
A fraudulent activity done by some corporations to falsify their financial
statements.
Cookie Jar Accounting
An accounting practice where a company uses generous reserves from good
years against losses that might be incurred in bad years.
Certified Public Accountant - CPA
A designation by the American Institute of Certified Public Accountants for
those who pass an exam and meet work-experience requirements.
Generally Accepted Accounting Principles - GAAP
The common set of accounting principles, standards and procedures thatcompanies use to compile theirfinancial statements. GAAP is a combination
of authoritative standards (set by policy boards) and simply the accepted
ways of doing accounting.
Auditor's Report
Recorded in the annual report, the auditor's report tests to see that a
corporation's financial statements comply with GAAP. This is sometimes
referred to as the clean opinion.
Cash Flow
The amount of cash a company generates and uses during a period,
calculated by adding non-cash charges (such as depreciation) to the net
income after taxes. Cash flow can be used as an indication of a company's
financial strength.
Income Statement
A financial report that - by summarizing revenues and expenses, and
showing the net profit or loss in a specified accounting period - depicts abusiness entitys financial performance due to operations as well as other
activities rendering gains or losses. Also known as the "profit and loss
statement" or "statement of revenue and expense".
Voodoo Accounting
Any form of accounting that does not follow principles of conservatism.
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While there are many methods by which financial statements can be fudged,
it always comes down to inflating revenue or hiding expenses. Examples of
accounting shenanigans include the big bath, cookie jar accounting and
improper recognition of revenue.
Big Bath
The strategy of manipulating a company's income statement to make poor
results look even worse. The big bath is often implemented in a bad year
to enhance artificially next year's earnings. The big rise in earnings might
result in a larger bonus for executives. New CEOs sometimes use the big
bath so they can blame the company's poor performance on the previous
CEO and take credit for the next year's improvements.
Earnings
The net income of a company during a specific period. Generally, but not
necessarily, referring to after-tax income.
Write-Off
A reduction in the value of an asset or earnings by the amount of an expense
or loss.
Bottom Line
Slang for net income or profit.
This term comes from the structure of the income statement: profit is
recorded on the bottom line of the sheet.
Net Income - NI
An individual's or company's total earnings, calculated by revenues adjusted
for costs of doing business, depreciation, interest, taxes and other expenses.
Often referred to as "the bottom line".
Top Line
A reference to sales or revenue.
Revenue
1. The dollar amount of sales during a specific period, including
discounts and returned merchandise. It is the "top line" figure from
which costs are subtracted to determine net income.
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2. When evaluating stocks, revenue growth serves as an indication of a
company's health.
Core Earnings
The revenue derived from a company's main or principal business less allassociated expenses.
Expenses
1. Money spent by a firm to continue its ongoing operations.
2. Money spent or costs incurred that are deductible and reduce yourtaxable
income.
Capital Expenditure - CAPEX
Funds used by a company to acquire or upgrade physical assets such as
property, industrial buildings, or equipment.
Capital Asset
A long-term asset that is not bought or sold in the regular course of business.
Capital
1. Financial assets or the financial value of assets such as cash.
2. The factories, machinery, and equipment owned by a business
Capital Appreciation
A rise in the market price of an asset.
Appreciation
The increase in value of an asset.
Depreciation
1. An expense recorded to reduce the value of a long-term tangible asset.
Since it is a non-cash expense, it increases free cash flow while
decreasing reported earnings.
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2. A decrease in the value of a particular currency relative to other
currencies
Accretion
1. Asset growth through addition or expansion.
2. In reference to discount bonds, it describes the accumulation of value until
maturity.
Earnings per Share - EPS
The portion of a company's profit allocated to each outstanding share of
common stock. Calculated as:
Outstanding Shares
Stock currently held by investors, including restricted shares owned by the
company's officers and insiders as well as those held by the public. Shares
that have been repurchased by the company are not considered outstanding
stock. They are also known as "issued shares" or "issued and outstanding".
Authorized Stock
The maximum number of shares that a corporation is legally permitted to
issue under its articles of incorporation. This figure is usually listed in the
capital accounts section of thebalance sheet.
Stock
A type of security that signifies ownership in a corporation and represents a
claim on part of the corporation's assets and earnings
American Depository Receipt - ADR
A negotiable certificate issued by a U.S. bank representing a specified
number of shares (or one share) in a foreign stock that is traded on a U.S.
exchange. ADRs are denominated in U.S. dollars, with the underlying
security held by a U.S. financial institution overseas, and help to reduce
administration and duty costs on each transaction that would otherwise be
levied.
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American Depository Share - ADS
A share issued under deposit agreement that represents an underlying
security in the issuer's home country.
Forex - FXThe foreign-exchange market ("forex" or "FX") is the place where
currencies are traded. The forex market is the largest, most liquid market in
the world with an average traded value of exceeds $1.9 trillion per day.
Foreign Currency Effects
The extent to which the changes in a foreign currency affects the return on a
foreign investment.
Repatriation
The process of converting a foreign currency into the currency of one's own
country.
Global Depository Receipt - GDR
1. A bank certificate issued in more than one country for shares in a foreign
company. The shares are held by a foreign branch of an international branch.
The shares trade as domestic shares, but are offered for sale globally through
the various bank branches.
2. A financial instrument used by private markets to raise capital
denominated in either U.S. dollars or Euros.
International Depository Receipt - IDR
A negotiable, bank-issued certificate representing ownership of stock
securities by an investoroutside the country of origin.
Depository Receipt
A negotiable financial instrument issued by a bank to represents a foreigncompany's publicly traded securities. The depository receipt trades on a local
stock exchange.
Unsponsored American Depository Receipt (ADR)
An ADR that is issued without the involvement of the foreign company
whose stock underlies the ADR. Shareholder benefits, voting rights, and
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other attached rights may not be extended to the holders of these particular
securities.
Voting Right
The right of a stockholder to vote on matters of corporate policy as well as
on who is to compose the board of directors.
Cumulative Voting
The procedure of voting for a company's directors, where each shareholder
is entitled one vote per share times the number of directors to be elected.
This is sometimes known as proportional voting.
Statutory Voting
The procedure of voting for a company's directors where each shareholder is
entitled to one vote per share. This is sometimes known as straight voting.
Voting Shares
Shares that give the stockholder the right to vote on matters of corporate
policy making as well as who will compose the members of the board of
directors.
Callable Preferred Stock
A type of preferred stock that carries the provision that the issuer has the
right to call in the stock at a certain price and retire it. Also referred to as aredeemable preferred stock.
Callable Bond
A bond that can be redeemed by the issuer prior to its maturity. Usually a
premium is paid to the bond owner when the bond is called. Also known as a
"redeemable bond".
Call Premium
1. The dollar amount over the parvalue of a callable fixed-income debt
security that is given to holders when the security is called by the
issuer.
2. The amount the purchaser of a call option must pay to the writer.
Conversion
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1. The translation of a convertible security into a predetermined number of
shares.
2. A strategy used by future traders whereby they mix the purchase of option
and futures contracts.
Bear Spread
1. An option strategy seeking maximum profit when the price of the
underlying security declines. The strategy involves the simultaneous
purchase and sale of options; puts or calls can be used. A higherstrike price
is purchased and a lower strike price is sold. The options should have the
same expiration date.
2. A trading strategy used by futures traders who intend to profit from the
decline in commodity prices while limiting potentially damaging losses.
Bear
An investor who believes that a particular security or market is headed
downward. Bears attempt to profit from a decline in prices. Bears are
generally pessimistic about the state of a given market.
Bear Market
A market condition in which the prices of securities are falling or areexpected to fall. Although figures can vary, a downturn of 15%-20% or
more in multiple indexes (Dow or S&P 500) is considered an entry into a
bear market
Bear Raid
The illegal practice of attempting to push the price of a stock lower by
taking large short positions and spreading unfavorable rumors about the
target firm.
Bear Hug
An offer made by a company to buy the shares of another company that is
too high for the board of the target firm to refuse.
Board of Directors - B of D
A group of individuals who are elected by stockholders to establish
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corporate management policies and make decisions on major company
issues, such as dividend policies.
Dividend
Distribution of a portion of a company's earnings, decided by the board ofdirectors, to a class of its shareholders. The amount of a dividend is quoted
in the amount each share receives or in other words dividends per share.
Cum Dividend
When a buyer of a security is entitled to receive a dividend that has been
declared, but not paid.
Cum Dividend
When a buyer of a security is entitled to receive a dividend that has been
declared, but not paid.
Ex-Date
The date on or after which a security is traded without a previously declared
dividend or distribution. After the ex-date, a stock is said to trade ex-
dividend.
Declaration Date
1. The date on which the next dividend payment is announced by the
directors of a company. This statement includes the dividend's size, ex-
dividend date and payment date. It is also referred to as the "announcement
date".
2. The last day on which the holder of an option must indicate whether they
will exercise the option. Also known as the "expiration date".
Equalizing Dividend
An additional dividend paid to eligible stockholders when their divided
income is reduced due to a change the board of directors makes to the
dividend payment schedule.
Dividend Policy
The policy a company uses to decide how much it will pay out to
shareholders in dividends.
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Dividend Payout Ratio
The percentage of earnings paid to shareholders in dividends.
Calculated as:
Ex-Dividend
The trading ofshares when a declared dividend belongs to the seller rather
than the buyer.Holder of Record
The name of the person who is the registered owner of a security.
Bearer Form
A security not registered in the books of issuing corporation but that is
payable to its bearer (the person possessing it). Securities can be issued in
two forms: registered or bearer. Registered form means the issuing firm
keeps records of a security's owner and mails out payments to him/her.Bearer form means the security is traded without any record of ownership,
so physical possession of the security is the sole evidence of ownership.
Most securities issued today are in registered form.
Book-Entry Securities
Securities that are recorded in electronic records called book entries rather
than as paper certificates.
Also referred to as "book-entry receipt."
Automated Bond System - ABS
The electronic system on the NYSE that records bids and offers for
inactively traded bonds until they are canceled or executed.
Ask
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The price a seller is willing to accept for a security, also known as the offer
price.
Ask Size
The number of shares a seller is selling at a quoted ask price.Bid Size
The number ofshares a buyer is willing to purchase at the quoted bid price.
Bid
1.An offer made by an investor, trader, or dealer to buy a security.
2. The price at which a market maker is willing to buy a security.
Best BidThe highest quoted bid for a particular stock among all those offered by
competing market makers.
Best Ask
The lowest quoted ask price for a particularstockamong those offered from
competing market makers.
Market Maker
A broker-dealer firm that accepts the risk of holding a certain number ofshares of a particular security in order to facilitate trading in that security.
Each market maker competes for customer order flow by displaying buy and
sell quotations for a guaranteed number of shares. Once an order is received,
the market maker immediately sells from its own inventory or seeks an
offsetting order. This process takes place in mere seconds.
Broker-Dealer
A person or firm in the business ofbuying and selling securities operating as
both abrokerand dealer depending on the transaction.Agent
1. An individual or firm that places securities transactions for clients.
2. A person licensed by a state to sell insurance.
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3. A securities salesperson who represents a broker-dealer or issuer when
selling or trying to sell securities to the investing public.
Analyst
A financial professional who has expertise in evaluating investments andputs together buy, sell, and hold recommendations on securities. Also known
as a financial analyst or security analyst.
Buy
1. A recommendation to purchase a specific security.
2. To acquire an asset in exchange for currency.
Buy and HoldA passive investment strategy with which an investor buys stocks and holds
them for a long period regardless of fluctuations in the market.
Dividend Reinvestment Plan - DRIP
A plan offered by a corporation allowing investors to reinvest their cash
dividends by purchasing additional shares or fractional shares on the
dividend payment date.
Automatic Investment Plan
An investment program that allows you to contribute small amounts of
money (as little as $20 a month) in regular intervals. Funds are automatically
deducted from your checking/savings account or your paycheck, and
invested in a retirement account or mutual fund.
Compounding
The ability of an asset to generate earnings that are then reinvested and
generate their own earnings.
Mutual FundA security that gives small investors access to a well-diversified portfolio of
equities, bonds and other securities. Each shareholder participates in the gain
or loss of the fund. Shares are issued and can be redeemed as needed.
Asset Allocation Fund - AAF
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A mutual fund that splits its investment assets among stocks, bonds and
other investment vehicles in an attempt to provide a consistent return for the
investor. Also referred to as a "diversification fund".
Blend Fund
A mutual fund composed of various asset classes (such as stocks, bonds and
money market securities), allowing investors to diversify their holdings by
owning just a single fund. Also called "hybrid funds".
Diversification
A risk management technique that mixes a wide variety of investments
within a portfolio. It is designed to minimize the impact of any one security
on overall portfolio performance.
PortfolioThe group of assets - such as stocks, bonds and mutuals - held by an
investor. To reduce their risk, investors tend to hold more than just a single
stock or other asset. Think of the portfolio as a pie: each piece is divided up
into specific assets such as bonds, equities, etc.
Portfolio Insurance
1. A method of hedging a portfolio of stocks against the market risk by short
selling stock index futures.
2. Brokerage insurance such as the Securities Investor Protection
Corporation (SIPC).
Hedge
Making an investment to reduce the risk of adverse price movements in an
asset. Normally, a hedge consists of taking an offsetting position in a related
security, such as a futures contract.
Delta HedgingAn options strategy that aims to reduce (hedge) the risk associated with price
movements in the underlying asset by offsetting long and short
positions. For example, a long call position may be delta hedged by shorting
the underlying stock. This strategy is based on the change in premium (price
of option) caused by a change in the price of the underlying security. The
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change in premium for each basis-point change in price of the underlying
is the delta and the relationship between the two movements is the hedge
ratio.
Delta
The ratio comparing the change in the price of the underlying asset to the
corresponding change in the price of a derivative.
Derivative
A security, such as an option or futures contract, whose value depends on the
performance of an underlying security or asset.
Forward Contract
A cash market transaction in which delivery of the commodity is deferred
until after the contract has been made. Although the delivery is made in thefuture, the price is determined on the initial trade date.
Commodity
Any bulk good traded on an exchange or in the cash market.
Commodity Swap
A swap where exchanged cash flows are dependent on the price of an
underlying commodity. This is usually used to hedge against the price of a
commodity.
Currency Swap
A swap that involves the exchange of principal and interest in one currency
for the same in another currency.
Currency Overlay
The outsourcing of currency risk management to a specialist firm, known as
the overlay manager. This is used in international investment portfolios to
separate the management of currency risk from the asset allocation andsecurity selection decisions of the investor's money managers.
Hard Currency
A currency, usually from a highly industrialized country, that is widely
accepted around the world.
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Soft Money
1. The "one-time" funding from governments and organizations for a
project or special purpose.
2. Paper currency, as opposed to gold, silver, or some other coined
metal.
Soft Currency
Another name for "weak currency." There is very little demand for this type
of currency and values often fluctuate.
Hard Money
1. Government and organizations refer to this as funding that is repetitive,
not a one time grant or gift.
2. Describes gold/silver/platinum (bullion) coins.
Bullion
Gold and silver that is officially recognized as high quality (at least 99.5%
pure), and is in the form of bars rather than coins.
Inflation
The rate at which the general level of prices for goods and services is rising,and, subsequently, purchasing power is falling.
Deflation
A general decline in prices, often caused by a reduction in the supply of
money or credit. Deflation can be caused also by a decrease in government,
personal or investment spending. The opposite of inflation, deflation has
the side effect of increased unemployment since there is a lower level of
demand in the economy, which can lead to an economic depression.
Hyperinflation
Extremely rapid or out of control inflation.
Disinflation
A slowing of the rate at which prices increase. Typically, this occurs during
a recession as sales drop and retailers are not able to pass on higher prices to
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customers.
Inflationary Psychology
The relationship between inflation and individuals' behavior.
StagnationA period of little or no growth in the economy. Economic growth of less
than 2-3% is considered stagnation. Sometimes used to describe low trading
volume or inactive trading in securities.
Stagflation
A condition of slow economic growth and relatively high unemployment
- a time of stagnation - accompanied by a rise in prices, or inflation
Consumer Price Index - CPIA measure of price changes in consumer goods and services such as
gasoline, food and automobiles. Sometimes referred to as "headline
inflation".
Personal Consumption Expenditures - PCE
A measure of price changes in consumer goods and services. It consists of
the actual and imputed expenditures of households and includes data
pertaining to durables, non-durables, and services. It is essentially a
measure of goods and services targeted towards individuals and consumed
by
Also referred to as "consumption."
Indicator
Anything used to predict future financial or economic trends.
Monetary Policy
The actions of a central bank, currency board, or other regulatory committee,that determine the size and rate of growth of the money supply, which in
turn affects interest rates.
Discount Rate
1. The interest rate that an eligible depository institution is charged to
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borrow short-term funds directly from a Federal Reserve Bank.
2. The interest rate used in determining the present value of future cash
flows.
Net Present Value - NPV
An approach used in capital budgeting where the present value of cash
inflows is subtracted by the present value of cash outflows. NPV is used to
analyze the profitability of an investment or project.
NPV analysis is sensitive to the reliability of future cash inflows that an
investment or project will yield.
Formula:
Capital Budgeting
The process of determining whether or not projects such as building a new
plant orinvesting in a long-term venture are worthwhile.
Cost of Capital
The required return necessary to make a capital budgeting project
worthwhile, such as building a new factory. Cost of capital would include
the cost of debt and the cost of equity.
Cost of Equity
The return that stockholders require for a company. The traditional formula
is the dividend capitalization model:
Capital Asset Pricing Model - CAPM
A model describing the relationship between risk and expected return that is
used in the pricing of risky securities.
Capital Market Line - CML
A line used in the Capital Asset Pricing Model to illustrate the rates of return
for efficient portfolios depending on the risk free rate of return and the level
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of risk (beta) for a particular portfolio.
Standard Deviation
1. A measure of the dispersion of a set of data from its mean. The more
spread apart the data is, the higher the deviation.
2. In finance, standard deviation is applied to the annual rate of return of an
investment to measure the investment's volatility (risk).
Variance
A measure of the dispersion of a set of data points around their mean value.
It is a mathematical expectation of the average squared deviations from the
mean.
ZZZZ Best
A company owned by Barry Minkow in the 1980s. Through such means as
forgery and theft, Minkow appeared to be building a multimillion dollar
corporation. ZZZZ Best went public in December of 1986, eventually
reaching a market capitalization of over $200 million (U.S. Dollars).
Caveat Emptor
Another way to say, "let the buyer beware."
Zombies
Companies that continue to operate even though they are insolvent. Also
known as living dead.
Insolvency
When a company can no longer meet its debt obligations with another firm
or institution.
Bankruptcy
The state of a person or firm unable to repay debts.
Lady Macbeth Strategy
A corporate-takeover strategy with which a third party poses as a white
knight to gain trust, but then turns around and joins with unfriendly bidders.
Hostile Takeover
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A takeover attempt that is strongly resisted by the target firm.
Takeover
A corporate action where an acquiring company makes a bid for an acquiree.
If the target company is publicly traded, the acquiring company will make anoffer for the outstanding shares.
Acquisition
When one company purchases a majority interest in the acquired.
Merger
The combining of two or more companies, generally by offering the
stockholders of one company securities in the acquiring company in
exchange for the surrender of their stock.
De-merger
A corporate strategy to sell off subsidiaries or divisions of a company.
Reverse Triangular Merger
When the subsidiary of the acquiring corporation merges with the target
firm. In this case, the subsidiary's equity merges with the target firm's stock.
As a result of the merger, the target would become a wholly-owned
subsidiary of the acquirer and shareholders of the target would get shares of
the acquirer.
Tracking Stock
A stock issued by a parent company in order to create a financial vehicle that
tracks the performance of a particular division or subsidiary.
Carve-out (Equity Carve-Out)
1. Sometimes known as a partial spinoff, a carve out occurs when a parent
company sells a minority (usually 20% or less) stake in a subsidiary for an
IPO or rights offering.
2. Where an established brick-and-mortar company hooks up with venture
investors and a new management team to launch an Internet spinoff.
Split-Up
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Exchanging the stock of two or more subsidiary companies for all of the
parent company's stock, followed by the liquidation of the parent
company
Consolidated Financial Statements
The combined financial statements of a parent company and its subsidiaries.
Parent Company
A company that controls other companies by owning an influential amount
of voting stock.
Subsidiary
A company whose voting stock is more than 50% controlled by another
company, usually referred to as the parent company.
Wholly Owned Subsidiary
A subsidiary whose parent company owns 100% of its common stock.
Initial Public Offering - IPO
The first sale of stock by a private company to the public. IPOs are often
smaller, younger companies seeking capital to expand their business.
Also referred to as a "Public Offering."
Underwriting
1. 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).
2. The process of issuing insurance policies.
Syndicate
A group ofbankers, insurers, etcetera, who work together on a large project.
Spread
1. The difference between the bid and the ask prices of a security or asset.
2. An options position established by purchasing one option and selling
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Index
A statistical measure of change in an economy or a securities market. In the
case of financial markets, an index is essentially an imaginary portfolio of
securities representing a particular market or a portion of it. Each index has
its own calculation methodology and is usually expressed in terms of achange from a base value. Thus, the percentage changes is more important
that the actually numeric value. For example, knowing that a stock exchange
is at, say, 5,000 doesn't tell you much. However, knowing that the index has
risen 30% over the last year to 5,000 gives a much better demonstration of
performance.
Futures
A financial contract that obligates the buyer (seller) to purchase (sell and
deliver) financial instruments or physical commodities at a future date,unless the holder's position is closed prior to expiration.
Arbitrage
The simultaneous purchase and selling of an asset in order to profit from a
differential in the price. This usually takes place on different exchanges or
marketplaces. Also known as a "riskless profit".
Market Value Added - MVA
The difference between the market value of a company and the capitalcontributed by investors (both bondholders and shareholders). In other
words, it is the sum of all capital claims held against the company plus the
market value ofdebt and equity.
Economic Value Added - EVA
A measure of a company's financial performance based on the residual
wealth calculated by deducting cost of capital from its operating profit
(adjusted for taxes on a cash basis). (Also referred to as "economic profit".)
The formula for calculating EVA is as follows:
= Net Operating Profit After Taxes (NOPAT) - (Capital * Cost of Capital)
Market Capitalization
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The total dollar value of all outstanding shares. It's calculated by multiplying
the number of shares times the current market price. This term is often
referred to as market cap.
Common Stock
A security that represents ownership in a corporation. Holders of common
stock exercise control by electing a board of directors and voting on
corporate policy. Common stockholders are on the bottom of the priority
ladder for ownership structure. In the event of liquidation common
shareholders have rights to a company's assets only after bond holders,
preferred shareholders, and other debt holders have been paid in full.
Leveraged Buyout - LBO
A strategy involving the acquisition of another company using borrowedmoney (bonds or loans). The acquiring company uses its own assets as
collateral for the loan in hopes that the future cash flows will cover the loan
payments.
Management Buyout - MBO
When the managers and/or executives of a company purchase controlling
interest in a company from existing shareholders.
Venture Capitalist
An investorwho provides capital to either start-up ventures or support small
companies who wish to expand but do not have access to public funding.
Angel Investor
A financial backer providing venture capital funds for small start-ups or
entrepreneurs.
Seed Capital
The initial equity capital used to start a new venture or business.
Operating Leverage
A measurement of the degree to which a firm or project relies on fixed rather
than variable costs.
Variable Cost
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A cost that changes in proportion to a change in a company's activity or
business.
Sunk Cost
A cost that has been incurred and cannot be reversed. Also referred to as"stranded cost."
Outlay Cost
Any concrete costs that can be identified in the past, present, or future.
Opportunity Cost
1. The cost of an alternative that must be forgone in order to pursue a certain
action. Put another way, the benefits you could have received by taking an
alternative action.
2. The difference in return between a chosen investment and one that is
necessarily passed up. Say you invest in a stock and it returns a paltry 2%
over the year. In placing your money in the stock, you gave up the
opportunity of another investment - say, a risk-free government bond
yielding 6%. In this situation, your opportunity costs are 4% (6%-2%).
Implicit Cost
A cost that is represented by lost opportunity in the usage of a company'sown resources, excluding cash.
Explicit Cost
A cost that is represented by lost opportunity in actual cash payments.
Greenshoe Option
An option that allows the underwriting of an IPO to sell additional shares to
the public if the demand is high.
Eating Stock
Purchasing stock not because you desire it but because you are forced to do
so.
Red Herring
A preliminary registration statement that must be filed with the SEC
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describing a new issue of stock (IPO) and the prospects of the issuing
company.
Prospectus
1. A formal legal document describing details of a corporation. Theprospectus is generally created for a proposed offering (usually an IPO), but
they can still be obtained from existing businesses as well. The prospectus
includes company facts that are vitally important to potential investors.
2. In this case of mutual funds, a prospectus describes the fund's objectives,
history, manager background, and financial statements.
Sandbag
A stalling tactic used by management to deter a company that is showinginterest in taking them over.
Lobster Trap
A strategy used by a target firm to prevent a hostile takeover. In a lobster
trap, the company passes a provision preventing anyone with more than 10%
ownership from converting convertible securities into voting stock.
Poison Pill
A strategy used by corporations to discourage a hostile takeover by another
company. The target company attempts to make its stock less attractive to
the acquirer. There are two types of poison pills:
1. A "flip-in" allows existing shareholders (except the acquirer) to buy more
shares at a discount.
2. The "flip-over" allows stockholders to buy the acquirer's shares at a
discounted price after the merger.
Suicide Pill
A defensive strategy by which a target company engages in an activity that
might actually ruin the company rather than prevent the hostile takeover.
Also known as the "Jonestown Defense."
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Whitemail
A strategy that a takeover target uses to try and thwart an undesired takeover
attempt. The target firm issues a large amount of shares at below-market
prices, which the acquiring company will then have to purchase if it wishes
to complete the takeover.
Bankmail
An agreement made between a company planning a takeover and a bank,
which prevents the bank from financing any other potential acquirer's bid.
Greenmail
A situation in which a large block of stock is held by an unfriendly
company. This forces the target company to repurchase the stock at a
substantial premium to prevent a takeover. It is also known as a "BonVoyage Bonus" or a "Goodbye Kiss".
Shark Repellent
Any number of measures taken by a corporation to discourage an unwanted
takeover attempt.
Pac Man
A form of defense used in a hostile takeover situation. The target firm turns
around and tries to take over the company that has made the hostile bid.
Macaroni Defense
An approach taken by a company that does not want to be taken over. The
company issues a large number ofbonds with the condition they must be
redeemed at a high price if the company is taken over.
Sleeping Beauty
A company that is prime for takeover but has not been approached by an
acquiring company.Scorched Earth Policy
An anti-takeover strategy that a firm undertakes by liquidating its valuable
and desired assets and assuming liabilities in an effort to make the proposed
takeover unattractive to the acquiring firm.
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Saturday Night Special
A slang term used to refer to a surprise takeover attempt.
Blank Check Preferred Stock
A method companies use to simplify the process of creating new classes ofpreferred stockto raise additional funds from sophisticated investors without
obtaining separate shareholder approval.
Articles of Incorporation
A set of documents filed with a government body for the purpose of legally
documenting the creation of a corporation. Also referred to as the "corporate
charter."
Participating Preferred Stock
A type ofpreferred stockthat, under certain conditions, gives holders the
right to receive earnings payouts over and above the specified dividend rate.
Unbundling
The process of taking over a large company with several different lines of
business, and then, while retaining the core business, selling off the
subsidiaries to help fund the takeover.
Crown Jewels
The most valuable unit of a corporation because of profitability, asset value,
future prospects, etc.
Yard
Slang for one billion units in currency.
Woody
Slang to describe when the market has a strong and quick upward
movement.
Winner's Curse
A financial theory that the winning participants within an auction will
typically pay an overvalued price for the winning item.
Window Dressing
A strategy used by mutual fund and portfolio managers near the year or
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quarter end to improve the appearance of the portfolio/fund performance
before presenting it to clients or shareholders.
Fund Manager
The person responsible for investing a mutual fund's assets, implementing itsinvestment strategy, and managing the day-to-day portfolio trading.
Portfolio Manager
The person responsible for investing a mutual fund's assets, implementing its
investment strategy, and managing the day-to-day portfolio trading.
Gunslinger
A high-strung portfolio managerwho, looking for high returns, invests in
very high-risk stock.
Hedge Fund
An aggressively managed fund portfolio taking positions in both safe and
speculative opportunities.
Winding Up
A process that entails selling all the assets of a business entity, paying off
creditors, distributing any remaining assets to the principals, and then
dissolving the business.
Wild Card Play
Having the right to deliver on a futures contract at the last closing price,
even though the contract is no longer trading.
Wild Card Option
An option associated with treasury bond or treasury note futures contracts
that permits the short position to delay the delivery of the underlying.
Widow-and-Orphan Stock
Relatively low-risk stocks from well-known firms that pay high dividends.
White Elephant
Any investment that nobody wants because it is unprofitable.
Falling Knife
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A stockwhose price has fallen significantly in a short period of time.
Whistle Blower
An employee who has inside knowledge of illegal activities occurring within
his or her organization and reports these to the public.Insider Trading
The buying or selling of a security by someone who has access to material,
nonpublic information about the security.
Open-Market Transaction
An order placed by an insider, after all appropriate documentation has been
filed, to buy or sell restricted securities openly on an exchange.
Black FridayA day of stock market catastrophe. Originally, September 24th, 1869 was
termed Black Friday. The crash was sparked by gold speculators including
Jay Gould and James Fist attempting to corner the gold market. Their
attempt failed and the gold market collapsed, causing the market to tank.
Black Monday
The most notorious day in financial history (October 19, 1987). The DJIA
fell 508 points, almost 22%.
Financial Terms
1)IPO glossary
Allotment
Allotment is the distribution of shares to the public during an offer. The
normal rule of allocation is to allocate the shares in the event of
oversubscription on a proportionate basis. This however excludes the firm
allotment portion.
Auditor
An auditor is an individual who conducts an examination and verification of
a company's financial and accounting records and supporting documents.
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Annual General Meeting (AGM)
The shareholders meeting, usually held at the end of each financial year, to
discuss the previous performance and future outlook.
Authorised Capital
The maximum equity capital a company can raise, which is mentioned in the
Memorandum of Association and Articles of Association of the Company.
However, share premium is excluded from the definition of authorized
capital.
Book Building
In a book building offer, the syndicate members decide the price range and
the people decide the price of the issue based on a tender method.
Bankers to the issue
Bankers to the issue are entities that are registered by SEBI and act as issue
and collecting centres for IPO forms and cheques.
Brokers
Companies making public issues appoint brokers to procure subscription.
The managers to the issue distribute prospectuses and application forms to
the brokers. These brokers form a very important link in the distribution
value chain of financial products.
Brokerage
It is the commission paid to the brokers for the purchase and sale of shares.
Bonus Issues
They are the shares issued to capitalize on the reserves and surplus of the
company without charging the shareholders. From the accounting
perspective it involves a debit to the free reserves and a credit to the share
capital.
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Bridge Loan
A Bridge Loan is a loan that is used for a short duration of time until
permanent financing is put in place. Companies that come out with an IPO
issue access bridge finance for the interim period before the issue proceedsare actually realized.
Conditional Offer
An offer to purchase securities depending on the effectiveness of a
registration statement and the pricing of an IPO.
Dematerialisation
Dematerialisation or "Demat" is a process of converting the physical
securities into electronic form and stored in computers by a Depository.
Securities present in the physical form are surrendered to the respective
company which will then nullify them and credit the depository account.
Direct Public Offerings
Offering of securities to the public directly by an issuer without the
assistance of any Investment Banking
firm.
Draft Prospectus
A draft prospectus provides the information on the financials of the
company, promoters, background, tentative issue price etc. It is filed by the
Lead managers to SEBI to provide issue details. Overview of the draft
prospectus can be seen on www.sebi.gov.in (SEBIs web site). The final
prospectus is printed after obtaining the clearance from SEBI and Registrar
of Companies (ROC).
Bought Out Deals
A bought out deal is a process by which an investor (usually the investment
banker) buys out a significant portion of the equity of an unlisted company
with a view to make it public within an agreed time frame.
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Private Placement
A type of offering, exempted from registration that allows the issuing
company to avoid registration requirements and save underwriting fees by
offering company shares directly to institutional and accredited investors.Rights Issues
If a company wants to increase its subscribed capital by allotment of further
shares after 1 or 2 years of first allotment, it has to offer to the existing
shareholders first in proportion to the capital paid up on the shares held by
them.
American depository Receipt (ADR)
They are negotiable certificates that represent a certain number of shares of a
foreign stock traded on a US exchange and held by a US bank.
Global Depository Receipt (GDR)
They are negotiable certificates held by a bank of one country that represent
a certain number of shares of a foreign stock traded on another exchange,
usually a European exchange. The accounting requirements for GDRs are
not as stringent as that for ADRs.
Firm Allotment
Out of the total amount the company proposes to raise in the market, some
portion is fixed to the promoters in order to avoid diluting their stake in the
company. This is called Firm Allotment.
Filing
A copy of prospectus having attached to the documents required to be
submitted to the Registrar of Companies (ROC).
Flipping
The practice of subscribing to a new security offer and quickly selling it in
the after-market.
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Extraordinary General Meeting (EGM)
The meeting which is not an annual general meeting. This can be conducted
by any point of time whenever the company needs to take some crucial
decisions.Secondary Offering
The sale of newly issued securities by an issuer which already has publicly
traded securities.
Issued capital
The capital proposed by the company to be raised from the market. Out of
the issued capital the shares for which both application and allotment monies
are paid in full represents the paid-up capital.
Guest User
A person who is not a trading member (and hence cannot subscribe a new
issue) but is eligible to view listings and prospectus of new issues.
IPO
Initial Public Offer (IPO) is a source of collecting money from the public for
the first time in the market to fund for its projects. In return, the company
gives the share to the investors in the company
Investment Banking Firm
A financial entity acting as an underwriter or agent, and serves as an
intermediary between an issuer of securities and the investing public.
Investment bankers perform various services: financing, facilitating mergers,
corporate restructuring activities, broking and trading on their own accounts.
Issuer
An entity, like a company, municipality or government, that has the power
to issue and distribute securities.
Impersonation
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A person who
a) uses fictitious names for acquiring or subscribing shares
b) induces the company to allot or register any transfer of shares to him or
any other person in a fictitious name
Joint Applications
Applications can be filled in single or in joint names (more than one person).
In joint application, all payments will be made in favor of the first applicant.
Listing
The process of making the securities officially quoted on the notified stock
exchange for the trade.
Multiple Applications
Two or more applications submitted on a single name are considered as
multiple applications.(An applicant is supposed to submit only one
application irrespective of the number of shares applied for.) The
applications submitted for both electronic and physical equity shares are
considered as multiple applications.
Minimum Subscription
The minimum shares the company needs to get from the public out of the
total issue by the date of closure. (Presently every company need to raise
90% of the issued amount). Else, the company shall refund the whole
amount received. This 90 % has to be exclusive of the cheques that are not
cleared.
Oversubscription
Any extra amount received by the company more than the proposed issued
capital.
Lead Managers
The lead manager is appointed by the company which desires to raise capital
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from the market. The lead manager performs the following activities:
Designing the instrument
Pricing the issue
Timing the issue
Marketing
Preparing the offer document
Listing
Allotment/Refund
Merchant Bankers
Merchant Bankers facilitate the issue process.
Role of Merchant Banker:
Directing and co-ordinating the activities with under writers, registrars and
bankers.
Assuring the investors of the soundness of the issue
Promising companies/entrepreneurs/promoters to tap resources, Complying
with SEBI guidelines.
National Securities Depository Limited (NSDL)
This is an organization, which is an intermediary between the Registrar and
the company for dematerialisation of shares.
Net Offer
The rest of the issued capital after allotting to promoters, which would be
raised from the public is called Net Offer.
Paid Up capital
The part of the issued capital of a company that has been paid up by the
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shareholders
Preferential Shares
These are the shares issued at a fixed coupon rate to investors which entails
the foregoing of the right to participate in the management.
Profit Earning (P\E) ratio
P/E is the ratio of a company's share price to earnings per-share. It
essentially shows the amount that an investor is willing to pay for every one
rupee earned by the company.
Prospectus
The official offer document included in the registration statement filed with
SEBI in conjunction with a public offer. The prospectus contains
information about the offer of securities and should be given to the original
purchasers no later than the written confirmation of their purchase.
Registration Statement
A document that must be filed with SEBI before securities can be sold to the
public. It describes the business of the issuer of the securities, how the
proceeds of the offering will be used, audited financial statements, some
background on the principal executives, and other pertinent data.
External Risk Factors
The external factors that influence the companys performance vis-a-vis
share performance, which has to be spelt out by the company in the offer
document. These are usually factors like changes in macroeconomic
variables which are outside the control of the company.
Internal Risk Factors
The internal factors that influence the companys performance vis-a-vis
share performance, which has to be spelt out by the company in the offer
document. These are usually factors pertaining to the companys internal
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operations and management which are within the control of the company.
Management Perception of Risk Factors
The managements comment on the possible impact of the risk factors and a
statement of how the company is prepared to tackle and overcome these riskfactors.
Rights Issue
In order to avoid dilution of stake of existing shareholders, company issues
"rights" shares in proportion to their current holding. This is done when the
company plans to tap the market after their IPO.
Registrar
They play an administrative role in conducting a public issue. They are
responsible for collecting information from the collecting banks and report
to the companies and lead managers about the issue collections. They advise
the company regarding the closure or extension of closing date of the issue.
Stock Option
The right to buy a stock at a specified price at a specified time in the future.
Stock options are usually given to senior managers and executives as anincentive to continue with the company.
Underwriter
An investment banking firm which enters into a contract with the issuer of
new securities to distribute them to the investing public.
Underwriting Commission
The commission paid to the underwriter for bearing the risk of an issue.
Venture Capital
An important source of financing used to fund start-up companies that do
not have access to capital markets. Venture Capital typically entails
significant investment risk but offers the potential for above-average future
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returns.
Mutual Fund Glossary
Active Portfolio Management
Is a systematic and proactive approach to investment with the goal of
beating the market. This strategy is based on the premise that markets are
not efficient and that there is scope to earn abnormal profits through an
active investment strategy.
Annualized Return
The return a fund would have generated over a year on a compounded basis.
This method is the best indicator to measure the performance of a fund.
Asset Management Company (AMC)
A Company registered with SEBI, which takes investment/ divestment
decisions for the mutual fund, and manages the assets of the mutual fund.
e.g. for Sun F&C mutual fund , the AMC is Sun F&C Asset Management
(India) Pvt. Ltd.
Asset Allocation
It is the process of allocating the overall corpus to different assets like
equities, bonds, real estate, derivatives etc.
Credit Risk
It is the risk that the issuer of a fixed income security may default on
payment of interest and repayment of principal. It is also referred to as
default risk.
Debt fund
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A fund that invests in debt securities like Government securities, Treasury
Bills, corporate Bonds etc. These funds are generally preferred by investors
wanting steady income and not willing to take higher risks.
Dematerialization
The process of converting the physical /paper shares in Electronic form.
SEBI had made it compulsory to get the shares of some companies
dematerialized. In this process the investor opens an account with a
Depository Participant (DP) and the number of shares the investor holds is
shown in this account.
Depository Participant
An authorized body who is involved in dematerialization of shares and
maintaining of the investors accounts.
Discount/Premium to (Net Asset Value) NAV
It is the difference between the unit price and NAV. If the price is higher
than the NAV, the units are trading at premium: if the price is lower, theunits are trading at a discount.
Diversification
It is the investment strategy of not putting all ones eggs in one basket. By
diversifying a portfolio across different industries, overall risk of the
portfolio is red
Dollar Cost Averaging
The strategy of dividing the investible amount into a number of equal parts
and buying at regular intervals to take advantage of lower prices. This
strategy is more beneficial in a bear phase.
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Efficient Portfolio
A portfolio which ensures maximum return for a given level of risk or a
minimum level of risk for an expected return.
Factor Fund
It is a mutual fund that has a core philosophy of investing in a particular
factor or style in the market. They are also referred to as Style Funds.
Examples of factor funds are Mid-cap funds, Low P/E funds, Growth funds
etc.
Financial Pyramid
An investment plan in the shape of a pyramid structure where the safest
investments are at the base and the riskiest investments at the peak.
Fixed Income Security
A type of security that pays fixed interest at regular intervals. Thesecomprise gilt-edged securities, bonds (taxable and tax-free), preference
shares and debentures. Less risky than equity shares and have little scope for
capital appreciation.
Equity/Growth fund
A fund that invest primarily in equities and has capital appreciation as its
investment objective
Fund Manager
A professional manager appointed by the Asset Management Company to
invest money in accordance with the objects of the scheme.
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Income Fund
A fund that usually invests in debentures, bonds, and high dividend shares.
Preferred by investors who wants regular income. It pays dividends to theinvestors out of its earnings.
Initial Offer Period
The dates on which the initial subscription to the units of the scheme can be
made. It is similar to the IPO of an equity issue. This initial offer period is
followed by a continuous offer period.
Interest Rate Risk
The change in the price of a debt security due to changes in the market
interest rates is the interest rate risk. For debt oriented mutual fund schemes,
this interest rate risk affects the NAV of the fund. A rise in the interest rates
leads to a fall in the price of a fixed income security.
Interim Dividend
An advance installment of the dividend finally declared. More often one, but
sometimes two such payments are made. The final dividend is often at least
equal, and sometimes more. The interim dividend is a fair indication of a
company's profitability, during the working year.
Liquid Fund
A fund that invests its corpus in short term instruments like call markets,
treasury bills, Commercial Paper (CP), Certificate of Deposit (CD).
Liquidity Risk
It is the risk in a fixed income security as well as in equities that these
securities may not be sold in the market at close to their value. Liquidity risk
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is characteristic of narrow markets like India.
Market Capitalization
Represents the market value of the company. It is a product of the current
market price and the number of shares outstanding.Market Instrument
A fully negotiable instrument for short-term debt.
Market Lot
A fixed minimum number of shares, in which or in multiples of which,
shares are bought and sold on the stock exchange. The advent of
dematerialization of shares will do away the significance of market lot.
Net Asset Value (NAV)
This is calculated as total assets minus all expenses and divided by the
number of outstanding units. This is the main performance indicator for a
mutual fund, especially when viewed in terms of appreciation over time.
No-Load Fund
Shares of an open-ended fund, which can be bought directly from the fund
without any sales charge or brokerage. US-64 is an example of a no-load
fund.
Offer Price
The price at which units can be bought from a fund.
Offshore Fund
A fund domiciled outside the country where investments are made. It is
often a tax haven, not subject to the tax laws of the holder's country.
Pari Passu
Ranking equally. After conversion of debentures into shares, the new shares
created carry the same rights as the existing shares of the company to receive
dividends, rights and bonus shares, and to participate in the company's profit
and loss.
Passive portfolio management
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Exactly the reverse of active portfolio management. The portfolio manager
assumes that markets are efficient and all information is already analyzed
and reflected in the prices of shares. This strategy is based on the premise
that it is impossible to consistently beat the market.
Rating
Evaluation of credit risk in fixed income securities. This evaluation is
specific to the security rated and is done in India by Crisil, Icra, Care and
Duff & Phelps.
Record Date
It is the date announced by the company/mutual fund, which is a cut-off date
for corporate benefits like dividends, rights, bonus etc. Only investors whose
names appear in the companys registers on that date are eligible for the saidbenefits.
Reinvestment Plan
It is a plan where the earnings of a mutual fund scheme are reinvested back
in the fund.
http://www.karvy.com/mfd/glossary.htm - TOP%23TOPReinvestment Risk
It is the risk that the interest on fixed income instruments cannot be
reinvested at the same rate. This problem becomes pronounced in a falling
interest rate scenario.
Sector fund
Such funds invest only in stocks belonging to a specific industry usually
aimed at growth. For e.g. Kothari Pioneer Infotech Fund. Sector funds are
generally considered to be risky in nature.
Securities
Financial documents which give the owner specific rights of ownership;
these include: equity and preference shares, debentures, treasury bills,
government bonds, units of mutual fund, and any other marketable
documents.
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Sinking Fund
Money regularly set aside in a separate fund and invested by a company for
the repayment of debt instruments (fixed deposits, debentures, other loans)
or the redemption of preference shares, or for replacement of assets.Sponsor
Sponsor is the parent organization that contributes the initial capital of the
asset management company (AMC). e.g. Kotak Mahindra Finance is the
sponsor for Kotak Mahindra Mutual Fund.
Switching
Transferring from one scheme to another in a group of schemes operated bya Mutual Fund, where the rules so permit. A switching fee may or may not
be
SWOT Analysis
A type of fundamental analysis of the health of a company by examining its
strengths(S), weakness (W), business opportunity (O), and any threat (T) or
dangers it might be exposed to.
Systematic Risk
This is the market risk that a security faces and is essentially non-
diversifiable in nature. This risk is caused by macro level factors like
changes in inflation, interest rates, budget announcements etc.
Tax saving fund
Such funds allow the income tax payees to claim a rebate under the Income
Tax Act.
Technical Analysis
A method of prediction of share price movements based on a study of price
graphs or charts on the assumption that share price trends are repetitive.
Since investor psychology follows a certain pattern, what is seen to have
happened before is likely to be repeated. The technical analyst is not
concerned with the fundamental strength or weakness of a company or an
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industry; he only studies price and volume behavior.
Top-Down Investment
An approach to stock selection which evaluates the prospects of the
economy first, then the prospects of the industry and then finally theprospects of a particular company to take an investment decision. It is the
opposite of a bottom-up approach to investing.
Transfer Agents
Professional firms, now mostly computerized, which maintain the records of
shareholders of their client companies.
Treasury Bills
These are bills of exchange, i.e., IOUs, issued by the Reserve Bank of India
for short-term loans, 91 days to 364 days.
Trustee
The trustee is the legal owner of the mutual fund. The trustee takes into
custody or under its control all the capital and property of every scheme of
the mutual fund and hold it in trust for the unitholders of the scheme.
Unsystematic Risk
This is the proportion of risk that is specific to a particular company. This
diversifiable risk could arise due to company specific factors like operational
factors, financial factors, labor unrest etc.
Value Investment
Investment in shares whose intrinsic value is above their market price.
Fundamental analysts often make recommendations of value investment, as
they can spot undervalued shares.
Vulture Fund
It is a fund that takes over the non-performing assets of bank or financialinstitution at a discount and issues pass-through units to the investors.
Venture Capital Fund
A limited company formed to provide venture or risk capital to new
industries.
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Zero Coupon Bond
A coupon is an interest warrant attached to a debt instrument, and the
coupon rate is the rate of interest. A zero-coupon bond carries no interest,
but is sold at a discount to its face value, which is the maturity value. Thedifference between the discounted price and the maturity value represents
the interest on the bond.
3) Stock market glossary
Arbitrage
The business of taking advantage of difference in price of a security tradedon two or more stock exchanges, by buying in one and selling in the other
(or vice versa). Quite simply it means you try to buy something cheap in one
place, to make a profit selling it somewhere else.Given the speed at which
the financial markets now operate, in practice the simultaneous purchase of
foreign exchange, securities, commodities or any other financial instrument
in one market and the sale in another at a higher price.
American Depository Receipt (ADR)
A stock representing a specified number of shares in a foreign corporation.
ADR's are bought and sold in the American markets just like regular stocks.
An ADR is issued by a U.S. Bank, consisting of a bundle of shares of a
foreign corporation that are being held in custody overseas. The foreign
entity must provide financial information to the sponsor bank. ADR's are
listed on either the NYSE, AMEX, or NASDAQ.
American Depository Share (ADS)
A share issued under deposit agreement that represents an underlying
security in the issuer's home country. The term ADR and ADS are thought to
be the same, they sort of are. ADS is the actual share trading while ADR
represents a bundle of ADSs.
Arbitration
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Settlement of claims differences or disputes between one member and
another and between a member and his clients, authorised clerks, sub-
brokers etc., through appointed arbitrators.
Bearer SecurityThis is a bond or a share for which there is no other proof of ownership than
the physical possession of the security. No official record or register of
ownership is kept, the owner is the "bearer" of the share or bond certificate.
This means that these certificates are easily traded without formality. If you
own bearer securities, look after them! No dividend is paid to such shares
and no interest paid to such bonds. Instead the certificate will have several
coupons attached. These must be physically removed from the certificate
and presented to the originating company for payment of any dividen