Money and Banking
Monetary Policy: The term monetary
policy refers to actions taken by central banks to affect monetary magnitudes
or other financial conditions.
Bank Rate: Bank
rate is the rate at which the central bank of a country provides loan to the
commercial banks.
Open Market Operations: Open market operation consists of purchase and
sale of securities by the central bank of the country.
Cash Reserve Ratio: Cash Reserve Ratio is a certain percentage of bank
deposits which banks are required to keep with RBI in the form of reserves or
balances.
Selective Credit Control: Selective Credit Controls are
aimed at regulating the distribution of
credit amongst sectors or purposes.
Repo Rate: Repo (Repurchase) rate is the rate at which the RBI lends shot-term money
to the banks against securities.
Reverse
Repo Rate: Reverse Repo rate is the rate at which banks park
their short-term excess liquidity with the RBI.
Financial inclusion: Financial inclusion is the process of
ensuring access to appropriate financial products and services needed by
vulnerable groups such as weaker sections and low-income groups at an
affordable cost in a fair and transparent manner by mainstream institutional
players.
Non-Performing
Asset: An asset, including a leased asset, becomes non performing when it
ceases to generate income for the bank. A non performing asset (NPA) is a loan
or an advance where interest and/ or instalment of principal remain overdue for
a period of more than 90 days in respect of a term loan.
Call money market: The call money market is an
important segment of the money market where uncollateralized borrowing and
lending of funds take place on overnight basis.
Liquidity Adjustment Facility: RBI stands ready, on daily
basis, to lend or borrow money from the banking system, as per the latter’s
requirement, at fixed interest rates. The primary aim of such an operation is
to assist banks to adjust to their day-to-day mismatches in liquidity, via repo
and reverse repo operations.
General Credit Card: With a view to helping the
poor and the disadvantaged with access to easy credit, banks have been asked to
consider introduction of a general purpose credit card facility up to Rs.
25,000 at their rural and semi-urban branches.
Lead Bank Scheme: Lead Bank Scheme emphasizes
making specific banks in each district the key instruments of local development
by entrusting them with the responsibility of locating growth centres,
assessing deposit potential, identifying credit gaps and evolving a
co-ordinated approach to credit deployment in each district, in concert with
other banks and credit agencies.
Development banks: Specialized public and private
financial intermediaries providing medium and long-term credit for development projects.
Price and
Inflation
Inflation: A
persistent and appreciable rise in the general level of prices of goods and
services in an economy
over a period of time.
Demand-pull Inflation: It is a situation when “too many money chasing after too
few goods”. An excess of aggregate demand over aggregate supply generates
inflationary rise in prices. When money supply increases it creates more demand
for goods but if supply of goods cannot be increased due to full employment or
other reasons, demand-pull inflation is caused.
Cost-push inflation: Cost-push inflation is caused by wage
increase enforced by labour unions, profit increase by the entrepreneurs and
input price rise due to structural or external reasons
Inflation Tax: Printing of money to raise government
revenue is like imposing a tax as it
causes inflation and inflation eats up a part of the value of money.
This is called inflation tax
Wholesale Price Index (WPI): WPI is a weighted average of price (whole sale) relatives of
commodities, classified into three categories namely, primary, manufacturing
and fuel and power.
Consumer Price Index (CPI): CPI is a
weighted average of price relatives of a basket of goods and services consumed
by the people.
Headline inflation: While ‘headline inflation’ covers the entire set of goods and services
included in the general index, ‘core inflation’ otherwise known as ‘underlying
inflation’ ignores the volatile items in the general index.
Inflation targeting: Inflation targeting refers to the practice of the central bank to set
an inflation target and then adjust its monetary policy accordingly.
Inflationary Gap: The inflationary gap is the
amount by which aggregate expenditure would exceed aggregate output at the full
employment level of income.
Producer Price Index (PPI): The Producer Price Index is a family
of indices that measures the average change over time in the selling prices
received by domestic producers of goods and services. PPIs measure price change
from the perspective of the seller.
Headline inflation: Headline inflation covers
the entire set of goods and services included in the general index.
Core inflation: Core inflation, otherwise
known as ‘underlying inflation’, ignores the volatile items in the general
index.
International
Economics
Autarky: A closed economy that has no trade
relation with the rest of the world.
Balance
of trade: The difference between the value of exports and the
value of imports.
Trade
deficit => imports >
exports
Trade surplus
=> exports
> imports
Balance of payments:
A systematic record of a country’s transactions with the rest of the world.
Balanced
trade: A
situation in which the value of a country's exports and the value of its
imports are equal.
Exchange
Rate: An exchange rate is the rate at which one country’s
currency can be traded for another
country’s currency. The exchange rate is determined by demand and supply in the
foreign exchange markets where traders buy and sell currencies.
Comparative advantage:
The principle of comparative advantage states that
as long as the relative opportunity costs of producing goods differ among
nations, there are potential gains from trade.
Tariff: Tariffs (customs duties) are taxes governments place on internationally
traded goods.
Quota: Quotas are quantity limits placed on imports.
Both tariffs
and quotas increase price and reduce quantity.
Under a tariff,
the government collects the tariff revenue.
With a quota,
the domestic price increases, and the importer, not the government, gets the
revenue.
Absolute
advantage:
If one country can produce more of a commodity with the same amount of real
resources than another country, the country is said to have absolute advantage
over other country.
Capital account: The portion of
a country’s balance of payments that
records the volume of private foreign investment and public grants and loans
that flow into and out of a country during a given period.
Capital account convertibility: Absence of restrictions on the use and availability of
a currency for buying and selling international assets. Unlike the current
account, the rupee is not fully convertible on the capital account yet in
India.
Capital
inflow: Borrowing from foreigners
.Example: foreigners purchasing domestic assets or surplus in capital account.
Capital
outflow: Lending
abroad. Example: Indians buying foreign assets or deficit in capital account.
Convertible currency: A currency that
can be freely traded for other currencies. Indian rupee is almost convertible
now.
Crawling peg: Exchange rate system in which the
exchange rate is allowed to move in line with the excess of domestic over
foreign inflation. The objective is to keep the real exchange rate stable.
Devaluation: Increase in
the exchange rate by the government.
Exchange rate: The price of
one national currency in terms of another.
Foreign exchange reserve: Foreign assets
held by the central bank.
Hard currency The currency
of a major country, suc as US dollar, German mark, or the Japanese yen, that is
freely convertible into other "soft" currencies.
Stock Market Concepts
Arbitrage: The difference
between price of a security in two different exchanges. The difference can be
used to make profits by persons holding a security to sell the same at an
exchange where its price is high and buy it at an exchange where it is
available at a lower price.
Bad Debt: A debt that is
not collectible and therefore worthless to the creditor. This debt, once
considered to be bad, will be written off by the company as an expense.
Balance Sheet:
A
financial statement that summarizes a company's assets, liabilities
and shareholders' equity at a specific point in time. These
three balance sheet segments give investors an idea as to what the company owns
and owes, as well as the amount invested by the shareholders.
Balanced Fund:
A
mutual fund that invests its assets into the money market, bonds, preferred
stock, and common stock with the intention to provide both growth and income.
Bankruptcy: The state of a
person or firm unable to repay debts.
Basis Point: A unit that is
equal to 1/100th of 1%, and is used to denote the change in a
financial instrument. The basis point is commonly used
for calculating changes in interest rates, equity indexes and
the yield of a fixed-income security.
Bear Market: A market
condition in which the prices of shares are falling or are expected to fall.
Blue Chip: A nationally
recognized, well-established and financially sound company.
Bond: A debt
investment with which the investor loans money to an entity (company or
government) that borrows the funds for a defined period of time at a specified
interest rate.
Book Closure: A company's
announcement of a dividend or bonus to investors.
Book Value: The net asset
value of a company, calculated by total assets minus intangible assets
(patents, goodwill) and liabilities.
Boom: A period of
time during which sales or business activity increases rapidly.
Broker: An individual
or firm that charges a fee or commission for executing buy and sell orders
submitted by an investor.
Bubble: A surge in
equity prices, often more than warranted by the fundamentals and usually in a
particular sector, followed by a drastic drop in prices as a massive selloff
occurs.
Bull Market: A
financial market of a certain group of shares in which prices are rising
or are expected to rise.
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.
CAGR: The
year-over-year growth rate of an investment over a specified period of time.
It's an imaginary number that describes the rate at which an
investment would have grown if it grew at a steady rate
Capital Gain: An increase in
the value of a capital asset (investment or real estate) that gives it a higher
worth than the purchase price. The gain is not realized until the asset is
sold.
Capital Gains
Tax: A
type of tax levied on capital gains incurred by individuals and corporations.
Capital gains are the profits that an investor realizes when he or
she sells the capital asset for a price that is higher than the
purchase price.
Cash Flow
Statement: This
document provides aggregate data regarding all cash inflows a company
receives from both its ongoing operations and external investment sources, as
well as all cash outflows that pay for business activities and investments
during a given quarter.
Closely Held
Shares: The
shares held by individuals closely related to a company.
Closing Price:
The
final price at which a security is traded on a given trading day.
Commodity: A basic good
used in commerce that is interchangeable with other commodities of the same
type. Commodities are most often used as inputs in the production of other
goods or services.
Commodity
Index: An
index that tracks a basket of commodities to measure their performance.
Crash: A major
decline in a financial market.
Demat –
Dematerialization: Dematerialisation
is the process by which physical certificates of an investor are converted to
an equivalent number of securities in electronic form and credited into the
BO’s account with his DP.
Dalal Street: A term that
refers to the Bombay Stock Exchange, the major stock exchange in India. The
street is home not only the Bombay Stock Exchange but also a large
number of other financial institutions.
De-merger: A corporate
strategy to sell off subsidiaries or divisions of a company.
Debenture: A type of
debt instrument that is not secured by physical asset or collateral.
Debentures are backed only by the
general creditworthiness and reputation of the issuer. Both
corporations and governments frequently issue this type of bond in order to
secure capital.
Debt: An amount of
money borrowed and owed by one party to another.
Debt Fund: An investment
pool, such as a mutual fund or ETF, in which core holdings are fixed
income investments. The fee ratios on debt funds are lower, on average,
than equity funds because the overall management costs are lower.
Derivative: The term
"Derivative" indicates
that it has no independent value, i.e. its value is entirely
"derived" from the value of the underlying asset. The underlying
asset can be securities, commodities, bullion, currency, live stock or anything
else. In other words, Derivative means a forward, future, option or any other
hybrid contract of pre determined fixed duration, linked for the purpose of
contract fulfillment to the value of a specified real or financial asset or to
an index of securities.
Disinvestment:
The
action of an organization or government selling or liquidating an
asset or subsidiary.
Diversification:
A
risk-management technique that mixes a wide variety of investments within a
portfolio. The rationale behind this technique contends that a portfolio
of different kinds of investments will, on average, yield higher returns
and pose a lower risk than any individual investment found within the
portfolio.
Dividend: Distribution
of a portion of a company's earnings, decided by the board of directors, to a
class of its shareholders.
EBITDA - Earnings Before Interest, Taxes, Depreciation and
Amortization:
EBITDA is a good metric to evaluate profitability
EPS - Earnings Per Share: EPS is the earning
on each share of a company.
ESOP - Employee Stock Ownership Plan: A
qualified, defined contribution, employee benefit plan designed to invest primarily
in the stock of the sponsoring employer.
FCCB - Foreign Currency Convertible Bond: A
type of convertible bond issued in a currency different than the issuer's
domestic currency.
FDI - Foreign Direct Investment: An
investment abroad, usually where the company being invested in is controlled by
the foreign corporation.
FII - Foreign Institutional Investor: Foreign Institutional investors (FIIs)
are entities established or incorporated outside India and make proposals for
investments in India. The biggest source through which FIIs invest is the
issuance of Participatory Notes (P-Notes), which are also known as Offshore
Derivatives. Types of typical
investors include banks, insurance companies,
retirement or pension
funds, hedge
funds, investment
advisors and mutual
funds.
GAAP - Generally Accepted Accounting Principles:
The common set of accounting principles, standards and procedures that
companies use to compile their financial statements.
GDR - Global Depositary Receipt: 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 bank.
Gilt Fund: A mutual fund
that invests in several different types of medium and long-term government
securities in addition to top quality corporate debt.
Growth Fund: A diversified
portfolio of stocks that has capital appreciation as its primary goal, and
thereby invests in companies that reinvest their earnings into expansion,
acquisitions, and/or research and development.
Haircut: The difference
between prices at which a market maker can buy and sell a security.
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.
Hedge Fund: An aggressively
managed portfolio of investments that uses advanced investment strategies
such as leverage, long, short and derivative positions in both
domestic and international markets with the goal of generating high
returns.
Holding Period:
In
a long position, holding period refers to the time between an asset's purchase
and its sale. In a short sale, the length of time for which the short
position is held.
Initial
Public Offering – IPO: The first sale of stock by a private
company to the public.
Income Fund: A mutual fund
that seeks to provide stable current income by investing in securities that pay
interest or dividends.
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.
Index Fund: A portfolio of
investments that is weighted the same as a stock-exchange index in order to
mirror its performance.
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 nonpublic.
Institutional
Investor: A
non-bank person or organization that trades securities in large enough share
quantities or dollar amounts that they qualify for preferential treatment and
lower commissions.
Liquidity: The degree to
which an asset or security can be bought or sold in the market without
affecting the asset's price.
Maturity Date: The date on
which the principal amount of a note, draft, acceptance bond or other debt
instrument becomes due and is repaid to the investor and interest payments
stop.
Mid Cap: Companies
having a market capitalization between Rs 500 cr. and Rs 1,000 cr.
Mutual Fund: A 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. Units are issued and can be redeemed as needed.
NAV - Net Asset Value: The total value of
the fund's portfolio less liabilities.
Open End Fund: A type of
mutual fund where there are no restrictions on the amount of shares the fund
will issue. If demand is high enough, the fund will continue to issue shares no
matter how many investors there are. Open-end funds also buy back shares when
investors wish to sell.
Oversubscribed:
A
situation in which the demand for an initial public offering of securities
exceeds the number of shares issued.
P/E Ratio - Price-Earnings Ratio: PE ratio or PE
multiples is the ratio arrived by dividing Current market Price by Earnings
per share of that stock.
Pension Fund: A fund
established by an employer to facilitate and organize the investment of
employees' retirement funds contributed by the employer
and employees.
Portfolio: The group
of assets - such as stocks, bonds and mutuals - held by an investor.
Redemption: The return of
an investor's principal in a security, such as a stock, bond, or mutual fund.
Registrar: An institution
or organization that is responsible for keeping records of bondholders and
shareholders.
Sensex: An abbreviation
of the Bombay Exchange Sensitive Index (Sensex) - the benchmark index of the
Bombay Stock Exchange (BSE). It is composed of 30 of the largest and most
actively-traded stocks on the BSE.
Warrant: A derivative
security that gives the holder the right to purchase securities (usually
equity) from the issuer at a specific price within a certain time frame.
Write-Off: A reduction
in the value of an asset or earnings by the amount of
an expense or loss.
YOY - Year Over Year: A method of evaluating two or more measured events
that compares the results of measurement at one time period with those from
another time period, on an annualized basis.
Yield: Yield
is the annual rate of return for any investment and is expressed as a
percentage.
Microeconomics
Allocative
efficiency: Production of maximum output possible, using
given quantities of inputs and available techniques of production in the most
efficient manner.
Asymmetrlc
informatlon:
A situation in which one party (say, seller) in the market has more information
than another party (i.e. buyer).
Invisible
hand:
According to Adam Smith if individuals conduct their economic activities in
their own best interests, the economy will operate at maximum efficiency,
without government requiring to intervene.
Cartel: An
organization of producers agreeing to limit the output of their product in an
effort to raise prices and Profits. Example: OPEC.
Colluslon: An agreement
among sellers of a commodity to set a common price or share their commodity
market so as to reduce competition among them.
Cost-benefit
analysis:
The actual and potential private and social costs of various economic decisions
are compared with actual and potential private and social benefits. Decisions
or projects that yield the highest ratio of benefit to cost are usually
selected for implementation.
Diminishing
returns:
If one factor of production is kept unchanged and other factors are added in
constant increments, the marginal productivity of variable factors will
eventually decline.
Division of
labor:
Allocation of tasks among workers such that each one engages in tasks that-he
or she performs most efficiently. Division of labor promotes worker
specialization and thereby adds to overall labor productivity.
Economies of
scale:
Economies of scale refers to increase in the scale of production, resulting in
reduction in the cost of production per unit of output.
Externality: Any benefit
or cost borne by an individual resulting from another person’s behaviour. Factor mobility: The unrestricted
transference or free voluntary movement of. factors of production among
different uses and geographic locations.
Factor-price
distortions:
When prices of the factors of production do not reflect their true scarcity
values i.e. their competitive market prices. Factor-price distortions may lead
to the use of inappropriate techniques of production.
Imperfect
competition:
A market situation in which producers have some degree of control over the
price of their product. Examples: Monopoly and oligopoly.
Imperfect
market:
A market where any (or some) features of perfect competition such as, large
number of buyers and sellers, free entry and exit, homogeneous product and
complete information is absent.
Increasing
returns:
A more than proportional increase in output that results from a change in the
scale of production leading to a reduction in cost per unit as scale enlarges.
Generally public utility services such as water supply, electricity etc. are
characterized by increasing returns. This leads to natural monopoly.
Market failure: A phenomenon
that results from the existence of market imperfections that weaken the
functioning of a free-market economy and the market fails to realize Pareto
optimality.Market failure often provides the justification for government
intervention.
Pareto optimality: A situation
in which no one can be made better off without making someone else worse off.
Perfect
competition:
A market situation characterized by (i) Large number of buyers and sellers;
(ii) homogeneous products; (iii) free entry and exit and (iv) perfect
knowledge.
Prisoners'
dilemma:
A situation in game theory in which all parties would be better off cooperating
than competing, but, given that cooperation has been initially achieved, each
party would gain the most by cheating while others stick to the cooperative
agreements.
Product differentiation: The practice
of some producers to differentiate their products from similar ones through
differential packaging and/or advertisements.
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