Understanding

the
Economic Times
INFLATION
• A general increase in prices and fall in the
purchasing power of money, or, an
increase in available currency.

DEFLATION
• Reduction of the amount of money in
circulation in order to increase its value.
DISINFLATION
• A policy designed to counteract inflation
without causing deflation.

STAGFLATION
• A state of inflation without corresponding
increase of demand and employment.
Cash Reserve Ratio (CRR)
• The liquid cash that all banks are required
to maintain with the RBI as a percentage
of their demand and time liabilities.
PRICE INDEX
• A normalized average (typically a
weighted average) of prices for a given
class of goods or services in a given
region, during a given interval of time.
• It is a statistic designed to help to compare
how these prices, taken as a whole, differ
between time periods or geographical
locations.
Consumer Price Index (CPI)
• A consumer price index (CPI) is a
measure of the average price of consumer
goods and services purchased by
households.
• It is one of several price indices calculated
by national statistical agencies.
• The percent change in the CPI is a
measure of inflation.
High Net worth Individuals (HNI)
• Individuals typically defined as having
investable assets (financial assets not
including primary residence) in excess of
US$1 million.

CARTEL
• An informal association of manufacturers
and suppliers to maintain prices at a high
level and control production etc.
 MARKET LIQUIDITY
• Is a term that refers to an asset's ability to be
easily converted through an act of buying or
selling without causing a significant
movement in the price and with minimum
loss of value.
 VENTURE CAPITAL
• It is a type of private equity capital typically
provided to immature, high-potential, growth
companies in the interest of generating a
return through an eventual realization event
such as an IPO or trade sale of the
company. Venture capital investments are
generally made as cash in exchange for
shares in the invested company.
 VENTURE CAPITALIST (VC)
• A VC is a person or investment firm that makes
venture investments, and these VCs are
expected to bring managerial and technical
expertise as well as capital to their investments.
• In exchange for the high risk that VCs assume
by investing in smaller and less mature
companies, they usually get significant control
over company decisions, plus a significant
portion of the company's ownership and
consequent value.
 ANGEL INVESTORS
• They are affluent individual who provides capital
for a business start-up, usually in exchange for
convertible debt or ownership equity.
• Angels typically invest their own funds, unlike
venture capitalists, who manage the pooled
money of others in a professionally-managed
fund
• Angel capital fills the gap in start-up financing
between "friends and family" (sometimes
humorously called "friends, family, and fools")
who provide seed funding, and venture capital.
ARBITRAGE
• Arbitrage is the practice of taking
advantage of a price differential between
two or more markets: striking a combination
of matching deals that capitalize upon the
imbalance, the profit being the difference
between the market prices.
REPO RATE
• It is the rate at which the banks can borrow
money from a central bank of the country in
order to avoid scarcity of funds.
• Thus, a reduction in the REPO rate will help
banks to get money at a cheaper rate.
• It is also a financial & economic tool in the
hands of the government to control the
availability of money supply in the market by
altering the REPO rate from time to time.
SHORT SELLING
• It is the practice of selling a financial
instrument that the seller does not own at
the time of the sale.
• Short selling is done with intent of later
purchasing the financial instrument at a
lower price.
• Short-sellers attempt to profit from an
expected decline in the price of a financial
instrument.
CLOSING A POSITION
• The act of repurchasing the financial
instrument is known as "closing" a
position.
FUTURES CONTRACT
• It is a standardized contract to:
– buy or sell a standardized quantity of a
specified commodity of standardized
quality
– at a certain date in the future,
– at a price determined by the
instantaneous equilibrium between the
forces of supply and demand on the
exchange at the time of the purchase or
sale of the contract.
DELIVERY DATE
• The future date in question is called the
delivery date or final settlement date.

SETTLEMENT PRICE
• The official price of the futures contract at
the end a day's trading session on the
exchange is called the settlement price
for that day of business on the exchange.
OPTIONS
• Options are financial instruments that
convey the right, but not the obligation, to
engage in a future transaction on some
underlying security, or in a futures
contract.
CALL OPTION
• Buying a CALL OPTION provides the right
to buy a specified quantity of a security at
a set strike price at some time on or before
expiration
PUT OPTION
• buying a PUT OPTION provides the right
to sell a specified quantity of a security at
a set strike price at some time on or before
expiration
CAPITAL GAINS TAX
• A capital gains tax is a tax charged on
capital gains, the profit realized on the sale
of a non-inventory asset that was
purchased at a lower price.
• The most common capital gains are
realized from the sale of stocks, bonds,
precious metals and property (real estate).
CAPITAL GAINS TAX
• As of 2008, equities are considered long
term capital if the holding period is one
year or more.
• Long term capital gains from equities are
not taxed if shares are sold through
recognized stock exchange and Securities
Transaction Tax (STT) is paid on the sale.
 FRINGE BENEFIT TAX
• It is the tax applied to fringe benefits. The
following items are covered:
• expenses on entertainment, travel, employee
welfare and accommodation.
• provision of employee transportation to work
or a cash allowances for this purpose.
• contributions to an approved retirement plan
(called a superannuation fund).
• Employee stock option plans (ESOPs) have
also been brought under FBT from the fiscal
year 2007-08.
BONDS
• A bond is a debt security, in which the
authorized issuer owes the holders a debt
and is obliged to repay the principal and
interest at a later date, termed maturity.
• A bond can be considered as a loan in the
form of a security
• Bonds enable the issuer to finance long-
term investments with external funds.
SHARE
• a share (also referred to as equity share)
of stock means a share of ownership in a
corporation (company).
 BONDS vs. STOCKS
• Bonds and stocks are both securities, but
the major difference between the two is that
stock-holders are the owners of the
company (i.e., they have an equity stake),
whereas bond-holders are lenders to the
issuing company.
• Another difference is that bonds usually
have a defined term, or maturity, after which
the bond is redeemed, whereas stocks may
be outstanding indefinitely.
COMMODITY
• A commodity is anything for which there
is demand, but which is supplied without
qualitative differentiation across a market.
• The price of a commodity is universal, and
fluctuates daily based on global supply
and demand..
• The price of a commodity is determined as
a function of its market as a whole.
COMMODITY
• Commoditization occurs as a goods or
services market loses differentiation across
its supply base, often by the diffusion of
the intellectual capital necessary to acquire
or produce it efficiently.
• As such, goods that formerly carried
premium margins for market participants
have become commodities, such as
generic pharmaceuticals and silicon chips.
 MONEY MARKET
• the money market is the global financial market
for short-term borrowing and lending. It provides
short-term liquidity funding for the global financial
system. The money market is where short-term
obligations such as Treasury bills, commercial
paper and bankers' acceptances are bought and
sold.
• The money market consists of financial
institutions and dealers in money or credit who
wish to either borrow or lend. Participants borrow
and lend for short periods of time, typically up to
thirteen months.
MONEY MARKET
• Money market trades in short-term financial
instruments commonly called "paper." This
contrasts with the capital market for longer-
term funding, which is supplied by bonds
and equity.
• The core of the money market consists of
banks borrowing and lending to each other,
using commercial paper, repurchase
agreements and similar instruments.
COMMERCIAL PAPER
• Commercial paper is an unsecured
promissory note with a fixed maturity of
one to 270 days.
• Commercial Paper is a money-market
security issued by large banks and
corporations to get money to meet short
term debt obligations (for example, payroll)
• They are backed by an issuing bank or
corporation's promise to pay the face
amount on the maturity date specified on
the note.
 NEGOTIABLE INSTRUMENT (NI)
• This is a specialized type of "contract" for the
payment of money that is unconditional and
capable of transfer by negotiation.
• Common examples include cheques, banknotes
(paper money), and commercial paper.
• This is not a contract, as contract formation
requires an offer, acceptance, and consideration,
none of which is an element of a NI.
• Unlike ordinary contract documents, the right to
the performance of a NI is linked to the
possession of the document itself (with certain
exceptions such as loss or theft).
 PROMISSORY NOTE
• A promissory note is a written promise by the
maker to pay money to the payee.
• The most common type of promissory note is a
bank note, which is defined as a promissory note
made by a bank and payable to bearer on
demand.
• The important points in a promissory note are
– 1) it is unconditional order
– 2) a specific amount
– 3) payable to the order of a person or on
demand
– 4) payable on a specified date.
BILL OF EXCHANGE
• A bill of exchange or "Draft" is a written order by
the drawer to the drawee to pay money to the
payee.
• The most common type of bill of exchange is
the cheque, which is defined as a bill of
exchange drawn on a banker and payable on
demand.
• Bills of exchange are used primarily in
international trade, and are written orders by
one person to his bank to pay the bearer a
specific sum on a specific date sometime in the
future.
LIBOR
• The London Inter-bank Offered Rate (or
LIBOR, is a daily reference rate based on
the interest rates at which banks offer to
lend unsecured funds to other banks in the
London wholesale money market (or inter-
bank market).
TIME DEPOSIT / DEMAND DEPOSIT
• A time deposit (also known as a term
deposit) is a money deposit at a banking
institution that cannot be withdrawn for a
certain "term" or period of time. When the term
is over it can be withdrawn or it can be held for
another term.
• Generally speaking, the longer the term the
better the yield on the money.
• The opposite is a Demand deposit, which can
be withdrawn at any time, without any notice or
penalty; e.g. money deposited in a checking
account or savings account in a bank.
 MORTGAGE
• A mortgage is the pledging of a property to a
lender as a security for a mortgage loan.
• While a mortgage in itself is not a debt, it is
evidence of a debt.
• It is a transfer of an interest in land, from the
owner to the mortgage lender, on the condition
that this interest will be returned to the owner of
the real estate when the terms of the mortgage
have been satisfied or performed.
• In other words, the mortgage is a security for
the loan that the lender makes to the borrower.
SECURITY
• A security is a fungible, negotiable
instrument representing financial value.
• Securities are broadly categorized into:
– debt securities (such as banknotes,
bonds and debentures)
– equity securities, e.g., common stocks.
DEBENTURE
• A debenture is defined as loans given
under the company's stamp and that
carries an undertaking that the debenture
holder will get a fixed return (fixed on the
basis of interest rates) and the principal
amount whenever the debenture matures.
• In finance, a debenture is a long-term
debt instrument used by governments and
large companies to obtain funds.
 BANKRUPTCY
• Bankruptcy is a legally declared inability or
impairment of ability of an individual or
organization to pay their creditors.
• Creditors may file a bankruptcy petition against
a debtor ("involuntary bankruptcy") in an effort
to recoup a portion of what they are owed or
initiate a restructuring.
• In the majority of cases bankruptcy is initiated
by the debtor (a "voluntary bankruptcy" that is
filed by the bankrupt individual or
organization).
DEPRECIATION
• Depreciation is a term used in accounting,
economics and finance to spread the cost
of an asset over the span of several years.
• In simple words we can say that
depreciation is the reduction in the value of
an asset due to usage, passage of time,
wear and tear, technological outdating or
obsolescence, depletion or other such
factors.
 AMORTIZATION
• Amortization is the distribution of a single lump-
sum cash flow into many smaller cash flow
installments.
• Unlike other repayment models, each repayment
installment consists of both principal and interest.
• Amortization is chiefly used in loan repayment
and in sinking funds.
• Payments are divided into equal amounts for the
duration of the loan, making it the simplest
repayment model.
• A greater amount of the payment is applied to
interest at the beginning, while more money is
applied to principal at the end.
 WORKING CAPITAL
• Working capital, also known as net working
capital, represents operating liquidity available
to a business.
• Along with fixed assets such as plant and
equipment, working capital is considered a part
of operating capital.
• It is calculated as current assets minus current
liabilities. If current assets are less than
current liabilities, an entity has a working
capital deficiency, also called a working
capital deficit.
 SECURITIES UNDERWRITING
• This is a way of placing a newly issued security,
such as stocks or bonds, with investors.
• A syndicate of banks (the lead managers)
underwrite the transaction, which means they
have taken on the risk of distributing the
securities.
• Should they not be able to find enough investors,
they will have to hold some securities themselves.
• Underwriters make their income from the price
difference between the price they pay the issuer
and what they collect from investors or from
broker-dealers who buy portions of the offering.