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Inflation, Stagflation, Disinflation, Deflation, CPI and WPI ........................................................................... 2 Policy Rates and Reserve ratios .................................................................................................................... 4 GDP and GNP ................................................................................................................................................ 5 Classical and Keynesian Theory .................................................................................................................... 6 Purchasing Power Parity ............................................................................................................................... 7 FDI and FII ..................................................................................................................................................... 8 Currency exchange rate and different exchange rate regimes .................................................................... 8 Fiscal and Monetary Policy ........................................................................................................................... 8 Microeconomics............................................................................................................................................ 9 Types of Industry........................................................................................................................................... 9 Money market and Capital market ............................................................................................................. 10 SENSEX Calculation ..................................................................................................................................... 10 Regional and national stock exchanges - how do you trade on exchange? ............................................... 11 How to trade on an Exchange? ................................................................................................................... 11 What are different caps of companies?...................................................................................................... 11 Different Investor Types: ............................................................................................................................ 12 Difference between shareholders and stakeholders .................................................................................. 12 Promoters ................................................................................................................................................... 12 Different types of financial instruments shares, bonds, options, futures and derivatives...................... 13 Bull and bear market and strategies followed in markets .......................................................................... 14 Dematerialization and Depositories ........................................................................................................... 14 SEBI its role as a regulator........................................................................................................................ 15 Accounts Basics ........................................................................................................................................... 15 Commercial banking v/s Investment Banking............................................................................................. 16 NBFCs .......................................................................................................................................................... 16 Types of Accounts ....................................................................................................................................... 17
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corresponding date. Let the price of sugar at beginning and end of year 2009 be Rs. 6 and Rs.6.50 respectively. Applying unitary method the index value at the beginning and end of year 2009 is 120 and 125 respectively. Since the percentage increase in index value over the year 2009 is 4.17% so inflation rate for year 2009 is 4.17%. In above paragraph we illustrated the calculation of inflation rate for a year but you must have come across newspaper articles reporting Inflation rate for month ending December 31, 2010 was 8.43%. So now one needs to understand the meaning of the above mentioned statement. The statement also mentions the inflation rate on a yearly basis only and for calculating the inflation rate the index values on December 31, 2009 and December 31, 2010 are considered. The percentage change in index values for the period between December 31, 2009 and December 31, 2010 gives the required inflation rate. If this inflation rate keeps increasing over a period of time then it is said that the economy is facing inflation. Based upon the type of price of commodity being considered for the calculation of index there are two types of indexes Consumer Price Index (CPI) and Wholesale Price Index (WPI). WPI accounts for price change at the wholesaler or producer level whereas CPI measures the change in consumer price level and retail margins. It is important to note that the composition of market basket for the two indexes is also different. The market basket for CPI is determined and maintained by United States Bureau of Labor Statistics. Another minor point of difference between the two indexes is that WPI is generally calculated and reported on a weekly basis while CPI follows a monthly calculation and reporting procedure. At present most of the countries including USA, UK, Japan and China use CPI for inflation rate calculation. However India follows WPI method for inflation rate. The market basket of WPI consists of 435 commodities which are grouped into three categories: 1. Primary Articles: consist of food grains, fruits and vegetables, milk, eggs, meats and fishes, condiments and spices, fibers, oil seeds and minerals. Their weight age is 22.02 %. 2. Fuel, Power, Light & Lubricants: consist of coal and petroleum related products, lubricants, electricity etc. Their weight age is 14.23%. 3. Manufactured Products: consist of dairy products, atta, biscuits, edible oils, liquors, cloth, toothpaste, batteries, automobiles etc. Their weight age is 63.75%. The base year in India for WPI is 1993-94 and base index value is 100. However there is on-going debate on increasing the number of commodities in market basket to 980 and shifting the base year to 2004-05. However India does not follow the normal weekly reporting period for WPI and instead reports the inflation rate on a monthly basis. The inflation rate calculation procedure remains same for both the indexes. However there are four types of Consumer price indexes which are mentioned below:
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1. CPI Industrial Workers; 2. CPI Urban Non-Manual Employees; 3. CPI Agricultural labourers; 4. CPI Rural labour. When inflation is accompanied by an increase in unemployment rate then the situation is called stagflation. The term stagflation is combination of two terms stagnation and inflation. Stagnation here refers to economic stagnation which means a slowdown in economic growth as indicated by increase in unemployment rate. The counterpart of inflation is disinflation which is the case of decrease in inflation rate over a period of time. This means that rate of increase in price level of goods and services has slowed down over the time period. If the decrease in inflation rate continues then the rate may become negative, a situation referred as deflation. During deflation the price level of goods and services decreases and consequently the purchasing power of money increase. This means that one can buy more amount of a given commodity with the same amount of money. Referring to the sandwich example given above now let us suppose that the price of a piece of sandwich has dropped to Rs. 5 and so now you can buy 10 sandwich pieces for Rs. 50.
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Cash reserve ratio(CRR) and statutory liquidity ratio(SLR) are reserve ratios which put a limit on the minimum amount of reserve that commercial banks and other financial intermediaries are required to keep in central bank. CRR is the percentage of their total deposits that the commercial banks have to keep in central bank in form of cash. SLR is similar to CRR except that apart from cash other liquid assets like precious metals such as gold and approved short term securities like treasury bills may be used to meet the reserve requirements. A better understanding of reserve ratio will be possible after going through the example provided below. Assume that the CRR and SLR are 6% and 20% respectively and a commercial bank has a total deposit of 10 million rupees with itself. Now the bank has to keep 0.6 million rupees in cash as a deposit with central bank and make a net deposit of 2 million rupees in form of liquid assets with the central bank. The RBI reviews these rates and ratios on a monthly basis with intent to keep a check on money supply and inflation rate in economy. In order to increase the supply of money in economy RBI may decrease its policy rates and reserve ratios. The decrease will have the combined effect of increasing the deposits available with the commercial banks which may be offered as loans to general public thereby pumping money into the economy. One can refer to the current value of these ratios and rates by visiting the homepage of RBIs website - http://www.rbi.org.in/home.aspx.
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GDP is considered to be an indicator of standard of living of a country. Countries with higher GDP are considered to have better standard of living. When net income receipt is added to GDP then it gives Gross National Product (GNP). Net income receipt is arrived at by summing the income from overseas investment and subtracting from the sum the income earned by foreign nationals and companies domestically. Let us consider an example for further clarification. Suppose the GDP and GNP of India are to be calculated, now if an Indian company has a plant in China then the profit made by that plant will not be included in GDP but will be included in GNP. Similarly if a Chinese firm has a plant in India then the plants income will be accounted for in GDP but will be subtracted from GNP value. To summarize the basis of production allocation is geographical location and ownership for GDP and GNP respectively.
demanded exceeds quantity supplied then the price rises to bring down the demand so that it equals supply. Change in price and wage influence the action of people in an economy. As existence of free market requires minimum regulatory requirements so followers of classical theory often advocate limited role of government in functioning of economy. The theory of classical economics took a severe blow in 1930 with its failure to come up with an effective solution for Great Depression that had crippled the economy of United States. At that time a British economist, John Maynard Keynes came up with an alternative to classical theory in his book The General
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Theory of Employment, Interest and Money. The theory is popularly named Keynesian theory after his name and it rejects the assumption of wage and price flexibility which forms the basis of classical theory. Keynes on the contrary assumed that wages and prices adjust slowly and are not able to reduce the number of people who want to work so as to make it equal to the number of people which the firm wants to employ which results in unemployment. Keynes proposed increased government intervention through purchase of goods and services as a solution to the problem of high unemployment. Purchase of goods and services by government will increase the market demand and the producers will have to ramp up production level to meet the increasing demand that will require hiring more people which will bring down the unemployment rate. The newly hired people will have more disposable income to spend which will further raise demand and consequently employment. For this reason Keynesian theory advocated increased government involvement for smooth functioning of economy.
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disposable incomes which households have, thus modifying the demand levels in the country. Also with
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the help of subsidies and special plans the government can support the growth certain sectors, regions, social segments in the economy.
Microeconomics
Law of Demand It basically establishes the relationship between the demand of a product and its price. It states that Demand of a particular product is inversely proportional to its price keeping oth er factors such as Income, Price of substitutive products etc. constant. For example, if we consider the recent example we can easily see that the demand of the onion decreased considerably with recent hike in its price. Law of Supply It basically establishes the relationship between the supply of a product and its price. It states that Supply of a particular product is directly proportional to its price keeping other factors such as supply of substitutive products etc. constant. The logic behind this l aw is actually the fact that the higher price motivates the supplier to produce more for higher amount of profit. For example, the rise in the price of the onion will motivate the farmers to produce more so that they will get more profit in the future. One thing that we will have to keep in mind is the fact that in the short term its supply will remain the same but in the long term its supply will increase considerably.
Types of Industry
Monopoly It exists when a specific individual or an enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. Monopolies are thus characterized by a lack of economic competition to produce the good or service and a lack of viable substitute goods. For Example, Indian Railway has monopoly in serving passengers through train as no other player exists.
Oligopoly An oligopoly is a market form in which a market or industry is dominated by a small number of sellers .Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms.
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Example: - Indian Petroleum Industries which is dominated by few players like HPCL, BPCL, IOCL etc. and the decisions of the one influences the decision of the others. Perfect competition It describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets. Still, buyers and sellers in some auction-type markets say for commodities or some financial assets may approximate the concept. Perfect competition serves as a benchmark against which to measure real-life and imperfectly competitive markets.
SENSEX Calculation
The BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index composed of the 30 largest and most actively traded stocks, representative of various sectors. These companies account for around one-fifth of the market capitalization of the BSE. The Bombay Stock Exchange (BSE) authorities review and modify its composition to make sure it reflects current market conditions. Sensex in nothing but the average weighted movement of these stocks. For Eg: Reliance Industries LTD (RIL) has 10% weightage in the index and overall growth in RIL is 5% on a particular day, so RIL contribution will be 10*1.05, and so on so forth. All the calculation will be done by this method and final average increase or decrease of the BSE index is done.
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Promoters
An individual or a company who devises a plan for a business venture or some kind of a business activity; one who takes the preliminary steps necessary for the formation of a corporation. Promoters help in
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raising the money to fund the new business from the public in the form of various investment instruments such as limited partnerships and direct investment activities.
Different types of financial instruments shares, bonds, options, futures and derivatives
Shares: A unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends. The two main types of shares are common shares and preferred shares. Bonds: A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities. Bonds are commonly referred to as fixed-income securities and are one of the three main asset classes, along with stocks and cash equivalents. Derivatives: A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks,
bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage. Options: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a security or other financial asset at an agreed-upon price (the strike price) during a certain period of time or on a specific date (exercise date). Call options give the option to buy at certain price, so the buyer would want the stock to go up. Put options give the option to sell at a certain price, so the buyer would want the stock to go down. Futures: A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.
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holds and facilitates the exchange of securities. Or a depository can refer to a depository institution that is allowed to accept monetary deposits from customers.
Accounts Basics
The accounting equation is given by: ASSETS = LIABILITIES + OWNERS EQUITY Let us understand the terms in the accounting equation with an example. Consider that you are the owner of a factory that produces shoes. Assets: The valuable resources that your business owns are called assets. Examples of assets in your shoe factory are the machines, the factory building etc. Liabilities: The resources or obligations that your business owes to outside parties are called liabilities. Example would be a, a bank loan which you had taken to buy leather from the market, which is the raw material for the shoes. This loan is an obligation to the business and it needs to be paid back to the bank and so is a liability. Another example would be the tax to be paid to the Government. Owners Equity: A business has owner/owners who put in money to run the business. The owners equity is divided generally in two parts: Paid-in capital and Retained earnings. Taking the same example once again. You and your friend started the shoe factory by contributing Rs. 100,000 each to the business. So the paid-in-capital is Rs. 200,000 (i.e. the money put into the business by the owners). After a successful year of operations, the business churns out a profit of Rs. 60,000. You and your friend decided to keep Rs. 10,000 and put the remaining Rs. 50,000 back into the business. This sum of Rs. 50,000 is called retained earnings which is the earnings that have been retained in the business. Current and Non- current Assets and Liabilities There are many ways in which assets and liabilities are classified. One of the classifications is current or non-current. The word current means that it (asset or liability) would be settled within a year. If the time
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span is more than one year they are termed as non-current assets and liabilities or long term assets and liabilities.Here are some of them using the shoe factory example Current Assets: The cash the business has in hand to carry out day to day activities Current Liabilities: A bank loan that the business needs to repay to the bank in the next 6 months Non current assets (also known as long term assets): Buildings and machinery owned by the business Non current liability (also known as long term liability): A long term loan i.e. which is to be paid back in 10 years.
NBFCs
Non-Banking Financial companies (NBFCs) are financial institutions that provide banking services, but do not have a banking license. Ideally, they are not allowed to take deposits from the public. Some of their services include:
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1) Providing loans and credit facilities 2) Wealth Management 3) Advisory during Mergers and Acquisitions 4) Retirement Planning 5) Underwriting It differs from commercial banks in the following aspects 1) NBFCs do not hold a banking license 2) NBFCs cannot take deposits from public
Types of Accounts
1) Savings Account: This type of account is most popular and commonly used account by individuals. This account provides cheque facility and money can be withdrawn from the account. However, there is a limit on the amount of cash that can be withdrawn on a single day. This account also fetches interest on the amount of money deposited. Currently, the interest rate is 3.5% p.a . 2) Current Account: This account is used mainly by business houses and is not for investment. The purpose of this account is to provide flexible liquidity and hence there is no limit on the amount of money that can be withdrawn on a single day or on the number of withdrawals within a certain period of time. No interest is paid on these accounts and bank actually levies service charges on such accounts. 3) Fixed Deposit(FD) account: Customers deposit money in a fixed deposit account for a fixed period of time at a fixed rate of interest. Money cannot be withdrawn from such accounts before the time period ends, though some banks allow withdrawal by paying a penalty fee 4) Demat Accounts: Also known as dematerialized accounts, these are used for selling or buying stocks in share market. In India, such accounts are maintained by NSDL (National Securities Depository Ltd). The shares are stored digitally in such accounts. 5) Joint Account: This account is owned by two or more individuals. Any of the owners can withdraw money from this account, but the permission of other owners is required. 6) NRI Account: It is a bank account opened in India by a non-resident Indian for the purpose of his personal financial transaction.
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