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This is only a representation and students are requested not to limit their learning to this handout only. Finance Stock- A type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings. There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated. Also known as "shares" or "equity". A holder of stock (a shareholder) has a claim to a part of the corporation's assets and earnings. In other words, a shareholder is an owner of a company. Ownership is determined by the number of shares a person owns relative to the number of outstanding shares. For example, if a company has 1,000 shares of stock outstanding and one person owns 100 shares, that person would own and have claim to 10% of the company's assets. Stocks are the foundation of nearly every portfolio. Historically, they have outperformed most other investments over the long run. Bonds- A Company needs funds to expand into new markets, while governments need money for everything from infrastructure to social programs. The problem large organizations run into is that they typically need far more money than the average bank can provide. The solution is to raise money by issuing bonds (or other debt instruments) to a public market. Thousands of investors then each lend a portion of the capital needed. Really, a bond is nothing more than a loan for which you are the lender. The organization that sells a bond is known as the issuer. You can think of a bond as an IOU given by a borrower (the issuer) to a lender (the investor). Of course, nobody would loan his or her hard-earned money for nothing. The issuer of a bond must pay the investor something extra for the privilege of using his or her money. This "extra" comes in the form of interest payments, which are made at a predetermined rate and schedule. The interest rate is often referred to as the coupon. The date on which the issuer has to repay the amount borrowed (known as face value) is called the maturity date. Bonds are known as fixed-income securities because you know the exact amount of cash you'll get back if you hold the security until maturity. For example, say you buy a bond with a face value of $1,000, a coupon of 8%, and a maturity of 10 years. This means you'll receive a total of $80 ($1,000*8%) of interest per year for the next 10 years. Actually, because most bonds pay interest semi-annually, you'll receive two payments of $40 a year for 10 years. When the bond matures after a decade, you'll get your $1,000 back. Municipal bond- Represents borrowing by state or local governments to pay for special projects such as highways or sewers. The interest that investors receive is exempt from some income axes. Debt Versus Equity - Bonds are debt, whereas stocks are equity. This is the important distinction between the two securities. By purchasing equity (stock) an investor becomes an owner in a corporation. Ownership comes with voting rights and the right to share in any future profits. By purchasing debt (bonds) an investor becomes a creditor to the corporation (or government). The primary advantage of being a creditor is that you have a higher claim on assets than shareholders do: that is, in the case of bankruptcy, a bondholder will get paid before a shareholder. However, the bondholder does not share in the profits if a company does well - he or she is entitled only to the principal plus interest. To sum up, there is generally less risk in owning bonds than in owning stocks, but this comes at the cost of a lower return.
Stock Market- The market in which shares are issued and traded either through exchanges or over-the-counter markets. Also known as the equity market, it is one of the most vital areas of a market economy as it provides companies with access to capital and investors with a slice of ownership in the company and the potential of gains based on the company's future performance. This market can be split into two main sections: the primary and secondary market. The primary market is where new issues are first offered, with any subsequent trading going on in the secondary market. There are two main types of stocks: common stock and preferred stock. Common Stock - Common stock is, well, common. When people talk about stocks they are usually referring to this type. In fact, the majority of stock is issued is in this form. We basically went over features of common stock in the last section. Common shares represent ownership in a company and a claim (dividends) on a portion of profits. Investors get one vote per share to elect the board members, who oversee the major decisions made by management. Over the long term, common stock, by means of capital growth, yields higher returns than almost every other investment. This higher return comes at a cost since common stocks entail the most risk. If a company goes bankrupt and liquidates, the common shareholders will not receive money until the creditors, bondholders and preferred shareholders are paid. Preferred Stock - Preferred stock represents some degree of ownership in a company but usually doesn't come with the same voting rights. (This may vary depending on the company.) With preferred shares, investors are usually guaranteed a fixed dividend forever. This is different than common stock, which has variable dividends that are never guaranteed. Another advantage is that in the event of liquidation, preferred shareholders are paid off before the common shareholder (but still after debt holders). Preferred stock may also be callable, meaning that the company has the option to purchase the shares from shareholders at anytime for any reason (usually for a premium). Some people consider preferred stock to be more like debt than equity. A good way to think of these kinds of shares is to see them as being in between bonds and common shares. Different Classes of Stock - Common and preferred are the two main forms of stock; however, it's also possible for companies to customize different classes of stock in any way they want. The most common reason for this is the company wanting the voting power to remain with a certain group; therefore, different classes of shares are given different voting rights. For example, one class of shares would be held by a select group who are given ten votes per share while a second class would be issued to the majority of investors who are given one vote per share. When there is more than one class of stock, the classes are traditionally designated as Class A and Class B. Cyclical stocks- The earnings on these stocks are tied very closely to the overall business cycle and economic state. Examples include the housing industry and industrial equipment companies. Defensive stocks- These remain stable in any economic conditions, such as food companies, drug manufacturers or utilities. These are stocks in companies that manufacture the necessities that people will need in any economy. Growth stocks- As the name might suggest, these stocks have strong growth potential. These are typically companies that are newer, busily doing research and developing products and services in hopes of achieving growth. Much of the profits are fed back into the companies themselves.
Income stocks - These pay higher-than-average dividends over a sustained period. They are typically long-established companies with stable earnings or utilities such as phone companies. Net worth- Total assets minus total liabilities of an individual or company. For a company, also called owner's equity or shareholders' equity or net assets. Speculative stocks - These are stocks in emerging companies that are speculating on their future earnings and revenue. These are risky investments since the company may or may not reach their intended future goals. Value stocks- These are stocks in companies that, for one of many reasons, are undervalued. They are stocks that are selling at a low price, but when analyzing the company's sales, earnings and looking at other factors, give indications that they should be selling for a higher per share price. The Bulls, The Bears And The Farm- On Wall Street, the bulls and bears are in a constant struggle. If you haven't heard of these terms already, you undoubtedly will as you begin to invest. The Bulls - A financial market of a certain group of securities in which prices are rising or are expected to rise. The term "bull market" is most often used in respect to the stock market, but really can be applied to anything that is traded, such as bonds, currencies, commodities, etc. A bull market is when everything in the economy is great, people are finding jobs, gross domestic product (GDP) is growing, and stocks are rising. Things are just plain rosy! Picking stocks during a bull market is easier because everything is going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called a "bull" and is said to have a "bullish outlook". Bull markets are characterized by optimism, investor confidence and expectations that strong results will continue. Of course, no bull market can last forever, and sooner or later a bear market (in which prices fall) will come. It's tough if not impossible to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation can sometimes play a large (if not dominant) role in the markets. The extreme on the high end is a stock-market bubble, and on the low end a crash. The use of "bull" and "bear" to describe markets comes from the way in which each animal attacks its opponents. That is, a bull thrusts its horns up into the air, and a bear swipes its paws down. These actions are metaphors for the movement of a market: if the trend is up, it is considered a bull market. And if the trend is down, it is considered a bear market. The Bears - A market condition in which the prices of securities are falling or are expected 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. When you see a bear what do you do? Tuck in your arms and play dead! Fighting back can be extremely dangerous. It is quite difficult for an investor to make stellar gains during a bear market, unless he or she is a short seller. A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks are falling using a technique called short selling. Another strategy is to wait on the sidelines until you feel that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish outlook".
it is that they expect most of the benefit from buying shares to come from an increase in their PRICE (CAPITAL appreciation) rather than from DIVIDEND payments. Even if the direction (up or down) of a yield curve is unchanged. the yield gap is often negative. a downward-sloping (or inverted) yield curve has been an indicator of RECESSION on the horizon.A way of comparing the performance of BONDS and SHARES. They get impatient. Also known as rate of return. It is normal for the yield curve to be positive (upward sloping. The gap is defined as the AVERAGE YIELD on equities minus the average yield on bonds. Yield gap. This is not because investors regard equities as safer than bonds (see EQUITY RISK PREMIUM). and emotional about their investments. Yield curve. and serves as a model for the pricing of risky securities. the usefulness of the dividend yield as a guide to the performance of shares has declined since the early 1990s. Bond investors usually expect more of their gains to come from coupon payments.The Other Animals on the Farm . bears make money. Rather. If investors think it is riskier to buy a bond with 15 years until it matures than a bond with five years of life. with bonds yielding more than equities. it means that investors are more worried that INFLATION will rise for the foreseeable future and therefore that higher interest rates will be needed. When the whole curve moves lower. greedy. because . A BOND yield is also known as its INTEREST RATE: the annual coupon divided by the market price. or thinly traded bonds versus highly liquid bonds). The CAPM asserts that the only risk that is priced by rational investors is systematic risk. When the yield curve as a whole moves higher. the amount of money returned to investors on their investments. that investors expect the CENTRAL BANK to cut shortterm interest rates in the near future. If so. at least. but pigs just get slaughtered!" Yield. They also worry that INFLATION will erode the REAL VALUE of future coupons. Pigs buy on hot tips and invest in companies without doing their due diligence. they will demand a higher interest rate (YIELD) on the longer-dated bond.Shorthand for comparisons of the INTEREST RATE on GOVERNMENT BONDS of different maturity. you might expect them to have a higher yield. as it's often from their losses that the bulls and bears reap their profits. A flat yield curve means that investors are indifferent to maturity risk. and they are drawn to high-risk securities without putting in the proper time or money to learn about these investment vehicles.An economic theory that describes the relationship between risk and expected return. In practice. The annual income from a SECURITY. useful information can be gleaned from changes in the SPREADS between yields on bonds of different maturities and on different sorts of bonds with the same maturity (such as government bonds versus corporate bonds. Capital asset pricing model (CAPM). expressed as a percentage of the current market PRICE of the security. Their fear overrides their need to make profits and so they turn only to money-market securities or get out of the markets entirely. Pigs are high-risk investors looking for the one big score in a short period of time. you are also guaranteed never to see any return if you avoid the market completely and never take any risk. but this is unusual.Chickens and Pigs -Chickens are afraid to lose anything. Professional traders love the pigs.In stocks and bonds. While it's true that you should never invest in something over which you lose sleep. Historically. making them value current payments more highly than those due in years to come. Moreover. or. it means that investors have a rosier inflationary outlook. Because shares are usually riskier investments than bonds. "Bulls make money. left to right) simply because investors normally demand compensation for the added RISK of holding longer-term SECURITIES. as increasingly companies have chosen to return cash to shareholders by buying back their own shares rather than paying out bigger dividends. the yield curve will slope upwards from left (the shorter maturities) to right. The yield on a SHARE is its DIVIDEND divided by its price.
proposed by James TOBIN. The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium multiplied by the assets systematic risk. and. So even a basket of all of the SHARES in a stockmarket will still be risky. Investors can eliminate some sorts of RISK. how an investor values any particular asset should depend crucially on how much the asset’s PRICE is affected by the risk of the market as a whole. Even so. Canada and the United States adopted open capital regimes. The market’s risk contribution is captured by a measure of relative volatility. Theory was invented by William Sharpe (1964) and John Lintner (1965). such as that of a global RECESSION. BETA. on direct investment by foreigners in businesses or property. such as TREASURY BILLS. The rationale of the CAPM can be simplified as follows. People must be rewarded for investing in such a risky basket by earning returns on AVERAGE above those that they can get on safer assets. Assuming investors diversify away alpha risks. that financial capital often brought with it valuable HUMAN CAPITAL. There was also discussion of a “Tobin tax” on short-term capital movements. as some Asian governments wondered whether lifting the controls had left them vulnerable to the whims of international speculators.government-imposed restrictions on the ability of CAPITAL to move in or out of a country. from roads in Thailand to telecoms systems in Mexico. such as a share. whose money could flow out of a country as fast as it once flowed in. The Asian economic crisis and CAPITAL FLIGHT of the late 1990s revived interest in capital controls. cannot be eliminated through diversification. Capital controls. which indicates how much an asset’s price is expected to change when the overall market changes. These alpha risks are specific to an individual asset. a winner of the NOBEL PRIZE FOR ECONOMICS. Asian countries began to loosen their widespread capital controls in the 1980s and did so more rapidly during the 1990s. They think the CAPM may be an elegant theory that is no good in practice. there were two main reasons why capital controls were lifted: free markets became more fashionable and financiers became adept at finding ways around the controls.that risk cannot be eliminated by diversification. when most developed countries scrapped their capital controls. but many countries then imposed them. Until the 20th century capital controls were uncommon. and on domestic residents’ investments abroad. They also found that capital controls did not work and had unwanted side-effects. In developed countries. This changed in the 1980s and early 1990s. Examples include limits on foreign INVESTMENT in a country’s FINANCIAL MARKETS. multiplied by the particular asset’s beta. Other rich countries maintained strict controls and many made them tougher during the 1960s and 1970s. How much is calculated by the average premium for all assets of that type. Latin America’s controls in the 1980s failed to keep much money at home and also deterred foreign investment. which some economists have found of dubious use. for example. Riskier investments. known as RESIDUAL RISK or alpha. Some risks. particularly . they mostly considered only limited controls on short-term capital movements. Yet it is probably the best and certainly the most widely used method for calculating the cost of capital. the risk that a company’s managers will turn out to be no good. by holding a diversified portfolio of assets (see MODERN PORTFOLIO THEORY). Following the end of the Second World War only Switzerland. should earn a premium over the risk-free rate. Developing countries later discovered that foreign capital could play a part in financing domestic investment. furthermore. But does the CAPM work? It all comes down to beta. Safe investments have a beta close to zero: economists call these assets risk free. The pattern was more mixed in developing countries. Latin American countries imposed lots of them during the debt crisis of the 1980s then scrapped most of them from the late 1980s onwards.
and are not normally listed on exchanges. equity funds that invest only in companies of the same sector or region are known as specialty funds. For example. some of which are listed on Stock Exchanges. Although some funds are less risky than others. When referring to mutual funds. This is a safe place to park your money. and did not reverse the broader 20-year-old process of global financial and economic LIBERALISATION. Each fund has a predetermined investment objective that tailors the fund's assets. In general. such as the ability to write cheques against their units. Mutual Funds: Different Types of Funds. Because there are many different types of bonds. This system allows small investors to participate in the reduced risk of a large and diverse portfolio that they could not otherwise build themselves. but you won't have to worry about losing your principal. Also there are several open ended mutual funds which are insurance linked. Bond funds are likely to pay higher returns than certificates of deposit and money market investments.The money market consists of short-term debt instruments. bonds. the higher the potential return. the audience for these funds consists of conservative investors and retirees. At the fundamental level. Bond/Income Funds .movements out of a country." and "income" are synonymous. regions of investments and investment strategies. mostly Treasury bills. Many open-ended funds allow contributors extra perks. You won't get great returns. For example. Other fundsMoney Market Funds . Units in closed-end funds. There are two types of mutual funds. while equity funds that invest in fast-growing companies are known as growth funds. the higher the risk of loss. there are three varieties of mutual funds: 1) Equity funds (stocks) 2) Fixed-income funds (bonds) 3) Money market funds All mutual funds are variations of these three asset classes. Open-end funds sell their own new shares to investors. are readily transferable in the open market and are bought and sold. The return on the fund's holdings is distributed back to its contributors. but only reinvest the return on the existing portfolio. a fund specializing in high-yield junk bonds is much more risky than a fund that invests in government . It is basically marketing with added benefits.A portfolio of stocks. Capital is contributed by smaller investors who buy shares in the mutual fund rather than the individual stocks and bonds in its portfolio. minus various fees and commissions. A typical return is twice the amount you would earn in a regular checking/savings account and a little less than the average certificate of deposit (CD). This is a fact for all investments. like other stock. open and closed-ended.it's never possible to diversify away all risk. These funds do not accept new contributions from investors. stand ready to buy back their old shares. but bond funds aren't without risk.each mutual fund has different risks and rewards. or other securities administered by a team of one or more managers from an investment company who make buy and sell decisions on component securities. They also have the benefit of professional managers overseeing their money who have the time and expertise to analyze and pick securities. These terms denote funds that invest primarily in government and corporate debt. Mutual Fund. While fund holdings may appreciate in value. As such. all funds have some level of risk ." "bond. the primary objective of these funds is to provide a steady cash flow to investors. bond funds can vary dramatically depending on where they invest. Open-end funds are so called because their capitalization is not fixed. they issue more units as people want them.Income funds are named appropriately: their purpose is to provide current income on a steady basis. the terms "fixed-income. or shareholders.
There are. only Brazil). etc. A similar type of fund is known as an asset allocation fund. which simply refers to companies that are neither value nor growth stocks and are classified as being somewhere in the middle. Global funds invest anywhere around the world. Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of certain guidelines or beliefs. Such a mutual fund would reside in the bottom right quadrant (small and growth). they can. which occurs if the region goes into a bad recession. which means that if rates go up the value of the fund goes down. A compromise between value and growth is blend. The opposite of value is growth.The objective of these funds is to provide a balanced mixture of safety. Balanced Funds . This may mean focusing on a region (say Latin America) or an individual country (for example.securities. as part of a well-balanced portfolio. The opposite of this would be a fund that invests in startup technology companies with excellent growth prospects. Although the world's economies are becoming more inter-related. Sector funds are extremely volatile. Just like for sector funds. The idea is to classify funds based on both the size of the companies invested in and the investment style of the manager. but these kinds of funds typically do not have to hold a specified percentage of any asset class. The term value refers to a style of investing that looks for high quality companies that are out of favor with the market. There is a greater possibility of big gains. Regional funds make it easier to focus on a specific area of the world. This type of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy. Most socially responsible funds don't invest in industries such as . it is likely that another economy somewhere is outperforming the economy of your home country. which refers to companies that have had (and are expected to continue to have) strong growth in earnings. It's tough to classify these funds as either riskier or safer than domestic investments. many different types of equity funds because there are many different types of equities. Global/International Funds . But.An international fund (or foreign fund) invests only outside your home country. These companies are characterized by low P/E and price-to-book ratios and high dividend yields. The portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves through the business cycle. sales and cash flow. Objectives are similar to those of a balanced fund. For example. the investment objective of this class of funds is long-term capital growth with some income.Funds that invest in stocks represent the largest category of mutual funds. Generally. on the flip side. The strategy of balanced funds is to invest in a combination of fixed income and equities. but you have to accept that your sector may tank. Equity Funds . which is otherwise difficult and expensive. actually reduce risk by increasing diversification. technology. income and capital appreciation. The weighting might also be restricted to a specified maximum or minimum for each asset class. health.This classification of mutual funds is more of an all-encompassing category that consists of funds that have proved to be popular but don't necessarily belong to the categories we've described so far. nearly all bond funds are subject to interest rate risk. Sector funds are targeted at specific sectors of the economy such as financial. Specialty Funds . They do tend to be more volatile and have unique country and/or political risks. A typical balanced fund might have a weighting of 60% equity and 40% fixed income. however. you have to accept the high risk of loss. An advantage of these funds is that they make it easier to buy stock in foreign countries. including your home country. a mutual fund that invests in largecap companies that are in strong financial shape but have recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and value). Furthermore.
An investor in an index fund figures that most managers can't beat the market. other companies. Ratio Analysis: Fundamental Analysis has a very broad scope. It's comparing the number against previous years.Mutual Fund that is sold for a sales charge by a brokerage firm or other sales representative. liabilities and all the other financial aspects of a company. technical analysis attempts to understand the emotions in the market by studying the market itself. quantitative analysis can produce excellent results. The biggest part of fundamental analysis involves delving into the financial statements. Technicians (sometimes called chartists) are only interested in the price movements in the market.tobacco. this involves looking at revenue. Load Fund. assets. If used in conjunction with other methods. Futures Fundamentals: What we know as the futures market of today came from some humble beginnings. In fact. Technical Analysis: The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. It wasn't until the 1850s that the U. will continue in the future. One aspect looks at the general (qualitative) factors of a company. . Ratio analysis isn't just comparing different numbers from the balance sheet. alcoholic beverages. yet almost all use the fundamentals. it's tough to know where to start. Because the subject is so broad. bond or commodity funds. but when we divide them by current liabilities we are able to determine whether the company has enough money to cover short term debts. Index Funds . This is where qualitative analysis comes in . An index fund merely replicates the market return and benefits investors in the form of low fees.the breakdown of all the intangible. The other side considers tangible and measurable factors (quantitative). and might perform in the future. technical analysis really just studies supply and demand in a market in an attempt to determine what direction. Technical analysis takes a completely different approach. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. it doesn't care one bit about the "value" of a company or a commodity. with conservative or aggressive objectives. or even the economy in general. however. difficult-to-measure aspects of a company.The last but certainly not the least important are index funds. corn and wheat. the industry. as opposed to its components. In other words. started using futures markets to buy and sell commodities such as cotton. Also known as quantitative analysis. some would say that you aren't really investing if you aren't performing fundamental analysis. Such funds may be stock. Fundamental Analysis: Fundamental analysis is the cornerstone of investing. Trading in futures originated in Japan during the eighteenth century and was primarily used for the trading of rice and silk. Ratios look at the relationships between individual values and relate them to how a company has performed in the past. Despite all the fancy and exotic tools it employs. expenses.S. or trend. weapons or nuclear power. For example current assets alone don't tell us a whole lot. and cash flow statement. There are an endless number of investment strategies that are very different from each other. This means crunching and analyzing numbers from the financial statements. income statement. The idea is to get a competitive performance while still maintaining a healthy conscience. Fundamental analysts look at this information to gain insight on a company's future performance. This type of mutual fund replicates the performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). But there is more than just number crunching when it comes to analyzing a company.
Better to think of every stock strategy as nothing more than an application of a theory . an option to buy a SHARE is derived from the share. quantity and quality of a futures contract is standardized and specified while the price is set at the time a contract is opened and is negotiated between buyers and sellers. but not the obligation. The delivery period. In other words. a $10. in which two parties agree to transact a set of financial instruments or physical commodities for future delivery at a particular price. If you buy a futures contract. That is why futures are used as financial instruments by not only producers and consumers but also speculators.000% by spring of 2004. your return could have been even greater. Derivatives.a "best guess" of how to invest. don’t use it. Economists mostly regard derivatives as a good thing. • A forward contract commits the user to buying or selling an asset at a specific price on a specific date in the future. to sell or buy a particular asset at a particular price. Here are translations of the most important bits. • A future is a forward contract that is traded on an exchange. or financial contract. At this point.Futures Contract (Futures) . on or before a specified date. it's no wonder that investors continue to hunt for "the next Microsoft".) With returns like this. The world of derivatives is riddled with jargon. So they come with an economists’ health warning: if you don’t understand it. It is a type of derivative instrument. • An option is a contract that gives the buyer the right. The bottom line is that there is no one way to pick stocks. Take Microsoft.remember. you can increase your personal wealth exponentially. Futures are traded either electronically or via open outcry on a trading floor on the Exchange offering the particular contract. risk tolerance and the amount of time you want to devote to investing and picking stocks.000 investment would have turned itself into a cool $3. for example. time frame.Financial ASSETS that “derive” their value from other assets. they concede that when derivatives are misused the LEVERAGE that is often an integral part of them can have devastating consequences. Why worry so much about it? Why spend hours doing it? The answer is simple: wealth. you may be asking yourself why stock-picking is so important. buyers and sellers in the futures market primarily enter into futures contracts to hedge risk or speculate rather than to exchange physical goods (which is the primary activity of the cash/spot market). And sometimes two seemingly opposed theories can be successful at the same time. so that the first pays the floating rate and the second the fixed rate.A futures contract is a legally binding agreement to buy or sell commodities or financial securities at a fixed time in the future at a price agreed upon today.5 million! (In fact. over an 18-year period. However. For example. allowing more precise pricing of financial RISK and better RISK MANAGEMENT. had you had this foresight in the bull market of the late '90s. . you are basically agreeing to buy something that a seller has not yet produced for a set price. is determining how well an investment strategy fits your personal outlook. But participating in the futures market does not necessarily mean that you will be responsible for receiving or delivering large inventories of physical commodities . one with a loan on a fixed INTEREST RATE over ten years and the other with a similar loan on a floating interest rate over the same period. may agree to take over each other’s obligations. Perhaps just as important as considering theory. Some politicians and others responsible for financial REGULATION blame the growing use of derivatives for increasing VOLATILITY in asset PRICES. • A swap is a contract by which two parties exchange the cashflow linked to a liability or an asset. two companies. Had you invested in Bill Gates' brainchild at its IPO back in 1986 and simply held that investment. If you become a good stockpicker. and for being a source of danger to their users. your return would have been somewhere in the neighborhood of 35. For example.
• Exotics are derivatives that are complex or are available in emerging economies. the value is given as zero.A rolling set of averages calculated over a time series of values. equities or commodities. relate to developed economies and are comparatively uncomplicated. If the intrinsic value is more than the current share price. if the difference between the underlying stock's price and the strike price is negative. bonds. your analysis is showing that the stock is worth more than its price and that it makes sense to buy the stock.as opposed to the value at which it is being traded in the marketplace. 2. Market Open/Close Price . it is the difference between the strike price and the underlying stock's price. The value of a company or an asset based on an underlying perception of the value. For call options. Although there are many different methods of finding the intrinsic value. Market Price . A Moving Average represents data in a manner that smoothens fluctuations and highlights possible trends Intrinsic Value – can be explained as- 1. OTC derivatives are customized contracts that enable the parties to select the trading units and delivery dates to suit their requirements. In the case of both puts and calls. Intrinsic value in options is the in-the-money portion of the option's premium 3. • Plain-vanilla derivatives. are typically exchange-traded. Moving Average. For put options. Intrinsic value includes hidden things like the value of a brand name. all it takes is a little time and energy. These underlying assets may be foreign exchange. a fancy term for what you believe a stock is really worth . Derivatives traded at exchanges are standardized contracts that have standard delivery dates and trading units. an investment BANK. Doing basic fundamental valuation is quite straightforward. the premise behind .It is the last price a particular stock sold for the previous day.It is the price a particular stock is currently selling for during the operating hours of the stock market. which is difficult to calculate. 4. The goal of analyzing a company's fundamentals is to find a stock's intrinsic value. in contrast to exotics.• An over-the-counter is a derivative that is not traded on an exchange but is purchased from. say. this is the difference between the underlying stock's price and the strike price.
Repo is short for repurchase agreement. In plain English. Dividend Discount Model – DDM.is the procedure for valuing the price of a stock by using predicted dividends and discounting them back to present value. then the stock is undervalued. you must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns. the riskreturn tradeoff says that invested money can render higher profits only if it is subject to the possibility of being lost. This short-term maturity and government backing means repos provide lenders with extremely low risk. Risk Return Tradeoff. its worth is the money you can take from the company year after year (not the growth of the stock). that nobody would buy a business for more than its future discounted cash flows. if you want to make money. therefore. In other words. A business is all about profits. Those who deal in government securities use repos as a form of overnight borrowing. then. but as trading vehicles. that is.all the strategies is the same: a company is worth the sum of its discounted cash flows. do stocks exhibit such volatile movements? It doesn't make sense for a stock's price to fluctuate so much when the intrinsic value isn't changing by the minute. Repos are classified as a money-market instrument. whereas high levels of uncertainty (high risk) are associated with high potential returns. and so on.The principle that potential return rises with an increase in risk. this means that a company is worth all of its future profits added together. and it doesn't work for companies that don't pay out dividends. But why. A dealer or other holder of government securities (usually T-bills) sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price. The fact is that many people do not view stocks as a representation of discounted cash flows. you can't cut out all risk. Money Market: The money market is better known as a place for large institutions and government to manage their short-term cash needs. On the other hand. Low levels of uncertainty (low risk) are associated with low potential returns. This procedure has many variations.one that generates some profit. The idea is that if the value obtained from the DDM is higher than what the shares are currently trading at. since the profit on a trade is not determined by a company's value. a trader would say that investors relying solely on fundamentals are leaving themselves at the mercy of the market instead of observing its trends and tendencies. Since a stock represents ownership in a company. And you can take something out of the company only if you have something left over after you pay for supplies and salaries.One of the assumptions of the discounted cash flow theory is that people are rational. from overnight to 30 days or more.the basis of intrinsic value. this assumption applies to the stock market. but about speculating whether you can sell to some other investor (the fool). Greater Fool Theory . but still allows you to sleep at night. Repos are popular because they can virtually . plain old revenue minus expenses . And these future profits must be discounted to account for the time value of money. reinvest in new equipment. If you have a small business. the force by which the $1 you receive in a year's time is worth less than $1 you receive today. Money Market: Repos. They are usually very short-term. The goal instead is to find an appropriate balance . Because of the risk-return tradeoff. They are usually used to raise short-term capital. Who cares what the cash flows are if you can sell the stock to somebody else for more than what you paid for it? Cynics of this approach have labeled it the greater fool theory. The idea behind intrinsic value equaling future profits makes sense if you think about how a business provides value for its owner(s).
based common stocks listed on The NASDAQ Stock Market. exchange. banks simply purchase a bulk lot of shares from the company. and are issued/sponsored in the U. an American depositary receipt (ADR) is a stock that trades in the United States but represents a specified number of shares in a foreign corporation. Level 2 ADRs have slightly more requirements from the SEC. Preferred/Preferential stock .Stock that receives preferential treatment over common stock with respect both to dividends and claims on assets in the event that the corporation goes out of business. Level 1 ADRs also have the loosest requirements from the Securities and Exchange Commission (SEC).The NASDAQ Composite Index measures all NASDAQ domestic and non-U.The most prestigious of the three. The advantages of ADRs are twofold. yet low enough to make it affordable for individual investors. Level 3 ADRs are able to raise capital and gain substantial visibility in the U. ADRs were introduced as a result of the complexities involved in buying shares in foreign countries and the difficulties associated with trading at different prices and currency values.S.S. Level 2 .S. For this reason. In return. Unfortunately. ADRs are an easy and cost-effective way to buy shares in a foreign company. but they also get higher visibility trading volume. ADRs are bought and sold on American markets just like regular stocks. allowing them to tap into the wealthy North American equities markets. This is done because the banks wish to price an ADR high enough to show substantial value.This type of ADR is listed on an exchange or quoted on NASDAQ. There are also variations on standard repos: • • Reverse Repo . it carries no voting rights. ADR.S. bundle the shares into groups. Level 1 ADRs are found on the over-thecounter market and are an easy and inexpensive way to gauge interest for its securities in North America. There are three different types of ADR issues: Level 1 . Level 3 .Introduced to the financial markets in 1927. this is when an issuer floats a public offering of ADRs on a U. The fixed income stream of preferred stock makes it similar in many ways to bonds. Mostly this type of stock that pays a fixed dividend regardless of corporate earnings.eliminate credit problems. American Stock Exchange (AMEX) or the NASDAQ. For individuals. NASDAQ Composite Index . In this case. a number of significant losses over the years from fraudulent dealers suggest that lenders in this market have not always checked their collateralization closely enough. ADRs per home-country share. Foreign entities like ADRs because they get more U. a dealer buys government securities from an investor and then sells them back at a later date for a higher price Term Repo . The Index is market value .The reverse repo is the complete opposite of a repo. The depositary bank sets the ratio of U.S. financial markets. exposure. and should earnings rise significantly the preferred holder is stuck with the same fixed dividend while common holders collect more.exactly the same as a repo except the term of the loan is greater than 30 days. This ratio can be anything less than or greater than 1. by a bank or brokerage. However. and which has priority over common stock in the payment of dividends.This is the most basic type of ADR where foreign companies either don't qualify or don't wish to have their ADR listed on an exchange. They save money by reducing administration costs and avoiding foreign taxes on each transaction.S. the foreign company must provide detailed financial information to the sponsor bank. U.S. and reissues them on the New York Stock Exchange (NYSE).
The market value. one. This order is very often referred to as a "stop loss" order.00 a share and the price of the stock drops to 35.Stock options. who buys and sells stocks rapidly. volume. Short position also means the total amount of stock an individual has sold short and has not covered. Then. Stock symbols are used so people can easily and quickly identify stocks without having to look or write sometimes long or similar company names. If a fifth letter appears on a NASDAQ security. Most stock exchanges have rigid rules regarding short selling. future. etc. Because it is so broad-based. The Bombay Stock Exchange has numeric stock codes whereas the National Stock Exchange has only alphabetical codes. Today the NASDAQ Composite includes over 5.00. Theoretically. is calculated throughout the trading day. as of a particular date.00 a share can only fall to zero. or 1500. Ticker symbol . and make a profit.000 companies. as the price of that security declines. This is usually brought about by the division of existing shares. The practice of short selling involves borrowing shares of a security from your broker and immediately selling them at the current price. Short sellers lose when the price of the stock ascends rather than descends. of a particular stock.000 or more shares in the preceding month. making a total of three. 40. This means that each company's security affects the Index in proportion to it's market value. short selling is based on the anticipation that a particular security price will go down. Alternately. and is related to the total value of the Index. or futures contracts sold short and not covered as of a particular date. because it prevents the security from falling below a certain price. the Composite is one of the most widely followed and quoted major market indexes.S. there is more risk involved with short selling because a stock price could continue to rise forever. 30. tabulation is issued once a month listing all issues on the Exchange in which there was a short position of 5.) on the exchange it is trading on and is used to retrieve information about that security from that . Stop Order -An order to buy or sell a security conditioned on a specific price. Selling short . For U. option. Short Position. A stock purchased at 10.weighted. two and three letter symbols indicate that the security is listed and trades on an exchange. a reverse stock split brings about the decrease in the numbers of shares in a corporation. etc. For instance. a two-for-one split means that shareholders will receive two new shares for each old share.A ticker symbol represents a particular security (company. etc.00. Stag .000 or more shares and issues in which the short position had changed by 2.A unique lettering system assigned to a particular stock or mutual fund. you buy back an equal number of shares on the open market and use them to cover the shares you borrowed from your broker. it identifies the issue as other than a single issue of common stock or capital stock. Stock Split .An increase in the number of outstanding shares in a corporation.00. etc. if you sell short 100 shares of XYZ Corporation at 50. securities.The reverse of the usual stock market technique.A ticker is a trading screen information display showing the current price. the last sale price multiplied by total shares outstanding.A holding in securities Ticker.00. Scrip. A stock sold short at 10. your profit is 15.00 could go to 20.00 a share. Stock symbol. more than most other stock market indexes. For example. usually to make profits quickly. On the NYSE.An investor. option. The reader should ascertain these rules from a registered broker of the exchange.00. NASDAQ traded securities have a four or five letters assigned to them.
For example: the symbol "f" on the New York Stock Exchange (USA) will bring you information about Ford Motor Company. A.Depth of market to absorb buy and sell interest of even large orders at prices appropriate to supply and demand. The market must also adapt quickly to new information and incorporate that information into the stock's price. Liquidity. Commodities. there are 30 diversified stocks thought to be representative of the market in general. BSE Sensex.A gain on the sale of a capital asset where the holding period was twelve months or more and the profit was subject to the long-term capital gains tax. Hedging -A practice of taking one market position to offset potential loses in another. How high this minimum level is may vary according to how risky a bank’s activities are.A stock index (one of many) commonly used as an indicator of changes in the general level of the stock market or stock prices in India. In a narrow sense. ticker symbols can be submitted to an electronic ticker quote retrieval system to find information about a particular security instantly.T. Liquidity is one of the most important characteristics of a good market. averaged over a period of time. high ratio may indicate high risk. metals. low ratio may indicate low risk Forex. In this index. . is used to extend the trading day for the major futures contracts as well as to provide a daytime trading environment for non-floor trading products. Hot stock.The number of shares traded per day. Long Term Gain. “ONGC” will show you the information of the Oil and Natural Gas Commission on the National Stock Exchange of India. Capital adequacy ratio. products traded on an authorized commodity exchange. required by regulators to be above a minimum (“adequate”) level so that there is little RISK of the bank going bust. So are taxation based on those classifications. Automated Pit Trading (APT). Defined by the capital asset pricing model. APT is the LIFFE screen-based trading system that replicates the open outcry method of trading on screen. usually one year. Average Daily Share Volume. The legal definition of short term and long term capital gains vary from country to country.Articles of commerce or products that can be used for commerce. petroleum.The line defined by every combination of the risk-free asset and the market portfolio. financial instruments and indexes to name a few.The ratio of a BANK’s CAPITAL to its total ASSETS.Long-term debt divided by shareholders' equity. The line represents the risk premium you earn for taking on extra risk. showing relationship between long-term funds provided by creditors and funds provided by shareholders. Ticker symbols can be used to retrieve information from a financial publication such as your daily paper's business section.exchange.Introduced in 1989. Today. Debt to Equity Ratio. Capital market line (CML). Types of commodities include agricultural products.A stock whose price rises quickly the day it goes public. foreign currencies.P.An abbreviated name for foreign currency. For example using a futures contract to reduce the impact of price fluctuations in a cash or physical market.
or EPS.1. But how does one evaluate a company's growth? One common method is to look at the price/earnings growth ratio.25 . but employer contributions may be vested over a period of several years. Vesting." When you're considering historical P/Es. More than any other figure in a financial report. (est." Theoretically when you calculate a P/E based on the past year's earnings. What drives up a price of a share? Any investor worth his or her salt will quote ratios like EPSearning per share or the PE-the price earning ratio-and possibly they will be right.2. Some investors measure stocks almost entirely by how much profits grow from quarter to quarter and year to year. Automatic Reinvestment. or PEG. Earnings per share.21 . it is how much investors are willing to pay for a rupee of the company's earnings. But things start to get a bit fuzzy when future projections come in to play. This is where the price-earnings ratio comes in. Average Portfolio Maturity. You may also hear it referred to as a "multiple.A tax-deferred investment device for employees. The price-earnings ratio.A fund service giving shareholders the option to purchase additional shares using dividend and capital gain distributions. plug in the forward P/E.The period of time an employee must work at a firm before gaining access to employer-contributed pension income. Now mostly in real life scenario what we see quoted as the PE is a measure which is a mixture of both. Next. The PE ratio has already incorporated into the price of the scrip any news –good or bad and projected earnings of the company for the coming year.25 = 25% Company A's earnings are expected to grow 100% over the next year. Earnings are the bottom line that show how much money a company can use to reinvest in business growth or to pay dividends to shareholders.50 = 1 = 100% Company B: ( 1. This is exactly what the term "discounted the news and earnings" means. ratio is the P/E divided by the projected earnings growth rate. Simply put. First. Adviser . the P/E is called "trailing.determines whether investors will continue to bid up share prices. Employers may also match employee investments in the 401k. however. so here the market tries to determine the forward PE based on the future earnings projections. since the idea is to look at the company's future prospects.and the prospect of higher earnings in the future -. EPS.An organization or person employed by a mutual fund to give professional advice on the fund's investments and asset management practices (also called the investment adviser). determine the projected growth rate using current EPS and next year's estimated EPS. earnings are the bottom line and how much profit a company earns. offers a handy way to compare past earnings to spot upward or downward trends. a lower ratio is often more attractive because investors may be getting a bargain. is the price of a company's stock divided by its EPS. earnings -. This is the "forward" P/E (also referred to as the "anticipated" P/E).The average maturity of all the bonds in a bond fund's portfolio. The price/earnings growth.current EPS) / current EPS = growth rate Company A: ( 5.the company's net earnings divided by the number of common-stock shares outstanding. 401k plans allow employees to invest pre-tax dollars into individual retirement plan accounts. or historical.00 ) / 1. EPS . while Company B's should grow 25%. For 401k plans. After all. The PEG calculation would look like this: forward P/E / growth rate = PEG A: 21 / 100 = 0. is what separates the winners from the losers. only gives a starting point to evaluate stocks. It is one of the most widely used tools in sizing up stocks.401k plan. It does not take into account the stock's current price. or P/E. Earnings are usually summed up as earnings per share -.50 ) / 2. It all comes down to earnings.00 = 0. employee contributions are immediately vested.00 .
the faster the stock can plummet if those expectations aren't met. if a company is currently trading at $43 a share and earnings over the last 12 months were $1. but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). Investors would do well to keep an eye out for unusually high P/Es. If a company were currently trading at a multiple (P/E) of 20.8 / 25 = 1. A PEG ratio lower than 1 shows that a stock may be undervalued. and to avoid basing a decision on this measure alone. it could also mean that something is fundamentally wrong with the company. Calculated as: For example. Company B's stock price has already been bid up to incorporate its potential growth over the next year. because it shows how much investors are willing to pay per dollar of earnings.05 ($43/$1. the P/E ratio doesn't tell us the whole story by itself. Calculated as: A lower P/B ratio could mean that the stock is undervalued.21. with a PEG of 0. the greater investors' expectations.and what they don't.95 per share. Price-Earnings Ratio . a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. As with most ratios. A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters. In general. Also known as the "price-equity ratio". may look like a good buy. However. The greater the expectations. The higher the P/E. its growth rate is already incorporated into the price of its stock. be aware this varies by industry. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. the P/E ratio for the stock would be 22. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects. with good potential for growth. However.P/B Ratio. making the quality of the P/E only as good as the quality of the underlying earnings number. Price-To-Book Ratio . to the market in general or against the company's own historical P/E. EPS is usually from the last four quarters (trailing P/E). Also sometimes known as "price multiple" or "earnings multiple". Company A. The P/E is sometimes referred to as the "multiple". the interpretation is that an investor is willing to pay $20 for $1 of current earnings. It is important that investors note an important problem that arises with the P/E measure.A ratio used to compare a stock's market value to its book value. What PE ratios reveal -. .152 Theoretically a PEG ratio of 1 is considered standard -. Anything higher than 1 means that the stock is trading at a premium to its growth rate.95).P/E Ratio-A valuation ratio of a company's current share price compared to its per-share earnings. This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation.B: 28.in other words.
where companies declare results every three months. The weakness . If the PE is too high. There's little argument about the need to estimate value. compared to other companies. However high a stock's PE is. in theory. Leading PE. Unfortunately.the classic case for stocks like Lever. a PE ratio is no help. you need to believe that the intrinsic value of this business is not fully reflected in the price you pay for the stock. and you are effectively taking a stake in its business.and abused -. but it also has limitations that can really mislead investors. That's why investors often look out for low PE stocks with the potential for growth. the more out-of-date the ratio gets. Even when they are undervalued. is computed by dividing the current market price of one share of a company by its earnings per share (EPS) during the most recent accounting period. Buy a company's shares. But don't rush out and pick stocks purely on PEs. it is still worth considering for investment. It is simple and useful. One way to get a PE ratio more up to date is to use a trailing PE. a 12-month trailing PE can be much closer to reality than a figure based on the last annual results. PEs are based on past performance. it will have a higher PE than a company in decline. PE ratios for most would at this time be calculated on earnings for the year ending March 31. The EPS is a company's profit after tax divided by the number of shares it has issued to its shareholders. and acting on it whenever a gap exists between it and the market price. Successful investing is all about getting a fix on this intrinsic value. This shows whether a stock is cheap relative to its future EPS growth prospects. However. The priceearnings (PE) ratio. so a trailing PE is not as finely tuned. If you expect this investment to appreciate. There are two ways of getting around this. PE-growth (PEG) ratio. the further you get from the end of the financial period for which earnings figures are available. because these are in businesses that will grow faster than the market for years -. 1997. In general. its predictive power declines the further ahead one looks.The PEG is the current PE divided by the estimated growth rate in EPS. What it is supposed to do is give you some idea of the value (essentially the potential for appreciation) in the investment you seek. most low-PE stocks are poor performers. And when price movements anticipate future performance. it means that the share price has already anticipated the future growth. as is often the case. certainly. also known as the PE multiple. so it's an irony that one of the most easily misinterpreted -.ratios is one that even investment toddlers tout. Moreover. For instance. which is no guarantee of future goodies. In developed markets. Trailing PE. The low PE should. The developments in the intervening 15 months can make the ratio quite meaningless. A leading PE is based on the current price and the earnings projected for the coming 12 months. if it does not fully reflect the earnings growth potential. if the market expects a company to grow and have higher future earnings. its looseness of definition (both high and low PEs can be good investments) and its susceptibility to creative accounting by companies (the bottom line is routinely manipulated by dodgy companies) make it more of a trap than a useful tool. because several Indian companies still have not declared their 1997-98 results. however. they will never give you the long-term return you would get from a great stock that is undervalued. in India few firms declare results more than twice a year. which takes the earnings for the most recent accounting periods that add up to 12 months. In any case.Financial ratios scare off lots of people. imply that the price has not yet risen to reflect the stock's potential. Investors in Indian Shaving Products or Hindustan Lever pay a large multiple of these companies' current earnings for their shares because they expect their sales and profits to grow quickly. For instance.
It refers to a short-term credit investment created by a non-financial intermediary and guaranteed by a bank. Ultimately. Over time. Usually we have little basis for judging the accuracy of estimates until the results are actually declared -. A security or fund with a beta higher than 1 is expected to move up or down more than the market. Banker’s Acceptance. and the price for which it was sold.of both methods lies in their dependence on analysts' estimates.In relations to banks. whereby a set minimal level of shareholders’ equity must be sustained to maintain the lending and investing activities of a bank. For a company.When you buy an ASSET you become exposed to a bundle of different RISKs.This is different from market value. It's how one uses it that matters.Reverse the PE ratio and we get earnings yield. Estimating future earnings is usually a highly subjective process. whereby the investment manager is required to repurchase units from unit-holders seeking to redeem part or all of their investment. Bid/ Bid Price. Many of these risks are not unique to the asset you own but reflect broader possibilities. not simply the fact that one has it. When in the case of a company.It is related to managed investments. Residual risk. the company buys back and cancels its securities. . If a company holds land that was purchased 100 years ago. amortization or impairment costs made against the asset. This is because. Capital Adequacy.A measure of a security or managed investment’s fluctuation in relation to that of the market. Buy-back.one of several that investors can use. this real estate has likely gained considerably in value. Residual risk. also known as alpha. a PE ratio is only a tool -. Capital Gain.An accounting measure of value. it holds it at the cost paid.It is the uppermost price a buyer is willing to pay for a security. Carrying Value.The increase between the price at which an investment was purchased. Exposure to this risk can be reduced by DIVERSIFICATION.his pinpoints a market condition whereby there is an abundance of goods and services available and buyers can buy at a lower price than usual. Beta. the asset in question and the accounting practices that affect them. In many cases. where the value of an asset or a company is based on the figures in the company's balance sheet. Also known as "book value". Relationship between PE Ratio and Earnings Yield. the carrying value of an asset and its market value will differ greatly. in accordance with accounting rules. however. Acceptances are traded at discounts from their face value in the secondary market. Contrast with SYSTEMATIC RISK. carrying value is a company's total assets minus intangible assets and liabilities such as debt. such as that the stock market average will rise or fall. that INTEREST rates will be cut or increased. For assets. is what is left after you take out all the other shared risk exposures. A beta below 1 indicates a security or fund that usually moves to a lesser extent than that of the market. the value is based on the original cost of the asset less any depreciation. Buyer’s Market. as it can be higher or lower depending on the circumstances. the assets are held based on original costs. or that the GROWTH rate will change in an entire economy or industry.which is generally too late. So double-digit growth in earnings is necessary to enhance yields for investments made now.
An investment style where trading is performed in anticipation of a turn in the business cycle. Also. The exercise is accomplished when the customer holding the long position gives his broker instructions to exercise his position. Dow Theory. the rate on commercial paper ranges from 8.A depiction of the return on a share of a mutual fund held over the past year. but is a liquid instrument since it can be traded in the Secondary Market.Bonds with high coupon rate. A CD represents the title to a time deposit with a bank. and higher risk assets such as shares.The rate of return differential between low risk assets such as government bonds.A promise of some form of security by a borrower to secure payment of a loan.The ratio of interest to the actual market price of the bond.Capital Gains Tax. . Exercise (Option). i. the cost base is usually indexed along with movements in the consumer price index. Only if a new high or low is recorded in two or more indexes can it be safely said that the market is headed in a certain direction.75 per cent depending on the period. four crore.50 to 10. Certificate Of Deposit (CD). Counter-Cyclical. Dividend Yield (Funds). Collateral. Dividend Yield (Stocks). Normally. The company should have a minimum net worth of Rs four crore and a minimum working capital requirement of Rs.When an option is converted to its underlying asset. Current yield.A tax on the appreciation of the capital value of investments. stated as a percentage or t he coupon rate divided by the market price of the bond. Commercial Paper (CP).e.. It is a Money Market instrument with a maturity of less than one year and is issued at a discount from the face value.It means an asset that is pledged against a loan. Delivery Points.It is an instrument by which blue chip companies raise funds from the market. This must be done in accordance with the rules pertaining to timing established by the exchanges and individual brokerage firms.It refers to physical points at futures exchanges at which the physical commodity signified in a futures contract may be delivered in fulfillment of such a contract.A belief that major trends in the stock market are confirmed by more than one index. Earnings Yield.When the holder of a long option position purchases (if calls are owned) or sells (if puts are owned) the underlying security at the exercise (strike) price.It is calculated by dividing the Earnings Per Share (EPS) by the company’s current share price and multiplying the result by 100 Equity Risk Premium. which is cheaper when compared to finance from the bank.Annual dividends divided by present stock price.This is a negotiable interest-bearing debt instrument of specific maturity issued by banks. not including value increases that are due to inflation. Exercise. Cushion bonds. These bonds provide a cushion in a falling market.
This process is usually done using the historical performance of the asset classes within sophisticated mathematical models. Two types of capital are measured: tier one capital. 2006 the Reserve Bank having regard to the needs of securing monetary stability in the country. 2006.It is the price at which the underlying asset will be bought or sold if the holder exercises the option. advertising and distribution costs in order to run a mutual fund (as of the last annual statement). Liabilities of the banks may be towards banking system (as defined under Section 42 of RBI Act.This type of bond makes no periodic interest payments but instead is sold at a steep discount from its face value.effective from June 22. Expected Rate of Return. Computation of Demand and Time Liabilities. Exit Fee. Also known as "Capital to Risk Weighted Assets Ratio (CRAR).3.Exercise Price.A redemption fee charged in relation to the withdrawal of units in a unit trust. It is expressed as a percentage of a bank's risk weighted credit exposures. RBI has decided to continue with the status quo on the rate of CRR required to be maintained by Scheduled Commercial Banks at the rate of 5 per cent of the demand and time liabilities subject to the exemptions as indicated in para 2."This ratio is used to protect depositors and promote the stability and efficiency of financial systems around the world.7 of this circular. Bondholders receive the face value of their bonds when they mature. 1934 to classify any particular liability and hence for any doubt regarding . can prescribe the Cash Reserve Ratio (CRR) for Scheduled Commercial Banks without any floor rate or ceiling rate.Liabilities of a bank may be in the form of demand or time deposits or borrowings or other miscellaneous items of liabilities. Expected Value. Expense Ratio.A measure of a bank's capital.e. Extrinsic Value.Maintenance of CRR. which can absorb losses without a bank being required to cease trading.The calculated average of the probability distribution of possible returns on an asset or portfolio. Reserve Bank of India has been authorized in terms of Section 42 (1C) of the RBI.An option’s price minus its intrinsic value (its value should it expire immediately). which can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors. Cash Reserve Ratio (CRR). such as fees.The anticipated value of a future variable. i. 1934) or towards others in the form of Demand and Time deposits or borrowings or other miscellaneous items of liabilities. overhead costs.Consequent upon the amendment to subsection (1) of Section 42 of the RBI Act 1934. Asset Allocation -The process of repositioning assets within a portfolio to maximize return for a given level of risk. Capital Adequacy Ratio – CAR. Act. and tier two capital. Zero-Coupon Bond.The percentage of the expenses incurred. The statutory minimum CRR requirement of 3 per cent of total demand and time liabilities no longer exists with effect from June 22. the strike price.
Time Liabilities are those which are payable otherwise than on demand and they include fixed deposits. at the close of the business on any day. balances in overdue fixed deposits. outstanding Telegraphic Transfers (TTs). At present. Maintenance of CRR on daily basis .'Demand Liabilities' include all liabilities which are payable on demand and they include current deposits. funds made available to banking system by way of loans or deposits repayable at call or short notice of a fortnight or less and loans other than money at call and short notice made available to the Banking System. balances with banks and notified financial institutions in other accounts. Thus. Mail Transfer (MTs).classification of a particular liability. 1949 all Scheduled Commercial Banks. Any other amounts due from banking system which cannot be classified under any of the above items are also to be taken as assets with the banking system. 1934. or b) in gold valued at a price not exceeding the current market price. time liabilities portion of savings bank deposits.R. Assets with the Banking System. are required to maintain minimum CRR balances upto 70 per cent of the total CRR requirement on all days of the fortnight with effect from the fortnight beginning December 28. as a measure of simplification. Procedure for calculation of CRR.In terms of Section 24 (2-A) of the B. staff security deposits. Money at Call and Short Notice from outside the Banking System should be shown against liability to others.In order to improve the cash management by banks. cash certificates and cumulative/recurring deposits. 2004 ) based on their NDTL as on the last Friday of the second preceding fortnight. a) in cash.R. unclaimed deposits. in addition to the average daily balance which they are required to maintain under Section 42 of the RBI. . Act. be less than 25 per cent or such other percentage not exceeding 40 per cent as the RBI may from time to time. the banks are advised to approach RBI for necessary clarification. margins held against letters of credit/guarantees. Time Liabilities. are required to maintain in India. c) in unencumbered approved securities valued at a price as specified by the RBI from time to time. cash certificates.Assets with banking system include balances with banks in current accounts.With a view to providing flexibility to banks in choosing an optimum strategy of holding reserves depending upon their intra period cash flows. all Scheduled Commercial Banks. demand liabilities portion of savings bank deposits. Act. by notification in gazette of India. cumulative and recurring deposits. of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight. deposits held as securities for advances which are not payable on demand and Gold Deposits. Act. specify. credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand. all SCBs are required to maintain a uniform SLR of 25 per cent of the total of their demand and time liabilities in India as on the last Friday of the second preceding fortnight which is stipulated under section 24 of the B. Statutory Liquidity Ratio (SLR). 2002. Demand Liabilities. a lag of one fortnight in the maintenance of stipulated CRR by banks has been introduced with effect from the fortnight beginning 6th November 1999. all Scheduled Commercial Banks are required to maintain the prescribed Cash Reserve Ratio (which is currently @ 5% per cent with effect from the fortnight beginning October 02. margin held against letters of credit if not payable on demand. an amount which shall not. 1949. Demand Drafts (DDs).
However. VAR is a simple and attractive model to compute portfolio risk by assigning probabilities of value-chain (asset-price data) quantified by a measurement of their standard deviations.The phased deregulation of interest rates and the operational flexibility given to banks in pricing most of the assets and liabilities imply the need for the banking system to hedge the Interest-Rate Risk.Value at Risk.Procedure for computation of demand and time liabilities for SLR. both the above liabilities and assets are not to be included in the liabilities to /assets with the banking system for computation of DTL/NDTL for the purpose of CRR as mentioned in para 2.It is the exchange rate of a currency that is allowed to float. which deals in buying and selling of foreign exchange. 29 days up to 3 months and so on. These forces of demand and supply are influenced by factors. By assuring a bank’s ability to meet its liabilities as they become due.The procedure to compute total net demand and time liabilities for the purpose of SLR under Section 24 (2) (B) of B. Rate Sensitive Assets and Liabilities. Forex Open Position. . However. such as. there is a cash flow. assets and off balance sheet positions into time buckets according to residual maturity or next re-pricing period. The gaps on the assets and liabilities are to be identified on different time buckets from 1–28 days. whichever is earlier. may keep their position either at 'overbought or 'oversold' which is exposed to exchange risk. it is clarified that Scheduled Commercial Banks are required to include inter-bank term deposits / term borrowing liabilities of original maturities of 15 days and above and up to one year in 'Liabilities to the Banking System'. Act 1949 is similar to the procedure followed for CRR purpose. The interest changes should be studied vis-à-vis the impact on profitability on different time buckets to assess the interest rate risk. Liquidity Risk . The interest rate resets/re prices contractually during the interval.R.7 above. 15 – 28 days and so on.The new complexities of financial instruments makes the assessment of risk of the exposed positions inadequate. trade performance and balance of payments position. Similarly banks should include their inter-bank assets of term deposits and term lending of original maturity of 15 days and above and up to one year in 'Assets with the Banking System' for the purpose of maintenance of SLR.A contract that gives a holder the right to buy (Call Option) or sell (Put Option) a certain number of shares of a company at a specified price is known as the 'Striking Price' or 'Exercise Price'. a nation's economic health.3. Floating Exchange rate. All the liability figures are outflows while the asset figures are inflows. The gap report should be generated by grouping interest rate sensitive liabilities.A corporate/financial institution. Interest rates on term deposits are fixed during their currency while the advance interest rates are floating rates. liquidity management can reduce the probability of an adverse situation arising. either within a narrow specified band around a reference rate or freely according to market forces. The bank can find out the net outflow or inflow in different periods and make their strategies so as to meet the mismatches in outflows. interest rates and inflation. Interest Rate Risk is the risk where changes in market interest rates might adversely affect the Bank’s Net Interest Income.An asset or liability is normally classified as rate sensitive. Option. Interest Rate Risk. if: • • Within the time interval under consideration. The bank’s asset and liability as on a particular day can be put on various residual maturity periods called 'time buckets' varying from 1 – 14 days. VAR.Measuring and managing liquidity is vital for effective operations in commercial banks. Keeping their position as either 'overbought' or 'oversold' is known as Open Position.
The gap reports indicate whether the institution is in a position to benefit from rising interest rates by having a Positive Gap (RSA > RSL) or whether it is a position to benefit from declining interest rate by a negative Gap (RSL > RSA).P. etc. NBFC. This rate becomes the cut off rate to borrow money to finance the project. Gap Analysis. Export Credit. DRI advances.• • RBI changes interest rates (i.P. It is contractually pre-payable or withdrawal before the stated maturities. These assets and liabilities are re priced at pre-determined intervals and are rate sensitive at the time of re pricing.ALM is concerned with risk management and provides a comprehensive and dynamic framework for measuring. NSE and SBI. State Financial Corporation. subject to approval of SEBI. It is a discount rate which equates the present value of a security’s inflows to its purchase price. to eliminate risks attached to physical form of certificates. Bank approved by RBI. opens accounts of the investors. Institutions which are eligible to function as D.e. promoted by BSE. are Scheduled Commercial Bank. Depository Participants (DP). 29 days and upto 3 months etc. CRR balance. Presently we have 2 depositories functioning in India: (a) National Securities Depository Ltd (NSDL) promoted by IDBI. Bank of Baroda. Certain assets and liabilities receive/pay rates that vary with a reference rate. the project is financially not viable. The institution must have a minimum net worth of Rupees one crore. The concerned depository has the right to choose D. It is assumed that the periodic inflows are reinvested at the rate equal to the yield to maturity. Clearing Corporations.A Depository holds securities of investors in electronic form and renders services related to transactions in securities. Bank of India. SEBI registered brokers and SEBI registered custodians. A D. Yield to maturity. Asset and Liability Management System. foreign exchange and equity and commodity price risks of a bank that needs to be closely integrated with the banks’ business strategy. The purpose of establishing depository are to reduce paper work.It is an annualized rate of return on investment. Depository services. ALM involves assessment of various types of risks and altering asset-liability portfolio in a dynamic way in order to manage risks.P.A Depository interfaces with investors through agents known as Depository participants. interest rates on Savings Bank Deposits. and items non-sensitive to interest based on the probable date for change in interest. If the cost of funds is above this rate. The positive gap indicates that it has more RSAS than RSLS whereas the negative gap indicates that it has more RSLS. Internal Rate of Return.) in cases where rates are administered and. Refinance. (b) Central Depository Services Ltd.IRR is the discount rate that makes the Net Present Value (NPV) of a project equal to zero. SBI and HDFC Bank.The various items of rate sensitive assets and liabilities and off-balance sheet items are to be classified in the various time buckets such as 1-28 days. The gap is the difference between Rate Sensitive Assets (RSA) and Rate Sensitive Liabilities (RSL) in various time buckets. . UTI. to reduce transaction cost and to facilitate pledging of securities. Public Financial Institutions. monitoring and managing liquidity interest rate. It indicates return earned by an investor on a debenture or bond held till maturity.
as spelled out in a formal document. refers to the purchase by an institutional broker of a large number of shares over a period of time in order to avoid pushing the price of that share up. Amortization. This account includes capital stock and contributions of stockholders credited to accounts other than capital stock.This involves the pay off of an interest bearing liability through a series of installments. Formula: opening stock (at cost) plus purchases (at cost) less closing stock (at cost). At present. Satellite dealers act on behalf of primary dealers and render services in any part of the country. shrinkage and freight charges. as well as any cash transactions.e. An example is the typical home loan.Primary dealers and satellite dealers. and expensed incurred but not yet paid.e. or a mortgage. Articles of Association. but not stock from capital generated from earnings or donated. Accumulation area. Arbitrage.A price range in which a buyer accumulates shares of a stock Acid test ratio. The minimum net owned funds are prescribed as Rs. In the context of investments. the purchase of an asset for a low price in one market and its sale for a higher price in another.These are the rules regarding the operations of a company.It represents the profit made from the price differences in different markets. and prepaid items to current liabilities Cost of goods sold .5 crores.. Cost price . . They take part in primary as well secondary market. of sales and purchases. Accounting TermsPaid-in capital – Capital received from investors in exchange for stock. accruals.Bond. i. Accrual. discounts.An actuary is a qualified expert who makes valuations and calculations related to investment funds. which are active in government securities market. In the context of mutual funds.An amount which the retailer pays to the supplier/vendor for goods Accrual Accounting.Also called the quick ratio.This is an accounting practice that takes into account all the revenues earned but not yet received. which includes interest along with the principal in each installment. there are 13 primary dealers.These are bonds in which interest is accumulated and paid at the time of redeeming the bonds along with the redeemable value Actuary. the ratio of current assets minus inventories. rebates.The amount which the retailer has paid for goods actually resold. Minimum net owned funds for them is Rs.In the context of corporate finance refers to profits that are added to the capital base of the company rather than paid out as dividends.Primary Dealers are those corporations like Discount & Finance House of India Ltd. It includes the invoice cost. Accumulation. It would also include surplus resulting from recapitalization. refers to the regular investing of a fixed amount while reinvesting dividends and capital gains. They have to commit a minimum bidding per year. They have a double code i.50 crores.
In the four years to 1933. Since 1930 it has been the norm in most developed countries for AVERAGE PRICES to rise year after year. Most serious of all.It means the company’s asset value when divided by its issued shares. Deflation is a persistent fall in the general price level of goods and SERVICES. before 1930 deflation (falling prices) was as likely as INFLATION.500% in one month! Stagflation.This theory can be summarized as "too much money chasing too few . excess CAPACITY and a shrinking MONEY SUPPLY.It represents any tangible or intangible resources or items of value that an individual or a corporation owns. so real rates can get stuck too high. The expectation that prices will be lower tomorrow may encourage consumers to delay purchases. Property. every dollar you own buys a smaller percentage of a good or service. when prices rose 2. This makes deflation particularly dangerous for economies that have large amounts of corporate debt. as in the Great DEPRESSION of the early 1930s. as the expansion of railways and advances in industrial technology brought cheaper ways to make everything. In extreme cases. However. Asset Backing.g. for example. As inflation rises. Yet annual real GDP GROWTH over the period averaged more than 4%. this can lead to the breakdown of a nation's monetary system. E. Sometimes deflation can be harmless. deflation can make MONETARY POLICY ineffective: nominal interest rates cannot be negative. Deflation is dangerous. when a bad economy was combined with OPEC raising oil prices. This is the opposite of inflation. however. Cash. Economics Inflation: Inflation is defined as a sustained increase in the general level of prices for goods and services. increase real INTEREST rates) causing BANKRUPTCY and BANK failure. for example. One of the most notable examples of hyperinflation occurred in Germany in 1923.It shows the worth of the assets underpinning a security. It is measured as an annual percentage increase. Deflation.is the combination of high unemployment and economic stagnation with inflation.Asset.is unusually rapid inflation. On the eve of the first world war. Runaway deflation of this sort can be much more damaging than runaway inflation. Causes of Inflation Demand-Pull Inflation . more so even than inflation.An ASSET pledged by a borrower that may be seized by a lender to recover the value of a loan if the borrower fails to meet the required INTEREST charges or repayments. Long-term and Short investments. because it creates a vicious spiral that is hard to escape. were almost exactly the same as they had been at the time of the great fire of London in 1666. In the last 30 years of the 19th century. when it reflects a sharp slump in DEMAND. American consumer prices fell by 25% and real GDP by 30%. prices in the UK. It is not to be confused with a decline in prices in one economic sector or with a fall in the INFLATION rate (which is known as DISINFLATION). consumer prices fell by almost half in the United States. Falling prices also inflate the real burden of DEBT (that is. Asset Value. perhaps even a good thing. if lower prices lift real INCOME and hence spending power. depressing demand and forcing FIRMS to cut prices by even more. Hyperinflation.is when the general level of prices is falling. Equipment. This happened in industrialized countries during the 1970s. Collateral. overall.
Increased costs can include things such as wages. gives the country's gross national product (GNP).I borrows from apex banking institutions or other such specific institutions.Refinance is the system under which a Bank/F. sanctioning powers and rate of interest charged by banks to borrowers dealing in such sensitive commodities. It is used as a measure of inflation and the relative cost of living.It is an index measuring the changing prices of household goods and services bought by ordinary consumers.P. SEBI is formulating a policy whereby it will mandate a three year lock in period from the date of allotment of shares issued under the Sweat Equity Plan. Rediscounting implies discounting of a debt instrument such as a Bill of Exchange by a Bank/F. It is a measure which is used by apex bank in a short-term period to control/regulate call money rates. GDP can be calculated in three ways. The effect of inflation can be eliminated by measuring GDP growth in constant real prices. GDP can be calculated at factor cost. if demand is growing faster than supply. or increased costs of imports. In other words. some economists argue that hitting a nominal gdp target should be the main goal of macroeconomic policy. It is issued by a corporate to retain the human assets. G.A ‘Weak Bank’ has been defined by the committee as follows: • • Where a total of accumulated losses of the bank and net NPA amount.N. however. by subtracting indirect tax and adding any government subsidy. prices will increase. which had earlier discounted it. RBI Re-Finance / Rediscount Facilities. The list of items under selective credit control is revised from time to time as per market forces. Cost-Push Inflation . G. Adding income earned by domestic residents from their investments abroad. It is calculated by adding the total value of a country's annual output of goods and services. This is because it would remind policymakers to take into account the effect of their decisions on inflation. for the last three consecutive years. Weak Bank. RBI has been controlling margins. Consumer Price Index (CPI).I. a measure of economic activity in a country.Narasimham Committee-II.Sweat Equity is the equity issued by the company to employees or director’s at a discount for consideration other than cash for providing the know-how or making available rights in the nature of intellectual property rights or value addition. as well as on growth. This measure more accurately reveals the income paid to factors of production.When companies' costs go up.imports).D.With the view to discourage hoarding and black-marketing of certain essential commodities by traders.P. taxes. Selective Credit Control. Alternatively. This usually occurs in growing economies. Sweat Equity. Gross domestic product. exceeds the net worth of the bank. The income method adds the income of residents (individuals and firms) derived from . they need to increase prices to maintain their profit margins.Gross Domestic Product is the sum total of values of output of goods and services in the country without adding net factor incomes received from abroad. However.Gross National Product is the aggregate market value of all final goods and services produced during a given year in a country. and subtracting income paid from the country to investors abroad.goods". GDP = private consumption + investment + public spending + the change in inventories + (exports . It is usually valued at market prices. where operating profit minus income from recapitalization bonds results in a negative position.
The expenditure method totals spending on goods and services produced by residents. They rarely are because of statistical imperfections.5% p.P. Any revision in Bank Rate by RBI is a signal to banks to revise deposit rates as well as Prime Lending Rate. GDP is disliked as an objective of economic policy by some because it is not a perfect measure of welfare. the output and income measures exclude unreported economic activity that takes place in the black economy but that may be captured by the expenditure measure. Yield Curve. different types of refinance facilities by RBI to banks are linked to a Bank Rate.Gross Non Performing assets is the total outstanding of all the borrowers classified as non-performing assets (viz. Tier I refers to core capital consisting of Capital.P.Capital structure of banks is made up of 2 tiers. such as parents teaching their children to read. Capital.The assets and liabilities of a bank’s balance sheet are nothing but future cash inflows or outflows. this tool is used together with other measures like Cash Reserve Ratio and Repo Rate. commercial banks have to distribute the outflows/inflows in different residual maturity period known as time buckets. This is Supplementary Capital. 15–28 days.It is a graphical representation of the pattern of yields on a specific date for government securities with varying maturities.Net National Product is the value of the net output of the economy during a year.Net Non Performing assets is the Gross NPA minus gross provision made. Hybrid Capital. unrealized interest and unadjusted credit balances with regard to various NPA accounts. It does not include aspects of the good life such as some leisure activities. N.N. Subordinated Term Debt and General Provisions.the production of goods and services. Capital adequacy is determined as a ratio of capital funds to total Risk Weighted Assets of the bank. such as activities that damage the environment. 29 days up to 3 months and so on.Tier I and Tier II. varying from 1–14 days. As one person's output is another person's income. Bank Rate. which in turn becomes expenditure. Yield curve can take different shapes depending upon the prevailing conditions at any point of time. substandard. the bank rate is 6. Yield curve reflects the broad expectations about interest rates. the use of maturity ladder and calculation of cumulative surplus or deficit of funds in different time slots on the basis of statutory reserve cycle of 14 days are termed as time buckets. Nor does it include economically valuable activities that are not paid for. these three measures ought to be identical. To measure the liquidity and interest rate risk. Tier II is comprised of Property Revaluation Reserve. Furthermore. Statutory Reserve. Capital Reserve (excluding Revaluation Reserves) and unallocated surplus/profit but excluding accumulated losses. Gross NPA. before allowing for depreciation and capital consumption. The output method adds the value of output from the different sectors of the economy. Time Buckets in ALM. investments in subsidiaries and other intangible assets. doubtful and loss asset). Normally. Bank Rate is a tool which RBI uses for short-term purposes. But it does include some things that lower the quality of life. Revenue and other reserves. It is arrived at by deducting the value of depreciation or replacement allowance of the capital assets from G. Undisclosed Reserves. As per RBI guidelines. At present. For greater effectiveness.a.N.Bank Rate is the rate at which RBI allows finance to commercial banks. . Net NPA.
Maturity profile of the rate sensitive assets and liabilities.The entire investment portfolio of the banks(including SLR and NON-SLR securities) will be classified under three categories.e. Once the company repays commercial paper.In the red – when more MONEY goes out than comes in. Ways and Means Advances-WMA. A current account deficit occurs when EXPORTS and inflows from private and official TRANSFERS are worth less than IMPORTS and transfer outflows (see BALANCE OF PAYMENTS).RBI has granted the facility of overdraft to the Central Government as well to State Governments.75% depending on the period. which is cheaper when compared to finance from the bank. With a view to check the adverse impact of government’s large borrowing program on interest rates. . These government borrowings result in high increase in interest payments on public debt. The securities which do not fall within the above two categories will be classified under Available for Sale. price of SGL transactions.When government expenditure exceeds government income.Categorization and valuation of Bank’s investments . Normally. viz.That part of the balance of payments recording current. In any case. The securities acquired by the banks with the intension to trade by taking advantage of the shortterm price/interest rate movements will be classified under Held for Trading. Deficit. borrowings foreign currency assetsliabilities as per buckets prescribed under Asset-Liability Management guidelines. depositors and general public. RBI announced in June '98. Disclosure Norms. Per employee business. Balance of payments on current account. Movements of NPAs. its intention to accept private placement of government securities from time to time.It is an instrument by which blue chip companies raise funds from the market. 'Held to Maturity'. the rate on commercial paper ranges from 8. Average cost of funds and return on assets. fiscal deficit of government and its borrowing requirements are to be kept within reasonable limits. Budget Deficit. The company should have a minimum NET WORTH of rupees four crores and having a sanctioned working capital limit from a bank/FI. Market Value. non-capital transactions. price list of RBI. A BUDGET deficit occurs when PUBLIC SPENDING exceeds GOVERNMENT revenue. opening balance and closing balance. 'Available for Sale' and 'Held for Trading'. investments. These are as follows: • • • • • • • Capital adequacy ratio. Commercial paper (CP).With a view to bring in transparency in banking transactions and for the benefit of investors. RBI has stipulated disclosure norms to be observed by banks. This enlarged borrowing program of the government has brought pressure on absorptive capacity of the market. quantum-wise gross and net NDA. Per branch profit. i. The securities acquired by the banks with the intension to hold them up to maturity will be classified under Held to Maturity.The 'market value' for the purpose of periodical valuation of investments included in the Available for Sale and Held for Trading categories would be the market price of the scrip as available from the trades/quotes on the stock exchanges.50 to 10. loans. the working capital limits hitherto availed from the bank is restored. Maturity pattern of deposits.
The ability of large firms to purchase their inputs at a larger discount than small firms. they will have to expand along a short run average cost curve as they will be limited by their fixed factors. However. The PSBR is now known as the Public Sector Net Cash Requirement and can be either positive or negative. Marketing economies of scale. Public Sector Net Cash Requirement (PSNCR). Parallel economy. Long Run Average Cost (Envelope) Curve.When government income exceeds government expenditure. This is why the LRAC is made up of a series of SRAC curves . Buying economies of scale. in the long run they can get more of the fixed factors and so will move back down to the long run average cost curve. In other words it the amount that their spending exceeds their tax revenue by.The production that takes place outside of the declared and formal circular flow of income. Financial economies of scale. Long run average cost curve. allowing the size of plant to vary.Shows the minimum unit cost of producing each level of output. The budget surplus in the UK used to be called the Public Sector Debt Repayment. It is now termed as a negative Public Sector Net Cash Requirement. Diseconomies of Scale.Budget surplus.The lower unit cost of advertising and promotion that is enjoyed by a large firm and which is unavailable to smaller companies Black economy. A larger firm may be able to buy in bulk. If a firm is producing in the most efficient way possible in the long run.A reduction in long run unit costs which arise from an increase in production.This used to be called the Public Sector Borrowing Requirement (PSBR) and is the amount of money the government need to borrow to meet their spending plans.The difference between government income and expenditure which is financed by borrowing. it may be able to organize production more efficiently.Increases in long run costs which occur from an increase in the scale of production. Public Sector Borrowing Requirement (PSBR). This may happen for a variety of reasons. Economies of scale occur when larger firms are able to lower their unit costs.The ability of large firms to borrow money on more favorable terms than small firms.Unrecorded production. but they then want to expand. Economies of Scale. All of these represent economies of scale.The long run average cost curve is derived from a series of short run average cost curves and so is often described as the envelope curve. it may be able to raise capital cheaper and more efficiently. The Black economy results from activity that has not been recorded through the tax system or other conventional means of recording.
The rate of interest adjusted for inflation Nominal rate of interest. this will then automatically change all their other rates. the long run average cost curve is horizontal Constant Returns to Scale Base Year.The rate of interest on which financial institutions base their lending rates.When a firm experiences constant returns to scale. Base Rate. without having taken account of the rate of inflation. Their loan rates will be a certain percentage above the base rate.The year in which calculations. Real rate of interest.The annual return form lending money expressed as a percentage. and their savings rates below. commence and with which other years are compared. usually indexes.Constant Returns to Scale. . It is used to set all their other interest rates. When they change their base rate.
so the quantity offered for sale falls.Shows by how much total liabilities can increase as a result of a rise in liquid assets Credit Creation. which is unregistered with the tax authorities.A curve showing that as the price of a good or service rises. They will therefore face a downward sloping demand curve for their product.A curve which plots average revenue. If the firm is a price-taker then the average revenue curve will be horizontal and the same as the marginal revenue curve. Backward bending supply of Labor. Backward sloping supply curve. The shape of the average revenue curve will depend on the situation the firm is in. Average Revenue Curve.Bank Multiplier.A price setter is a firm that is powerful enough to set the price that they will charge in the market.Shows by how much total liabilities can increase as a result of a rise in liquid assets Money Multiplier. often comprising of small businesses and individuals. Average revenue and marginal revenue. Revenue Curves for a Price Setter . For example a worker may use an increase in wage rates to work fewer hours and enjoy more leisure time. Revenue Curves for a Price Setter.Shows by how much total liabilities can increase as a result of a rise in liquid assets Credit Creation multiplier.In some circumstances it may be possible for the labor supply curve to become backward-bending as people become less willing to work at higher wage levels Backward-bending Supply of Labour . It is equivalent to the demand curve. If the firm has price setting power then the average revenue curve (demand curve) will be downward-sloping.Average revenue is the level of total revenue divided by output.The ability of the banking sector to create money by giving advances Informal Sector. Marginal revenue is the revenue that the firm receives for the next unit of output.the sector of the economy.
If the level of average cost is above the average revenue. Monopolist. Pure Monopoly.6. For example.000. If abnormal losses persist in an industry firms will tend to leave.Average Propensity to Consume. prices will rise and normal profits will be restored. if a person spends £4.An abnormal loss is where total revenue does not cover total cost.The proportion of disposable income saved.Profits exceed the amount a firm must receive to carry on production.The proportion of each extra pound of disposable income not spent Average Cost pricing.000 of a £10.4. It is a situation where a firm is making below normal profits.000 income. If abnormal profits persist in an industry this will tend to attract . then the firm will make a loss (or below normal profit if normal profit is included in the cost curves). Abnormal profits. if a person spends £4. The APS is therefore 0. then they have saved £6. Marginal Propensity to save.Setting price equal to average cost Abnormal loss. then the APC is 0.000 of a £10.Only one producer who can therefore determine the market price on its own. Also known as supernormal profit.The proportion of disposable income spent: APC = C/Y.Loss. APS = S/Y.000 income. Average Propensity to save. For example.
The precise cause of the crisis remains a matter of debate. Today. as the price charged reflects the variable costs of each item plus a share of the fixed costs Arbitrage. for example. Asian crisis. partly because of the GLOBALISATION of FINANCIAL MARKETS. which had become increasingly exposed to the promise that Asia had seemed to offer. Monopolist -Supernormal Profit Absorption pricing. shares in a company listed on both the London Stock Exchange and New York Stock Exchange. Sometimes these will be identical assets in different markets. if EUROS are available more cheaply in dollars in London than in New York. supply will increase. This had big consequences for the global financial markets. Often the assets being arbitraged will be identical in a more complicated way. involves assets that have some similarities but are not identical.new firms in. Some kinds of arbitrage are completely risk-free—this is pure arbitrage. Arbitrage pricing theory. prices will fall and normal profits will be restored.A means by which the fixed costs are shared between all the products that are sold. for instance. many of the East Asian tiger economies suffered a severe financial and economic crisis. a lot of so called arbitrage. In the banking system alone. and how the price of the asset changes relative to the price of a portfolio of assets. Opportunities for pure arbitrage have become rare in recent years. This is not pure arbitrage and can be far from risk free.a destruction of savings on a scale more usually associated with a full-scale war. Monopolist. arbitrage by investors should bring it back into line.If the level of average revenue is above the average cost. such as the expected rate of interest. If the price of an asset happens to diverge from what the theory says it should be. much of it done by hedge funds.This is one of two influential economic theories of how assets are priced in the financial markets.Supernormal profit.Buying an asset in one market and simultaneously selling an identical asset in another market at a higher price. The crisis destroyed wealth on a massive scale and sent absolute poverty shooting up.During 1997-98. corporate loans equivalent to around half of one year's GDP went bad . Fingers have been pointed at the currency peg . arbitrageurs (also known as arbs) can make a risk-free PROFIT by buying euros in London and selling an identical amount of them in New York. The other is the capital asset pricing model. For instance. The arbitrage pricing theory says that the price of a financial asset reflects a few key risk factors. If there are barriers to entry then abnormal profits may persist in the long-run. then the firm will make a supernormal profit. they will be different sorts of financial securities that are each exposed to identical risks. The fixed costs are said to be absorbed into the price of the goods.
and a reduction of capital controls in the years before the crisis. OLIGOPOLY is more common. firms can earn some excess profits.Other things being equal. . Some blamed economic contagion.An economy that does not take part in international trade. Most markets exhibit some form of imperfect or MONOPOLISTIC COMPETITION. Perfectly competitive markets are extremely rare. ill-disciplined banking and lack of transparency. Economic growth does not benefit all members of a society equally but rather increases the wealth of the richest while increasing the poverty of the poorest. the opposite of an OPEN ECONOMY. For example. The crisis brought an end to a then widespread belief that there was a distinct "Asian way" of capitalism that might prove just as successful as capitalism in America or Europe. Closed economy. Prices are higher and OUTPUT lower than under perfect competition. perhaps by ADVERTISING or through small differences in design. also known as imperfect competition. If firms earn more than this (excess profits) other firms will enter the market and drive the price level down until there are only normal profits to be made. In monopolistic competition. Ceteris paribus. Thus firms can earn some excess profits without a new entrant being able to compete to bring prices down. These small differences form BARRIERS TO ENTRY. they might say that “higher interest rates will lead to lower inflation. critics turned their fire on Asian cronyism. The least competitive market is a MONOPOLY. A market dominated by a single firm does not necessarily have monopoly power if it is a CONTESTABLE MARKET. At the turn of the century about the only notable example left of a closed economy is North Korea (see AUTARKY). Monopolistic competition-Somewhere between PERFECT COMPETITION and MONOPOLY. History has shown that this does not actually happen. the bare minimum PROFIT necessary to keep them in business. although not as much as a pure monopoly. In this sense it is a price setter. PERFECT COMPETITION is the most competitive market imaginable in which everybody is a price taker. Competition. although some (such as South Korea) went much further than others (such as Indonesia). the more likely are FIRMS to be efficient and PRICES to be low. As a result. and few FIRMS enjoy a pure monopoly. without a new entrant being able to reduce PRICES through COMPETITION. a single firm can dominate only if it produces as efficiently as possible and does not earn excess profits. which means that they will stand by their prediction about INFLATION only if nothing else changes apart from the rise in the INTEREST RATE. In such a market. If it becomes inefficient or earns excess profits. Economists use this Latin phrase to cover their backs. another more efficient or less profitable firm will enter the market and dominate it instead.The more competition there is.adopted by some countries. Trickle-down economics. there are fewer firms than in a perfectly competitive market and each can differentiate its products from the rest somewhat. ceteris paribus”. In the years following the crisis. Economists have identified several different sorts of competition. It describes many real-world markets. Firms earn only normal profits. most of the countries involved have introduced reforms designed to increase transparency and improve the health of the banking system. Instead.an assumption that the benefits of economic growth will eventually trickle-down to the poorest sectors of a society. When there are few firms in a market (OLIGOPOLY) they have the opportunity to behave as a monopolist through some form of collusion (see CARTEL). dominated by a single firm that can earn substantial excess profits by controlling either the amount of OUTPUT in the market or the price (but not both). There are fewer firms than in a perfectly competitive market and each can to some degree create BARRIERS TO ENTRY.
it exploits all the available INFORMATION and properly aligns everybody’s incentives. the state safety net could be shrunk. the New Deal. Arrangements vary around the world. One approach is to monitor what banks do very closely. If a bank defaults. the American economy (among others) went into prolonged recession. The downside of deposit insurance is that it creates a MORAL HAZARD. the bank will have to persuade informed investors of this. The United States introduced it in 1933. not least because of the high cost. deepening its DEPRESSION. This exploits the fact that bankers know more about banking than do their supervisors.Protection for your SAVINGS.The domino effect. a depression is an even deeper and more prolonged slump. By insulating depositors from defaults.000 BANKS in the United States failed. in case your BANK goes Bust. This ingenious idea was first tried in Argentina. However. Also banks can take greater risks. After growing strongly during the “roaring 20s”. just in case. where it became a victim of the country's economic. Subordinated debt (uninsured certificates of deposit) is simply junior debt. Its holders are at the back of the queue for their MONEY if the bank gets into trouble and they have no safety net. Alternatively. safe in the knowledge that there is a state-financed safety net to catch them if they fall. Roughly half of the 25. If it cannot convince them it cannot operate. that could range more widely under a much lighter regulatory system. Another is to ensure CAPITAL adequacy by requiring banks to set aside. such as when economic problems in one country spread to another. after a massive bank panic led to widespread BANKRUPTCY. Depression. “broad banks”. Deposit insurance. Unlike the present regime. An attempt to stimulate growth.A bad.Contagion. and thereby reduces SYSTEMIC RISK. at least up to a certain amount. with the stipulation that the YIELD on this debt must not be more than so many (say 50) basis points higher than the rate on a corresponding risk-free instrument. . specified amounts of capital when they take on different amounts of RISK. depressingly prolonged RECESSION in economic activity. To sell its debt. and uninsured institutions. usually government-run. this fund guarantees its customers’ deposits. UNEMPLOYMENT soared and stayed high: in 1939 the jobless rate was still 17% of the workforce. their customers). Yet another possible answer is to require every bank to finance a small proportion of its assets by selling subordinated DEBT to other institutions. Output fell by 30%. Savers who invested in a broad bank would probably earn much higher RETURNS because it could invest in riskier assets. There are no easy solutions to this moral hazard. the depression only ended with the onset of preparations to enter the second world war. insurance fund. deposit insurance aims to prevent them from panicking and causing a bank run. By reassuring banks’ customers that their cash is protected. deposit insurance reduces their incentive to monitor banks closely. government-insured “narrow banks” that stick to traditional business and invest only in secure assets. Investors will buy subordinated debt at a yield quite close to the risk-free INTEREST RATE only if they are sure the bank is low risk. A slump is where output falls by at least 10%. This is easier said than done. ultimately. banking and political crisis of 2001-02 before it really had a chance to prove itself. It asks banks not to be good citizens but to look only to their profits. which contribute a small slice of their ASSETS to a central. was the most far-reaching example of active FISCAL POLICY then seen and greatly extended the role of the state in the American economy. The textbook definition of a recession is two consecutive quarters of declining OUTPUT. but in most countries deposit insurance is required by the GOVERNMENT and paid for by banks (and. but they would also lose their shirts if it went bust. The most famous example is the Great Depression of the 1930s. by splitting banks into two types: supersafe.
but forget the popular explanation: that it all went wrong with the Wall Street stockmarket crash of October 1929. but it also piled taxes on business and sought to prevent excessive COMPETITION. Deregulation. or the PRICES charged within a particular industry.The more you have. in 1998 the Code of Federal Regulations was more than 130. But the Fed. some economists argue. The New Deal brought DEPOSIT INSURANCE and boosted GOVERNMENT spending. Diminishing returns. and the Fed let them. dampened the impact of this adjustment mechanism. and that it took the New Deal to put things right. None of this stopped – and indeed may well have contributed to – the economy falling into recession again in 1937–38. but the annual benefits were $298 billion. although in recent years reluctant devaluers have blamed financial SPECULATION. tried to reduce imports through TARIFFS. Price controls were brought in. red tape is alive and well. In the spring of 1929. expanding the MONEY SUPPLY and boosting the economy. the crash set the scene for a severe contraction but not for the decade-long slump that ensued. many governments committed to the free market pursued policies of LIBERALISATION based on substantial amounts of deregulation hand-in-hand with the PRIVATISATION of industries owned by the state. Coming on top of a recession that had already begun.Cutting red tape. For instance. The aim was to decrease the role of GOVERNMENT in the economy and to increase competition.000 pages thick. that the slump persisted because policymakers just sat there. and instead the money supply got tighter. Most studies of devaluation suggest that its beneficial effects on COMPETITIVENESS are only temporary.Why did the Great Depression happen? It is not entirely clear. As the crisis of confidence spread more banks failed. Taxes were raised in 1932 to help balance the budget and restore confidence. after a brief recovery starting in 1935. began raising interest rates. devaluation refers only to sharp falls in a currency within a fixed EXCHANGE RATE system. which was still worried about easy CREDIT and speculation. over time they are eroded by higher PRICES (see J-CURVE). causing international trade to collapse. worried about financial SPECULATION and inflated STOCK PRICES. capital may not suffer from . the sorts of business done. not all REGULATION is necessarily bad. along with other anti-business regulations. This underpins the CATCH-UP EFFECT. well before the stockmarket lost half of its value between October 24th and mid-November. Then American banks started to fail. In the United States. the annual cost of these rules was $289 billion. its BALANCE OF PAYMENTS moved further into surplus and gold should have flowed into the country. In the NEW ECONOMY.800 rules a year. However. whereby there is (supposedly) convergence between the rates of GROWTH of DEVELOPING COUNTRIES and developed ones.A sudden fall in the value of a currency against other currencies. The process of removing legal or quasi-legal restrictions on the amount of COMPETITION. Even so. As early as 1928 the Federal Reserve. Governments everywhere. the recession started in the summer. Also it usually refers to a deliberate act of GOVERNMENT policy. when workers have a lot of CAPITAL giving them a little more may not increase their PRODUCTIVITY anywhere near as much as would giving the same amount to workers who currently have little or no capital. the smaller is the extra benefit you get from having even more. hit by falling demand. Devaluation. and as people rushed to turn bank deposits into cash the money supply collapsed. industrial production started to slow. not just in the United States but also around the globe? In 1929 most of the world was on the GOLD STANDARD. year after year. During the last two decades of the 20th century. which should have helped stabilise the American economy. also known as diseconomies of scale (see ECONOMIES OF SCALE). Strictly. So why did a bad downturn keep getting worse. As DEMAND in the United States slowed its IMPORTS fell. Bad MONETARY POLICY was abetted by bad fiscal policy. According to estimates by the American Office of Management and Budget. with some 60 federal agencies issuing more than 1.
Leveraged buy-out. giving them the illusion that their circumstances are improving. when in fact the value of MONEY is declining. some economists see LBOs as a way of tackling AGENCY COSTS associated with corporate governance. However. There may even be ever increasing returns. even though in real (inflation-adjusted) terms they may be no better off. This makes them attractive to buyers (see TOBIN). say. workers like to see their nominal WAGES rise. These can be a voluntary marriage of equals. There are three sorts of mergers between FIRMS: HORIZONTAL INTEGRATION. helping to “grease the wheels” of the economy. the different sorts of mergers have different sorts of potential benefits. in most cases the need to meet demanding interest bills drove the new managers to run the firm more efficiently than their predecessors. a phrase coined by KEYNES. . Leveraged buy-outs (LBOs) became popular in the United States during the 1980s. • SECURITIES are traded in efficient markets. Although some LBOs ended up with the borrower going bust. Modern portfolio theory is based upon the simple idea that DIVERSIFICATION can produce the same TOTAL RETURNS for less RISK.Buying a company using borrowed MONEY to pay most of the purchase PRICE. Combining many financial ASSETS in a portfolio is less risky than putting all your investment eggs in one basket. Modern portfolio theory. • For every level of risk. One possible explanation is that when SHARE PRICES are low. the damning lesson of merger waves stretching back over the past 50 years is that. and how much. when two companies with nothing in common jump into bed. During periods of high inflation double-digit pay rises (as well as. people are fooled by inflation is much debated by economists. big increases in the value of their homes) can make people feel richer even if they are not really better off. VERTICAL INTEGRATION. many firms have a MARKET CAPITALISATION that is low relative to the value of their ASSETS. a voluntary takeover of one firm by another. Money illusion. and DIVERSIFICATION. The INTEREST will be paid out of the company’s future cashflow. Whether. with one big ex ception – the spate of LEVERAGED BUYOUTS in the United States during the 1980s – they have often failed to deliver benefits that justify the costs. When inflation is low.diminishing returns. rather than by looking at individual assets.When two businesses join together. In theory. in which the management of the target firm resists the advances of the buyer but is eventually forced to accept a deal by its current owners. as public DEBT markets grew rapidly and opened up to borrowers that would not previously have been able to raise loans worth millions of dollars to pursue what was often an unwilling target. GROWTH in real incomes may hardly register.When people are misled by INFLATION into thinking that they are getting richer. there is an optimal portfolio of assets that will have the highest EXPECTED RETURNS. The DEBT is secured against the ASSETS of the company being acquired.One of the most important and influential economic theories about finance and INVESTMENT. For this reason. Mergers and acquisitions. Money illusion. or at least the amount of diminishing will be much smaller. in which two similar firms tie the knot. either by merging or by one company taking over the other. The theory has four basic premises• Investors are RISK AVERSE. For reasons that are not at all clear. merger activity generally happens in waves. Because of money illusion. • Risk should be analyzed in terms of an investor’s overall portfolio. or a hostile takeover. is used by some economists to argue that a small amount of inflation may not be a bad thing and could even be beneficial. in which two firms at different stages in the SUPPLY chain get together.
can be substituted for another. the legal liability of company bosses. Federal reserve system. the good is INELASTIC. Ernst Engel. if it is less. tea) changes. Texas. • Price Elasticity measures how much the quantity of SUPPLY of a good.America's central bank. If they are SUBSTITUTE GOODS (tea and coffee) the crosselasticity will be positive: an increase in the price of tea will increase demand for coffee. the rate of UNEMPLOYMENT or the rate of INFLATION. but they can also afford LUXURIES beyond the budgets of poor people. Sometimes this is done to test a theory. This.People generally spend a smaller share of their BUDGET on food as their INCOME rises. as well as further scandals involving accounting fraud (WorldCom) and other dubious practices (many by Wall Street firms). at other times the computers churn the numbers until they come up with an interesting result. or DEMAND for it. prompting what was widely described as a crisis of confidence in American capitalism. which poor people have to buy. However. a Russian statistician. resulted in efforts to reform corporate governance. Econometricians crunch data in search of economic relationships that have STATISTICAL SIGNIFICANCE. Enron. Treasury bills usually mature after three months. • Cross-elasticity shows how the demand for one good (say. changes if its PRICE changes. If the percentage change in quantity is more than the percentage change in price. • Elasticity of substitution describes how easily one input in the production process. Economic indicator. Econometrics. coffee) changes when the price of another good (say. Some economists are fierce critics of theory-free econometrics.A statistic used for judging the health of an economy. Such statistics are often subject to huge revisions in the months and years after they are first published. revelations of accounting fraud by the firm led to its bankruptcy. such as LABOUR.A form of short-term GOVERNMENT DEBT.A measure of the responsiveness of one variable to changes in another. If they are unrelated (tea and oil) the cross-elasticity will be zero. had been one of the most admired firms in the United States and the world. the good is price elastic. an energy company turned financial powerhouse based in Houston. It was praised for everything from pioneering energy trading via the internet to its innovative corporate culture and its system of employment evaluation by peer review.Mathematics and sophisticated computing applied to ECONOMICS. Enron. thus causing difficulties and embarrassment for the economic policymakers who rely on them Elasticity. first made this observation in 1857.Treasury bills. Most government borrowing takes the form of longer-term BONDS. such as GDP per head. each with its own . Set up in 1913. Hence the share of food in total spending falls as incomes grow. The reason is that food is a necessity. accounting. Economists have identified four main types. • Income Elasticity of demand measures how the quantity demanded changes when income increases.Until late 2001. which resulted in those that were not rated by their peers being fired. If they are COMPLEMENTARY GOODS (tea and teapots) the cross-elasticity will be negative. As people get richer they can afford betterquality food. They are used for managing fluctuations in the government’s short-run cash needs. Wall Street research and regulation. so their food spending may increase. and popularly known as the Fed. the system divides the United States into 12 Federal Reserve districts. such as machinery Engel's law.
either by buying a company there or establishing new operations of an existing business. which prefer indirect investment abroad such as buying small parcels of a country's supply of shares or bonds.3. Hawala.Named after Robert Giffen (1837-1910). consisting of seven governors based in Washington. which implies absolute inequality.Shorthand for gilt-edged securities. No legal contracts are involved. a version of hawala existed in China in the second half of the Tang dynasty (618-907). Who would buy a Big Mac in London if it had to be sent from New York? Governments used to be highly suspicious of FDI. Furthermore. transactions in opposite directions cancel each other out. They hope that investors will create jobs. increased steadily. Some investments. unlike financial investors. Giffen goods. There was a time when economists considered FDI as a substitute for trade. DC. Foreign direct investment (FDI) grew rapidly during the 1990s before slowing a bit. with every household earning exactly the same. or flying money.5. The Gini coefficient measures the inequality of income distribution within a country. a firm can use a factory in one country to supply neighboring markets. Most of this investment went from one oecd country to another. such as the Securities and Exchange Commission (SEC) in the United States. This includes financial markets. and bring expertise and technology that will be passed on to local firms and workers. more than 90% of FDI into the United States took the form of mergers rather than of setting up new subsidiaries and opening factories. mutual funds. central banks. banks. Foreign direct investment. in the early years of the 21st century. which indicates perfect equality. a good for which demand increases as its price rises.regional Federal Reserve bank. This is done mostly by companies as opposed to financial institutions. insurers. no money moves physically between locations. The price of gilts can vary considerably over time. Although it is now more associated with the Middle East. Nowadays they are more likely to court it. creating a degree of risk for investors. It predates western bank practices. to prove that money is due. often regarding it as corporate imperialism. For instance. national regulators. securities exchanges. are essential prerequisites for selling to foreigners. meaning a safe bet. Over time. such as the imf and world bank. especially in Asia. These are overseen by the Federal Reserve Board.The firms and institutions that together make it possible for money to make the world go round. Building factories in foreign countries was one way of jumping tariff barriers. and recipients are given only a code number or simple token. such as a low-value banknote torn in half. Trust is the only capital . known as fei qian. in rich countries the figure is closer to 0. at least as far as receiving interest and avoiding default goes. For example. In hawala. It varies from zero.Investing directly in production in another country. governments and multinational institutions. with a Gini coefficient of around 0. Gilts. multinationals generally invest directly in plant and equipment. Gini coefficient. monetary policy is decided by its Federal Open Market Committee. with a single household earning a country's entire income. Usually the term is applied only to government bonds. to one. along with the global economy. Mergers and Acquisitions are a significant form of FDI. especially in services industries. but the share going to developing countries. helping to sharpen up their whole economy. pension funds.An inequality indicator. so physical movement is minimised. Latin America is the world's most unequal region. however. nowadays it is transferred by means of a telephone call or fax between dealers in different countries. Financial system. But such goods may not exist in the real world. Now economists typically regard FDI and trade as complementary.An ancient system of moving money based on trust. in 1997.
These bogey-men of the FINANCIAL MARKETS are often blamed. Although they are often accused of disrupting financial markets by their SPECULATION.Reducing your risks. Whether these investments are financed through DEBT. informal money networks are threatening. however. You can hedge away that currency risk by buying $1m of pounds at the current exchange rate (in effect) in the futures market. Different methods of financing simply determine how a firm’s value is divided between its various sorts of investors (for example. when things go wrong. as hedging does not come free. the users of hawala have a worldwide money-transmission service that is cheap. by non-financial FIRMS. More recently. Hedging sounds prudent. Another popular strategy is to use “natural” hedges wherever possible. they concentrate on making as much MONEY as possible. that you are British and you are to be paid $1m in three months’ time. An extension of this idea is operational hedging. Imagine. for example. It may be a clever way to get around public hostility to paying more in TAXATION. their willingness to bet against the herd of other investors may push security prices closer to their true fundamental values. relocating production facilities to get a better match of costs in a given currency to revenue. since they lie outside official channels that are regulated and taxed. but some economists reckon that firms should not do it because it reduces their value to shareholders. Few managers agree. they can diversify their portfolio of shareholdings. on the contrary. it might finance it by borrowing in the currency of that country. if investors want to avoid the financial risks attached to holding SHARES in a firm. that is. argued that firms make MONEY only if they make good investments. if a company is setting up a factory in a particular country. say education or health. not away. Hedging involves deliberately taking on a new RISK that offsets an existing one. From a government's point of view. hypothecated taxes . for example. usually unfairly. Hedge funds. there are big implications for hedging.that the dealers have. They fear they are used by criminals. however. Conversely. There is a downside. For example. This surprising insight helped win each of them a Nobel prize. not (like many mutual funds) simply on outperforming an index. remitting earnings to their families. Hypothecation Earmarking taxes for a specific purpose. including terrorists. thus reducing the number of pounds you will be able to convert the $1m into. There is no simple definition of a hedge fund (few of them actually HEDGE). by far the main users of hawala networks are overseas workers. two economists. doing it might actually lower that value. firms have hedged using financial instruments and DERIVATIVES. At the very least they may be forced to make more informed decisions about the trade-offs between taxes and public SERVICES. With it. who do not trust official money transfer methods or cannot afford them. financial institutions and. INTEREST RATE or COMMODITY PRICE. increasingly. If they are right. such as your exposure to an adverse change in an EXCHANGE RATE. the kind that increase their operating cashflow. Although this is probably true. shareholders or bondholders). they may be more willing to cough up. Hypothecated taxes may tie the hands of a GOVERNMENT at times when the hypothecated revenue could be spent to better effect elsewhere in the public sector. It used to be fashionable for firms to hedge by following a policy of DIVERSIFICATION. In the 1950s. Merton Miller (1923–2000) and Franco Modigliani. Firms need not manage their financial risks. If people are told that a specific share of their INCOME TAX will go to some popular cause. fast and free of bureaucracy. and perhaps more likely. You are worried that the dollar may have fallen in value by then. argued Messrs Miller and Modigliani. It cannot add to the firm’s value. If methods of financing and the character of financial risks do not matter. managing them is pointless. Hedging is most often done by commodity producers and traders. not the value itself. EQUITY or retained earnings is irrelevant. Moreover. Hedge. investors can do it for themselves. But they all aim to maximize their absolute returns rather than relative ones.
The IMF was set up in 1944 at BRETTON WOODS. which is usually given only if the recipient country promises to implement IMF-approved economic reforms. around half of publicly traded SHARES are owned by institutions and half by individual investors. the IMF has often approved “one size fits all” policies that. of which it became a forceful advocate. charitable endowment trusts. say. Contrast with SUBSTITUTION EFFECT. The INTEREST will be paid out of the company’s future cashflow. doubtless under pressure from their political bosses. It has also been accused of creating MORAL HAZARD. such as copyrights. Invisible trade accounts for a growing slice of the value of world trade. More sympathetic folk argued that the IMF should evolve into a global LENDER OF LAST RESORT. institutions own over two-thirds of listed shares. in most cases the need to meet demanding interest bills drove the new managers to . HEDGE FUNDS.Buying a company using borrowed MONEY to pay most of the purchase PRICE. The DEBT is secured against the ASSETS of the company being acquired. Leveraged buy-out. can usually find ways to fudge the definition of the specific purpose for which a tax is hypothecated. But because institutions mostly invest other people’s MONEY. In the United States. in effect encouraging governments (and FIRMS. letting government regain control over how the MONEY is spent. a change in consumer tastes. including the ability to move the PRICES in financial markets and to call company bosses to account. they are themselves prone to AGENCY COSTS. fundmanagement companies. Civil servants. as the absence of its safety net would encourage more prudent behaviour all round. Leveraged buy-outs (LBOs) became popular in the United States during the 1980s. and again after the crisis in Argentina early in this decade. it played a leading part in sorting out the problems of DEVELOPING COUNTRIES’ mounting DEBT. Institutional investors. In the UK. along with the WORLD BANK. one way or another. referee and. Indeed. investment BANKS. rescuer of the world’s FINANCIAL SYSTEM. some policymakers argued (to no avail) for the IMF to be abolished.A change in the DEMAND for a good or service caused by a change in the INCOME of consumers rather than.The big hitters of the FINANCIAL MARKETS: pension funds. Invisible trade EXPORTS and IMPORTS of things you cannot touch or see: SERVICES. the IMF became more involved with its member countries’ economic policies. it has several times coordinated and helped to finance assistance to countries with a currency crisis. Income effect. sometimes acting against the best long-term interests of the people who trust them with their SAVINGS. such as banking or advertising and other intangibles.Short for International Monetary Fund. not much later.may prove to be less hypothecated than the public is led to believe. turned out to be inappropriate. BANKS and other investors) to behave recklessly by giving them reason to expect that if things go badly the IMF will organize a bail-out. This gives them considerable clout. The Fund has been criticized for the CONDITIONALITY of its support. Unfortunately. as public DEBT markets grew rapidly and opened up to borrowers that would not previously have been able to raise loans worth millions of dollars to pursue what was often an unwilling target. In the 1980s. to supervise the newly established fixed EXCHANGE RATE system. Although some LBOs ended up with the borrower going bust. IMF. INSURANCE companies. Following the economic crisis in Asia during the late 1990s. More recently. when the need arises. some financiers have described an INVESTMENT in a financially shaky country as a “moral-hazard play” because they were so confident that the IMF would ensure the safety of their MONEY. doling out advice on FISCAL POLICY and MONETARY POLICY as well as microeconomic changes such as PRIVATISATION. After this fell apart in 1971–73.
Increases in the MONEY SUPPLY are the main cause of INFLATION. which is the rate consistent with a country achieving an overall balance with the outside world. PPP is often very different from the current market exchange rate.Some things are bought for their intrinsic usefulness. as it indicates the appropriate EXCHANGE RATE to use when expressing incomes and PRICES in different countries in a common currency. Some economists argue that once the exchange rate is pushed away from its PPP. the quantity of these goods is somewhat fixed. what an arm’s length price would be can be a matter of great debate and an opportunity for firms that want to lower their tax bill. The current market rate is only a short-run equilibrium. including both traded goods and services and CAPITAL flows. But when there is no genuinely independent market with which to compare transfer prices. for the purposes of calculating tax liability. Positional goods are bought because of what they say about the person who buys them. The theory says that the quantity of MONEY available in an economy determines the value of money. by charging low transfer prices from a unit based in a high-tax country that is selling to a unit in a low-tax country. By necessity. (See BIG MAC INDEX. which may differ from its current market value. since by definition they had to be in scarce supply.The PRICES assumed. Because it is not just traded goods that are affected. FIRMS spend a fortune on advisers to help them set their transfer prices so that they minimise their total tax bill. They are a way for a person to establish or signal their status relative to people who do not own them: fast cars. . Overheating. Transfer pricing. Purchasing power parity (PPP) says that goods and SERVICES should cost the same in all countries when measured in a common currency. thus helping developed economies to keep growing. resulting in potentially substantial trade and current account deficits or surpluses. In theory. holidays in the most fashionable resorts. They prefer the fundamental equilibrium exchange rate (FEER). Positional goods. clothes from trendy designers. By correct value. a firm can record a low PROFIT in the first country and a high profit in the second. For this reason. It is helpful when comparing living standards in different countries. Entrepreneurs have come up with ever more ingenious ways for people to buy status. some economists argue that PPP is too narrow a measure for judging a currency’s true value. trade and financial flows in and out of a country can move into DISEQUILIBRIUM. for instance. economists mean the exchange rate that would bring DEMAND and SUPPLY of a currency into EQUILIBRIUM over the long-term. This is why Milton FRIEDMAN claimed that “inflation is always and everywhere a monetary phenomenon”. to have been charged by one unit of a multinational company when selling to another (foreign) unit of the same firm. a hammer or a washing machine.The foundation stone of MONETARISM.run the firm more efficiently than their predecessors. It often boils over into INFLATION. Purchasing power parity. however. PPP is the exchange rate that equates the price of a basket of identical traded goods and services in two countries. For instance. transfer prices are supposed to be set according to the arm’s-length principle: that they should be the same as would be charged if the sale was to a business unconnected in any way to the selling firm. some economists see LBOs as a way of tackling AGENCY COSTS associated with corporate governance.) Quantity theory of money.When an economy is growing too fast and its productive CAPACITY cannot keep up with DEMAND. What would owning a Rolls-Royce say about you if everybody owned one? Fears that the rise of positional goods would limit GROWTH. have so far proved misplaced. because to increase SUPPLY too much would mean that they were no longer positional.A method for calculating the correct value of a currency.
default. A triple-A or A++ rating represents a low risk of DEFAULT. such as SHARES. contradicting the classical dichotomy (see MONETARY NEUTRALITY). The equation says. which draws parallels between the real economy and the use and valuation of . M is the stock of money. In practice. The quantity theory. Random walk. assumes that V and T are both constant. or by how much it will rise or fall. Thus any change in M leads directly to a change in P. a C or D rating an extreme risk of. Real options theory. EFFICIENT MARKET THEORY says that the PRICES of many financial ASSETS. Contrast with PRICE REGULATION. that the quantity of money spent equals the quantity of money used. (See NET PRESENT VALUE and DISCOUNT RATE. A triple-A BOND has a low yield. KEYNES challenged this theory. or actual. totaling up how much capital was used can be tricky. simply and obviously. which was orthodoxy until then. some critics argued that the big three agencies had formed a cozy oligopoly and that encouraging more competition was the way to improve ratings. predictable ways that did not challenge the thrust of the theory. follow a random walk. and whether they were slow to give warning of impending trouble.The theory is built on the Fisher equation. In the 1930s. In other words. P is the average PRICE level and T is the number of transactions in the economy. High-yielding bonds. slow to innovate and quick to spend money on such things as big offices and executive jets. usually have a rating that suggests a high risk of default. A public utility is forbidden to earn above a certain RATE OF RETURN decided by the regulator.A guide to the risk attached to the FINANCIAL INSTRUMENT provided by a ratings agency. increase the money supply and you simply cause inflation. there is no way of knowing whether the next change in the price will be up or down. but did so only in stable. Likewise. Deciding what number to use for profit is rarely simple. Increases in the money supply seemed to lead to a fall in the velocity of circulation and to increases in real INCOME. When FIRMS are evaluating a project to decide whether to go ahead with it. A series of financial market crises from the mid-1990s onwards led to growing debate about the reliability of ratings. especially if it is expanded to include INTANGIBLE ASSETS and HUMAN CAPITAL. they estimate the project’s expected rate of return and compare it with their COST OF CAPITAL. named after Irving Fisher (1867–1947). at least in the short-run. as even Friedman has since conceded. this often encourages the utility to be inefficient. Rate of return. It is calculated by expressing the economic gain (usually PROFIT) as a percentage of the CAPITAL used to produce it.A way to measure economic success. Standard and Poor’s and Fitch IBCA. to keep down its PROFIT and thus the rate of return.Impossible to predict the next step. This belief has led some economists to argue that investors cannot consistently outperform the market. V is the VELOCITY OF CIRCULATION.) Rate of return regulation. Debt PRICES and YIELDS often (but not always) reflect these ratings. all the INFORMATION that would allow an investor to predict the next price move is already reflected in the current price. But some economists argue that asset prices are predictable (they follow a nonrandom walk) and that markets are not efficient. After the Enron debacle.A recent theory of how to take INVESTMENT decisions when the future is uncertain. Even so. MV = PT. which again the ratings agencies had failed to predict. such as Moody’s. These measures of CREDIT quality are mostly offered on marketable GOVERNMENT and corporate DEBT. monetarist policies did not perform well when they were applied in many countries during the 1980s. In other words.An approach to REGULATION often used for a PUBLIC UTILITY to stop it exploiting MONOPOLY power. Ratings. monetarists such as Friedman conceded that V could changein response to variations in M. albeit one that can be manipulated quite easily. in its purest form. The reason is that in an efficient market. Later. also known as junk bonds.
Number-crunching to discover the relationship between different economic variables. invented by Bill Sharpe. The relationship between a dependent variable (GDP. Real options theory assumes that FIRMS also have some choice in when to invest. and so on) is expressed as a regression equation. go ahead. This goes against the principle of VERTICAL EQUITY. and valuing real options is harder still. It is becoming increasingly fashionable at business schools and even in the boardroom. However. How big a pinch can vary considerably and is indicated by the degree of STATISTICAL SIGNIFICANCE and R SQUARED. In other words. As with financial options. It may pay to wait. the simplest measure of risk. oil) the more the option is worth. The higher the Sharpe ratio is the better. to go ahead with it. the greater is the return per unit of risk. not merely those for which market prices exist. and the extra investment needed to start production to its strike price (the money that must be paid if the option is exercised). CAPITAL. it should calculate the project’s NET PRESENT VALUE (NPV) and if it is positive. Financial options should not necessarily be exercised as soon as they are in the money (the benefit from exercising exceeds the cost). the interesting question is when to exercise the option: certainly not when it is out of the money (the cost of investing exceeds the benefit). INTEREST rates. the cost of LAND corresponds to the down-payment on a call (right to buy) option.A rough guide to whether the rewards from an INVESTMENT justify the RISK.A tax that takes a smaller proportion of INCOME as the taxpayer’s income rises. Shadow price. The similarities are such that they can. that is. Shadow pricing is often used in COST-BENEFIT ANALYSIS. pricing financial options is often tricky. perhaps because they are set by GOVERNMENT. which many people think should be at the heart of any fair tax system. Sharpe ratio. In practice. a winner of the NOBEL PRIZE FOR ECONOMICS and co-creator of the CAPITAL ASSET PRICING MODEL. say) and a set of explanatory variables (DEMAND. the project is like an option: there is an opportunity. the longer the option lasts before it expires and the more volatile is the price of the underlying asset (in this case. Because oil prices are highly volatile. As with financial options. say). It may be better to wait until it is deep in the money (the benefit is far above the cost). a fixed-rate vehicle tax that eats up a much larger slice of a poor person’s income than a rich person’s income. companies should not necessarily invest as soon as a project has a positive NPV. Options on real ASSETS behave rather like financial options (a SHARE option. where the whole purpose of the analysis is to capture all the variables involved in a decision. Regression analysis. consider an oil company whose bosses think they have discovered an oil field.financial options. to start to pump? Whether to exercise these options will depend on the oil price and what it is likely to do in future. The findings of this statistical technique should always be taken with a pinch of salt. In the case of the oil company. it might not make sense to go ahead with production until the oil price is far above the price at which traditional investment theory would say that the NPV is positive and give the investment the green light. as it is a . This is the theory. be valued according to the same methodology. Likewise. You simply divide the past RETURN on the investment (less the RISK-FREE RATE) by its STANDARD DEVIATION. Regressive tax. Option one: to buy or lease the land and explore? Option two: if they find oil. UNEMPLOYMENT. Most firms’ investment opportunities have embedded in them many managerial options. at least in theory. Traditional investment theory says that when a firm evaluates a proposed project. For instance. for example. for instance.The true economic PRICE of an activity: the OPPORTUNITY COST. but not an obligation. Shadow prices can be calculated for those goods and SERVICES that do not have a market price. but they are uncertain about how much oil it contains and what the PRICE of oil will be once they start to pump.
the Sharpe ratio does not guarantee similar performance in future. at least temporarily.Petrol-pump PRICES do not change every time the oil price changes.Producing OUTPUT at the minimum possible cost. Small disequilibria in.The RISK that remains after DIVERSIFICATION. Sticky prices. -end- .A loan provided at below the market INTEREST RATE. In FINANCIAL MARKETS. Contrast spot markets with FORWARD CONTRACTS and futures markets. a MONOPOLY can be an X-efficient producer. but in order to maximize its PROFIT it may produce a different quantity of output than there would be in a surplus-maximizing market with PERFECT COMPETITION. (See CAPITAL ASSET PRICING MODEL. Another concern of regulators is that the RISK MANAGEMENT methods used by banks are so similar that they may increase systemic risk by creating a tendency for crowd behavior. prices move all the time because the cost of quoting the wrong price can be huge.The PRICE quoted for a transaction that is to be made on the spot. Prices change only when the cost of leaving them unchanged exceeds the expense of adjusting them. Systemic risk. It is systematic risk that determines the RETURN earned on a welldiversified portfolio of ASSETS. consumers’ dislike of frequent price changes and long-term contracts with fixed prices. paid for now for delivery now. bonuses. that is. Also contrast with long-term contracts. Wage drift consists of things such as overtime payments. which maximizes society’s total CONSUMER plus PRODUCER SURPLUS. As a result there is. It usually increases during periods of strong GROWTH and declines during an economic downturn X-efficiency. Spot price. because the quantity of output produced may not be ideal. Soft loan.) Wage drift-The difference between basic pay and total earnings. in which a price is agreed for repeated transactions over an extended time period and which may not involve immediate payment in full.The RISK of damage being done to the health of the FINANCIAL SYSTEM as a whole. based on what an investment has done in the past. This is why regulators often organize a rescue when a bank gets into financial difficulties. the pricing of hotel rooms will not make much difference. Soft loans are used by international agencies to encourage economic activity in DEVELOPING COUNTRIES and to support non-commercial activities. also known as market risk or undiversifiable risk. and holiday prices and standard hotel rates are fixed for months. So hotel prices are often sticky. where payment and/or delivery will be made at some future date. the penalty may be much less severe. say. In particular. However. This is not enough to ensure the best sort of economic EFFICIENCY. encouraging banks to behave in ways that increase systemic risk. Systematic risk. For instance. The causes of stickiness include MENU COSTS. In other industries. A constant concern of BANK regulators is that the collapse of a single bank could bring down the entire financial system. Sticky prices are slow to change in response to changes in SUPPLY or DEMAND. DISEQUILIBRIUM in the market. the expectation of such a rescue may create a MORAL HAZARD. inadequate information. PROFIT share and performance-related pay. causing a vicious cycle of LIQUIDITY being withdrawn from the financial system as everybody rushes for the emergency exit at once.backward-looking measure. problems in one market may cause banks in general to liquidate positions in other markets.
including why it is great. its name.The total of all the impressions the consumer receives from the brand. It is a combination of words and letters.is a promise. This is only a representation and students are requested not to limit their learning to this handout only. and colors. sign. Branding -. Brand loyalty .The degree of consumer preference for one brand compared to close substitutes. advertising. a pledge of quality. Brand . the media used for advertising. its packaging. Brand image . These include actual experience.Instructions: This handout comprises a compilation of certain basic marketing concepts and terms.A name. it is often measured statistically in consumer marketing research. hearsay from other consumers. and how it is better than all competing products. the tone and form of advertising. buying or recommending the brand. symbols. . symbol. and the types of people seen using. or a combination of these used to identify the products of one seller or group of sellers and differentiate them from those of competitors. It is the essence of a product. term. the kind of store in which it is sold. It is an image.
Effectiveness is the degree to which an exchange helps achieve an organization’s objectives. Mattel. Efficiency refers to minimizing the resources an organization must spend to achieve a specific level of desired exchanges. Business markets. The product characteristics must now match what someone specifically wants to buy. goods. Often it's the cost of time to drive somewhere.Understand the consumer's cost to satisfy the want or need. The product price may be only one part of the consumer's cost structure.Individuals or groups that purchase a specific kind of product for resale. and people to create exchanges that will satisfy individual and organizational goals.Understand what the consumer wants and needs. Personal Selling. A dissatisfied customer who lacks trust in the relationship often searches instead for alternative organizations or products. but COST. promotion. organizing. or idea and sellers must be satisfied with the financial reward or something else of value received. There are two types of markets. To maintain an exchange relationship. making the presentation.The specific activities involved in the selling process vary among salespeople and selling situations. and distribution of ideas. the cost of conscience of what you eat. approach. and the cost of guilt for not treating the kids. In general use.Paid personal communication that informs customers and persuades them to buy products in an exchange situation.Is the process of planning. and authority to purchase such products.A popular branding strategy. but CONSUMER.Purchasers and household members who intend to consume or benefit from the purchased products and do not buy to make profits. service. Marketing activities should attempt to create and maintain satisfying relationships exchange relationships. buyers must be satisfied with the obtained good.the process of planning and executing the conception.Consumer markets and Business Markets. Warner guaranteed royalties of $20 million from Mattel’s licensing fee of 15 percent of gross revenues earned in these branded products. licensed Warner Bros Harry Potter brand for use on board games and toys.prospecting. closing the sale and following up." Not PRICE. • . implementing and controlling marketing activities to facilitate exchanges effectively and efficiently.Brand Licensing. the term market sometimes refers to the total population or mass market that buys products. Market. This process consists of seven steps. willingness. or use in general daily operations. brand licensing is an agreement in which a company permits another organization to use its brand on other products for a license fee. 4 P's vs. pre approach. pricing. overcoming objections. Royalties maybe as low as 2 per cent of wholesale revenues or higher than 10 per cent. Marketing management. Times have changed and you can no longer sell whatever you can make. it is a group of people who as individuals or as organizations have needs for products in a product class and have the ability. 4 C's • Not PRODUCT. Consumer markets. for example. Elements of Personal selling process.a market could be a specific location or a geographic location. many salespeople move through a general selling process as they sell the products. Nonetheless. services. No two salespeople use the same selling methods. direct use in producing other products. Marketing -. And part of what the consumer is buying is the personal "buying experience.
Marketers sometimes use psychographic variables such as personality characteristics. Many mediums working together to present a unified message with a feedback mechanism to make the communication two-way.the number of potential customers within a unit of land area. persuade or remind. Benefit: The gain obtained from the use of a particular product or service.• • Not PLACE. turn the standard logic around. Competitive Advantage: Offering a different benefit then that of your competitors.Extra compensation to sales people for pushing a line of goods. each message reinforcing the earlier images? Micromarketing. And be sure to include an understanding of non-traditional mediums. AIDA model of communication: A communication model which aims to obtain Attention. The application of the brand name Virgin on a number of business activities. with the aim that an organisation will find a competitive positioning difference within the market. communicate. but CONVENIENCE. Think convenience of the buying experience and then relate that to a delivery mechanism. Desire and Action. transaction service time and hours of availability. Consumers purchase product/services because of their desire to gain these built in benefits. Interest. communicate. Consider all possible definitions of "convenience" as it relates to satisfying the consumer's wants and needs. A psychographic dimension can be used by itself to segment a market or combined with other types of segmentation variables. often part of the display. Not PROMOTION. Benefit Segmentation: Dividing a market according to the benefit they seek from a particular product/service. offered to a retailer who purchases a specific quantity of the merchandise Premium push money. but COMMUNICATION.A gift. Dealer Loader. Market density.g. Cooperative advertising. motives and lifestyles to segment markets. How many ways can a customer hear (or see) the same message through the course of the day. .Marketing segmentation that clusters people in zip code areas and smaller neighborhood units based on lifestyle and demographic information. access ease.An approach to market segmentation in which organizations focus precise marketing efforts on very small geographic markets. Competitor Analysis: Process of understanding and analysing a competitors strengths and weaknesses. Psychographic variables. To inform of a new development. Brand extension strategy: The process of using an existing brand name to extend on to a new product/service e. Convenience may include aspects of the physical or virtual location. Advertising objective: The objective of your communication strategy.As above. such as word of mouth and how it can influence your position in the consumer's mind.Communicate.Sharing media costs by manufacturer and retailer for advertising the manufacturer’s products. Geodemographic segmentation.
Brand repositioning: An attempt to change consumer perceptions of a particular brand. Mass marketing: The promotion of a product or service to all consumers. Geographic segmentation: Dividing the market into certain geographic regions e. Intensive distribution: Distributing a product to as many retail outlets as possible. Direct marketing: The process of sending promotion material to a named person within an organisation. The aim is to obtain qualitative information on the given topic. . Dividing the population into age. For example VW has successfully repositioned the Skoda brand. Laggards: Those consumers who adopt the product/service as it reaches the end of its lifecycle. Demographic segmentation. They are usually willing to pay a premium to have the benefit of being the first. gender. They usually pay a competitive price for the benefit of waiting. Dichotomous question: Questions which limit the responses of the respondent eg YES/NO. cities or neighborhoods. Demography: A study of the population. Econometric modeling: Application of regression techniques in marketing analysis Focus Group: A simultaneous interview conducted amongst 6-8 respondents. Market Development Strategy: Selling an existing product/service in a new and developing market. Engels Law: Suggest that peoples spending patterns change as their income rises. Innovator: Those consumers who are the first to adopt a product/service at the beginning of its lifecycle. Data mining: Application of artificial intelligence to solve marketing problems and aiding forecasting and prediction of marketing data. The new products on offer could be related or unrelated to the organisations core activities. interest and opinion (AIOs) to develop a profile on the given segment. Lifestyle segmentation: Analyzing consumers activities.Concept testing: Testing the idea of a new product or service with your target audience.. towns.g. income and socioeconomic groups amongst other variables. Exclusive distribution: Limiting the distribution of a product to particular retail store to create an exclusive feel to the brand/product. Diversification: A growth strategy which involves an organisation to provide new products or services.
Questions which encourage the respondent to provide their own Paretos Law (80/20) : A rule which suggests that 80% of an organizations turnovers is generated from 20% of their customers. Public relations: The process of building good relations with the organizations various stakeholders. Product Development Strategy: The development of a new product/service aimed at the organization existing market. get one free. Niche marketing: The process of concentrating your resources and efforts on one particular segment Objective to task method: Setting a advertising budget based on the desired goals of the communication campaign. The aim is to increase expenditure within the segment. Secondary data: Researching information which has already been published. marketing mix strategies and any contingency plans should an organization not reach their given objectives. Sales promotion: An incentive to encourage the sale of a product/service e. New buy: Where an organization faces the task of purchasing a new product/service. The document should include an environmental analysis. Relationship marketing: Creating a long-term relationship with existing customers. Perceptual map: Mapping a product/organization alongside all competitors in the hope to find a ' positioning gap' in the given market. buy one. money off coupons. Market position: The perception of a product or an organization from the view of the consumer. Modified Rebuy: Where an organization has to make changes to a specific buying situation.Marketing Planning: A written document which plans the marketing activities of an organization for a given period. Primary data: The process of organizing and collecting data for an organization. customers and competitors for purposes of business decision making. Open ended questions: answers.g. . Market research: Analyzing and collecting data on the environment. Product Cannibalization: Loosing sales of a product to another similar product within the same product line. The aim is to build strong consumer loyalty.
the process of selecting representative units from a total population Probability sampling.Firms that compete for limited financial resources of the same customers Discretionary income.A type of probability sampling in which the population is divided in sub groups according to a common attribute and a random sample is then chosen within each group. which sometimes gives it an advantage over its competition Market opportunity-A combination of circumstances and timing that permits an organization to take action to reach a target market Competitive advantage-The result of a company’s matching a core competency to opportunities in the market place. benefits and prices Generic competitors-Firms that provide very different products that solve the same problem or satisfy the same basic customer need Total budget competitors. SWOT analysis: A model used to conduct a self appraisal of an organization.refers to discovery of patterns hidden in databases that have the potential to contribute to marketers understanding of customers and their needs . The model looks at internal strengths and weaknesses and external environmental opportunities and threats. Types of competitionBrand Competitors-Firms that market products with similar features and benefits to the same customers at similar prices.Disposable income available for spending and saving after an individual has purchased the basic necessities of food. Core Competencies-Things a firm does extremely well. Test marketing: Testing a new product or service within a specific region before national launch. medium or heavy users. clothing and shelter Sampling. Usage segmentation: Dividing you segment into non. Straight Rebuy: Where an organization reorders without modification to the specification. Product competitors-Firms that compete in the same product class but have products with different features.Segmentation: The process of dividing a market into groups that display similar behavior and characteristics. light. Data mining technique.A sampling technique in which every element in the population being studied has a known chance of being selected for study Random sampling – A type of probability sampling in which all units in a population have an equal chance of appearing in the sample Stratified sampling.
Boston Consulting Group approach is based on the market growth / market share matrix and is based of the philosophy that a product’s market growth rate and its markets hare are important considerations in determining its marketing strategy. these products are often found in established markets. dogs and question marks. cash cows. potential competitors. Mission statement. The matrix enables the strategic planner to classify a firm’s products into four basic types: stars. A value is a customer’s subjective assessment of benefits relative to costs in determining the worth of the product. and increase market share. Example Apple’s Imac computer. competitive advantages and overall coordination of functional areas.Checkers a fast food chain that features twin drive through lanes is experiencing declining profits and market share and may be considered a dog relative to other fast food chains with different formats Questions marks sometimes called “problem children” have a small share of the growing market and generally require a large amount of cash to build market share. they use more cash than they generate to finance growth. We used the five-forces model as a basic structure and built on it . suppliers. overall matrix and evaluated to determine overall portfolio strategies. Customer Value-Value is important element of managing long term customer relationships and implementing the marketing concept. add capacity.A long term view of what the organization wants to become Corporate strategy.Growth occurs when current products and current markets have the potential for increasing sales. However. Strategies for intensive growth are – Market penetration. Intensive Growth. Mercedes mountain bikes are a question mark relative to Mercedes’ automobile products. Stars are products with dominant share of the market and good prospects for growth. The long term health of the organization depends on having some products that generate cash and provide acceptable profits and others that use cash to support growth. BCG matrix.Michael Porter described a concept that has become known as the "five forces model".using information about customers to create marketing strategies that develop and sustain desirable customer relationships. Dogs have a subordinate share of the market and low prospects for growth. Example. Product Development. This concept involves a relationship between competitors within an industry.Strategic Window-A temporary period of optimal fit between the key requirements of a market and a firm’s capabilities Customer Relationship Management. Michael Porter’s Five Forces Model. buyers and alternative solutions to the problem being addressed. A corporate strategy determines not only the scope of business but also its resource deployment. Cash Cows have a dominant share of the market but low prospects for growth typically they generate more cash than is required to maintain market share.Growth occurring when new products are developed to be sold in new markets. Bounty the best selling paper towels in US are a cash cow for Procter & Gamble.A strategy that determines the means for utilizing resources in the various functional areas to reach organization’s goals. All the firms SBUs and products should be integrated into a single. Market Development Diversified growth.
largely concerned which commodities would be covered by the agreement and freezing existing tariff levels. This results in a set of analyses. from 1959 to 1979. the agreement was not ratified. so the GATT remained simply an agreement. Originally signed by 23 nations in 1947. While each industry involves all of these factors. Originally.000 relational links. . The result was a model with over 5. The GATT's main purpose was to reduce barriers to international trade. not an organisation.General Agreement on tariffs and trade (GATT). GATT provides a forum for tariff negotiations and a place where international trade problems can be discussed and resolved. However. encompassing three rounds. the relational strengths vary. The General Agreement on Tariffs and Trade (typically abbreviated GATT) was originally created by the Bretton Woods Conference as part of a larger plan for economic recovery after World War II. A second phase. The GATT was an agreement.with concepts from the works of many other authors. from 1947 until the Torquay round. The functions of the GATT have been replaced by the World Trade Organisation which was established through the final round of negotiations in the early 1990s. quantitative restrictions and subsidies on trade through a series of different agreements. the GATT was supposed to become a full international organisation like the World Bank or IMF called the International Trade Organisation. The history of the GATT can be divided into three phases: the first. This was achieved through the reduction of tariff barriers. including: • • • • • • a success potential rating in eleven key areas a list of strategic strengths and weaknesses observations on strategic inconsistencies a written critique of your strategy a graphic analysis of key marketing concepts a written draft of a marketing plan GATT.An agreement among nations to reduce worldwide tariffs and increase international trade.
capital. Unique Selling Proposition (USP) -. or idea consisting of a bundle of tangible and intangible benefits that satisfies consumers’ needs and wants. person. Place . These are gaining importance because with . extended the agreement fully to new areas such as intellectual property. analyzing markets and selecting target markets. promotion.persuasive communication between a representative of the company and one or more prospective customers. Positioning -.the blend of product. Strategic Marketing Planning -. service. to develop a specific image of the brand in the minds of consumers.the process of planning.any type of persuasive communication between a marketer and one or more of its stakeholder groups.the process of getting a product from the place it was manufactured into the hands of consumers in the right location at the right time. Andorra. Marketing Mix -.Joint venture is the partnership between a domestic firm and a foreign firm or government. place.focused on reducing tariffs. facilitate international trade. Tuvalu and Nauru. Joint ventures are especially popular in industries that call for large investments. Difference between Joint venture and Strategic Alliance. and sales promotion. and reduce poverty". and controlling and evaluating results. Monaco. Market Research -.the money or other compensation or unit of value exchanged for the purchase or use of a product. all UN member states either participate directly in the IMF or are represented by other member states. and analyzing data relevant to marketing decision-making. Price -. service. services. or person.the process of managerial and operational activities required to create and sustain effective and efficient marketing strategies. Cuba. personal selling. Out of this round the WTO was born. Using a combination of primary and secondary research tools to better understand a situation. developing a positioning strategy. and agriculture. IMF describes itself as "an organization of 184 countries. secure financial stability. and pricing strategies designed to produce satisfying exchanges with a target market. publicity. Promotion -. designed to influence the person's or group's purchase decision. Promotional tools include advertising. Product -. Liechtenstein. idea. preparing and executing the market plan. It's the one reason marketers think consumers will buy the product even though it may seem no different from many others just like it. working to foster global monetary cooperation. including identifying and evaluating opportunities. consisting only of the Uruguay Round from 1986 to 1994.developing a specific marketing mix to influence potential customers’ overall perceptions of a brand.the one thing that makes a product different than any other. collecting. Personal Selling -. The third phase. promote high employment and sustainable economic growth. Control of the joint venture can be split equally or one party may control decision making. With the exception of North Korea.a good.
What distinguishes strategic alliances from other business structures is that the partners in the alliance may have traditional rivals competing for market share in the same product class. Ansoff Matrix. Product Development: The organization develops new products to aim within their existing market. This can be done either by a better understanding of segmentation. i. Diversification: Moving away from what you are selling (your core activities) to providing something new e. 1.A common tool used within marketing was developed by Igor Ansoff in 1957. For Example Sony launched the Play station 2 to replace their existing model. His model gives organization five strategic business options. Consolidation: Where the organization adopts a strategy of withdrawing from particular markets.Segmenting. in the hope that they will gain more custom and market share. scaling back on operations and concentrating on its existing products in existing markets.5. STP. 2. who else can possibly purchase the product or selling the product to new markets overseas. Market Penetration: This involves increasing sales of an existing product and penetrating the market further by either promoting the product heavily or reducing prices to increase sales. Market Development: The organization here adopts a strategy of selling existing products to new markets.3. 4. Moving over from selling foods to selling cars. Strategic alliances – are partnerships formed to create competitive advantage on a worldwide basis. Similar to joint ventures.e.g.the advent of globalization a number of inexperienced firms are entering the market and it gives a cost advantage as well. Targeting and Positioning- .
competitive products. One way to think of a marketing mix is using the 4P’s framework. Toyota has the Lexus product line.is a process of prioritizing target segments based on the firm’s core competencies or capabilities.Strengths. Opportunities. A market can be segmented according to customer needs. It is a strategic approach midway between mass marketing and individual marketing. SWOT . targeting is key. Targeting. Another way to look at positioning is articulating the value of the company’s products / solutions vis-à-vis customer needs. purchasing power. the opportunities and threats are in the context of the competitive landscape in the external marketplace. Unless the target segment is chosen based on considerable market research and careful planning. Weaknesses. The above is a timehonored framework to initiate any meaningful competitive analysis. Threats Where as the strengths and weaknesses analyze the core competencies and capabilities of the company in the context of the internal environment. Positioning-This involves developing a marketing mix for each targeted segment.Segmenting a market helps a company target its products / solutions better to its customers. etc. Honda has Acura.Segmenting. For example. geographic location. Product data sheets. . car manufacturers can segment the car market into two broad segments: basic cars and luxury cars. hot sheets. cheat sheets. and Nissan has Infiniti. beat sheets. etc. So. a company’s product / solution will not be able to capture the intended market share in the target segment. because businesses battle for market share in these target segments. They can have separate product lines for each segment. growth potential of the segmented market. and other researched factors including segmented market size. competitive dynamics. white papers help articulate this value tactically. For example. for the luxury car segment. Segmentation is based on the concept that customers in a specific segment have similar needs. It can be applied to a company and also to its products and services. etc.
e. and what will the next generation of customers need from the company? • • • • Competition: Who are the biggest competitors and how much market share do they hold in each market segment the company plays in? What are their strategic advantages? Is it tight appropriability of their product lines to the market segment requirements. i.This is an elementary framework which can drive any strategic analysis. is it complementary assets like better sales and marketing channels. one can analyze a Company's business problems step by step as a means to proposing solutions which will improve the Company's business: • Company: What is the company size. if the company crafts and executes an effective Internet strategy? Also see double marginalization in our advanced frameworks section. Can sales and revenue grow. If one thinks through the answers raised under each term. Costs. and Channels. are they likely to vary over time? How do the costs compare to the competitors' costs? How do these costs compare to the industry? Is there any advantage to offshoring / outsourcing to reduce costs? Channels: What are the company's distribution channels? Does it rely on a direct sales force to deliver its products / services to customers. what will they be buying over the next two years. . are they likely to vary with volume.e. Customers. The five C's stand for Company.g. what are their demographic and psychographic patterns. or is their speed of execution? Is any competitor gaining market share in any specific market / market segment? Is the competitor public or private? Who are the key executives of the competitor and what is their leadership / management style? What are the competitor's core competencies? Costs: Which costs are fixed and which are variable? What is the basic split between fixed and variable costs. is the company mid-sized (less than $500 M in revenue) or larger? Is it public or private? What are its products / product lines / services? What are its sustainable competitive advantages / core competencies? Who are its key executives? Who are its board members? Customers: Are they consumers or businesses? What are their current / emerging problems / needs? Does the company listen to its customers and solve their problems? What is the bargaining power of these customers? Will they switch to the competition. is it appropriate to segment them as mid-market and Fortune 500. or does it make more sense to segment the market geographically? If these are individual consumers. Competition. or does it rely on indirect sales / channel partners? In the context of manufactured products.. and examples of successful companies include Amazon.Five C's.com and Dell. Internet is also emerging as a dominant distribution channel with the advent of e-commerce. distributors / retailers can have significant bargaining power if they are the dominant players in their channel segment. Walmart. if the company increases its price? What are their preferences for company's product quality / availability / reliability / performance? How can the company segment the customer base to target its products at specific segments? If the customers are business / industrial houses. what do they crave that the company can't provide.
Strategy, Systems, Structure, Staff, Skills, Style, Shared Values
Strategy, Systems, and Structure constitute the "hard" S's. The other four are "soft" S's. This framework was developed by McKinsey consultants in the early 1970s, and is discussed in Tom Peter's book "In Search of Excellence." Together, the hard and soft S's constitute a company's competitive advantage. All these seven factors will be hard to duplicate by a competitor. So, these key factors, if developed right, will work in synergy to create a superior company vis-avis the competition. Four P's-The four P's of marketing are Product, Price, Place, and Promotion. Together, they constitute the classic "marketing mix." Sometimes, brand and service are additional mix variables used in crafting a meaningful marketing strategy. • Product: What are the company's core products / product lines / services? Are the products and services tightly or loosely coupled and why? Does the company bundle its products together? If the company is in the business of services as opposed to manufacturing and distributing tangible products, the distributions channels for these services will be different from those of the traditional manufacturing companies. Price: What is the demand elasticity of the product, or in other words, how sensitive are the customers to price increases? Is the pricing cost based, or is it based on economic fundamentals where marginal revenues equal marginal costs, or is it based on the competitive pricing in the marketplace? Place: What are the distribution channels for the product (please refer to Channels under the five C's framework)? Does the competition serve market segments which the company can't reach? Promotion: What marketing campaigns does the company use to reach its customers? How effective are these campaigns? Can the Internet be used more effectively to improve these campaigns?
Product Life Cycle- Product Life Cycle (PLC) as a concept was first introduced into management literature by Ted Levitt in 1965. Since then, the world has changed, and Geoffrey Moore of Silicon Valley came up with a book called “Crossing the Chasm” where he introduced the concept of a majority of new high-tech products falling into the chasm. PLC divides the product lifecycle into four stages based on time: introductory, growth, maturity, and decline. On the other hand, Moore’s chasm is based on a now well-accepted concept called technology adoption which categorizes users of technology into four categories: early adaptors, early majority, late majority, and laggard.
It can be argued that this chasm, if it exists, will not let the product move to the growth stage from the introductory stage, in the classic PLC diagram below, because the product will fall into the chasm between the early adaptors and the early majority. So, the PLC framework, if used for new product introduction strategies, should be used in conjunction with the concept of user adoption; this specially holds true for high-tech product cases involving technology adoption. Nevertheless, the PLC mapping is a useful framework to adopt for product cases in general, especially for established products, because as per the PLC curve above, the products sales will grow during the growth stage, will keep growing into the maturity stage, and then decline with time. Before the product sales and profits enter the decline stage, or at the beginning of the maturity stage, the company can take measures to extend the life cycle of the maturing product by introducing new products into the product mix, by stretching the product line vertically and horizontally, by making the product compatible with the latest technologies, etc. For example, enterprise software companies with maturing ERP (Enterprise Resource Planning) and CRM (Customer Relationship Management) software products, which were on-premise (deployable at the client’s premises) are now extending the PLC of these solutions by introducing new ERP and CRM product lines which are on-demand (web based, need not be deployed at client sites, client can use the product on-demand through the Internet). Double Marginalization-Double marginalization happens when there is market power at two channel segments. This produces a double whammy effect of lower total channel profits, and higher retail prices. For example, let’s take a simple channel with two segments: manufacturer, and retailer. If both the retailer and manufacturer are monopolists, there is market power in both the segments of the channel. This is a simple case of double marginalization. which results in lower total channel profits, and higher retail prices. In a simple example of double marginalization below, it is illustrated that if market power exists in both the segments of a two layer channel, the end consumer pays a higher retail price of $10.70 as opposed to $ 7.13 in case of no double marginalization (only the manufacturer has market power, and not the retailer). Further, it is illustrated that in case of double marginalization, the total channel profits of $ 6625.36 are lower compared to the profits of $ 8838.76 in case of no double marginalization. Game Theory- A firm's business decision is often affected by the moves made by its competitors. In other words, if the firm believes that its competitors are rational and act to maximize their own profits, the firm has to take this into account while making its own profitmaximizing decisions. This is what gaming and strategic decision is all about, in a nut-shell. The major strategies in Game Theory are as follows: Nash Equilibrium-This is a set of strategies such that each player is doing the best it can given the action of its competitors. Dominant Strategy-This is a strategy that is optimal for a player regardless of what its competitors do. Maximum Strategy-This is a strategy that maximizes the minimum gains that can be earned. Tit-for-Tat Strategy-This is a strategy where the firm attempts to reach a cooperative outcome through sending appropriate signals, and punishes the competitor if the competitor fails to cooperate. GE Portfolio Matrix- This 3 x 3 matrix is an outgrowth of a framework pioneered by General Electric (GE) in the 1970s to assess its Strategic Business Units (SBUs) along two dimensions:
industry attractiveness, and business strength. All business units of a firm can be represented by circles placed appropriately within the matrix. The size of the circle represents the industry / market size. The market share of the SBU is represented by the smaller sector within the circle. Thus, as you can see, this is a complex framework to evaluate an SBU along four dimensions: market attractiveness, market size, market share, and business strength. The strength of this framework is based on the premise that to be successful, a firm should enter attractive markets / industries for which it has the needed business strengths to succeed. However, over-reliance on this framework may lead to undue neglect of existing businesses. SBU owners / managers will also be susceptible to manipulate the parameters so that their SBUs show up on the desired high or medium-high overall attractive zones. Thus, this framework should be used with caution while crafting strategy. Base point pricing- Is a geographic pricing policy that includes the price at factory, plus freight charges from the base point nearest the buyer Transfer Pricing- Prices charged in sales between organization’s units. The price is determined by one of the following methodsActual full cost- calculated by dividing all fixed and variable expenses for a period into the number of units produced. Standard Full Cost- calculated based on what it would cost to produce the goods at full plant capacity. Cost plus investment- calculated at full cost, plus the cost of a portion of the selling units assets used for internal needs Market based cost- calculated at the market price less a small discount to reflect the lack of sales effort and other expenses Cost plus pricing- Assigning a specified dollar amount or percentage to the seller’s cost Mark up pricing- Assigning to the cost of the product a pre determined percentage of the cost . Electronic commerce- Sharing business information, maintaining business relationships and conducting business transactions by means of telecommunications network URL-Uniform Resource Locator is nothing but the website address Click through rate- The percentage of ads that website visitors actually click on. Pop Up ads- Large ads that open in a separate web browser window on top of the website viewed Pop Under ads- Large ads that open in a new browser window underneath the currently viewed site Monopsony- A market dominated by a single buyer. A monopsonist has the MARKET POWER to set the PRICE of whatever it is buying (from raw materials to LABOUR). Under PERFECT COMPETITION, by contrast, no individual buyer is big enough to affect the market price of anything.
product development and sourcing is either completed in house or with an external partner. Price Discrimination.Charging low PRICES now so you can charge much higher prices later. Push and Pull channel policies. For producers. this strategy makes sense only if the predatory firm is able eventually to establish a MONOPOLY. The predator charges so little that it may sustain losses over a period of time. Captive Brands .promoting a product only to the next institution down the marketing channel. This approach provides the most flexible introductory base price. in general. It is certainly much less common in practice than it might appear from the propaganda of FIRMS that are under pricing pressure from more efficient competitors. Indeed. Product line pricingproduct line. Pull Policy. Wheel of retailing. . But this will work only if the market segments can be kept apart. the evidence gives little support for this view.promoting a product directly to consumers to develop strong consumer demand that pulls products through the marketing channel. not least because sellers do not know how much any individual would pay. Demand tends to be inelastic in the introductory stage of its life cycle. Predatory Pricing.The addition of unrelated products and product lines to an existing product mix. Yet some price discrimination is possible if an overall market can be segmented into somewhat separate markets and the EQUILIBRIUM price in each of these markets is different. Establishing and adjusting prices of multiple products within a Captive pricing. Penetration pricing. Buying power . This cannot happen. Captive market . If it is possible and profitable to buy the product in a low-price segment and resell it in a high-price segment.A Hypothesis holding that new retailers usually enter the market as low status. particularly fast moving items that can be sold in volume. Clearly. high price merchants. In practice.Scrambled Merchandising.When a firm charges different customers different PRICES for the same product. in the hope that its rivals will be driven out of business. perhaps because in some segments the firm enjoys some MARKET POWER.Pricing the basic product in a product line low while pricing related items at a higher level.Charging the highest possible price that buyers who most desire the product will pay. the perfect world would be one in which they could charge each customer a different price: the price that each customer would be willing to pay. This would maximize PRODUCER SURPLUS.The ability to buy in large quantities and thereby attract special price or discount.The potential clientele of retail or service businesses located in areas where consumers may have no reasonable alternative sources of supply. perhaps because of differences in consumer tastes.Exclusive merchandise assortments where the brand mark is owned by someone other than the company selling the merchandise and the design. low margin. predatory pricing is quite rare. Some advocates of anti-DUMPING policies say that cheap IMPORTS are examples of predatory pricing. Price Skimming. low price operators but eventually evolve into high cost.Push policy. then price discrimination will not last for long.Setting prices below those of competing brands to penetrate a market and gain significant market share quickly.
Eye Tracking – A research method that determines what part of an advertisement consumers look at. the Odd price gives the impression that the product is low priced and great for bargain hunters. With its origins in anthropology. product or brand of product that has the largest sales to the consumer in a particular market Market share .Everyday Low Pricing. by tracking the pattern of their eye movements. Customary pricing.Premium pricing. the mystery customer technique. Odd even pricing. EDLP . Even prices are often used to give a product an exclusive or upscale image. the focus is on cultural aspects of behavior.The company.packaging together two or more identical products and selling them for a single price.Advertising intended to inform prospective customers of special sales.Pricing a product at a moderate level and positioning it next to a more expensive model or brand. Promotional advertising . product or brand of product attracts.Pricing an item in the product line low with the intention of selling a higher priced item in the line Price lining.Setting prices at an artificially high level to convey prestige or a quality image. A pricing policy based on the lowest prices everyday rather than sale markdowns.Pricing the highest quality or most versatile products higher than other models in the product line Bait Pricing.95 as against an even price of Rs.How much of the total market a company. 99. Bundle pricing. Multiple unit pricing. new products and seasonal goods and to maintain a market for the merchandise in regular stock.uses naturalistic observation to record systematically the behavior of research subjects in their own settings.Ending the price with certain numbers to influence buyer’s perceptions of the price of a product. Market leader .Pricing that attempts to influence a customer’s perception of price to make a product’s price more attractive.Setting a price at a specific level and comparing it with a higher price. and even such creative and non- .Packaging together two or more complementary products and selling them for a single price. Reference pricing. 100. Comparison discounting.Pricing on the basis of tradition Prestige pricing. Odd prices are marked at Rs. Ethnographic techniques can include the disposable camera technique. Ethnographic Research.Setting a limited number of prices for selected groups or lines of merchandise Psychological pricing. the video and audio recording of everyday behavior where the recording apparatus is made as less obtrusive as possible.
Top Line Report. It can also identify powerful linguistic elements too. Usability can be most effectively and validly assessed by observational research techniques. the sample should be viewed as a "convenience sample".mainstream techniques as "garb logy" . and clarity of product use instructions. the placing of consumers in such foreign environments affects their responses. re-packaging. so it can be easily merged into their own presentations to top management. than the full market research report. Intercepts are also commonly carried out in or outside shopping malls. using language they are comfortable with and avoiding market research jargon. They still often rely on participants recalling how they make decisions and interpreting their own motives within a different social context. the top line report is targeted specifically at senior management. the topline report can be viewed as similar (though not totally analogous) to an "executive summary". such as phrases used by consumers in their daily lives that many not be recalled naturally in focus groups as they are less immediate. intuitiveness. Focus Groups are typically carried out in custom built focus group facilities. where consumers are observed using the product in natural settings. It can also be tested less directly in more contrived settings such as focus groups. converting casual users to high users. then asking for permission to deliver a questionnaire in return for a small incentive. intended vs. More traditional techniques can include the observation of shoppers and the way they browse stores. The results of Usability Testing can be used for product redesign. despite the few short qualification questions. and at higher levels. the top line report is often provided in point format. Intercepts.The term "Intercepts" defines a broad range of short interviews. face to face interviews or questionnaire surveys. intercept surveys have great advantages in terms of expense. In academic or other management areas. asking a few qualification or screening questions. Street intercepts are common and involve approaching likely research interview prospects at a certain time and place. However.indeed any venue where large numbers of a target group are possible. summarizing the key findings in a short document for top management. It is based on the insight and knowledge available about the problem or circumstances from previous research studies and other sources. preferably where the user is unaware of the fact that they are being observed. .The top line report is usually part of a comprehensive research report. and be action oriented in nature. periodic). enhancing product instructions or communications aimed at modeling various examples of product-in-use. extended or unintended use. branding. It is a key document as it will be far more widely read.g. and other aspects of the shopping experience that may be impossible to detect with traditional survey and focus group techniques. seasonal. or retail outlets . For readability. identifying problems shoppers may have with locating items. a key section of the topline report must address implications. completing the loop from management questions to research questions to results and back. Usability criteria can include "ease of use".Research focused solely on assessing the usability of a product. usually only a few minutes in length which are carried out "in-situe" with consumers. Generally. queuing. speed of data collection and collecting a good range of views. as generally sample selection is less strict than other methods. and in some cases. and often clients request the top line in Powerpoint format. Hypothesis-Is an informed guess or assumption about a certain problem or a set of circumstances. The strength of ethnographic research is in reducing the sources of error associated with more artificial and secondary qualitative methods such as focus groups. usage patterns (e. Usabililty Testing. high or frequent. Usually 2 or 3 pages.the analysis of garbage left out for collection by householders. labeling. It should clearly relate the results back to the original management or research questions. If analysis is a part of the brief.
age. for example. Sales Budget Vs Sales Forecast-Sales Forecasting is the art that predicts the likelihood of economic activity on the basis of certain assumptions. perhaps incorrectly or simplistically.e. actors etc are taken seriously. Different ways to identify a prospectAcquaintance references.is the final forecast of the sales to be achieved in a stipulated period. traveling etc. sex and social grade.rather than being imposed in advance. social gatherings. addresses and phone numbers of prospects who may be among acquaintances.take leads for new customers. CAPI . Personal Observation method. The sales budget can be prepared on the basis of division.Also called random prospecting. Direct Mail method. Identifies the customer segment to whom the sales person may call upon without reference but with anticipation of converting the call into sale. This solution could be in terms of a product or service.A satisfied customer can be a good source of information about the names.through advertisements Retailers. by the researcher.A salesmen can contact prospective buyers through a telephone call. Multivariate analysis -A range of analysis techniques which can examine quantitative data in more depth than can usually be obtained from a basic cross-analysis of the data by. brand. Using these references the prospects are influenced into taking a buying decision since the recommendations of eminent personalities such as politicians.Prospecting-Is the process of identifying prospective buyers of the product. Sales Budget. analyses can be produced quickly.. territory and sales force. based on the responses of the informants . their tastes and preferences Other Methods. direct mail. relatives or family members. dealers.Identifying prospects on several occasions like attending seminars. The salesperson assists the buyer in finding an appropriate solution to the problem.participating in trade fairs and exhibitions can generate sales leads. The prospects are those who have a need or will to buy and the power to pay. The essence of this range of approaches is that the information is analyzed in a way that permits patterns to emerge from within the data itself i. The process of making certain estimates of future events is referred to as sales forecasting.Computer Assisted Personal Interviewing is conducted face-to-face. product modifications etc. Centre of Influence Method. Since the data is entered directly into the computer. products. functions. The interviewer is prompted with the question by the computer and the appropriate response codes are keyed in directly according to the respondent's answers. Buying Formula Theory.This theory emphasizes on the needs or problems of the buyer. .salesmen obtain the reference from the eminent people in the society. usually employing laptop computers. Routing procedures use these codes to determine which question appears next. Cold Calling. brochure informing them about new products.The salesmen can refer to the company’s records and get in touch with several old and new contacts Newspapers. Company Records.
A survey covering a number of topics. Quantitative research . The samples tend to be nationally representative and composed of types of people for which there is a general demand. Analysis of Covariance (ANCOVA) An analysis of variance procedure in which the effects of one or more metric-scaled extraneous variables (covariates) are removed from the dependent variable data before one conducts ANOVA.The collection of information from retail outlets. Attitude Research (aka Attitude Survey) is a research study to obtain information on how people feel about certain products. Observation . There are three components of attitude: (i) a cognitive component . Analysis of Variance (ANOVA) is a statistical technique for examining the differences among means for two or more populations. Atomistic Test is a test that aims to assess participants’ reactions to individual elements of a product or concept (in contrast to a holistic test that looks at a product or concept as a whole). Attitude is an individual’s learned predisposition to behave in a consistent manner towards an object or idea. purchasing patterns develop and can be influenced. usually for different clients. language. Semiotics .knowledge and beliefs (ii) an affective component . are evaluated since they provide the cultural framework within which.feelings and emotions (iii) a co native component behavior (usually measured in terms of likelihood to buy). Association Technique is a form of projective technique where participants are presented with some stimulus material and they are then asked to respond with the first thing that comes to their minds. Advertising and other images (including overt and implied symbolism). packaging design. subjective.A non-verbal means of obtaining primary data as an alternative or complement to questioning. Analysis is interpretative. Clients are charged by the market research agency on the basis of the questionnaire space or the number of questions required.Mystery shopping .A body of research techniques which seeks insights through loosely structured. Qualitative research . whether or not anyone is actually reached and whether or not the contact results in the potential respondent participating in some research.Research which seeks to make measurements as distinct from qualitative research.A form of social description and analysis which. used in research. . showrooms etc. impressionistic and diagnostic. puts particular emphasis on an understanding and exploration of the cultural context in which the work is taking place. Attempt is when someone tries to contact a potential research participant. Omnibus surveys . mainly verbal data rather than measurements. for example. media content and style. ideas or companies. etc. societal assumptions. Attitude Scaling is the development of measurement criteria used to measure individuals’ attitudes. by people posing as ordinary members of the public.
Attitude Measurement cognitive component (know/ believe about an act or object) . example. Attribute Analysis is a technique that is designed to develop lists of characteristics. Group Discussion and focus group G. Observation.strongly disagree D. but the median and the mode can also be used to summarize a set of values. Diary panels. Telephone research K. A second definition is a Project Audit that involves visiting a project site to ensure all project specifications are being met and agreed procedures are being followed. In store testing .sources of continuous data I. Average is a general term that is used to represent or summarize the relevant features of a set of values. Projective Techniquessentence completion psychodrama (yourself as a product) friendly Martian (what someone else might do) F. Audimeter see people meter. Semantic Differential Scale. Postal research questionnaire H.neither agree nor disagree . In home canning. uses or benefits relevant to a particular product category.strongly agree . A Store Audit is a method of determining the number of product units that have been sold by counting physical units in stores and combining that with a knowledge of the number ordered and stock levels.disagree .Attribute is a word or phrase to describe a qualitative characteristic of an idea or object under consideration. There are two main measures of awareness: spontaneous (or unaided) and prompted (or aided) awareness.co native component (behave towards an object or act) C.hand held light pen to scan barcodes J.agree . gender is a attribute but age is a variable. Awareness is a measure of respondents’ knowledge of an object or an idea. Audit has two definitions in the context of Marketing Research.home audit and direct observation L. Likert scale . The arithmetic mean is often used as a measure of average.differences between words example practical or impractical E. Average Issue Readership is the average number of people who read a particular publication.affective component (feel about an act / object) . Marketing research techniques areInterviews-face to face -telephone -postal questionnaire B.
or "eaten up" within that period. the total spending. Competition . Collateral . Capital resources . Change in supply .All buildings. enjoyed. equipment.A financial institution accepts checking deposits. Strictly speaking.People whose wants are satisfied by consuming a good or a service. Capital .A certificate reflecting a firm's promise to pay the holder a periodic interest payment until the date of maturity and a fixed sum of money on the designated maturity date.The effort of two or more parties acting independently to secure the business of a third party by offering the most favorable terms." Comparative advantage . Benefit .Options among which to make choices.The direct trading of goods and services without the use of money. Business (firm) . consumption should apply only to those goods totally used. Command economy . on consumer goods during a given period. many of which last well beyond the period in question --e. Sometimes called a "centrally planned economy. holds savings. Change in demand .g. Circular flow of goods and services (or Circular flow of economic activity) . furniture. and automobiles. In practice.In macroeconomics.Products that are used with one another such as hamburger and hamburger buns Consumers .The principle of comparative advantage states that a country will specialize in the production of goods in which it has a lower opportunity cost than other countries. sells traveler's checks and performs other financial services. equipment and human skills used to produce goods and services.A model of an economy showing the interactions between households and business firms as they exchange goods and services and resources in markets.The part of a nation's balance of payments that deals with merchandise (or visible) imports or exports.The gain received from voluntary exchange.see Supply decrease and Supply increase.Private profit-seeking organizations that use resources to produce goods and services. Barter .What someone must make when faced with two or more alternative uses of a resource (also called economic choice). and for whom--are principally determined by government directive. Choice .The ability to produce something with fewer resources than other producers would use to produce the same thing Alternatives . commercial . how. Bank.Glossary of Economic Terms and Concepts Absolute advantage . consumption expenditures include all consumer goods bought.see Demand decrease and Demand increase.A mode of economic organization in which the key economic functions-what. clothing. Consumption .Anything of value that is acceptable to a lender to guarantee repayment of a loan.Goods made by people and used to produce other goods and services. by individuals or a nation. Balance of trade . and machinery.. Complements . Examples include buildings. Bond . .