Equity Derivatives in India - An Overview Derivatives Markets Derivatives markets broadly can be classified into two categories, those

that are traded on the exchange and the those traded one to one or ‘over the counter’. They are hence known as • • Exchange Traded Derivatives OTC Derivatives (Over The Counter)

OTC Equity Derivatives • • • Traditionally equity derivatives have a long history in India in the OTC market. Options of various kinds (called Teji and Mandi and Fatak) in un-organized markets were traded as early as 1900 in Mumbai The SCRA however banned all kind of options in 1956.

Derivative Markets today • • • • The prohibition on options in SCRA was removed in 1995. Foreign currency options in currency pairs other than Rupee were the first options permitted by RBI. The Reserve Bank of India has permitted options, interest rate swaps, currency swaps and other risk reductions OTC derivative products. Besides the Forward market in currencies has been a vibrant market in India for several decades. In addition the Forward Markets Commission has allowed the setting up of commodities futures exchanges. Today we have 18 commodities exchanges most of which trade futures. e.g. The Indian Pepper and Spice Traders Association (IPSTA) and the Coffee Owners Futures Exchange of India (COFEI). In 2000 an amendment to the SCRA expanded the definition of securities to included Derivatives thereby enabling stock exchanges to trade derivative products. The year 2000 will herald the introduction of exchange traded equity derivatives in India for the first time.

• •

Equity Derivatives Exchanges in India • • In the equity markets both the National Stock Exchange of India Ltd. (NSE) and The Stock Exchange, Mumbai (BSE) have applied to SEBI for setting up their derivatives segments. The exchanges are expected to start trading in Stock Index futures by mid-May 2000.

BSE's and NSE’s plans • • • Both the exchanges have set-up an in-house segment instead of setting up a separate exchange for derivatives. BSE’s Derivatives Segment, will start with Sensex futures as it’s first product. NSE’s Futures & Options Segment will be launched with Nifty futures as the first product.

Product Specifications BSE-30 Sensex Futures

• • • • • •

Contract Size - Rs. 50 times the Index Tick Size - 0.1 points or Rs. 5 Expiry day - last Thursday of the month Settlement basis - cash settled Contract cycle - 3 months Active contracts - 3 nearest months

Product Specifications S&P CNX Nifty Futures • • • • • • Contract Size - Rs. 200 times the Index Tick Size - 0.05 points or Rs. 10 Expiry day - last Thursday of the month Settlement basis - cash settled Contract cycle - 3 months Active contracts - 3 nearest months

Membership • • • Membership for the new segment in both the exchanges is not automatic and has to be separately applied for. Membership is currently open on both the exchanges. All members will also have to be separately registered with SEBI before they can be accepted.

Membership Criteria NSE Clearing Member (CM) • • • Networth - 300 lakh Interest-Free Security Deposits - Rs. 25 lakh Collateral Security Deposit - Rs. 25 lakh

In addition for every TM he wishes to clear for the CM has to deposit Rs. 10 lakh. Trading Member (TM) • • • BSE Clearing Member (CM) • Networth - 300 lacs Networth - Rs. 100 lakh Interest-Free Security Deposit - Rs. 8 lakh Annual Subscription Fees - Rs. 1 lakh

• • • •

Interest-Free Security Deposits - Rs. 25 lakh Collateral Security Deposit - Rs. 25 lakh Non-refundable Deposit - Rs. 5 lakh Annual Subscription Fees - Rs. 50 thousand

In addition for every TM he wishes to clear for the CM has to deposit Rs. 10 lakh with the following breakup. • • • Cash - Rs. 2.5 lakh Cash Equivalents - Rs. 25 lakh Collateral Security Deposit - Rs. 5 lakh

Trading Member (TM) • • • Networth - Rs. 50 lakh Non-refundable Deposit - Rs. 3 lakh Annual Subscription Fees - Rs. 25 thousand

The Non-refundable fees paid by the members is exclusive and will be a total of Rs.8 lakhs if the member has both Clearing and Trading rights. Trading Systems • • NSE’s Trading system for it’s futres and options segment is called NEAT F&O. It is based on the NEAT system for the cash segment. BSE’s trading system for its derivatives segment is called DTSS. It is built on a platform different from the BOLT system though most of the features are common.

Settlement and Risk Management systems • • Systems for settlement and risk management are required to satisfy the conditions specified by the L.C. Gupta Committee and the J.R. Verma committee. These include upfront margins, daily settlement, online surveillance and position monitoring and risk management using the Value-at-Risk concept.

Certification Programmes • • • The NSE certification programme is called NCFM (NSE’s Certification in Financial Markets). NSE has outsourced training for this to various institutes around the country. The BSE certification programme is called BCDE (BSE’s Certification for the Derivatives Exchnage). BSE conducts it’s own training run by it’s training institute. Both these programmes are approved by SEBI.

Rules and Laws • • • Both the BSE and the NSE have been give in-principle approval on their rule and laws by SEBI. According to the SEBI chairman, the Gazette notification of the Bye-Laws after the final approval is expected to be completed by May 2000. Trading is expected to start by mid-June 2000.

The current set of global bank capital standards are called Basel II. banks have historically owned major stakes in industrial corporations while in other countries such as the United States banks are prohibited from . and regulates the money supply  a commercial bank accepts deposits and channels those deposits into lending activities. In some countries such as Germany. and government restrictions on financial activities by banks have varied over time and location.  a savings bank. either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses on the world's open financial markets.A bank is a financial intermediary and appears in several related basic forms: a central bank issues money on behalf of a government. also known as a building society in Britain is only allowed to borrow and save from members of a financial cooperative  Banking is generally a highly regulated industry.

In Iceland banks followed international standards of regulation prior to the 2008 collapse. the largest derivative exchange in the world. headquartered in Siena. Japan [ Images ]. as early as the 1650s. dealings resembling present day derivative market transactions were seen in rice markets in Osaka.owning non-financial companies. The oldest bank still in existence is Monte dei Paschi di Siena. what . was established. Italy. Do you know derivatives first came about in Japanese rice markets? Yes. banks are usually the nexus of a cross-share holding entity known as the keiretsu. So. The first leap towards an organized derivatives market came in 1848. equity and commodity derivative markets are rapidly gaining in size in India. In Japan. when the Chicago Board of Trade. and has been operating continuously since 1472 Everyone talks about derivatives these days. these markets are catching on like a forest fire. In terms of popularity too. Derivative products have been around for a long time. Today.

are these markets all about? What are the products that they trade in? Why do people feel the need to trade in such products and what sort of traders benefit from such trades? Do these markets hold scope for retail investors too? And if so. The prohibition on options in SCRA was removed in 1995. currency swaps and other . how exactly can you go about trading in them? Derivatives markets broadly can be classified into two categories. Foreign currency options in currency pairs other than Rupee were the first options permitted by RBI. Options of various kinds (called Teji and Mandi and Fatak) in un-organized markets were traded as early as 1900 in Mumbai [ Images ] The SCRA however banned all kind of options in 1956. They are hence known as: • • • Exchange Traded Derivatives OTC Derivatives (Over The Counter) OTC Equity Derivatives Traditionally equity derivatives have a long history in India in the OTC market. The Reserve Bank of India [ Get Quote ] has permitted options. those that are traded on the exchange and the those traded one to one or 'over the counter'. interest rate swaps.

bullion. With the amendment in the definition of 'securities' under SC(R)A (to include derivative contracts in the definition of securities). Derivative Exchange/Segment function as a SelfRegulatory Organisation and Sebi acts as the oversight regulator. The term "Derivative" indicates that it has no independent value.risk reductions OTC derivative products. The underlying asset can be securities. its value is entirely "derived" from the value of the underlying asset. currency. Derivative trading in India takes can place either on a separate and independent Derivative Exchange or on a separate segment of an existing Stock Exchange. live stock or anything else. The clearing & settlement of all trades on the Derivative Exchange/Segment would have to be through a Clearing Corporation/House. In other words. which is independent in governance and membership from the Derivative Exchange/Segment. Derivative means a forward.e. Besides the Forward market in currencies has been a vibrant market in India for several decades. option or any other hybrid contract of pre determined fixed duration. i. commodities. derivatives trading takes place under the . future. linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities.

provisions of the Securities Contracts (Regulation) Act. The Rules.C Gupta Committee constituted by Sebi had laid down the regulatory framework for derivative trading in India. The eligibility conditions have been framed to ensure that Derivative Exchange/Segment & Clearing Corporation/House provide a transparent trading environment. 1956 and the Securities and Exchange Board of India Act. 1992. Dr. L. SEBI has also framed suggestive bye-law for Derivative Exchanges/Segments and their Clearing Corporation/House which lay's down the provisions for trading and settlement of derivative contracts. Sebi has also laid the eligibility conditions for Derivative Exchange/Segment and its Clearing Corporation/House. Bye-laws & Regulations of the Derivative Segment of the Exchanges and their Clearing Corporation/House have to be framed in line with the suggestive Bye-laws. Namita Jain/Commodity Online Banking [edit]Standard activities . safety & integrity and provide facilities for redressal of investor grievances.

individuals and governments. paying cheques drawn by customers on the bank. and by issuing debt securities such as banknotes and bonds. and automated teller machine (ATM). and a bank account is considered indispensable by most businesses. by making installment loans. Banks also enable customer payments via other payment methods such as telegraphic transfer. . Banks act as payment agents by conducting checking or current accounts for customers. by accepting term deposits. EFTPOS. and by investing in marketable debt securities and other forms of money lending. Banks provide almost all payment services. Banks borrow money by accepting funds deposited on current accounts.Large door to an old bank vault. and collecting cheques deposited to customers' current accounts. Banks lend money by making advances to customers on current accounts. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account.

g. and money market funds.[clarification needed] [edit]Channels Banks offer many different channels to access their banking and other services: ATM is a machine that dispenses cash and sometimes takes deposits without the need for a human bank teller.Banks borrow most funds from households and nonfinancial businesses. Some ATMs provide additional services. over the Internet  . and lend most funds to households and non-financial businesses. but nonbank lenders provide a significant and in many cases adequate substitute for bank loans.  A branch is a retail location  Call center  Mail: most banks accept check deposits via mail and use mail to communicate to their customers. payments etc. e. by sending out statements  Mobile banking is a method of using one's mobile phone to conduct banking transactions  Online banking is a term used for performing transactions. cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings too.

mostly for private banking or business banking.clarification  [edit]Business model A bank can generate revenue in a variety of different ways including interest. This difference is referred to as the spread between the cost of funds and the loan interest rate. transaction fees and financial advice. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine). often visiting customers at their homes or businesses  Telephone banking is a service which allows its customers to perform transactions over the telephone without speaking to a human  Video banking is a term used for performing banking transactions or professional banking consultations via a remote video and audio connection. profitability from lending activities has been cyclical and dependent on the needs and strengths of loan customers and the stage of . or via a videoconferenceenabled bank branch. Historically. and the level of interest it charges in its lending activities. The main method is via charging interest on the capital it lends out to customers[citation needed].Relationship Managers. The bank profits from the differential between the level of interest it pays for deposits and other sources of funds.

prepaid cards. Second. the banks hope. and insurance functions allows traditional banks to respond to increasing consumer demands for "one-stop shopping" by enabling cross-selling of products (which. which allows banks again to merge with investment and insurance houses. will also increase profitability). In the past 20 years American banks have taken many measures to ensure that they remain profitable while responding to increasingly changing market conditions. and credit cards.the economic cycle. which means charging higher interest rates to those customers that are considered to be a higher credit risk and thus increased chance of default on loans. smart cards. they have expanded the use of risk-based pricing from business lending to consumer lending. Fees and financial advice constitute a more stable revenue stream and banks have therefore placed more emphasis on these revenue lines to smooth their financial performance. investment. These products include debit cards. This helps to offset the losses from bad loans. this includes the Gramm-LeachBliley Act. First. they have sought to increase the methods of payment processing available to the general public and business clients. and offers credit products to high risk customers who would otherwise be denied credit. . Third. lowers the price of loans to those who have better credit histories. Merging banking.

it is still common to deal strictly in cash.cards. . West Yorkshire. This helps in making profit and facilitates economic development as a whole{{Citation needed|date=January 2011.debit . [edit]Products A former building society. However. Banks make money from card products through interest payments and fees charged to consumers and transaction fees to companies that accept the credit. now a modern retail bank in Leeds. including carrying suitcases filled with cash to purchase a home). with convenience of easy credit. there is also increased risk that consumers will mismanage their financial resources and accumulate excessive debt.They make it easier for consumers to conveniently make transactions and smooth their consumption over time (in some countries with underdeveloped financial systems.

Liverpool [edit]Retail         Business loan Cheque account Credit card Home loan Insurance advisor Mutual fund Personal loan Savings account [edit]Wholesale Capital raising (Equity / Debt / Hybrids)  Mezzanine finance  Project finance  Revolving credit  Risk management (FX. interest rates. derivatives)  Term loan  . commodities.An interior of a branch of National Westminster Bank on Castle Street.

which sets a framework on how banks and depository institutions must handle their capital.[edit]Risk and capital Banks face a number of risks in order to conduct their business. [edit]Banks in the economy .  The capital requirement is a bank regulation.  Liquidity risk: risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit). and how much capital a bank is required to hold. Some of the main risks faced by banks include: Credit risk: risk of loss[citation needed] arising from a borrower who does not make payments as promised. and how well these risks are managed and understood is a key driver behind profitability.  Market risk: risk that the value of a portfolio. The categorization of assets and capital is highly standardized so that it can be risk weighted (see riskweighted asset). will decrease due to the change in value of the market risk factors.  Operational risk: risk arising from execution of a company's business functions. either an investment portfolio or a trading portfolio.

participating in interbank clearing and settlement systems to collect. . These claims on banks can act as money because they are negotiable or repayable on demand. in the form of banknotes and current accounts subject to cheque or payment at the customer's order. They are effectively transferable by mere delivery. 2. and pay payment instruments. be presented with. present. since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas. Netting and settlement of payments – banks act as both collection and paying agents for customers. and hence valued at par. Credit intermediation – banks borrow and lend back-to-back on their own account as middle men. reducing the cost of settlement between them. 3.See also: Financial system [edit]Economic functions The economic functions of banks include: Issue of money. This enables banks to economise on reserves held for settlement of payments. in the case of banknotes. 4. or by drawing a cheque that the payee may bank or cash. Credit quality improvement – banks lend money to ordinary commercial and personal 1.

g. banknotes and deposits are generally unsecured. Maturity transformation – banks borrow more on demand debt and short term debt. With a stronger credit quality than most other borrowers. withdrawals and redemptions of banknotes). wholesale cash markets and securities markets). In other words. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However. These . this puts the note holders and depositors in an economically subordinated position. investing in marketable securities that can be readily converted to cash if needed. but provide more long term loans. if the bank gets into difficulty and pledges assets as security. to raise the funding it needs to continue to operate.g. banks can do this by aggregating issues (e. accepting deposits and issuing banknotes) and redemptions (e.borrowers (ordinary credit quality). [edit]Bank crisis Banks are susceptible to many forms of risk which have triggered occasional systemic crises.g. 5. but are high quality borrowers. and raising replacement funding as needed from various sources (e. they borrow short and lend long. maintaining reserves of cash.

down from 61% in the previous year. Savings and Loan crisis in the 1980s and early 1990s. Banking crises have developed many times throughout history. Asian banks' share increased from 12% to 14% during the year. Prominent examples include the bank run that occurred during the Great Depression.000 banks in the world grew by 6.include liquidity risk (where many depositors may request withdrawals in excess of available funds). when one or more risks have materialized for a banking sector as a whole.4 trillion while profits declined by 85% to $115bn. [edit]Size of global banking industry Assets of the largest 1. while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment banking . and interest rate risk (the possibility that the bank will become unprofitable. 56% in 2008/2009. EU banks held the largest share of the total. credit risk (the chance that those who owe money to the bank will not repay it). Growth in assets in adverse market conditions was largely a result of recapitalisation. the U. if rising interest rates force it to pay relatively more on its deposits than it receives on its loans).8% in the 2008/2009 financial year to a record $96. and the subprime mortgage crisis in the 2000s.S. the Japanese banking crisis during the 1990s.

totalled $66.000 branches—more than double the 15. ABC:2400 0+) with an additional 140 smaller banks with an undetermined number of branches.[9] [edit]Regulation Main article: Banking regulation See also: Basel II Currently in most jurisdictions commercial banks are regulated by government entities and require a special bank licence to operate.3bn in 2009. even if they are not repayable . Usually the definition of the business of banking for the purposes of regulation is extended to include acceptance of deposits. Germany.000 branches.BOC:12000+. As of Nov 2009. CCB:13000+.085 at the end of 2008) and possibly branches (82.000 branches (ICBC:18000+.[citation needed] This is an indicator of the geography and regulatory structure of the USA. resulting in a large number of small to medium-sized institutions in its banking system.[9] The United States has the most banks in the world in terms of institutions (7. China's top 4 banks have in excess of 67. France.000 branches in the UK. and Italy each had more than 30. In 2004.000). Japan had 129 banks and 12. up 12% on the previous year.

the regulator is typically also a participant in the market. in some countries this is not the case. by itself. 2. The law implies rights and obligations into this relationship as follows: 1. the UK government's central bank. for example. Unlike most other regulated industries. when the account is overdrawn. being either a publicly or privately governed central bank. the bank owes the balance to the customer. Banking law is based on a contractual analysis of the relationship between the bank (defined above) and the customer—defined as any entity for which the bank agrees to conduct an account. and some commercial banks (such as the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of England.to the customer's order—although money lending. The bank account balance is the financial position between the bank and the customer: when the account is in credit. However. the customer owes the balance to the bank. is generally not included in the definition. The bank agrees to pay the customer's cheques up to the amount standing to the credit . Central banks also typically have a monopoly on the business of issuing banknotes. the Financial Services Authority licences banks. In the UK.

The statutes and regulations in force within a . since cheques are outstanding in the ordinary course of business for several days. 6. since each account is just an aspect of the same credit relationship. These implied contractual terms may be modified by express agreement between the customer and the bank. The bank may not pay from the customer's account without a mandate from the customer. to the extent that the customer is indebted to the bank. e. 8.of the customer's account. The bank must not disclose details of transactions through the customer's account— unless the customer consents. or the law demands it. The bank agrees to promptly collect the cheques deposited to the customer's account as the customer's agent. The bank has a right to combine the customer's accounts. The bank has a lien on cheques deposited to the customer's account.g. the bank's interests require it. 4. and to credit the proceeds to the customer's account. The bank must not close a customer's account without reasonable notice. plus any agreed overdraft limit. 7. a cheque drawn by the customer. 3. 5. there is a public duty to disclose.

'Fit and Proper' requirements for the bank's controllers. Some types of financial institution. [edit]Types of banks Banks' activities can be divided into retail banking. providing services to mid-market business.particular jurisdiction may also modify the above terms and/or create new rights. such as building societies and credit unions. and therefore regulated under separate rules. . Approval of the bank's business plan as being sufficiently prudent and plausible. Most banks are profit-making. obligations or limitations relevant to the bank-customer relationship. The requirements for the issue of a bank licence vary between jurisdictions but typically include: 1. owners. may be partly or wholly exempt from bank licence requirements. corporate banking. dealing directly with individuals and small businesses. Minimum capital ratio 3. providing wealth management services to high net worth individuals and families. private banking. directors. relating to activities on the financial markets. private enterprises. business banking. directed at large business entities. or senior officers 4. Minimum capital 2. and investment banking.

some are owned by government. [edit]Types of retail banks National Bank of the Republic. Salt Lake City 1908 ATM Al-Rajhi Bank National Copper Bank. Salt Lake City 1911 .However. or are non-profit organizations.

 Postal savings banks: savings banks associated with national postal systems. the U.  Community development banks: regulated banks that provide financial services and credit to underserved markets or populations. members of a certain labor union or religious organizations. residents of a defined neighborhood.  Private banks: banks that manage the assets of high net worth individuals.  Credit unions: not-for-profit cooperatives owned by the depositors and often offering rates more favorable than for-profit banks.Commercial bank: the term used for a normal bank to distinguish it from an investment bank. Since the two no longer have to be under separate ownership. some use the term "commercial bank" to refer to a bank or a division of a bank that mostly deals with deposits and loans from corporations or large businesses. and their immediate families.S. Typically. After the Great Depression.  Community banks: locally operated financial institutions that empower employees to make local decisions to serve their customers and the partners. Congress required that banks only engage in banking activities. Historically a minimum of  . membership is restricted to employees of a particular company. whereas investment banks were limited to capital market activities.

savings banks took their roots in the 19th or sometimes even in the 18th century.  Building societies and Landesbanks: institutions that conduct retail banking. socially committed individuals created foundations to put in place the necessary infrastructure. Apart from this retail focus. over the last years many private banks have lowered their entry hurdles to USD 250. in others. In some countries.000 for private investors.[citation needed]  Offshore banks: banks located in jurisdictions with low taxation and regulation. providing local and regional outreach—and by their socially responsible approach to business and society.  Savings bank: in Europe. Nowadays. European savings banks have kept their focus on retail banking: payments. savings products. Many offshore banks are essentially private banks. credits and insurances for individuals or small and mediumsized enterprises.USD 1 million was required to open an account. savings banks were created on public initiative. they also differ from commercial banks by their broadly decentralised distribution network.  Ethical banks: banks that prioritize the transparency of all operations and make only what . however. Their original objective was to provide easily accessible savings products to all strata of the population.

among other services. engage in several of these activities. These big banks are very diversified groups that. refers to banks which provide capital to firms in the form of shares rather than loans. The modern definition.  Merchant banks were traditionally banks which engaged in trade finance. make markets. also distribute insurance— hence the term bancassurance.  A Direct or Internet-Only bank is a banking operation without any physical bank branches. a portmanteau . they tend not to invest in new companies. conceived and implemented wholly with networked computers. more commonly known as financial services companies. [edit]Types  of investment banks Investment banks "underwrite" (guarantee the sale of) stock and bond issues. however.they consider to be socially-responsible investments. and advise corporations oncapital market activities such as mergers and acquisitions. [edit]Both  combined Universal banks. trade for their own accounts. Unlike venture capital firms.

They generally provide liquidity to the banking system and act as the lender of last resort in event of a crisis. such as supervising commercial banks. All banking activities must avoid interest. [edit]Challenges within the banking industry The examples and perspective in this section may not represent a worldwide view of the subject. or controlling the cash interest rate. (September 2009) . [edit]Other  types of banks Central banks are normally government-owned and charged with quasi-regulatory responsibilities.  Islamic banks adhere to the concepts of Islamic law. signifying that both banking and insurance are provided by the same corporate entity. a concept that is forbidden in Islam. Please improve this article and discuss the issue on the talk page. This form of banking revolves around several well-established principles based on Islamic canons. the bank earns profit (markup) and fees on the financing facilities that it extends to customers.word combining "banque or bank" and "assurance". Instead.

Please help improve this section by adding citations to reliable sources. or OTS. Each regulatory agency has their own set of rules and regulations to which banks and thrifts must adhere. standards. Unsourced material may be challenged and removed. the Office of the Comptroller of the Currency (OCC) is the primary federal regulator for national banks. however. All banks with FDIC-insured deposits have the Federal Deposit Insurance Corporation(FDIC) as a regulator. and report forms for the federal . is the primary federal regulator for thrifts. Qualified Intermediaries & Exchange Accommodators are regulated by MAIC. for examinations. National banks have one primary regulator—the OCC.This section does not cite any references or sources.[clarification needed] the Federal Reserve is the primary federal regulator for Fed-member state banks. the banking industry is a highly regulated industry with detailed and focused regulators. The Federal Financial Institutions Examination Council (FFIEC) was established in 1979 as a formal interagency body empowered to prescribe uniform principles. (September 2008) [edit]United States Main article: Banking in the United States In the United States. and the Office of Thrift Supervision. State non-member banks are examined by the state agencies as well as the FDIC.

OTS. industry trends and economic fluctuations. rate competition for deposits and the general market changes. It has been a challenge for banks to effectively set their growth strategies with the recent economic market. potentially resulting in an overall increase in bank failures across the United States. supervisory regions have been merged. A rising . MAIC and OCC. Although the FFIEC has resulted in a greater degree of regulatory consistency between the agencies. Offices have been closed. The impact of these changes is that banks are receiving less hands-on assessment by the regulators. staff levels have been reduced and budgets have been cut. The changing economic environment has a significant impact on banks and thrifts as they struggle to effectively manage their interest rate spread in the face of low rates on loans. the rules and regulations are constantly changing. While banks struggle to keep up with the changes in the regulatory environment. In addition to changing regulations. and the potential for more problems slipping through the cracks. The remaining regulators face an increased burden with increased workload and more banks per regulator. less time spent with each institution. FDIC. changes in the industry have led to consolidations within the Federal Reserve. regulators struggle to manage their workload and effectively regulate their banks.examination of financial institutions.

declining asset quality has become a big problem for financial institutions. such as adequate employee training programs.interest rate environment may seem to help financial institutions. the foundation of a bank is shaken to the core. but the effect of the changes on consumers and businesses is not predictable and the challenge remains for banks to grow and effectively manage the spread to generate a return to their shareholders. struggle to cut costs and have consequently eliminated certain expenses. one of which is the lax attitude some banks have adopted because of the years of “good times. Banks also face ongoing pressure by . Banks also face a host of other challenges such as aging ownership groups. like any business. Across the country. The management of the banks’ asset portfolios also remains a challenge in today’s economic environment. banks. While always an issue for banks. Loans are a bank’s primary asset category and when loan quality becomes suspect.” The potential for this is exacerbated by the reduction in the regulatory oversight of banks and in some cases depth of management. Problems are more likely to go undetected. In addition. resulting in a significant impact on the bank when they are recognized. many banks’ management teams and board of directors are aging. There are several reasons for this.

Banking is also an extremely competitive industry. to achieve earnings and growth projections. banks must compete for deposits. etc. through financial market operations such as brokerage and MAIC trust & Securities Clearing services trading and become big players in such activities. As a reaction. Treasury obligations. One of the greatest factors in recent years in the movement of deposits was the tremendous growth of money market funds whose higher interest rates attracted consumer deposits.S. Regulators place added pressure on banks to manage the various categories of risk. banks have developed their activities in financial instruments. credit unions. The phenomenon of disintermediation had to dollars moving from savings accounts and into direct market instruments such as U. [edit]Competition for loanable funds To be able to provide homebuyers and builders with the funds needed. check cashing services.shareholders.[10] To compete for deposits. Competing in the financial services industry has become tougher with the entrance of such players as insurance agencies. US savings institutions offer many different types of plans[10]: . agency securities. both public and private. credit card companies. and corporate debt.

 Certificate accounts — subject to loss of some or all interest on withdrawals before maturity.  Individual retirement accounts (IRAs) and Keogh plans — a form of retirement savings in which the funds deposited and interest earned are exempt from income tax until after withdrawal.  NOW and Super NOW accounts — function like checking accounts but earn interest.  Notice accounts — the equivalent of certificate accounts with an indefinite term. Savers agree to notify the institution a specified time before withdrawal.  All withdrawals and deposits are completely the sole decision and responsibility of the account owner unless the parent or guardian is required to do otherwise for legal reasons. A minimum balance may be required on Super NOW accounts.  Checking accounts — offered by some institutions under definite restrictions.  .  Money market accounts — carry a monthly limit of preauthorized transfers to other accounts or persons and may require a minimum or average balance.Passbook or ordinary deposit accounts — permit any amount to be added to or withdrawn from the account at any time.

 [edit]Accounting for bank accounts Suburban bank branch Bank statements are accounting records produced by banks under the various accounting standards of the world. Equity and Liabilities. if you read your bank statement. However. Under GAAP and MAIC there are two kinds of accounts: debit and credit.Club accounts and other savings accounts — designed to help people save regularly to meet certain goals. while you debit your credit card account every time you spend money from it (and the account is normally in debit). and you debit a credit account to decrease its balance. and you debit it when you withdraw . Debit Accounts are Assets and Expenses.[11] This also means you credit your savings account every time you deposit money into it (and the account is normally in credit). Credit accounts are Revenue. This means you credit a credit account to increase its balance. it will say the opposite—that you credit your account when you deposit money.

combined with risky . as the funds must be lent or invested in a way that yields a return sufficient to pay the high interest being paid on the brokered deposits. on average. If you have cash in your account. It is possible for a bank to be engaged in business with no local deposits at all. you have a negative (or deficit) balance. if you are overdrawn. Banks which failed during 2008 and 2009 in the United States during the global financial crisis had. [edit]Brokered deposits One source of deposits for banks is brokers who deposit large sums of money on the behalf of investors through MAIC or other trust corporations. often better than those offered local depositors. balances. credits and debits are discussed below. Such deposits. or "hot money" as it is sometimes called. Accepting a significant quantity of such deposits. This money will generally go to the banks which offer the most favorable terms. puts a bank in a difficult and sometimes risky position. four times more brokered deposits as a percent of their deposits than the average bank. they are done so from the viewpoint of the account holder—which is traditionally what most people are used to seeing. you have a positive (or credit) balance. This may result in risky decisions and even in eventual failure of the bank. Where bank transactions. all funds being brokered deposits.funds.

[12] [edit]Banking                   by country Banking in Australia Banking in Austria Banking in Bangladesh Banking in Canada Banking in China Banking in France Banking in Germany Banking in Greece Banking in Iran Banking in India Banking in Israel Banking in Italy Banking in Pakistan Banking in Russia Banking in Singapore Banking in Switzerland Banks of the United Kingdom Banking in the United States .real estate investments. factored into the Savings and loan crisis of the 1980s. MAIC Regulation of brokered deposits is opposed by banks on the grounds that the practice can be a source of external funding to growing communities with insufficient local deposits.

Read more:http://www.com/5413/banking.banking Definition In generalterms. and thenlendingout this money inordertoearnaprofit.investorwords. thebusiness activityof accepting and safeguardingmoneyowned by otherindividualsandentities.html#ixz z1Of3AZ0Em bank Definition .

Anorganization, usually acorporation,charteredby a state orfederal government, which does most or all of the following: receivesdemand depositsandtime deposits,honorsinstrumentsdrawn on them, andpaysintereston them;discountsnotes, makesloans, andinvestsinsecurities;collectschecks,drafts, and notes;certifiesdepositor'schecks; andissuesdrafts andcashier's checks.
Read more:http://www.investorwords.com/401/bank.html#ixzz1Of 3Gj4HB

Bankers' bank
From Wikipedia, the free encyclopedia

A bankers' bank is a financial institution that provides financial services to community banks in the United

States of America. Bankers' banks are owned by investor banks and may provide services only to community banks. By leveraging positive economies of scale, bankers' banks are able to provide many services to community banks that typically would be economically available only to large national or multinational banks. The advantage here is that community banks which use these services can in turn offer them to their customers, allowing these smaller independent banks to effectively compete with larger banks. The first bankers' bank was formed in Minnesota in 1975. Currently there are 22 bankers' banks across the US serving more than 6,000 banks in 48 states. The largest bankers' bank is at present TIB-The Independent BankersBank, located in Irving, TX, and serving over 1,400 banks across 46 states - plus Guam and Bermuda. The most successful Banker's Bank is the State Bank of North Dakota. Founded in 1919, this bank partners with other banks around the state of North Dakota and has helped the state remain solvent in hard economic times. In 1997, when the Red River flooded and destroyed Grand Forks and East Grand Forks, the State Bank of North Dakota quickly funneled money so that people could save others and repair the damages after the flood died down. Grand Forks quickly recovered thanks, in part, to the efforts of the State

Bank of North Dakota, East Grand Forks, located in Minnesota, did not recover as well or as quickly, due to a lack of funds that the State Bank of North Dakota provided its counterpart.

Mutual Fund is an instrument of investing money. Nowadays, bank rates have fallen down and are generally below the inflation rate. Therefore, keeping large amounts of money in bank is not a wise option, as in real terms the value of money decreases over a period of time. One of the options is to invest the money in stock market. But a common investor is not informed and competent enough to understand the intricacies of stock market. This is where mutual funds come to the rescue. A mutual fund is a group of investors operating through a fund manager to purchase a diverse portfolio of stocks or bonds. Mutual funds are highly cost efficient and very easy to invest in. By pooling money together in a mutual fund, investors can purchase stocks or bonds with much lower trading costs than if they tried to do it on their own. Also, one doesn't have to figure out which stocks or bonds to buy. But the biggest advantage of mutual funds is diversification. Diversification means spreading out money across many different types of investments. When one investment is down another might be up. Diversification of investment holdings reduces the risk tremendously. On the basis of their structure and objective, mutual funds can be classified into following major types: Closed-end funds A closed-end mutual fund has a set number of shares issued to the public through an initial public offering. Open-end funds Open end funds are operated by a mutual fund house which raises money from shareholders and invests in a group of assets Large cap funds Large cap funds are those mutual funds, which seek capital appreciation by investing

It is a type of mutual fund that buys a combination of common stock. and often choose investments providing dividends as well as capital appreciation. As there is no standard definition classifying companies Equity funds Equity mutual funds are also known as stock mutual funds. Hence. Exchange traded funds Exchange Traded Funds (ETFs) represent a basket of securities that is traded on an exchange.Load mutual funds and No-Load mutual funds. which invest in small / medium sized companies. the fund's local region. preferred stock. . International mutual funds International mutual funds are those funds that invest in non-domestic securities markets throughout the world. similar to a stock. Regional mutual funds Regional mutual fund is a mutual fund that confines itself to investments in securities from a specified geographical area. bonds. and short-term bonds Growth funds Growth funds are those mutual funds that aim to achieve capital appreciation by investing in growth stocks.primarily in stocks of large blue chip companies Mid-cap funds Mid cap funds are those mutual funds. usually. Money market instruments are forms of debt that mature in less than one year and are very liquid. Balanced funds Balanced fund is also known as hybrid fund. Money market funds A money market fund is a mutual fund that invests solely in money market instruments. unlike conventional mutual funds Value funds Value funds are those mutual funds that tend to focus on safety rather than growth. Equity mutual funds invest pooled amounts of money in the stocks of public companies. Sector funds Sector mutual funds are those mutual funds that restrict their investments to a particular segment or sector of the economy. No load funds Mutual funds can be classified into two types .

However. debentures. bonds or other securities. Therefore. Fund of funds A fund of funds (FoF) is an investment fund that holds a portfolio of other investment funds rather than investing directly in shares. This NAV keeps on changing with the changes in the equity and bond market. Why Should I Invest in a Mutual Fund when I can Invest Directly in the Same Instruments : We have already mentioned that like all other investments in equities and debts. Mutual Funds are in a much better position to effectively spread your investments across various sectors and among several products available in the market. The investments by the Mutual Funds are made in equities. but a good managed Fund can give you regular and higher returns than when you can get from fixed deposits of a bank etc. bonds. the investments in Mutual Funds is not risk free. call money etc. Your small investment cannot be spread into equity shares of various good companies due to high price of such shares. depending on the terms of each scheme floated by the Fund.. investments through Mutual Funds is considered better due to the following reasons :• • Your investments will be managed by professional finance managers who are in a better position to assess the risk profile of the investments. Mutual Fund Definition : or What is a Mutual Funds and How does these work? Mutual Fund Definition: A mutual fund is made up of money that is pooled together by a large number of investors who give their money to a fund manager to invest in a large portfolio of stocks and / or bonds Mutual fund is a kind of trust that manages the pool of money collected from various investors and it is managed by a team of professional fund managers (usually called an Asset Management Company) for a small fee. This is called risk . the investments in Mutual funds also carry risk. The current value of such investments is now a days is calculated almost on daily basis and the same is reflected in the Net Asset Value (NAV) declared by the funds from time to time.Index funds An index fund is a a mutual fund or exchange-traded fund) that aims to replicate the movements of an index of a specific financial market.

For example. there is no specific date when the scheme will be closed) or there is a closing date when finally the scheme will be wind up.While launching a new scheme. Thus.00. every Mutual Fund is supposed to declare in the prospectus the kind of instruments in which it will make investments of the funds collected under that scheme.000/-. Mutual Funds can be classified into various categories under the following heads:(A) ACCORDING TO TYPE OF INVESTMENTS :. WHAT ARE VARIOUS TYPES OF MUTUAL FUNDS A common man is so much confused about the various kinds of Mutual Funds that he is afraid of investing in these funds as he can not differentiate between various types of Mutual Funds with fancy names. the various kinds of Mutual Fund schemes as categoried according to the type of investments are as follows :(a) EQUITY FUNDS / SCHEMES (b) DEBT FUNDS / SCHEMES (also called Income Funds) (c ) DIVERSIFIED FUNDS / SCHEMES (Also called Balanced Funds) (d) GILT FUNDS / SCHEMES (e) MONEY MARKET FUNDS / SCHEMES (f) SECTOR SPECIFIC FUNDS (g) INDEX FUNDS B) ACCORDING TO THE TIME OF CLOSURE OF THE SCHEME :.000 to get started (assuming that you make minumum investment of Rs 10000 per scrip). according to the time of closure schemes are classified as follows :- .e. we can say that Mutual funds are better options for investments as they offer regular investors a chance to diversify their portfolios. which is something they may not be able to do if they decide to make direct investments in stock market or bond market. Thus. you can invest in some of the diversified Mutual Fund schemes for an low as Rs. However.diversification and can effectively shield the steep slide in the value of your investments. Thus. you would probably need Rs 2. if you want to build a diversified portfolio of 20 scrips.While launching a new schemes.10. Mutual Funds also declare whether this will be an open ended scheme (i.

Some of the most popular type of Mutual Funds these days are "Aggressive Growth Fund".Mutual Funds are also allowed to float some tax saving schemes. "Growth and Income Fund". Various Types of Mutual Funds based on allocation of funds : These days asset managers give very attractive names to some of their schemes. "Blend Fund". Association of Mutual Funds in India : It is popularly known as AMFI (www. "Prime Rate Fund". "Liquid Fund". Therefore. "Balanced Fund". "Capital Appreciation Fund". For getting the details of the latest NAVs of various Mutual Fund schemes in India. The categories are as follows :(a) Dividend Paying Schemes (b) Reinvestment Schemes The mutual fund schemes come with various combinations of the above categories. "Index Fund". sometimes the schemes are classified according to this also:(a) TAX SAVING FUNDS (b) NOT TAX SAVING FUNDS / OTHER FUNDS (D) ACCORDING TO THE TIME OF PAYOUT :. "Global Fund". Before you invest. Money Market Fund".amfindia. you must find out what kind of the scheme you are being asked to invest. The site provides valuable information about mutual fund industry in India.e. You should choose a scheme as per your risk capacity and the regularity at which you wish to have the dividends from such schemes.). you can click on link provided at the top. dividend etc. "Crossover fund".Sometimes Mutual Fund schemes are classified according to the periodicity of the pay outs (i. Therefore. SOME OF THE TERMS USED IN MUTUAL FUNDS . "International Fund". "Hedge Fund".(a) OPEN ENDED SCHEMES (b) CLOSE ENDED SCHEMES C) ACCORDING TO TAX INCENTIVE SCHEMES :.com). which may just another type of the above referred schemes. we can have an Equity Fund which is open ended and is dividend paying plan.

asset allocation fund. Mutual fundsofferchoice.bond .Net Asset Value (NAV) Net Asset Value is the market value of the assets of the scheme minus its liabilities. shareholders receive anequitypositionin the fund and.It is the price at which a Mutual Funds repurchases its units and it may include a back-end load. but is actually aninvestment trust.blend fund. Sales Load / Front End Load : It is a charge collected by a scheme when it sells the units.bondsandmoney market instruments.Benefitsof mutual funds includediversificationandprofessionalmoney management. Schemes which do not charge a load at the time of entry are called ‘No Load’ schemes. Repurchase Price : . Inreturnfor the money they give to the fund whenpurchasingshares.liquidity. Repurchase / ‘Back-end’ Load : It is a charge collected by a Mufual Funds when it buys back / Repurchases the units from the unit holders. depending upon theperformanceof thesecuritiesheldby the fund. This is also called Bid Price. It may include a sales load. butchargefeesand oftenrequireaminimum investment. There are many types of mutual funds. in each of itsunderlying securities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date. and convenience. For most mutual funds. ineffect. Mutual funds thentakethe money theyreceivefrom thesaleof their shares (along with any money made from previous investments) and use it topurchasevariousinvestmentvehicles. Sale Price : It is the price you pay when you invest in a scheme and is also called "Offer Price". such asstocks. Also called. inaccordancewith a statedsetofobjectives. Such prices are NAV related. includingaggressive growth fund. much like any other type ofcompanycansell stockin itself to the public. Redemption Price : It is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. mutualfundsraisemoney bysellingshares of the fund to thepublic.balanced fund. shareholders arefreetoselltheir shares at any time. ‘Front-end’ load. although thepriceof asharein a mutual fund willfluctuatedaily. Definition Anopen-endedfundoperated by aninvestment companywhich raisesmoneyfromshareholdersandinvestsin a group ofassets. Aclosed-end fundis often incorrectly referred to as a mutual fund.

It is defined as a market in which money is provided for periods longer than a year.international fund.hedge fund. usually on a securities exchange.regional fund.growth fund.fund of funds. new stock or bond issues are sold to investors via a mechanism known as underwriting.sector fund.clone fund.capital appreciation fund. UTI enjoyed a monopoly in the Indian mutual fund market till 1987 when a host of other government controlled Indian financial companies came up with their own funds.index fund. This market was made open to private players in 1993 after the historic constitutional amendments brought forward by the then Congress led government under the existing regime of Liberalization..S. existing securities are sold and bought among investors or traders. Canara Bank.income fund. Privatization andGlobalization (LPG). Financial regulators. Capital markets may be classified as primary markets and secondary markets. The first private sector fund to operate in India was Kothari Pioneer which was later merged with Franklin Templeton.investorwords.prime rate fund. .g. such as the UK's Financial Services Authority (FSA) or the U. Securities and Exchange Commission (SEC). In primary markets. the money market). where business enterprises (companies) and governments can raise long-term funds.growth and income fund.municipal bond fund.global fund. A capital market is a market for securities (debt or equity). among other duties. Read more:http://www. These included State Bank of India.com/3173/mutual_fund. over-the-counter.specialty fund.stock fund. In the secondary markets.money market fund. or elsewhere. oversee the capital markets in their designated jurisdictions to ensure that investors are protected against fraud.equity fund.html#ixzz1Of7RkmLj The first mutual fund to be introduced in India was way back in 1963 when the Government of India launched Unit Trust of India (UTI). Punjab National Bank etc. The capital market includes the stock market (equity securities) and the bond market (debt).crossover fund. andtax-free bond fund.fund.[1][dead link] as the raising of shortterm funds takes place on other markets (e.closed fund.

Some companies and corporations use debt as a part of their overallcorporate finance strategy. in most cases. A basic loan is the simplest form of debt. debt is a means of using future purchasing power in the present before a summation has been earned. 2) private and public debt. It consists of an agreement to lend a principal sum for a fixed period of time. the amount actually loaned to the debtor is less than the principal sum to be repaid. Types of debt A company uses various kinds of debt to finance its operations. debt is usually granted with expected repayment. the additional principal has the same economic effect as a higher interest rate (see point (mortgage)). Unsecured debt comprises financial obligations. calculated as a percentage of the principal sum per year. In some loans. to be repaid by a certain date.[1] A debt obligation is considered secured.Debt is that which is owed. A debt is created when a creditor agrees to lend a sum of assets to a debtor. 3) syndicated and bilateral debt. Private debt comprises bank-loan type obligations. but the term can also cover moral obligations and other interactions not requiring money. usually assets owed. will also have to be paid by that date. whether senior or mezzanine. with few if any restrictions. plusinterest. where creditors do not have recourse to the assets of the borrower to satisfy their claims. if creditors have recourse to the assets of the company on a proprietary basis or otherwise ahead of general claims against the company. In commercial loans interest. and 4) other types of debt that display one or more of the characteristics noted above. and is . In the case of assets. In modern society. The various types of debt can generally be categorized into: 1) secured and unsecured debt. Public debt is a general definition covering all financial instruments that are freely tradeable on a public exchange or over the counter.

however. then this is ($10–$9)/$9 = 11 1/9 % interest. if one borrows $9 and must repay $10. usually many millions of dollars. lasting over 30 years. and are widely used as relatively safe investments in comparison to equity. being less common. then this is ($11–$10)/$10 = 10% interest. Loan syndication is a risk management tool that allows the lead banks underwriting the debt to reduce their risk and free up lending capacity. a play on "baker's dozen" – owe twelve (a dozen). with long-term bonds. receive a loan of eleven (a banker's dozen). a syndicate of banks can each agree to put forward a portion of the principal sum. Bonds have a fixed lifetime.[2] A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan. Bonds are issued to investorsin a marketplace when an institution wishes to borrow money. In such a case. or can be paid in regular installments (known as coupons) during the life of the bond.sometimes referred to as a banker's dozen. At the end of the bond's life the money should be repaid in full. A bond entitles the holder to repayment of the principal sum. Bonds may be traded in the bond markets. Interest may be added to the end payment. It runs like a current account except that the money that can be withdrawn from this account is not restricted . Note that the effective interest rate is not equal to the discount: if one borrows $10 and must repay $11. A bond is a debt security issued by certain institutions such as companies and governments. usually a number of years. plus interest. [edit] Fund base Cash Credit This is the primary method in which banks lend money against the security of commodities and debt.

It is vital to a business to have sufficient working capital to meet all its requirements. and is an important part of the top half of the firm's balance sheet.a person can be said to be "overdrawn". counter part of demand deposits of the Bank. Many businesses have undergone bankcruptcy. Working capital is therefore Current Assets (stock + debtors + cash) minus Current liabilities. setting up new projects fall in this category. and the amount overdrawn is within this authorised overdraft. Bill discounting: Bill discounting is a major activity with some of the smaller Banks. Under this particular type of lending. However.to the amount deposited in the account. not because they were unprofitable. but because they suffered from a shortage of working capital. therefore. Working capital is the same as net current assets. the firm also has current liabilities and so these have to be taken account of when working out how much working capital a firm has at its disposal. Instead. Bank Overdraft: The word overdraft means the act of overdrawing from a Bank account. pre-determined installments. Bank takes the bill drawn by borrower on his(borrower's) customer and pay him or her immediately . This type of loan is normally given to the borrowers for acquiring long term assets i. real estate and creation of infra structure also falls in this category. pay bills and so on.e. payable on demand. assets which will benefit the borrower over a long period (exceeding at least one year). An overdraft occurs when withdrawals from a bank account exceed the available balance which gives the account a negative balance . Cash Credits are. In other words. then fees may be charged and higher interest rate might apply Term loan: Term Loan are the counter parts of Fixed Deposits in the Bank. pay for raw materials. The main sources of working capital are the current assets as these are the short-term assets that the firm can use to generate cash. If the balance exceeds the agreed terms. "credit facility" in excess of the amount deposited in the account. Banks lend money in this mode when the repayment is sought to be made in fixed. They have to pay wages. consumer durables. then interest is normally charged at the agreed rate. in theory. These are. constructing building for factory. the account holder withdraws more money from a Bank Account than has been deposited in it. If there is a prior agreement with the account provider for an overdraft protection plan. The money available to them to do this is known as the firm's working capital. Purchases of plant and machinery. the account holder is permitted to withdraw a certain sum called "limit". Financing for purchase of automobiles. Working capital: Firms need cash to pay for all their day-to-day activities.

[edit]Non Fund Base Letter of Credit: The LC can also be the source of payment for a transaction. The parties to a letter of credit are usually a beneficiary who is to receive the money. stormwater ponds. Typically.. the documents a beneficiary has to present in order to receive payment include a commercial invoice. sidewalks. If the bill is delayed. In executing a transaction.e. letters of credit incorporate functions common to giros and Traveler's cheques. bill of lading. a project financing structure involves a number of equity investors. the list and form of documents is open to imagination and negotiation and might contain requirements to present documents issued by a neutral third party evidencing the quality of the goods shipped. cannot be amended or canceled without prior agreement of the beneficiary. Almost all letters of credit are irrevocable. the issuing bank and the confirming bank. The Bank then presents the Bill to the borrower's customer on the due date of the Bill and collect the total amount. or their place of origin. meaning that redeeming the letter of credit will pay an exporter. Usually. rather than the balance sheets of project sponsors. the borrower or his customer pay the Bank a pre-determined interest depending upon the terms of transaction. Project Financing: Project finance is the financing of long-term infrastructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the project. They are also used in the land development process to ensure that approved public facilities (streets. and the advising bank of whom the beneficiary is a client.) will be built. if any. However. known as sponsors. etc. the issuing bank of whom the applicant is a client. and a document proving the shipment was insured against loss or damage in transit.deducting some amount as discount/commission. Corporate finance Working capital Cash conversion cycle Return on capital . Letters of credit are used primarily in international trade transactions of significant value. as well as a syndicate of banks that provide loans to the operation. for deals between a supplier in one country and a customer in another. i.

states.Economic value added Just in time Economic order quantity Discounts and allowances Factoring (finance) Capital budgeting Capital investment decisions The investment decision The financing decision Sections Managerial finance Financial accounting Management accounting Mergers and acquisitions Balance sheet analysis Business plan Corporate action Societal components Financial market Financial market participants Corporate finance Personal finance Public finance Banks and Banking Financial regulation Clawback This box: view · talk · edit [edit]Accounting debt In national accounting. "National" or Public debt is the debt held by the various governmental institutions (federal government. debts are added according to those who are indebted. cities . Business debt is the debt held by businesses. Household debt is the debt held by households...). Financial debt is the .

for instance. and the state's ability to levy tax on it. For example.debt held by the financial sector (from one financial institution to another). Any payments from the trust must be made to regular investors in precedence to this interest. Often the company maintains a special interest in the trust which is called an "interest only strip" or "first loss piece". and this debt is enforceable by public agents. There are differences in the accounting of debt for private and public agents. Companies often do this in order to remove these assets from their balance sheets and monetize an asset. it has a debt. This protects investors from a degree of risk. Those ratios help to assess the speed of variations in the indebtness and the size of the debt due. the money supply. so it can happen even though the borrower and the lender are using the same currency. These various types of debt can be computed in debt/GDP ratios. inflation and the exchange rate As noted below. that does not end the company's involvement. There is therefore a relationship between inflation. making the securitization more attractive. debt is normally denominated in a particular monetary currency. Although these assets are "removed" from the balance sheet and are supposed to be the responsibility of the trust. whereas the money private companies promised to pay for retirements do. If a public body passes a law stating that it'll pay something later (a kind of promise). and debt. [edit]Debt. the money governments promised to pay for retirements does not show up in the public debt assessment. This can happen due to inflation or deflation. acts to the foreign . it keeps the right to change the law later (and not to pay). The aforementioned brings into question whether the assets are truly off-balance-sheet given the company's exposure to losses on this interest. so that a degree of fluctuation will also be agreed as acceptable. Any asset with a cashflow can be securitized. If a private agent promises to pay something later. It is for instance common[citation needed] to agree to "US dollar denominated" debt. The store of value represented by the entire economy of the industrialized nation. Total debt is the sum of all those debts. excluding financial debt to prevent double accounting. broad money. and so changes in the valuation of that currency can change the effective size of the debt. [edit]Securitization Main article: Securitization Securitization occurs when a company groups together assets or receivables and sells them in units to the market through a trust. The form of debt involved in banking accounts for a large proportion of the money in most industrialised nations (see money. the USA has a high consumer debt and a low public debt. and demand deposits for a discussion of this). This is why. The cash flows from these receivables are used to pay the holders of these units. deflation. Thus it is important to agree on standards of deferred payment in advance. while in eastern European countries the opposite tends to be true.

ordinary borrowings at banks may also be inflation indexed. see Money market fund. and some did so for many years before the US government. Money market From Wikipedia. the US government issues two types of inflation-indexed bonds. Treasury Inflation-Protected Securities (TIPS) and I-bonds. since industrial goods are in high demand in many places worldwide.holder of debt as a guarantee of repayment. A number of other governments issue similar bonds. [edit]Inflation indexed debt Borrowing and repayment arrangements linked to inflation-indexed units of account are possible and are used in some countries. Finance Financial markets[show] Financial instruments[show] Corporate finance[show] Personal finance[show] Public finance[show] Banks and banking[show] Financial regulation[show] Standards[show] Economic history[show] . the free encyclopedia This article is about the financial market. For the bank deposit account. For example. see Money market account. For the fund type. since the only major source of risk — that of inflation — is eliminated. In countries with consistently high inflation. These are one of the safest forms of investment available.

such as GMAC. Certain large corporations with strong credit ratings. Finance companies. Trading companies often purchase bankers' acceptances to be tendered for payment to overseas suppliers. Examples of eligible assets include auto loans. repurchase agreements and similar instruments. mortgage-backed securities and similar financial assets.e. and short-lived mortgage-and asset-backed securities. state and local governments all issue paper to meet funding needs. The money market consists of financial institutions and dealers in money or credit who wish to either borrow or lend.  . Trading in the money markets involves Treasury bills. federal." This contrasts with the capital market for longer-term funding. certificates of deposit. These instruments are often benchmarked to (i. commercial paper. typically up to thirteen months. which is supplied by bonds and equity. priced by reference to) the London Interbank Offered Rate (LIBOR) for the appropriate term and currency.v·d·e The money market is a component of the financial markets for assets involved in short-term borrowing and lending with original maturities of one year or shorter time frames. Other large corporations arrange for banks to issue commercial paper on their behalf via commercial paper lines. bankers' acceptances. States and local governments issue municipal paper. issue commercial paper on their own credit. In the United States. such as General Electric. credit card receivables. federal funds. Participants borrow and lend for short periods of time. while the US Treasury issues Treasury bills to fund the US public debt. typically fund themselves by issuing large amounts of asset-backed commercial paper (ABCP) which is secured by the pledge of eligible assets into an ABCP conduit. residential/commercial mortgage loans. The core of the money market consists of interbank lending--banks borrowing and lending to each other using commercial paper.[1] It provides liquidity funding for the global financial system. Money market trades in short-term financial instruments commonly called "paper.

Deposits made in U.Unsecured promissory notes with a fixed maturity of one to 270 days.S. Short-term securities issued by government sponsored enterprises such as the Farm Credit System. commonly offered to consumers by banks.S.  Municipal notes .  Treasury bills .).Short-term loans—normally for less than two weeks and frequently for one day—arranged by selling securities to an investor with an agreement to repurchase them at a fixed price on a fixed date.Retail and institutional money market funds  Banks  Central banks  Cash management programs  Arbitrage ABCP conduits. .  Federal agency short-term securities .  Commercial paper . and credit unions. For the U.  Merchant Banks  [edit]Common  money market instruments Certificate of deposit .  Eurodollar deposit . see Treasury bills. They are lent for the federal funds rate. usually sold at a discount from face value. which seek to buy higher yielding paper.(in the U.(in the U.  Federal funds . the Federal Home Loan Banks and theFederal National Mortgage Association.  Repurchase agreements .Time deposits.S. Short-term notes issued by municipalities in anticipation of tax receipts or other revenues. dollars at a bank or bank branch located outside the United States. thrift institutions.).Short-term debt obligations of a national government that are issued to mature in three to twelve months.S. while themselves selling cheaper paper. these are immediately available funds that institutions borrow or lend.(in the U.)..S. usually on an overnight basis. Interest-bearing deposits held by banks and other depository institutions at the Federal Reserve.

Exchanging a set of currencies in spot date and the reversal of the exchange of currencies at a predetermined time in the future. municipal generalobligation bonds by a commercial bank or dealer bank for its own account or for resale to investors. underwriting is the detailed credit analysis preceding the granting of a loan.Money funds . [edit] OTC-traded stocks . salary and financial statements. mortgage. which is detailed in a credit report. Underwriting can also refer to the purchase of corporate bonds.and asset-backed securities  [edit] Underwriting refers to the process that a large financial service provider (bank. called securities affiliates or Section 20 affiliates. investment house) uses to assess the eligibility of a customer to receive their products (equity capital. government securities. such as employment history.Pooled short maturity. insurance. commercial paper. high quality investments which buy money market securities on behalf of retail or institutional investors. based on credit information furnished by the borrower. Bank underwriting In banking.  Foreign Exchange Swaps . publicly available information. Bank underwriting of corporate securities is carried out through separate holding-company affiliates. insurer. and the lender's evaluation of the borrower's credit needs and ability to pay. Financial bankers. who would accept some of the risk on a given venture (historically a sea voyage with associated risks of shipwreck) in exchange for a premium. Examples include mortgage underwriting.  Short-lived mortgage. such as the borrower's credit history. would literally write their names under the risk information that was written on a Lloyd's slip created for this purpose. The name derives from the Lloyd's of London insurance market. or credit).

Bond (finance) From Wikipedia. OTC stocks are not usually listed nor traded on any stock exchanges. This segment of the OTC market is occasionally referred to as the "Fourth Market. the exchange's clearing house. It is mostly done via the computer or the telephone. have no reporting requirements. while those stocks categorized as OTCQX have met alternative disclosure guidelines through Pink OTC Markets. [edit]OTC contracts An over-the-counter contract is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. For derivatives. though exchange listed stocks can be traded OTC on thethird market. It is usually from an investment bank to its clients directly.S.. the free encyclopedia Finance Financial markets[show] Financial instruments[show] Corporate finance[show] Personal finance[show] Public finance[show] . other OTC stocks. these agreements are usually governed by an International Swaps and Derivatives Association agreement.S. Securities and Exchange Commission (SEC) reporting requirements. such as those stocks categorized as Pink Sheets securities. over-the-counter trading in stock is carried out by market makers that make markets in OTCBB and Pink Sheets securities using inter-dealer quotation services such as Pink Quote (operated by Pink OTC Markets) and the OTC Bulletin Board (OTCBB)." The NYMEX has created a clearing mechanism for a slate of commonly traded OTC energy derivatives which allows counterparties of many bilateral OTC transactions to mutually agree to transfer the trade to ClearPort. thus eliminating credit and performance risk of the initial OTC transaction counterparts. Forwards and swaps are prime examples of such contracts. Although stocks quoted on the OTCBB must comply with U.In the U.

after which the bond is redeemed. A bond is a formal contract to repay borrowed money with interest at fixed intervals. buy an entire issue of bonds from an issuer and re-sell them to investors.. Another difference is that bonds usually have a defined term. bond with no maturity).e.. whereas bondholders have a creditor stake in the company (i. the holder is the lender (creditor). in the case of government bonds. The security firm takes the risk of being unable to sell on the issue to end investors.[1] Thus a bond is like a loan: the issuer is the borrower (debtor). The bookrunners' willingness to underwrite must be discussed prior to opening books on a bond issue as there may be limited appetite to do so. they are lenders). depending on the terms of the bond. termed maturity. in which the authorized issuer owes the holders a debt and. forming a syndicate. Primary issuance is arranged by bookrunners who arrange the bond issue. to finance current expenditure. In underwriting. they are owners). Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds.e. credit institutions. whereas stocks may be outstanding indefinitely. Bonds and stocks are both securities. or maturity. Bonds provide the borrower with external funds to finance long-term investments. or. and the coupon is the interest.Banks and banking[show] Financial regulation[show] Standards[show] Economic history[show] v·d·e In finance. is obliged to pay interest (thecoupon) to use and/or to repay the principal at a later date. which is a perpetuity (i. The most common process of issuing bonds is through underwriting. Issuing bonds Bonds are issued by public authorities. have the direct contact with investors and act as advisors to the bond issuer in terms of timing and price of the bond issue.e.. companies and supranational institutions in the primary markets. . a bond is a debt security. An exception is a consol bond. but the major difference between the two is that (capital) stockholders have an equity stake in the company (i. one or more securities firms or banks.

For example the coupon may be defined as three month USD LIBOR + 0. but the price is not. typically every one or three months. called a public sale.[3] Types of Bond Bond certificate for the state of South Carolinaissued in 1873 under the state's Consolidation Act.S. these are usually issued by auctions. because the cost of issuance for a publicly auctioned bond can be cost prohibitive for a smaller loan. An example of zero coupon bonds is Series E savings bonds issued by the U. so that the interest is effectively rolled up to maturity (and usually taxed as such).[2] However. The following descriptions are not mutually exclusive. the separated coupons and the final principal payment of the bond may be traded separately. and more than one of them may apply to a particular bond.20%. In other words. . They are issued at a substantial discount to par value. government. Zero-coupon bonds may be created from fixed rate bonds by a financial institution separating ("stripping off") the coupons from the principal. the percent return is a function both of the price paid as well as the coupon. the bond is held by the lender and does not enter the large bond market. The coupon rate is recalculated periodically. The bondholder receives the full principal amount on the redemption date.   Fixed rate bonds have a coupon that remains constant throughout the life of the bond.In the case of government bonds. Since the coupon is fixed. it is also common for smaller bonds to avoid the underwriting and auction process through the use of a private placement bond. Floating rate notes (FRNs) have a variable coupon that is linked to a reference rate of interest. In the case of a private placement bond. See IO (Interest Only) and PO (Principal Only). such as LIBOR or Euribor.  Zero-coupon bonds pay no regular interest. where both members of the public and banks may bid for bond.

there is a hierarchy of creditors. After they have been paid. as the principal amount grows. Inflation linked bonds. Treasury Inflation-Protected Securities (TIPS) and Ibonds are examples of inflation linked bonds issued by the U. The first bond holders in line to be paid are those holding what is called senior bonds. The United Kingdom was the first sovereign issuer to issue inflation linked Gilts in the 1980s. then government taxes.  Asset-backed securities are bonds whose interest and principal payments are backed by underlying cash flows from other assets. As a result. First the liquidator is paid. the subordinated bond holders are paid. In case of bankruptcy.S. added value) or on a country's GDP. Receipt for temporary bonds for the state ofKansas issued in 1922  Other indexed bonds. etc. in which the principal amount and the interest payments are indexed to inflation. Examples of asset-backed securities are mortgage-backed securities (MBS's). collateralized mortgage obligations (CMOs) and collateralized debt obligations(CDOs). the payments increase with inflation. government. the risk is . for example equity-linked notes and bonds indexed on a business indicator (income. The interest rate is normally lower than for fixed rate bonds with a comparable maturity (this position briefly reversed itself for short-term UK bonds in December 2008).  Subordinated bonds are those that have a lower priority than other bonds of the issuer in case of liquidation. However.

Often they are registered by a number to prevent counterfeiting. It is the alternative to aBearer bond. subordinated bonds usually have a lower credit rating than senior bonds.higher. They have no maturity date. Interest payments.  Perpetual bonds are also often called perpetuities or 'Perps'. are sent to the registered owner. although the amounts are now insignificant. also called government bond. or by a transfer agent. It is characterized as the safest bond.e. Some ultra-long-term bonds (sometimes a bond can last centuries: West Shore Railroad issued a bond which matures in 2361 (i. Especially after federal income tax began in the United States. this type of bond is often referred to as risk-free. Some of these were issued back in 1888 and still trade today. Therefore.[4] U. The main examples of subordinated bonds can be found in bonds issued by banks.  Treasury bond. In other words.S. with the lowest interest rate. with the current value of principal near zero. corporations stopped issuing bearer bonds in the 1960s. A treasury bond is backed by the “full faith and credit” of the federal government.S. For that reason. is issued by the Federal government and is not exposed to default risk. and asset-backed securities. the person who has the paper certificate can claim the value of the bond. the U. The latter are often issued in tranches. the subordinated tranches later.[5]  Registered bond is a bond whose ownership (and any subsequent purchaser) is recorded by the issuer. which are also known as Treasury Annuities or Undated Treasuries. The senior tranches get paid back first. bearer bonds were seen as an opportunity to conceal income or assets. Bearer bonds are very risky because they can be lost or stolen. and the principal upon maturity.  . 24th century) are virtually perpetuities from a financial point of view. but may be traded like cash. The most famous of these are the UK Consols.  Bearer bond is an official certificate issued without a named holder. Treasury stopped in 1982. and state and local tax-exempt bearer bonds were prohibited in 1983.

However." meaning that in the event of default. Territory.[6]  Book-entry bond is a bond that does not have a paper certificate. interest received on BABs is subject to federal taxation.Pacific Railroad Bond issued by City and County of San Francisco.  Climate bond is a bond issued by a government or corporate entity in order to raise finance for climate change mitigation or adaptation related projects or programs. which are usually tax exempt. issuers (and banks that used to collect coupon interest for depositors) have tried to discourage their use. a $100. or their agencies. Some of these redemptions will be for a higher value than the face value of the bond. 5- year serial bond would mature in a $20. even to investors who prefer them. the bond holder has no recourse to other governmental assets or revenues. As physically processing paper bonds and interest coupons became more expensive. local government. although municipal bonds issued for certain purposes may not be tax exempt. CA. In effect. Serial bond is a bond that matures in installments over a period of time. as with municipal bonds. BABs offer significantly higher yields (over 7 percent) than standard municipal bonds. usually a European state.[7]  Lottery bond is a bond issued by a state. 1865 Municipal bond is a bond issued by a state.000 annuity over a 5-year interval.S.  Build America Bonds (BABs) is a new form of municipal bond authorized by the American Recovery and Reinvestment Act of 2009.   War bond is a bond issued by a country to fund a war. the bond is tax-exempt within the state it is issued. but the issuer will redeem randomly selected individual bonds within the issue according to a schedule. Unlike traditional municipal bonds.  Revenue bond is a special type of municipal bond distinguished by its guarantee of repayment solely from revenues generated by a specified revenue-generating entity associated with the purpose of the bonds. . city.000. May 1. U. Generally. Revenue bonds are typically "non-recourse. Interest is paid like a traditional fixed rate bond. Some book-entry bond issues do not offer the option of a paper certificate. Interest income received by holders of municipal bonds is often exempt from the federal income tax and from the income tax of the state in which they are issued.

Investors who no longer wish to invest in the fund cannot sell their shares back to the fund (as they can with an open-end fund). [edit]Unit investment trusts Unit investment trusts or UITs issue shares to the public only once. and closed-end funds. Unit investment trusts do not have a professional investment manager. these shares are also priced at net asset value. UITs generally have a limited life span. Their portfolio of securities is established at the creation of the UIT and does not change.Types of mutual funds There are three basic types of registered investment companies defined in the Investment Company Act of 1940: open-end funds. Instead. [edit]Open-end funds Open-end mutual funds must be willing to buy back their shares from their investors at the end of every business day at the net asset value computed that day. buying and selling securities as appropriate. unit investment trusts (UITs). [edit]Exchange-traded funds Main article: Exchange-traded fund A relatively recent innovation. when they are created through an initial public offering. at a "discount" to net asset value (meaning that it is lower than net asset value). Investors can redeem shares directly with the fund (as with an open-end fund) or they may also be able to sell their shares in the market. redemptions and fluctuation in market valuation. the exchange-traded fund or ETF is often structured as an open-end investment company. [edit]Closed-end funds Closed-end funds generally issue shares to the public only once. The total investment in the fund will vary based on share purchases. It may be at a "premium" to net asset value (meaning that it is higher than net asset value) or. established at creation. investments trust. when they are created. buying and selling securities as appropriate. Their shares are then listed for trading on a stock exchange. A professional investment manager oversees the portfolio. grantor trusts or bonds (as an exchange-traded note). Like closed-end funds. ETFs are traded throughout the day . the price they receive may be significantly different from net asset value. partnerships. ETFs combine characteristics of both closed-end funds and open-end funds. A professional investment manager oversees the portfolio. though ETFs may also be structured as unit investment trusts. exchange-traded funds (ETFs)are open-end funds or unit investment trusts that trade on an exchange. they must sell their shares to another investor in the market. more commonly. Most open-end funds also sell shares to the public every business day.

Financial markets Public market Exchange Securities Bond market Fixed income Corporate bond Government bond Municipal bond Bond valuation High-yield debt Stock market Stock Preferred stock Common stock Registered share Voting share . as with open-end funds. investors normally receive a price that is close to net asset value. equities Stock From Wikipedia.on a stock exchange at a price determined by the market. Most ETFs are index funds. see Physical capital For other uses. However. To keep the market price close to net asset value. see Stock (disambiguation). the free encyclopedia (Redirected from Equities) For "capital stock" in the sense of the fixed input of a production function. ETFs issue and redeem large blocks of their shares with institutional investors.

non organized Spot market Forwards Swaps Options Foreign exchange Exchange rate Currency Other markets Money market Reinsurance market Commodity market Real estate market Practical trading Participants Clearing house Financial regulation Finance series Banks and banking Corporate finance Personal finance Public finance v·d·e The capital stock (or just stock) of a business entity represents the original capital paid into or invested in the business by its founders.Stock exchange Derivatives market Securitization Hybrid security Credit derivative Futures exchange OTC. It serves as a security for the creditors of a business since it cannot be .

organization or an entrepreneur. It is a wide disputed debate topic that whether to earn profit in the business is utmost or to think that what are the customer‘s rights. if we talk about business.withdrawn to the detriment of the creditors. the remaining amount is called the profit. then that product‘s company will suffer a great loss. Business refers to the system to produce or distribute goods or services to the customer with the basic aim to earn profit. In a more technical term. If a business firm does not have the aim to earn the profit. Therefore. With a slight dejection of the . there will be no increase in the capital or the investment of the businessman. then we talk about the aim of business which is same for a company. Profit Profit is a unique term of business. If we talk about a business institute. business needs some amount of money to make his status and widen the area. Profit increases the money that a businessman has invested in the activity and it also increases the area of business. the rest of the income is profit. a company does such activities even a shopkeeper does business. then it will be weakened by the passage of time and once it is dissolved. But on the other hand. which is to earn profit. There is no single business institution which does not have the aim to earn the profit. If we examine a business environment. firm. because these are the people who will buy the product and will enable the business to run. if a businessman just thinks about profit. After the expenditure on the activity of the business. after the exclusion of the expenses of production or distribution from the business return. Certainly. Profit is earned due to the remuneration of those people who are a part of that business entity. it is the customer who will use and utilize the product and if they do not demand. Profit in busi Business is always considered an organization but it is not so. then he will not succeed because it will charge an extra amount from the customer and will exploit him. Likely. then we will see the initial effect of the customer to the business firm. we should be aware about the concept of customer desires. Indeed. Stock is distinct from the property and the assets of a business which may fluctuate in quantity and value.

therefore the company gives an additional cost of this expenditure on the product. In the second degree. It has a broad and a wide range. a well-known aspect of the business comes at the view that is corporate social responsibility. tend to make itself much valuable for the society. Taxes will make the government strong which will provide social ease. . They are in fact the customer. Corporation The most easily defined type is the entrepreneur. Indeed. the company should also be ethical and should provide a very apparent image to the outer world about the society and should provide its all account summaries to the people.product by the customer. it is not ethical but a proportion of the amount is paid by the company and it is even more advantageous for the company because it can advertise its social aspects to the people for a better image and goodwill. Corporate Social Responsibility To stop such cases. the company can face a big loss. in which the investor in a single body who handles the business. It will disturb the whole economy. Entrepreneur 2. It is also known as the social degree in which makes it clear that a company should have a legal existence and pay taxes. company or an entrepreneur. It initially tends to make the company more strong on the economic bases. then it should reimburse the employees more because it is due to their hard work that the company is earning so much profit. Profitable Business Institutes If we take about a business institution we think of three firms 1. The last part is the social responsiveness degree that tends the company to make a major problem of the society to erase. Social responsibility make the profit of the company less. in which the number of investors is more than that in the entrepreneur. Corporate social responsibility is referred to that activity in which the corporation. There are many factors which regret the aim of earning profit at wide range because it has many adverse effects on the society and the economy. If the company is earning much profit. which enable the business to run. one is the rich and other is the poor. it tends to make the company have a legal and an ethical value in the society. not the businessman or the worker. It is just like that the society is paying for itself. Social responsibilities are measured by degrees which include many features. The third and the last type is the corporation or a company. Along with that. A businessman seeks to earn more and more profit that will make them richer and those people who buy that product will suffer a decline in the financial status. Corporate social responsibility is much known for the welfare activities but that they do not make the whole sense. That results to a practical distribution of the society in two groups. They together handle the business and make the decisions. The other is partnership. Partnership 3.

An entrepreneur uses his managing qualities and the knowledge about the product and market to boost up the profit. the businessman tends to take more and more liabilities of debts over himself than the resources. then they have a very sound risk management system. considering in the mind that they have invested their money in a very profitable company. It has the merged qualities of many entrepreneurs. Like. therefore they are widely known. If likely an entrepreneur has great knowledge about the market and the sales aspects. Find a reliable stock broker with a great knowledge and experience about the market and the values of the company. Alternatively. he needs to have a large amount of experience and expertise about the variation of the market. Profit measures in the other businesses Talking about the entrepreneur and the partnership. they never get bankrupted.Profit in a company Company is a great amount of recourses and a whole board of professional to make the decisions. At a certain limit of the debt. These types of businesses are much more profitable than the others because it has a good risk management feature. whether self-made or a third party product and earns the profit. They give out shares in the market. a company has limited liabilities. Choosing a company to invest is not a hard job. Many times. But in the company business. entrepreneur and partnership. mostly it is analyzed that the profit is doubled and the profit proportion to each partner rises. and thus they earn a periodical profit on the investments. then they can merge themselves to earn a greater amount of profit. They get themselves insured and tend to be more conscious over any deal. or time etc. In the entrepreneur and partnership business. with the unavailability of the recourses. Partnership is not much different from entrepreneur. If he is in a job then he must have money to invest. Unlike the other two types. Some people think that by merging of the company. he can leave the job and can start his own business. It is not true. He can also be a hidden partner in any other firm to gain profit. The shareholders enjoy a very good and a beneficial business with a regular profit. At a very strong height of experience. A person can earn more profit in this kind of business. which are bought by the customer also called shareholder. they are also profitable but in the sense. They try to run their business in a good and a fine condition. a company cannot take more liability than its resources. the profit in not much the same. All the decisions are handled by the experts of the field with a strong knowledge and they have a huge capital. Indeed. a merchant or a trader uses his investment and skills to sell the product. In other words. he becomes unable to pay them back and therefore becomes bankrupt. if . It has numerous amounts of investors and a very sound financial status. by the continuous addition of shareholders. Concluding that if someone has the knowledge about the market and is more intellectual. labor. They don’t need to make any business decision. An entrepreneur can have much more profit than the company’s investment money. these entrepreneurs merge themselves to have an adequate profit. If they are under a major loss. then he must go for the business like the entrepreneur or partnership. Resources include everything like money. if they are adequate to manage the organization.

then he can go to invest his money in any of the profitable and creditable company by buying shares. Shar holder fund Shareholders' funds is the balance sheet value of the shareholders' interest in a company. For company (as opposed to group) accounts it is simply all assets less all liabilities. The balance sheet value of assets does have some significance for valuation (see NAV). Further adjustments gives us total equity. However. The most obvious reason for shareholders' funds to change is that profits have been made and retained. the more so because looking at changes that have not gone through the P & L can alert investors to some manipulations of the accounts. which he has paid. . For consolidated group accounts the the value ofminority interests should also be excluded. such as revaluations. reserves and retained profit) are usually of little importance. He just needs to examine the yearly dividend and the yearly premium. This is why both the statement of total recognised gains and losses (STRGL) and the note to the accounts reconciling beginning and ending shareholders' funds are important. although the amount of distributable reserves might matter to shareholders if it is too low. The items within shareholders' funds (share capital. For example. The addition of minority interests gives us “shareholders' fund including minority interests”. changes in shareholders' funds are also important. however changes can also be caused by gains or losses that do not go through the P & L. a consistent accumulation of unrealised losses on investments may be a cause for concern.somebody doesn’t have the knowledge about any product or market. and (even more rarely) to creditors if it is too high.

usually via electronic funds transfer or a printed paper check. or another corporation (such as its subsidiary corporation). Many corporations retain a portion of their earnings and pay the remainder as a dividend. Such dividends are a form of investment income and are usually taxable to the recipient in the year they are paid. The word "dividend" comes from the Latin word "dividendum" meaning "thing to be divided Joint stock company dividends A dividend is allocated as a fixed amount per share. Therefore. Stock or scrip dividends are those paid out in the form of additional stock shares of the issuing corporation. or it can be paid to the shareholders as a dividend. if a person owns 100 shares and the cash dividend is USD $0. so their dividends are often considered to be a pre-tax expense. it is the division of after tax profits among shareholders. store credits (common among retail consumers' cooperatives) and shares in the company (either newly created shares or existing shares bought in the market. allocate dividends according to members' activity.50 per share. They are usually issued in . but may declare a dividend at any time. Retained earnings (profits that have not been distributed as dividends) are shown in the shareholder equity section in the company's balance sheet .Dividends are payments made by a corporation to its shareholder members. sometimes called a special dividend to distinguish it from the fixed schedule dividends. that money can be put to two uses: it can either be re-invested in the business (called retained earnings). Cooperatives. Dividends are usually paid in the form of cash.the same as its issued share capital. many public companies offer dividend reinvestment plans. which automatically use the cash dividend to purchase additional shares for the shareholder. a dividend is allocated as a fixed amount per share. a shareholder receives a dividend in proportion to their shareholding. the holder of the stock will be paid USD $50. Therefore. For the joint stock company. It is the portion of corporate profits paid out to stockholders. Thus. on the other hand. rather. This is the most common method of sharing corporate profits with the shareholders of the company. a declared amount of money is distributed. a shareholder receives a dividend in proportion to their shareholding.[1] When a corporation earns a profit or surplus. For a joint stock company. For each share owned. paying dividends is not an expense.) Further. [edit]Forms of payment Cash dividends (most common) are those paid out in currency. Public companies usually pay dividends on a fixed schedule.

Dividend cover is calculated by dividing the company's cash flow from operations by the dividend. it now owes the money to the stockholders. For public companies. it is similar to a stock splitin that it increases the total number of shares while lowering the price of each share without changing the market capitalization. If the payment involves the issue of new shares. (See also Stock dilution. a liability is created and the company records that liability on its books. A payout ratio greater than 1 means the company is paying out more in dividends for the year than it earned. For large companies with subsidiaries. Payout ratio is calculated by dividing the company's dividend by the earnings per share. These are discussed in detail with examples at the Securities and Exchange Commission site [1] Declaration date is the day the Board of Directors announces its intention to pay a dividend. Other dividends can be used in structured finance. On this day. existing holders of the stock and anyone who buys it on this day will receive the dividend. whereas any holders selling the stock lose their right to the dividend. [edit]Reliability of dividends There are two metrics which are commonly used to gauge the sustainability of a firm's dividend policy. a 5% stock dividend will yield 5 extra shares). A common technique for "spinning off" a company from its parent is to distribute shares in the new company to the old company's shareholders. such as a subsidiary corporation. or total value. Financial assets with a known market value can be distributed as dividends. This ratio is apparently popular with analysts of income trusts in Canada. there are four important dates to remember regarding dividends. which is one trading day before the ex-dividend date. warrants are sometimes distributed in this way. In-dividend date is the last day. however they can take other forms. dividends can take the form of shares in a subsidiary company. On the declaration date. They are relatively rare and most frequently are securities of other companies owned by the issuer. The new shares can then be traded independently. of the shares held.) Property dividends or dividends in specie (Latin for "in kind") are those paid out in the form of assets from the issuing corporation or another corporation. the Board will also announce a date of record and a payment date. for every 100 shares of stock owned. where the stock is said to be cum dividend ('with [including] dividend'). such as products and services.proportion to shares owned (for example. Ex-dividend date (typically 2 trading days before the record date for U. In other words. securities) is the day on which all shares bought and sold no longer come attached with the right to be paid the most recently declared .[citation needed] [edit]Dividend Dates Dividends must be "declared" (approved) by a company’s Board of Directors each time they are paid.S. After this date the stock becomes ex dividend.

not to be confused with scrips. usually with no commission and sometimes at a slight discount. [edit]Dividend Taxation [edit]Australia and New Zealand In Australia and New Zealand. companies also forward franking credits or imputation credits to shareholders along with dividends. Existing holders of the stock will receive the dividend even if they now sell the stock. in an efficient market.dividend. These franking credits represent the tax paid by the company upon its pre-tax profits. Payment date is the day when the dividend checks will actually be mailed to the shareholders of a company or credited to brokerage accounts. [edit]UK . At the current 30% rate. Companies can forward any proportion of franking up to a maximum amount that is calculated from the prevailing company tax rate: for each dollar of dividend paid. This is an important date for any company that has many stockholders. but in most cases they do. this works out at 0. This reflects the decrease in the company's assets resulting from the declaration of the dividend. or DRIPs.30 of a credit per 70 cents of dividend. Shareholders who are not registered as of this date will not receive the dividend. Record date Shareholders registered in the stockholders of record on or before the date of record will receive the dividend. Read "Book Closure" for a better understanding. Registration in most countries is essentially automatic for shares purchased before the ex-dividend date. The shareholders who are able to use them offset these credits against their income tax bills at a rate of a dollar per credit. or 42. the shareholder might not need to pay taxes on these re-invested dividends. [edit]Dividend-reinvestment Some companies have dividend reinvestment plans. including those that trade on exchanges. DRIPs allow shareholders to use dividends to systematically buy small amounts of stock. it also announces a date on which the company will ideally temporarily close its books for fresh transfers of stock. whereas anyone who now buys the stock will not receive the dividend. One dollar of company tax paid generates one franking credit. In some cases. the maximum level of franking is the company tax rate divided by (1 company tax rate). as it makes reconciliation of who is to be paid the dividend easier. This system is called dividend imputation. buyers and sellers will automatically price this in. Book closure Date Whenever a company announces a dividend pay-out. It is relatively common for a stock's price to decrease on the exdividend date by an amount roughly equal to the dividend paid.857 cents per dollar of dividend. The company does not take any explicit action to adjust its stock price. thereby effectively eliminating the double taxation of company profits.

the price of the holder's shares should rise. [edit]Criticism Some believe that company profits are best re-invested back into the company: research and development. only when the shareholder chooses to sell the stock. and then when the dividend is paid. however. This ensures that double taxation does not take place. etc. or for performing a stock buyback. Certain types . in which the company buys back stock. in respect of which Corporate Dividend Tax has been paid by the company. In contrast.The UK's taxation system operates along similar lines: when a shareholder receives a dividend. the company pays income tax to the government when it earns any income. Proponents of this view (and thus critics of dividends per se) suggest that an eagerness to return profits to shareholders may indicate the management having run out of good ideas for the future of the company. are required to pay a Corporate Dividend Tax in addition to the tax levied on their income. Dividend received is exempt in the hands of the shareholder's. [edit]India In India. individual shareholders in many countries suffer from double taxation of those dividends: 1. charities and pension funds which are not allowed to reclaim the deemed tax payment and thus are in effect taxed on their income. the basic rate of income tax is deemed to already have been paid on that dividend. the individual shareholder pays income tax on the dividend payment. but the tax on these gains is delayed until the actual sale of the shares. In many countries. The shareholder will pay a tax on capital gains (often taxed at a lower rate than ordinary income). the tax rate on dividend income is lower than for other forms of income to compensate for tax paid at the corporate level. expansion. Some studies. companies declaring or distributing dividend. however this creates difficulties for some non-taxpaying entities such as certain trusts. capital investment.[3] Taxation of dividends is often used as justification for retaining earnings. 2. When dividends are paid. corporate shareholders often do not pay tax on dividends because the tax regime is designed to tax corporate income (as opposed to individual income) only once. thereby increasing the value of the stock left outstanding. have demonstrated that companies that pay dividends have higher earnings growth. If a holder of the stock chooses to not participate in the buyback. suggesting that dividend payments may be evidence of confidence in earnings growth and sufficient profitability to fund future expansion.

or remote. This. A debenture is thus like a certificate of loan or a loan bond evidencing the fact that the company is liable to pay a specified .S. The ability to estimate a loss is described as known. or when a company is wound down and all assetsliquidated and distributed amongst shareholders. of a company. the term is used for a medium. or leverage. delegates the dividend policy from the board to the individual shareholder. reasonably estimable.) allow the shareholder to partially or fully avoid double taxation of dividends. In corporate finance. in effect.of specialized investment companies (such as a REIT in the U. reasonably possible.to long-term debt instrumentused by large companies to borrow money. A footnote to the balance sheet describes the nature and extent of the contingent liabilities. a debenture is a document that either creates a debt or acknowledges it. loan stock or note. Contingent liabilities are liabilities that may or may not be incurred by an entity depending on the outcome of a future event such as a court case. The likelihood of loss is described as probable. or not reasonably estimable. Shareholders in companies which pay little or no cash dividends can reap the benefit of the company's profits when they sell their shareholding. [edit]Examples         outstanding lawsuits Legal liability Liquidated damages Tort Bills Discounted with bank Unliquidated damages Destruction by Flood product warranty In law. In some countries the term is used interchangeably with bond. Payment of a dividend can increase the borrowing requirement. These liabilities are recorded in a company'saccounts and shown in the balance sheet when both probable and reasonably estimable.

NAV MEANS NET ASSET VALUE NAV=TOTAL VALUE OF INVESTMENT-LIABILITIES /TOTAL OF NO. Closed ended investment trusts have a net asset value but have a separate market value. . Simply take the current market value of the fund's net assets (securities held by the fund minus any liabilities) and divide by the number of shares outstanding. you should make sure that you understand them in full before you start to invest in mutual funds. NAVper share is calculated by dividing this figure by the number of ordinary shares. Value or purchase price of a share of stock in a mutual fund. then dividing the result (total net assets) by the total number of shares outstanding.. So if a fund had net assets of Rs. The value of a collective investment fund based on the market price of securities held in its portfolio. it does not become share capital. Investments trusts can trade at net asset value or their price can be at a premium or discount to NAV. The interest paid to them is a charge against profit in the company's financial statements.amount with interest and although the money raised by the debentures becomes a part of the company's capital structure. NAV MEANS TOTAL VALUE OF UNITS MINES LIABILITIES IS DIVADED BY TOTAL OF NO. UNITS OUTSTANDING . but they may have separate meetings or votes e. It is calculated by subtracting liabilities from the value of a fund's securities and other items of value and dividing this by the number of outstanding shares. then the price per share (or NAV) is Rs. These concepts are an important part of mutual fund investing. subtracting all liabilities. Units in open ended funds are valued using this measure.Calculating mutual fund net asset values is easy.[1] Debentures are generally freely transferable by the debenture holder.g.50 lakh and there are one lakh shares of the fund. NAV is calculated each day by taking the closing market value of all securities owned plus all other assets such as cash.00 Basic Mutual Fund Concepts InvestorGuide University > Subject: Mutual Funds > Topic: Mutual Fund Basics > Basic Mutual Fund Concepts by InvestorGuide Staff (Write for us!) There's a lot of terminology associated with mutual funds that you'll need to know before you can start investing in them.UNITS OUTSTANDING What is NET ASSET VALUE ? The Term Net Asset Value (NAV) is used by investment companies to measure net assets. Debenture holders have no rights to vote in the company's general meetings of shareholders. Calculating NAVs .50. on changes to the rights attached to the debentures.Net asset value is popularly used in newspaper mutual fund tables to designate the price per share for the fund.

New and existing shareholders may add as much money to the fund as they want and the fund will simply issue new shares to them. Mutual funds only calculate their NAVs once per trading day. closed-end funds issue a fixed number of shares to the public in an initial public offering. Open-end funds also redeem. Unlike open-end funds. Net Asset Value (NAV) Open-end mutual funds price their shares in terms of a Net Asset Value (NAV) (note that you can calculate NAV for a closed-end fund too. at the close of the trading session. The reason why these funds are called "open-end" is because there is no limit to the number of new shares that they can issue. Since you must take into consideration not only the fund's net asset value but also the discount or premium at which the fund is trading. The price of a share in a closed-end fund is determined entirely by market demand. they are not traded on exchanges. The resulting NAV per share is the price at which shares in the fund are bought and sold (plus or minus any sales fees). subtracting all of the fund's liabilities. closed-end funds are not obligated to issue new shares or redeem outstanding shares. . Most mutual funds are open-end. NAV is calculated by adding up the market value of all the fund's underlying securities. Closed-end Funds Closed-end funds behave more like stock than open-end funds. shares from shareholders. so shares can either trade below their net asset value ("at a discount") or above it ("at a premium"). You can purchase shares in a closed-end fund through a broker. just as you would purchase a share of stock. but it will not necessarily be the price at which you buy or sell closed-end shares). In order to determine the value of a share in an open-end fund at any time. a number called the Net Asset Value (described below) is used. or buy back. that is to say. You purchase shares in open-end mutual funds from the mutual fund itself or one of its agents. after which time shares in the fund are bought and sold on a stock exchange. and then dividing by the number of outstanding shares in the fund.Open-end Funds All mutual funds fall into one of two broad categories: open-end funds and closed-end funds. closed-end funds are considered to be more suitable for experienced investors.

a mutual fund makes money on one of the fund's assets when that asset pays the mutual fund dividends or interest. then that is called a capital loss). The federal government mandates that all mutual funds distribute these dividends and capital gains to the fund's shareholders at leas . For a load fund. Dividends and Capital Gains Distributions Mutual funds earn money on their investments through one of two ways: dividend income and capital appreciation. or when the mutual fund sells the asset for more than what it initially paid (if it sells the asset for less than what it initially paid. In other words.Public Offering Price (POP) The public offering price (POP) is the price at which shares are sold to the public. As with the NAV. the POP is simply equal to the Net Asset Value (NAV). the POP will typically change on a day to day basis. For funds that don't charge a sales commission (or "load"). the POP is equal to the NAV plus the sales charge.