ACCOUNTANCY WORLD

What is Index ?

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A quantity whose variation represents market fluctuation .The Standard & Poor's 500 index measures the overall change in the value of 500 stocks of the largest firms in the US.

What is holding period return/yield ?

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The financial statement of a firm that presents both revenues and expenses during a specified time period.

What is GDP (gross domestic product) ?

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The total value of goods and services produced by a nation. In the U.S. it is calculated by the Commerce Department, and it is the main measure of U.S. economic output .In other countries, the GDP is called the gross national product (GNP).

What is meant by going public ?

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An expression used to describe the first public selling of shares of an institution that previously sold shares privately

What is fundamental analysis ?

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An analysis of stocks based on fundamental factors, such as company earnings, growth potential, etc., to determine a company's worth, strength, and potential for growth

Who is financial planner ?

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An investment professional who helps with financial plans for specific goals and assists in the coordination of financial concerns

What is financial strength ?

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A company's financial condition as seen by its analysts .Value Line rates financial strength on a scale from A++ to C.

What is DCA (dollar cost averaging) ?

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A system of buying securities at regular intervals, using a fixed amount of cash over a considerable period of time regardless of the prevailing prices of the securities .DCA protects against the risk of losing a sum of money invested all at once at an inopportune time, e.g., right before a price drop.

What is diversification ?

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The process of buying securities in different investment types, industry types, risk levels, and companies in order to reduce the loss from a possible company-local or industry-local loss of business .Diversification is illustrated by a famous saying, "Don't put all your eggs in one basket."

What is cyclical industry ?

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An industry whose success is closely linked to the rise and fall of the general economy . For example the auto industry is a cyclical industry.

What is Capital Loss ?

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A decrease from the purchase price to the selling price of common stock or any other capital asset; a loss from the sale of investments or property

What is Capital gain ?

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An increase from the purchase price to the selling price of common stock or any other capital asset; profit from the sale of investments or property .A capital gain that persists for one year or less is called a short-term capital gain. Likewise, one that persists for more than one year is called a long-term capital gain.

What is beta ?

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The indicator used by Value Line to measure a stock's risk relative to the market, in this case the NYSE Index. The market's beta is always 1.0 (Based on past statistical records, a beta higher than 1.0 indicates that when the market rises, the stock will rise to a greater extent than that of the market; likewise, when the market falls, the stock will fall to a greater extent. A beta lower than 1.0 indicates that the stock will usually change to a lesser extent than that of the market. The higher the beta, the greater the investment risk.)

Government Securities

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The Central Government and the State Governments issue securities periodically for the purpose of raising loans from the public. There are 2 main types of Government securities:

Dated Securities: have a maturity period of more than 1 year
Treasury Bills: have a maturity period of less than 1 year

Equity shares

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Equity shares represent proportionate ownership in a company. Investors who own equity shares in a company are entitled to ownership rights, such as:

Share in the profits of the company (in the form of dividends),
Share in the residual funds after liquidation / winding up of the company,
Selection of directors in the board, etc.

Preference shares

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Preferential shareholders enjoy a preferential right over equity shareholders with regards to ordinary shareholder.

Bonds

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A bond is a debt investment with which the investor loans money to an entity (company or government) that borrows the funds for a defined period of time at a specified interest rate.

Debentures

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A debenture is the most common form of long-term loan taken by a company. It is usually a loan repayable at a fixed date, although some debentures are irredeemable securities; these are sometimes called perpetual debentures. Most debentures also pay a fixed rate of interest, and this interest must be paid before a dividend is paid to shareholders

What are the different types of financial instruments?

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The following are the different types of financial instruments-
Debentures
Bonds
Preference shares
Equity shares
Government securities

Money Market

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The money market is a subsection of the fixed income market. We generally think of the term "fixed income" as a synonym of bonds. In reality, a bond is just one type of fixed income security. The difference between the money market and the bond market is that the money market specializes in very short-term debt securities (debt that matures in less than one year). Money market investments are also called cash investments because of their short maturities. Money market securities are essentially IOUs (an abbreviation of the phrase "I owe you") issued by governments, financial institutions and large corporations. These instruments are very liquid and considered extraordinarily safe. Since they are extremely conservative, money market securities offer significantly lower returns than most of the other securities.

Stock Market

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A stock market is a market for the trading of publicly held company stock and associated financial instruments (including stock options, convertibles and stock index futures). Many years ago, worldwide, buyers and sellers were individual investors and businessmen. These days markets have generally become "institutionalized"; that is, buyers and sellers are largely institutions whether pension funds, insurance companies, mutual funds or banks. This rise of the institutional investor has brought growing professionalism to all aspects of the markets.

Financial Market

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The financial markets are markets which facilitate the raising of funds or the investment of assets, depending on viewpoint. They also facilitate handling of various risks. The financial markets can be divided into different subtypes:
Capital markets consists of:

Stock markets, which facilitates equity investment and buying and selling of shares of stock. Bond markets, which provides financing through the issue of debt contracts and the buying and selling of bonds and debentures.
Money markets, which provides short term debt financing and investment.
Derivatives markets, which provides instruments for handling of financial risks.
Futures markets, which provide standardized contracts for trading assets at a forthcoming date.
Insurance markets, which facilitates handling of various risks.
Foreign exchange markets

Capital Market

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The capital market is the market for long-term loans (debentures & bonds) and equity capital. Companies and the government can raise funds for long-term investments via the capital market. The capital market includes the stock market, bond market and primary market. Thus, organized capital markets are able to guarantee sound investment opportunities.

The capital market can be contrasted with other financial markets such as the money market which deals in short term liquid assets and futures markets which deal in commodities contracts.

What are Index Futures and Index Option Contracts

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Futures contract based on an index i.e. the underlying asset is the index,are known as Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30 Index. These contracts derive their value from the value of the underlying index. Similarly, the options contracts, which are based on some index, are known as Index options contract. However, unlike Index Futures, the buyer of Index Option Contracts has only the right but not the obligation to buy / sell the underlying index on expiry. Index Option Contracts are generally European Style options i.e. they can be exercised / assigned only on the expiry date. An index, in turn derives its value from the prices of securities that constitute the index and is created to represent the sentiments of the market as a whole or of a particular sector of the economy. Indices that represent the whole market are broad based indices and those that represent a particular sector are sectoral indices.

In the beginning futures and options were permitted only on S&P Nifty and BSE Sensex. Subsequently, sectoral indices were also permitted for derivatives trading subject to fulfilling the eligibility criteria. Derivative contracts may be permitted on an index if 80% of the index constituents are individually eligible for derivatives trading. However, no single ineligible stock in the index shall have a weightage of more than 5% in the index. The index is required to fulfill the eligibility criteria even after derivatives trading on the index has begun. If the index does not fulfill the criteria for 3 consecutive months, then derivative contracts on such index would be discontinued. By its very nature, index cannot be delivered on maturity of the Index futures or Index option contracts therefore, these contracts are essentially cash settled on Expiry.Therefore index options are the European options while stock options are American options.

Option contract

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Options Contract is a type of Derivatives Contract which gives the buyer/holder of the contract the right (but not the obligation) to buy/sell the underlying asset at a predetermined price within or at end of a specified period. The buyer / holder of the option purchases the right from the seller/writer for a consideration which is called the premium. The seller/writer of an option is obligated to settle the option as per the terms of the contract when the buyer/holder exercises his right. The underlying asset could include securities, an index of prices of securities etc. Under Securities Contracts (Regulations) Act,1956 options on securities has been defined as "option in securities" means a contract for the purchase or sale of a right to buy or sell, or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi, a galli, a put, a call or a put and call in securities;

An Option to buy is called Call option and option to sell is called Put option. Further, if an option that is exercisable on or before the expiry date is called American option and one that is exercisable only on expiry date, is called European option. The price at which the option is to be exercised is called Strike price or Exercise price.

Therefore, in the case of American options the buyer has the right to exercise the option at anytime on or before the expiry date. This request for exercise is submitted to the Exchange, which randomly assigns the exercise request to the sellers of the options, who are obligated to settle the terms of the contract within a specified time frame. As in the case of futures contracts, option contracts can also be settled by delivery of the underlying asset or cash. However, unlike futures cash settlement in option contract entails paying/receiving the difference between the strike price/exercise price and the price of the underlying asset either at the time of expiry of the contract or at the time of exercise / assignment of the option contract.However so far delivery against option contracts have not been introduced and the option contract, on exercise or expiry, is settled by cash settlement only.