The stock in hand at the end of the accounting period is called as closing stock. Closing stock is to be prized at cost or market price whichever is lower.
Value of closing stock will always materialize on the credit side of trading account and on the assets side of balance sheet.
Final accounts are the channel of conveying the profitability and financial stance to management, entrepreneurs and interested outsiders of the business.
When a entrepreneur starts a business he desires to know the financial execution of his business. He can easily ascertain these by preparing the Final Accounts, which is prepared on the basis of the Trial Balance.
The preparation of Final Accounts is the last step in the accounting cycle and that is why they are called Final Accounts.
Final Accounts include the preparation of
1. Trading and Profit and Loss Account ; and
2. Balance sheet.
Final accounts have to be prepared periodically that to on yearly basis, Its done in order to make a continuous assessment of the business for a completed span. All the expenses and incomes for the full accounting period are to be taken into account for preparing Final Accounts.
Major adjustments used in Final Accounts:
Few important and widespread items, which need to be adjusted at the time of preparing the final accounts are discussed below.
1. Closing stock
2. Outstanding expenses
3. Prepaid Expenses
4. Accrued incomes
5. Incomes received in advance
6. Interest on capital
7. Interest on drawings
8. Interest on loan
9. Interest on investment
10. Depreciation
11. Bad Debts
12. Provision for bad and doubtful debts
13. Provision for discount on debtors
14. Provision for discount on creditors.
Classification of Investments
| Financial Management, Financial Market, Financial Service | 0 comments »Investments can be categorized on quite a few bases like significance, size, functional activity, cost and revenue management, etc. On all the above, most appropriate way of classification is on the basis of correlation between investments.
The probable correlation between investments are listed below:
1. Prerequisite
2. Complement
3. Independent
4. Substitute
5. Mutually Exclusive
1. Prerequisite: One investment might be a prerequisite for the other. In other words, an initial investment is required for further investment.
For example: Investment in land is prerequisite for construction company
2. Complement: If secondary investment increases the expected returns from the primary (or decreases cost), then the secondary investment is said to be a complement of the primary investment.
For example, Erection of new plant to enjoy the cost advantage due to mass production.
3. Independent: Investments are said to be independent, if the cash flows from primary investment would be the same despite of whether the secondary investment is undertaken or not.
For example, Buying a lathe for the plant and computerizing administration activities are independent investments.
4. Substitutes: If secondary investment decreases the returns generated from the first investment (or increases costs), then the secondary investment is said to be a substitute of the first. This kind of investment are inversely correlated to complement investment.
For example, Producing air-coolers and fans for the same market may lead to product cannibalization and erode profitability.
5. Mutually Exclusive: In the extreme situation, the benefits from the primary investment may totally disappear if further investment is accepted or it may be technically impossible to undertake both. Such investments are called mutually exclusive investments.
For example, it is not possible to build a plant in two different locations. Accepting one will result in involuntary rejection of the other.
The time value of money has obtained greater significance in studying the feasibility of the project by associating the initial investment with the projected future benefits. If the anticipated future benefits is greater than the initial investment made then the investment is found to be feasible in generating the economic benefits.
Time value of money is important to determine the real rate of return, with reference to capital employment on productive assets; In an inflationary era, a rupee today has greater value or purchasing power than rupee in the future; The future is uncertain, because of the risk of uncertainty individuals prefer current consumption rather than future consumption.
Time value of money on the whole contains three different components viz:
1. Real rate of return: Actual return of the investment made.
2. Expected/Anticipated rate of return: It is the optimistic rate of return normally expected by every one on the amount of investment from the future.
3. Risk premiums: This an allowance is normally given to the investors to compensate the uncertainty.
Classifications of Time Value of Money
1. Future Value
a. Single sum
b. Annuity
2. Present Value
a. Single sum
b. Annuity
Sweat equity is one kind of Equity share, which was introduced in the Ordinance 1998, smoothing the progress of the companies to get hold of the technical know-how, intellectual property through the issue of equity shares.
In other words, "The equity shares which are issued at discount to employees and directors and consideration other than cash for Technical know-how, intellectual property are known as sweat security."
In general the sweat security is issued by the companies in two different categories:
1. Issued at preferential pricing more specifically for employees
Issued at face value, that may be either at par or above par
Sinking Fund factor method one of the most popular method used by investors. Investors knows the proposed value of investment they require in future, accordingly they see to that, the fund made available by investing/depositing now viz the amount deposited with regular time intervals for fetching returns and those returns are accumulated for future needs till certain point of time.
The amount deposited with regular time interval is calculated based on the time availability, interest of deposit, required amount. This can be expressed in formula
A = FVA [(K/(1+K)^n) -1]
Where,
A = Amount to be deposited
FVA = Future Value of deposited Amount
K = Interest
n= Number of years
For example
Mr. X is running a business and planning to expand his business after 10 years and he arrives the value of proposed project is Rs. 20,000. The interest rate prevailing in market is 12%
Thus the Amount to be deposited annually is = Rs.20,000 [(0.12/(1+.12)^10) -1]
= 20,000*(0.05698) = Rs. 1,139.60. Therefore by depositing Rs 1,1,39.60 annually for 10 years yields the required amount of Rs. 20,000.
As we all know the value of money today is not the value of money tomorrow, the discounting may not be annually it can be frequent in times like intra month, intra quarter, intra year compounding and so on.
This can be formulated like
PV = FV * {1 /[1+(k/m)]}^(m*k)
Where,
PV = Present Value
FV = Future Value
K = Discount Rate
M = Number of times discounting
For example
Mr. X has the cash inflow of Rs.1,00,000 at the end of four years. The present value of cash inflow when the discount rate is 12% and discounting quarterly is calculated as
PV = Rs.1,00,000 * {1/[1+(0.12/3)]}^(4*4) = 1,00,000*0.623 = Rs. 62,300.
Effective rate of Interest is the percentage at which amount of the investment grows with regards to the rate of compounding.
The effective rate of interest can be calculated using the following formula
r = [(1+k/m)^m] - 1
Where,
r = Effective Rate of Interest
k = Nominal Rate of Interest
m = Frequency of Compounding
For example
A money lender offers 8% nominal rate of interest with quarterly compounding.
Then the effective rate of interest will be
R = [(1+.08/4)^4] -1 = 1.082-1 = 0.082 or 8.2%
Present value of an annuity or Present value factor annuity is used to identify the value of future cash flows on present value. This method is feasible only when the cash flow is constant.
This can be formulated as fallows,
PVA = [(1+K)^(n-1)] / [k * (1+K)^n]
Where,
PVA = Present Value Annuity
K = Discount rate
N = Number of years
For example,
Mr. X has receivable of Rs.1,000 annually for 3 years, each receipt is expected to be at the end of the years. Prevailing rate of discount is 10% .
Thus the PVA is calculated as
PVA = 1,000 * { [(1+.10)^(3-1)] / [0.10* (1+0.10)^3] }= 1,000*2.487 = Rs.2,487.
Present value of single cash flow is the procedure in which the future value of single cash flow is consider to "0" time horizon i.e on today. In other words, the value of cash inflow is calculated based on the value of the same in future.
This can be expressed in view of formula
PV = FV * (1 / (1+K)^n)
Where,
PV = Present Value
FV = Future Value
K= Interest
N = Number of years
For example,
Mr. X is receiving Rs 1,00,000 receivable after 6 years hence if the rate of discount if 6%.
Then PV = Rs.1,00,000 * ( 1/(1+.06)^6)
= Rs.1,00,000 * (0.705)
= Rs.70,500
Non Voting Shares is one type of equity shares under no circumstances carry any voting rights. These type of shares are also entitled to enjoy the bonus issue and elite listing for the holding of the shares.
The nature of the non voting shares will automatically become as voting shares if two year dividends are continuously missed. The non voting shares are to be declared 20% dividend more than the ordinary dividend. The issue size of the Non voting shares should not go beyond the maximum limit of the voting stock i.e. 25%
Either payment or receipts in form of sequence then it is said to be 'Annuity'. The annuity can be sub-divided into three categories, they are
1. Deferred Annuity / End of the period
2. Annuity Due / Beginning of the period
3. Sinking Fund Method
1. Annuity at the end of the period
Future Value of the Annuity at End of the Period (FVAEP) is product of Principal amount (A) and Future Value Interest factor Annuity (FVIFA). In view of formula
FVAEP = A*FVIFA
Where
A = Principal Amount
FVIFA = [(1+k)^n]-1] / k, where k = rate of Interest and n = No. of years
For example
Assuming that Mr. X deposits Rs.1,000 annually in a bank for 5 years at the rate of 10%.
Then the value of the deposits after 5 years based on deferred annuity is
FVAEP = Rs.1,000(FVIFA) for 10% and 5 year = 1,000*(((1 .10)^5 -1)/0.10) = 1,000 × 6.105 = Rs.6,105
2. Annuity at the beginning of the period
Future Value of the Annuity at the Beginning of the Period (FVABP) is product of Future Value of Annuity at End of the Period (FVAEP) and principal amount added up with yearly interest. In view of formula
FVABP = FVAEP * (A+I)
Where
A = Principal Amount
I = Rate of Interest
FVAEP = A*FVIFA
FVIFA = [(1+k)^n]-1] / k
k = rate of Interest and
n = No. of years.
For Example
Assuming Mr. X invest Rs 1,000 at the beginning of every year, for five years at the rate of 10%.
Then the value of the investment after five years is
FVABF = Rs.1,000 × 6.7155= Rs.6,715.5
3. Sinking Fund Factor Method
Sinking Fund factor method one of the most popular method used by investors. Investors knows the proposed value of investment they require in future, accordingly they see to that, the fund made available by investing/depositing now viz the amount deposited with regular time intervals for fetching returns and those returns are accumulated for future needs till certain point of time.
The amount deposited with regular time interval is calculated based on the time availability, interest of deposit, required amount. This can be expressed in formula
A = FVA [(K/(1+K)^n) -1]
Where,
A = Amount to be deposited
FVA = Future Value of deposited Amount
K = Interest
n= Number of years
For example
Mr. X is running a business and planning to expand his business after 10 years and he arrives the value of proposed project is Rs. 20,000. The interest rate prevailing in market is 12%
Thus the Amount to be deposited annually is = Rs.20,000 [(0.12/(1+.12)^10) -1]
= 20,000*(0.05698) = Rs. 1,139.60. Therefore by depositing Rs 1,1,39.60 annually for 10 years yields the required amount of Rs. 20,000.
Future value single sum could be calculated from the inbound correlation in between the future value and present value of money.
FVn = PV(1+K)^n
Where,
FVn = Future Value of Cash Inflow
PV = Initial Cash Flow
K = Annual Rate of Return
N = Life of Investment
For example:
If Mr. X deposit Rs.1,00,000 today in a Axis bank which pays 3.5% interest, find out the
future value of money after 3 years.
Future value of Rs.1,00,000 after three years will be = Rs.1,00,000(1+0.035)^3 = Rs. 110871.7875
Annuity at the end of the period
Future Value of the Annuity at End of the Period (FVAEP) is product of Principal amount (A) and Future Value Interest factor Annuity (FVIFA).
In view of formula
FVAEP = A*FVIFA
Where
A = Principal Amount
FVIFA = [(1+k)^n]-1] / k, where k = rate of Interest and n = No. of years
For example
Assuming that Mr. X deposits Rs.1,000 annually in a bank for 5 years at the rate of 10%.
Then the value of the deposits after 5 years based on deferred annuity is
FVAEP = Rs.1,000(FVIFA) for 10% and 5 year = 1,000*(((1 .10)^5 -1)/0.10) = 1,000 × 6.105 = Rs.6,105
Doubling period is the period which makes the investment as "Doubled", that is the amount invested fetches 100% return.
There are two different approaches Viz.
1. Rule of 72
2. Rule of 69
1. Rule of 72
The initial amount of investment gets Doubled within which 72/I
Where, I = Interest Rate of the investment.
For example
The amount of the investment is Rs.1,00,000. The annual rate of interest is 12%.
Then the doubling period of Rs.1,00,000 is 72/12 = 6 years
2. Rule of 69
The amount method is found to crude logic in determining the doubling period which has its own limitations. The rule of 69 eliminates the bottleneck associated with the rule of 72 method.
The rule of 69 is originate to be a scientific and rational method in determining the doubling period of the investment made
As per rule of 69 method the doubling period is calculated as 0.35+ 69/I
For example
The amount of the investment is Rs.1,00,000. The annual rate of interest is 12%.
Then the doubling period of Rs.1,00,000 is 0.35+ 69/12= 6.1 yrs
Compounding is one of the method used to obtain the future value of money. This method is adopted when an investment is made on installment basis like Investing every quarter, month or half yearly.
Every time any compounding is taking place, the following line of action has to be adopted for the determination of the future value of money.
Future Value of Money = PV(1+k/m)^(m*n)
Where,
PV= Initial investment value
m = Number of Times Compounding is done during the year
n = Number of years
k = compounding rate
For example:
Mr. X deposits Rs. 5,00,000 four time a year for 6 years at 12% nominal rate of interest.
The future value of Rs. 5,00,000 will be
= Rs.5,00,000(1+.12/4)^(4*6)
= Rs.5,00,000(2.033)= Rs.10,16,500.
Annuity at the beginning of the period
Future Value of the Annuity at the Beginning of the Period (FVABP) is product of Future Value of Annuity at End of the Period (FVAEP) and principal amount added up with yearly interest.
In view of formula
FVABP = FVAEP * (A+I)
Where
A = Principal Amount
I = Rate of Interest
FVAEP = A*FVIFA
FVIFA = [(1+k)^n]-1] / k
k = rate of Interest and
n = No. of years.
For Example
Assuming Mr. X invest Rs 1,000 at the beginning of every year, for five years at the rate of 10%.
Then the value of the investment after five years is
FVABF = Rs.1,000 × 6.7155= Rs.6,715.5
Bond issued at a discount and repaid at a face value. No periodic interest is paid. The difference between the issue price and redemption price represents the return to the holder. The buyer of these bonds receives only one payment, at the maturity of the bond.
Read Full post!Options generally have lives of up to one year. The majority of options traded on exchanges have maximum maturity of nine months. Longer dated options are called Warrants and are generally traded over-the counter market (OTC).
Read Full post!The task here is to look for stocks that have been overlooked by other investors and which may have a ‘hidden value’. These companies may have been beaten down in price because of some bad event, or may be in an industry that's not imaginary by most investors.
However, even a company that has seen its stock price decline still has assets to its name - buildings, real estate, inventories, subsidiaries, and so on. Many of these assets still have value, yet that value may not be reflected in the stock's price.
Value investors look to buy stocks that are undervalued, and then hold those stocks until the rest of the market realizes the real value of the company's assets. The value investors tend to purchase a company's stock usually based on relationships between the current market price of the company
and certain business fundamentals.
They like P/E ratio being below a certain absolute limit; dividend yields above a certain absolute limit; Total sales at a certain level relative to the company's market capitalization, or market value, etc.
Short-term (up to one year) bearer discount security issued by government as a means of financing their cash requirements.
Read Full post!Stock Exchange
| Financial Management, Financial Market, Financial Service, Forex Market | 0 comments »The Securities Contract (Regulation) Act, 1956 [SCRA] defines ‘Stock Exchange’ as any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities.
The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact in securities. The trading platform provided by Indian exchanges is an electronic one and
there is no need for buyers and sellers to meet at a physical location to trade.
Stock exchange could be a regional stock exchange whose area of operation/jurisdiction is specified at the time of its recognition or national exchanges, which are permitted to have nationwide trading since inception.
In India there are two stock exchanges dealing with equities. i.e. National Stock Exchange(NSE) & Bombay Stock Exchange (BSE).
According to the Securities Contracts Regulation Act(SCRA), 1956, the term ‘Securities’ is defined as "Instruments such as shares, bonds, scripts, stocks or other marketable securities of similar nature in or of any incorporate company or body corporate, government securities, derivatives of securities, units of collective investment scheme, interest and rights in securities, security receipt or any other instruments so declared by the Central Government."
Read Full post!Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase and sell shares, bonds, debentures etc.
Further, it performs an important role of enabling corporates, entrepreneurs to raise resources for their companies and business ventures through public issues. Transfer of resources from those having idle resources (investors) to others who have a need for them (corporates) is most efficiently achieved through the securities market.
Stated formally, securities markets provide channels for reallocation of savings to investments and entrepreneurship. Savings are linked to investments by a variety of intermediaries, through a range of financial products, called ‘Securities’.
Securities market is regulated by the regulators.
Various securities one can invest in are:
1. Shares
2. Government Securities
3. Derivative products
4. Units of Mutual Funds etc…
Securities Market has two interdependent segments, they are the primary and secondary markets. The primary market paves path for fresh issue and secondary market deals with securities previously issued.
The Securities and Exchange Board of India (SEBI) is the regulatory authority in India established under Section 3 of SEBI Act, 1992. SEBI Act, 1992 provides for establishment of Securities and Exchange Board of India (SEBI) with statutory powers for
1. Protecting the interests of investors in securities
2. Promoting the development of the securities market and
3. Regulating the securities market.
SEBI's regulatory jurisdiction extends over corporates in the issuance of capital and transfer of securities, in addition to all intermediaries and persons associated with securities market. SEBI has
been obligated to perform the aforesaid functions by such measures as it thinks fit. In particular, it has powers for:
• Regulating the business in stock exchanges and any other securities markets
• Registering and regulating the working of stock brokers, sub–brokers etc.
• Promoting and regulating self-regulatory organizations
• Prohibiting fraudulent and unfair trade practices
• Calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, intermediaries, self –regulatory organizations, mutual funds and other persons associated with the securities market.
Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets.
For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of
incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions.
Various Products in Secondary Markets
1. Shares
2. Bonds
3. Derivatives
Stock price is the price at which that particular scrip is traded in the market, It is also known as market price.
Then market price of the scrip is influenced by two specific factors, they are
1. Stock specific factor: It is related to people’s expectations about the company, its future earnings capacity, financial health and management, level of technology and marketing skills.
2. The market specific factor: It is influenced by the investor’s sentiment towards the stock market as a whole. This factor depends on the environment rather than the performance of any particular company. Events favorable to an economy, political or regulatory environment like high economic growth, friendly budget, stable government etc. can fuel euphoria in the investors, resulting in a boom in the market. On the other hand, unfavorable events like war, economic crisis, communal riots, minority government etc. depress the market irrespective of certain companies performing well. However, the effect of market-specific factor is generally short-term. Despite ups and downs, price of a stock in the long run gets stabilized based on the stock specific factors. Therefore, a prudent advice to all investors is to analyze and invest and not speculate in shares.
A stock split is a corporate action which splits the existing shares of a particular face value into smaller denominations so that the number of shares increase, however, the market capitalization or the value of shares held by the investors post split remains the same as that before the split.
Read Full post!The absence of conditions of perfect competition in the securities market makes the role of the Regulator extremely important. The regulator ensures that the market participants behave in a desired manner so that securities market continues to be a major source of finance for corporate and government and the interest of investors are protected.
The responsibility for regulating the securities market is shared by
1. Department of Economic Affairs (DEA),
2. Department of Company Affairs (DCA),
3. Reserve Bank of India (RBI) and
4. Securities and Exchange Board of India (SEBI).
Rights issue is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders.
In other words, The issue of new securities to existing shareholders at a ratio to those already held, at a price. For example, a 1:2 rights issue represents the existing shareholder to receive 1 share for every two shares he/she own at same price.
Under rolling settlement all open positions at the end of the day mandatorily result in payment/ delivery ‘n’ days later.
Read Full post!Real Account is a most important classification which highlights the real worth of the assets. This is the account principally deals with the transfer of assets.
It is an account which reveals the value and movement of the assets taking place in between the firm and also other parties due to any transactions.
The movement of the assets can be classified into two categories, i.e. the assets which are going out of the firm and the assets which are coming into the firm. The accounting treatment for this account is, "Debit what comes in, Credit what goes out."
"Debit what comes in, Credit what goes out."
The securities market basically has three class of participants, namely, the issuers of securities, investors in securities and the intermediaries, such as merchant bankers, brokers etc. While the corporate and government raise resources from the securities market to meet their obligations, it is households that invest their savings in the securities market.
Read Full post!The primary market paves the channel for sale of new securities. Primary market provides chance to issuers of securities; Government as well as corporates, to raise financial resources to meet their requirements of investment and/or discharge its obligation.
They may issue the securities at face value, or at a discount/premium and these securities may take a variety of forms such as equity, debt etc. They may issue the securities in domestic market and/or international market.
Securities are generally issued in denominations of 5, 10 or 100. This is known as the Face Value or Par Value of the security. When a security is sold above its face value, it is said to be issued at a Premium.
Read Full post!A public issue is an open offer to the public to subscribe to the share capital of a company. Once this is done, the company allots equity to the applicants as per the approved rules and regulations laid down by SEBI.
Read Full post!A Preferential issue is an issue of shares or of convertible securities by listed companies to a select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights issue nor a public issue.
This is a faster way for a company to raise equity capital. The issuer company has to act in accordance with the Companies Act and the requirements pertaining to preferential allotment in SEBI guidelines which inter-alia include pricing, disclosures in notice etc.
When an issue is made to particular set or group of people, it is called private placement. The set of people to whom the equity are allocated must be lesser than 50 persons. Private placements is predominantly done by private limited companies with closed group of circle, it can be any one as a wish provided with terms of promoters of the company and regulators.
Read Full post!The prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means that the put a ceiling on should not be more than 120% of the floor price.
The price band can have a alteration and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing a press release and also indicating the change on the related websites and the terminals of the trading members participating in the book building process.
In case the price band is revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding ten days.
It may be unwritten that the regulatory mechanism does not play a role in setting the price for issues. It is up to the company to decide on the price or the price band, in consultation with Merchant Bankers.
A large number of new companies float public issues. While a large number of these companies are genuine, quite a few may want to exploit the investors. Therefore, it is very important that an investor before applying for any issue identifies future potential of a company. A part of the guidelines issued by SEBI (Securities and Exchange Board of India) is the disclosure of information to the public.
This disclosure includes information like the reason for raising the money, the way money is proposed to be spent, the return expected on the money etc.
This information is in the form of ‘Prospectus’ which also includes information regarding the size of the issue, the current status of the company, its equity capital, its current and past performance, the promoters, the project, cost of the project, means of financing, product and capacity etc. It also contains lot of mandatory information regarding underwriting and statutory compliances. This helps investors to evaluate short term and long term prospects of the company.
Owners of these kind of shares are at liberty to a fixed dividend or dividend calculated at a fixed rate to be paid periodically. They also enjoy priority over the equity shareholders in payment of surplus. But in the event of liquidation, their claims rank below the claims of the company’s creditors, bondholders/debenture holders.
Generally preference share come with lock-in period and only institutions can buy these shares. There are few types of preference shares, namely
• Cumulative preference shares: In this the unpaid dividends will be accumulated and it is paid out before paying dividend to equity share holders.
• Convertible preference shares: After a specific date, these shares will be converted into equity capital of the company.
A Portfolio is a combination of different class of assets mixed and correlated for the purpose of achieving an investor's goal(s).
Items that are considered a part of your portfolio can include any asset you own-from shares, debentures, bonds, mutual fund units to items such as gold, art and even real estate etc. However, for most investors a portfolio has come to signify an investment in financial instruments like shares, debentures, fixed deposits, mutual fund units.
Principal is the amount that has been borrowed from lender, and is also called the par value or face value of the bond. The coupon is the product of the principal and the coupon rate.
Read Full post!Put option give the buyer the right, but not the obligation to sell a given quantity of underlying asset at a given price on or before a given future date.
Read Full post!
When an investor goes for an actively managed mutual fund, investors leaves the decision of investing to the professional fund manager. The fund manager is the decision maker as to which company or instrument to invest in. Sometimes such decisions may be right, rewarding the investor handsomely. However, possibilities are that the decisions might go wrong or may not be right all the time which can lead to considerable losses for the investor.
There are mutual funds that propose Index funds whose objective is to compensate the return given by a select market index. Such funds follow a passive investment style. They do not analyze companies, markets, economic factors and then narrow down on stocks to invest in.
As an alternative they prefer to invest in a portfolio of stocks that imitate a market index, such as the CNX Nifty 50 index. The returns fetched by the index are the returns given by the fund. No attempt is made to try and beat the index. Research results has shown that most fund managers are unable to continually beat the market index year after year. Also it is impossible to identify which fund will beat the market index.
Therefore, there is an aspect of going wrong in selecting a fund to invest in. This has lead to a huge interest in passively managed funds such as Index Funds where the choice of investments is not left to the judgment of the fund manager. Index Funds hold a diversified basket of securities which represents the index while at the same time since there is not much active turnover of the portfolio the cost of managing the fund also remains low. This gives a dual advantage to the investor of having a diversified portfolio while at the same time having low expenses in fund.
Pay-in day is the day when the securities sold are delivered to the exchange by the sellers and funds for the securities purchased are made available to the exchange by the buyers.
Read Full post!Pay-out day is the day the securities purchased are delivered to the buyers and the funds for the securities sold are given to the sellers by the exchange.
Read Full post!Personal Accounts is an account which deals with a due balance either to or from these individuals on a particular period. It is an account normally reveals the outstanding balance of the firm to individuals. All the accounts which falls under this category have same kind of treatment and that is,
"Debit the Receiver, Credit the Giver."
‘Offer document’ means Prospectus in case of a public issue or offer for sale and Letter of Offer in case of a rights issue which is filed with the Registrar of Companies (ROC) and Stock Exchanges (SEs). An offer document covers all the relevant information to help an investor to make his/her investment decision.
Read Full post!An Option is a contract which gives the right, but not an obligation, to buy or sell the underlying at a stated date and at a stated price. While a buyer of an option pays the premium and buys the right to exercise his option, the writer of an option is the one who receives the option premium and therefore obliged to sell/buy the asset if the buyer exercises it on him.
Options are classified in to two types, they are Calls and Puts options.
At the time of buying an option contract, the buyer has to pay premium. The premium is the price for acquiring the right to buy or sell. It is price paid by the option buyer to the option seller for acquiring the right to buy or sell.
Read Full post!Net Asset Value (NAV)represents the cumulative market value of the assets of the fund net of its liabilities. NAV per unit is simply the total net value of assets divided by the number of units outstanding.
Buying and selling into funds is done on the basis of NAV-related prices. The NAV of a mutual fund are required to be published in newspapers. The NAV of an open end scheme should be disclosed on a daily basis and the NAV of a close end scheme should be disclosed at least on a weekly basis.
At whatever time a company announces a book closure/record date, the exchanges sets up a no-delivery period for that particular scrip. During this period only trading(intraday) is permitted in the security. However, these trades are settled only after the no-delivery period is done. This is made to make sure that investor's right for the corporate benefit is unmistakably determined.
Read Full post!Nominal account deals with the amount of incomes earned or expenses incurred. It takes in all expenses and losses as well as incomes and gains of the enterprise. Nominal account records the expenses and incomes which are not carried forwarded to near future. The accounting treatment for this account is,
"Debit all the expenses and losses, Credit all incomes and gains"
These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears.
These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed on stock exchanges (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.
These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds.
Read Full post!Balanced Funds funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks.
Read Full post!Gilt Funds funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.
Read Full post!These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have merged as an alternative for savings and short term fixed deposit accounts with comparatively higher returns. These funds are ideal for corporates, institutional investors and business houses that invest their funds for very short periods.
Read Full post!Debt/Income Funds funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor.
Read Full post!These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act.
Read Full post!These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The money collected from the investors is invested only in the stocks, which represent the index.
For example: a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns.
These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector.
Read Full post!These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors.
Read Full post!Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.
Read Full post!A Mutual Fund (MF) is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a array of different financial instruments or securities such as equity shares, Government securities, Bonds, debentures etc.
MF can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors. MFs issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors.
The investment objectives outlined by a MF in its prospectus are compulsory on the MF scheme. The investment objectives specify the class of securities a MF can invest in. MF invest in various asset classes like equity, bonds, debentures, commercial paper and government securities. The schemes offered by MF vary from fund to fund. Some are pure equity schemes, others are a mix of equity and bonds. Investors are also given the option of getting dividends, which are declared periodically by the MF, or to participate only in the capital appreciation of the scheme.
Benefits of Investing in MFs are
• Small investments
• Professional Fund Management
• Spreading Risk
• Transparency
• Choice
• Regulations
Mutual Fund Plans:
• Growth Plan and Dividend Plan: A growth plan is a plan under a scheme in which the returns from investments are plowed back for investment. The investor thus only realizes capital appreciation on the amount invested. Under the dividend plan, income is distributed on periodic basis. This plan is ideal to those investors, who are in need of regular income.
• Dividend Reinvestment Plan: Dividend plans carry an additional option for reinvestment of income distribution. This is referred to as the dividend reinvestment plan. Under this plan, dividends declared by a fund are reinvested in the scheme on behalf of the investor, thus increasing the number of units held by the investors.
Mutual funds are classified in the following manner:
A. On the basis of Objective
• Equity Funds/ Growth Funds : Funds that invest in equity shares are called equity funds. They carry the principal objective of capital appreciation of the investment over the medium to long-term. They are best suited for investors who are seeking capital appreciation. There are different types of equity funds such as Diversified funds, Sector specific funds and Index based funds.
• Diversified funds: These funds invest in companies spread across sectors. These funds are generally meant for risk-averse investors who want a diversified portfolio across sectors.
• Sector funds: These funds invest primarily in equity shares of companies in a particular business sector or industry. These funds are targeted at investors who are bullish or fancy the prospects of a particular sector.
• Index funds: These funds invest in the same pattern as popular market indices like S&P CNX Nifty or CNX Midcap 200. The money collected from the investors is invested only in the stocks, which represent the index. For e.g. a Nifty index fund will invest only in the Nifty 50 stocks. The objective of such funds is not to beat the market but to give a return equivalent to the market returns.
• Tax Saving Funds: These funds offer tax benefits to investors under the Income Tax Act. Opportunities provided under this scheme are in the form of tax rebates under the Income Tax act.
• Debt/Income Funds: These funds invest predominantly in high-rated fixed-income-bearing instruments like bonds, debentures, government securities, commercial paper and other money market instruments. They are best suited for the medium to long-term investors who are averse to risk and seek capital preservation. They provide a regular income to the investor.
• Liquid Funds/Money Market Funds: These funds invest in highly liquid money market instruments. The period of investment could be as short as a day. They provide easy liquidity. They have merged as an alternative for savings and short term fixed deposit accounts with comparatively higher returns. These funds are ideal for corporates, institutional investors and business houses that invest their funds for very short periods.
• Gilt Funds: These funds invest in Central and State Government securities. Since they are Government backed bonds they give a secured return and also ensure safety of the principal amount. They are best suited for the medium to long-term investors who are averse to risk.
• Balanced Funds: These funds invest both in equity shares and fixed-income-bearing instruments (debt) in some proportion. They provide a steady return and reduce the volatility of the fund while providing some upside for capital appreciation. They are ideal for medium to long-term investors who are willing to take moderate risks.
B. On the basis of Flexibility
• Open-ended Funds: These funds do not have a fixed date of redemption. Generally they are open for subscription and redemption throughout the year. Their prices are linked to the daily net asset value (NAV). From the investors' perspective, they are much more liquid than closed-ended funds.
• Close-ended Funds: These funds are open initially for entry during the Initial Public Offering (IPO) and thereafter closed for entry as well as exit. These funds have a fixed date of redemption. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but the discount narrows as maturity nears. These funds are open for subscription only once and can be redeemed only on the fixed date of redemption. The units of these funds are listed on stock exchanges (with certain exceptions), are tradable and the subscribers to the fund would be able to exit from the fund at any time through the secondary market.
The market capitalization of a listed company, is calculated by multiplying its current share price (market price) by the number of shares in issue is called as market capitalization.
Example. Company A has 100 million shares in issue. The current market price is Rs. 100. The market capitalization of company A is Rs. 10000 million(100*100).
Maturity of a bond refers to the date, on the date of the barrower is obliged to repay the principle amount.
Term-to-Maturity(TTM) refers to the number of years/months left behind for the bond to mature. The TTM changes everyday till maturity from date of issue of the instrument. TTM is also called the term or the tenure of the bond.
There are various risks involved investing in mutual fund, those risks are:
1. Market risk
If the overall stock or bond markets fall on account of overall economic factors, the value of stock or bond holdings in the fund's portfolio can drop, thereby impacting the fund performance.
2. Non-market risk
Bad news about an individual company can pull down its stock price, which can negatively affect fund holdings. This risk can be reduced by having a diversified portfolio that consists of a wide variety of
stocks drawn from different industries.
3. Interest rate risk
Bond prices and interest rates move in opposite directions. When interest rates rise, bond prices fall and this decline in underlying securities affects the fund negatively.
4. Credit risk
Bonds are debt obligations. So when the funds invest in corporate bonds, they run the risk of the corporate defaulting on their interest and principal payment obligations and when that risk crystallizes, it leads to a fall in the value of the bond causing the NAV of the fund to take a beating.
" Recording of transactions are only in terms of money in the process"
This is the concept tweaks the system of accounting as productive in recording the transactions and events of the enterprise only in terms of money.
The money is used as well as expressed as a denominator of the business events and transactions. The transactions which are not in the manifestation of monetary terms cannot be registered in the book of accounts as transactions. The transactions which are not in financial in character cannot be entered in the book of accounts.
Management Accounting mainly deals with internal reporting to the managers of a business unit. It narrates to planning, control, analysing and decision making which are helpful to the management in the discharge of its functions.
Management accounting highlights the control of decision making characteristics of accounting which is customised to suit the management needs and wants of a specific enterprise, rather than stewardship aspects of accounting.
It is ‘forward looking’ and usually includes cost accounting, financial accounting and budgeting. There is no stiff convention or accounting principles are used for preparing management accounting.
Matching Concept builds the entire accounting system as meaningful to agree on the volume of profit or losses of the firm at each and every level of transaction; which is an result of matching in between the revenues and expenses.
This concept smooth's the progress to recognize the value of the transaction at every moment. The value of the transaction is acknowledged through matching of profits which are mainly fetched from the total sales volume and the firms expenses at every level.
‘Lock-in’ is a period which indicates a freeze on the sale of shares for a certain period of time. SEBI guidelines have predetermined lock-in requirements on shares of promoters mainly to guarantee that the promoters or main persons, who are controlling the company, shall continue to hold some minimum percentage in the company after the public issue.
Read Full post!Listing means enrollment of securities of an issuer to trading privileges (dealings) on a stock exchange through a formal agreement. The prime objective of admission to dealings on the exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective control and supervision of trading.
Read Full post!At the time of listing a company on a stock exchange, the company is obligated to enter into a listing agreement with the exchange. The listing agreement spells out the terms and conditions of listing and the disclosures that shall be made by a company on a continuous basis to the exchange.
Read Full post!International Securities Identification Number (ISIN) is a unique identification number of a security.
Read Full post!The price at which a company's shares are offered initially in the primary market is called as the Issue price. When they begin to be traded, the market price may be above or below the issue price.
The company and merchant banker are required to give full disclosures of the attributes which they had considered while deciding the issue price. There are two types of issues, one where company and Lead Merchant Banker fix a price (called fixed price) and other, where the company and the Lead Manager (LM) stipulate a floor price or a price band and leave it to market forces to determine the final price (price discovery through book building process).
Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. This paves way for listing and trading of the issuer’s securities.
Read Full post!An Index shows how a specified portfolio of share prices are moving in order to give an indication of market trends. It is a basket of securities and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards. Index is the barometer of the market.
Read Full post!There are various options available for investment, it can be broadly classified into "Physical and Financial assets"
1. Physical assets are tangible in nature, i.e. gold, real estate, any commodities, etc…
2. Financial assets includes all the class of financial instruments, its further classified into long and short term investment options
a. Short term investment are
i. Saving bank account
ii. Money market or liquid funds
iii. Fixed deposits with banks, etc...
b. Long term investment options are
i. Post office savings
ii. Public provident fund
iii. Company Fixed deposits
iv. Bonds & Debentures
v. Mutual Funds
vi. Equities, etc...
When we borrow money from lender, we are expected to pay lender as compensation for using it – this is known as Interest.
Interest is an amount charged to the borrower by the lender for the privilege of using the lender’s money. Interest is typically calculated as a percentage of the principal balance (the amount of money borrowed). The percentage rate may be fixed for the period of the loan, or it may be floating, depending on the terms and condition of the loan.
The factors which impacts these interest rates are mostly economy related and are commonly referred to as macroeconomic factors. Some of these are:
1. Demand for money
2. Level of Government borrowings
3. Supply of money
4. Inflation rate
5. The Reserve Bank of India and the Government policies which determine some of the variables mentioned above
Global Depository Receipts (GDRs) may be defined as a global finance vehicle that allows an issuer to raise capital simultaneously in two or markets through a global offering. GDRs may be used in public or private markets inside or outside US. GDR, a negotiable certificate usually represents company’s traded equity/debt. The underlying shares correspond to the GDRs in a fixed ratio say 1 GDR=10 shares.
Read Full post!Companies whose potential for growth in sales and earnings are excellent, are growing faster than other companies in the market or other stocks in the same industry are called the Growth Stocks. These companies usually pay little or no dividends and instead prefer to reinvest their profits in their business for further expansions.
Read Full post!This accounting concept says natural life of business is infinity, it does not matter whether the owner of the business is alive or not but the business is long lasting for ever. This concept is also known as concept of long term assets.
Only because of this concept the depreciation is charged on original value of the asset but not on its realization value.
Read Full post!Various transactions recorded must be classified and summarized in a format, that summarized transaction is known as financial statement.
The financial statements are found to be more useful to many people immediately after presentation only in order to study the financial status of the enterprise in the angle of their own objectives.
1. To Management
The financial statements are most inevitable for the management to take rational decisions to maintain the sustainability in the business environment among the other competitors.
2. To Shareholders, Security Analysts and Investors
The information extracted from the financial statements are processed by the above mentioned people to identify not only the financial status but also to determine the qualities of getting appropriate rate of return out of the prospective investment.
3. To Lenders
The lenders do study about the business enterprise through the available information of its financial statements normally before lending. The aim of the study is to analyse the status of the firm for the worthiness of lending with reference to the payment of interest periodicals and the repayment of the principal.
4. To Suppliers
The suppliers are in need of information about the business fleeces before sale of goods on credit. The Suppliers are very cautious in supplying the goods to the business houses based on the various capacities of themselves. The most important capacity required as well as expected from the buyer firms is that prompt repayment of dues of the credit purchase from the suppliers. This quality of prompt payment could be known through culling out the information from the balance sheet. It mainly plays pivotal role in answering the status inquiries about the buyer
5. To Customers
The legal relationship of the transferability of ownership of the products is obviously understood through financial information available in the statements. The agreement of warranty and guarantee is tested through the financial status of the enterprise.
6. To Government and Regulatory Authorities
The taxes to be paid to the central and state governments on the revenues only through presentation of information.
7. To Research and Development
For research and development, the amount of investment required is voluminous, which has to be mobilized from either internally or externally to the requirement of the future prospects of the enterprise.
Financial accounting highlights the stewardship aspect of accounting significantly than the control or decision making aspects of accounting. Financial Accounting is described as origin for the creation of information and the continuous value of information.
After the creation of information, the developed information should be appropriately recorded.
There are three important function in financial accounting, they are:
1. Financial Transaction is only to be recorded,
2. Time relevance of the transaction at the moment of recording,
3. Methodology of recording the transactions- It contains two different systems of accounting, they are:
a. Cash system and
b. Accrual system
A Fund Offer document is a manuscript that provides all the necessary information about a particular scheme and the fund launching that scheme.
That way, before investment, you are well aware of the risks involved in it. This has to be designed in accordance with the guidelines stipulated by SEBI and the prospectus must disclose details about:
• Investment objectives
• Risk factors and special considerations
• Summary of expenses
• Constitution of the fund
• Guidelines on how to invest
• Organization and capital structure
• Tax provisions related to transactions
• Financial information
A futures contract is an harmony between two parties to buy or sell an asset at a certain time in the future at a certain price. Futures contracts are special types of forward contracts in the sense that the futures are standardized exchange-traded contracts.
Read Full post!A forward contract is a customized contract between two parties, where settlement takes place on a specific date in the future at today’s pre-agreed price.
Read Full post!Floor price is the minimum price at which the bids can be made.
Read Full post!A fallow in public offering is when an previously listed company makes either a fresh issue of securities to the public or an offer for sale to the public, through an offer document.
Read Full post!The fixed amount (in Rs.) assigned to a instrument by the issuer. For shares, it is the original cost of the stock shown on the certificate; for bonds, it is the amount paid to the holder at maturity. Also known as par value or simply par.
For an equity share, the face value is usually a very small amount (Rs. 5, Rs. 10) and does not have much bearing on the price of the share, which may quote higher in the market, at Rs. 100 or Rs. 1000 or any other price.
For a debt security, face value is the amount repaid to the investor at the time of maturity (usually, Government securities and corporate bonds have a face value of Rs. 100). The price at which the security trades depends on the fluctuations in the interest rates in the economy.
The first day of the no-delivery period is the ex-date. If there is any corporate benefits such as rights, bonus, dividend announced for which book closure/record date is fixed, the buyer of the shares on or after the ex-date will not be eligible for the benefits.
Read Full post!The date on or after which a scrip begins trading without the dividend included in the price, i.e. buyers of the securities will no longer be entitled for the dividend which has been declared recently by the company, in case they buy on or after the ex-dividend date.
Read Full post!Exchange-traded fund (ETF) as a mutual fund that trades like a stock. Just like an index fund, an ETF represents a basket of stocks that reproduce an index such as the Nifty.
An ETF, however, is not a mutual fund; it trades just like any other scrip on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at the end of each trading day, an ETF's NAV changes throughout the day, fluctuating with supply and demand. It is important to bear in mind that while ETFs try to imitate the return on indexes, there is no assurance that they will do so accurately.
By owning an ETF, you get the diversification of an index fund plus the suppleness of a stock. Because, ETFs trade like stocks, you can take various positions on it like buy/short sell with the available margin. An additional advantage is that the expense ratios of most ETFs are lower than that of the average mutual fund. When trading ETFs, same commission is paid to broker similar to other listed securities.
A Load is a charge imposed, which the mutual fund may collect on entry and/or exit from a fund. A load is charged to cover the up-front cost incurred by the mutual fund for selling the fund. It also wraps one time processing costs. Some funds do not charge any entry or exit load. These funds are referred to as ‘No Load Fund’. Funds by and large charge an entry load ranging between 1.00% and 2.00%. Exit loads vary between 0.25% and 2.00%.
Read Full post!Equity represents form of fractional possession in business venture. Total equity capital is divided into equal units of small denominations, each called a share/equity.
For example, in a company let us assume the total equity capital of Rs. 5,00,00,000 is divided into 50,00,000 units of Rs 10 each is called a share.
The equity shareholders are the owners of the company and have the voting rights. The term 'equity' is most interchanged with the term 'share'.
Every business transaction has two fold effect and recording of both pieces of a transaction is called double entry system of book keeping. There are two main approaches to examine the duality of the transaction and to find out whether the accounts to be debited or credited.
They are as under:
1. Accounting equation approach:
Assets = Liabilities + Capital
For Assets = Add debit and subtract the credit
For Liabilities & Capital = Subtract debit and Add credit
2. Traditional approach :
a. Personal account,
b. Real account, and
c. Nominal Account.
Duality or Double entry accounting concept represents the two sides of a single transaction. The law of entire business circumnavigates around only on mutual agreement sharing policy between the players.
The entire idea of business is predominantly conducted on mutual agreement between the parties from one occasion to another. This is being denominated into two different sides of accounting i.e. Debit and Credit. Therefore, Every debit transaction is appropriately compensated with the credit transaction.
For example: The total funds raised by the firm is equated to the total investments.
Returns received by investors in equities come in two forms
a. Growth in the value (market price) of the share and
b. Dividends.
Dividend is distribution of part of earnings to shareholders, Typically twice a year in the form of a final dividend and an interim dividend. Dividend is therefore a source of income for the shareholder.
Normally, the dividend is articulated on a 'per share' basis, for instance – Rs. X per share. This kind of articulation makes it easy to see how much of the company's profits are being paid out as dividend, and how much are being retained by the company to reinvest in business.
For example: A company that has earnings per share in the year of Rs. 10 and pays out Rs. 5 per share as a dividend is passing half of its profits on to shareholders and retaining the other half.
Directors of a company have carefulness as to how much of a dividend to declare or whether they should pay any dividend at all. Before declaration they may think about opportunity cost of issuance.
The Depository renders its services to investors through its agents called depository participants (DPs). DPs are directly appointed by the depository with the approval of Securities Exchange Board of India(SEBI). Banks, Financial Institutions and SEBI registered trading members can become DPs.
The various benefits enjoyed by DPs from depository are
• Instant transfer of securities
• Transfer of securities with no stamp duty on it
• Purging of risks associated with physical securities certificates such as bad delivery, fake securities, etc.
• Less or no paperwork involved in transfer of securities
• Decline in transaction cost
• Simplicity of nomination facility
• Change in address recorded with DP automatically gets registered electronically with all companies in which investor holds securities eliminating the necessitate to correspond with each of them separately
• Transfer of securities is done directly by the DP purging correspondence with companies
• Handy method of consolidation of folios/accounts
Holding various investments like equity, debt instruments and Government securities in a single account; automatic credit/debit into demat account, of shares, arising out of split/consolidation/merger etc.
Diversification is one of the widely used risk management technique that combines a wide variety of investments within a portfolio. It is basically designed to minimize the impact of any one security on overall portfolio performance. Diversification is probably the best way to reduce the risk in a portfolio.
A good investment portfolio is a blend of a wide range of asset class. Different securities play differently at any point in time, so with a blend of asset types, entire portfolio does not experience the impact of a decline of any one security. When a stocks in portfolio goes down, you may perhaps still have the stability of the bonds in well built portfolio. All sorts of academic studies and formulas demonstrate importance of diversification, but it is actually just the simple custom of not putting all your eggs in one basket. Spreading your investments across various types of assets and markets, will reduce the risk of the portfolio getting affected by the unfavorable returns of any single asset class.
Delisting of securities means permanent removal of securities of a listed company from a stock exchange. As a result of delisting, the securities of that company would no longer be displayed and traded at that stock exchange.
Read Full post!‘Draft Offer document’ means the offer document in draft stage. The draft offer documents are filed with Securities Exchange Board of India(SEBI), atleast 21 days prior to the filing of the Offer Document with Registrar of company (ROC)/Stock exchanges (SEs).
SEBI may specify changes, if any, in the draft Offer Document and the issuer or the lead merchant banker shall carry out such changes in the draft offer document before filing the Offer Document with ROC/SEs. The Draft Offer Document is available on the SEBI website for public comments for a period of 21 days from the filing of the Draft Offer Document with SEBI.
Securities are generally issued in denominations of Rs. 5, 10 or 100. This is known as the Face Value or Par Value of the security. When a security is sold less than its face value, then it is said to be issued at a Discount.
Read Full post!Dematerialization is the process by which physical certificates of an investor are transformed to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP).
Read Full post!A depository is like a bank where securities like shares, debentures, bonds, government securities, units etc. in electronic form.
• Hold securities in an account
• Transfers securities between accounts on the instruction of the account holder.
• Facilitates transfers of ownership without having to handle securities.
• Facilitates safekeeping of shares.
The National Securities Depository Limited (NSDL) & Central Securities Depository Limited (CDSL) are two depositories in India.
Derivative is a financial instrument whose value is derived from the value of one or more basic variables, called underlying. The underlying asset can be anything like equity, index, foreign exchange, commodity or any other asset.
Derivative products initially materialized as hedging device against price fluctuations in commodity market and commodity - linked derivatives remained the sole form of such products for almost three centuries.
The financial derivatives came into spotlight after 1970's period due to growing volatility
in the financial markets. However, since their emergence, these products have become very popular and by 1990s, they accounted for about two thirds of total transactions in derivative products. At present the turnover in derivative market is greater than the equity market.
Debt instruments in simple terms represents a contract whereby money lenders lends money to another on agreed terms and conditions with regards to rate and term of interest, refund of principle amount by the borrower to the lender.
In India the term bond refers to debt instruments issued by the Government. If the instrument is issued by private corporate sector then the term used to represent is debenture.
According to this convention, the intact status of the firm should be presented in detail manner without hiding anything; which has to deliver the required information to various parties involved in the process of the firm.
Read Full post!Conservatism means taking the worst case scenario as a act of caution policy. With this, the managers take into account all the possible future losses which may occur and ignore the possible future gains while recording the books of account.
For example: The closing stock is accounted at market/cost price which ever is less and this is the application of the principle of conservatism
The transaction recording methodology should not be changed at any cause or moment. It must be maintained throughout the life span of the firm. Consistency in method will provide an opportunity to compare the financial statements to get various information and interpretations from it. Therefore, the accounting rules must be carefully observed and obtain the same year after year.
For example: If a firm follows the method of straight line for charging the depreciation since its inception should be followed without any change . The firm should not alter the method of charging the depreciation from one to another.
Cost concept is strongly pertinent with the going concern concept. In this concept, each and every transactions are recorded only in cost terms rather than in market value.
For example: Fixed assets are only entered in original cost of the asset at the moment of purchase. The main reason is the market value of the asset will require the frequent update of information to the tune of changes in the market. Its impossible for regular updating of information but also leads to lot of consequences like value of asset at the time of sale or replacement, because the market value can be bifurcated into two categories i.e. Realizable value and Replacement value.
Realizable value is the value of the asset at the moment of sale or realization. Replacement value is the another value which considered at the moment of replacing the old asset with the new one. These two cannot be the same at single point of time.
In short we can say that following the cost concept will help to reduce the scope for subjectivity and personal bias.
Cost Accounting is one type of accounting which mainly deals with the accumulation and allocation of historical costs to units of product and various departments, primarily for valuation of stocks and measurement of profits and losses.
It also seeks to ascertain the cost of a sales/service provided by the business unit with a view to exercising control over these costs to assess the profitability and efficiency of the enterprise.
Cost accounting generally correlated to the future and includes an estimation of future costs to be incurred. The cost accounting process is based on the data provided by the financial accounting. We can also say cost accounting is next step to financial accounting.
The revenues are recognized only at the moment of realization but the expenses are recognized at the time of payment. The charges which were paid only will be taken into consideration but the outstanding, not yet paid will not be considered.
For e.g. Rent paid only will be considered but not the outstanding of rent charges.
A Clearing Corporation is a part of an exchange or a separate entity and performs three functions, namely, it clears and settles all transactions, i.e. completes the process of receiving and delivering shares/funds to the buyers and sellers in the market, it provides financial guarantee for all transactions executed on the exchange and provides risk management functions.
For example: National Securities Clearing Corporation (NSCCL), a 100% subsidiary of NSE, performs the role of a Clearing Corporation for transactions executed on the NSE.
A Custodian is basically an organization, which helps register and safeguard the securities of its clients.
Besides safeguarding securities, a custodian also keeps track of corporate actions on behalf of its clients.
• Maintaining a client’s securities account
• Collecting the benefits or rights accruing to the client in respect of securities
Keeping the client informed of the actions taken or to be taken by the issue of securities, having a bearing on the benefits or rights accruing to the client.
Commodity derivatives market trade contracts for which the underlying asset is commodity. It can be an agricultural commodity like wheat, soybeans, rapeseed, cotton, etc or precious metals like gold, silver, etc.
Read Full post!FCRA Forward Contracts (Regulation) Act, 1952 defines “goods” as “every kind of movable property other than actionable claims, money and securities”.
Futures trading is organized in such goods or commodities as are permitted by the Central Government. At present, all goods and products of agricultural (including plantation), mineral and fossil origin are allowed for futures trading under the auspices of the commodity exchanges recognized under the FCRA.
A Commodity Exchange is an association, or a company of any other body corporate organizing futures trading in commodities. In a wider sense, it is taken to include any organized market place where trade is routed through one mechanism, allowing effective competition among buyers and among sellers – this would include auction-type exchanges, but not wholesale markets, where trade is localized, but effectively takes place through many non-related individual transactions between different permutations of buyers and sellers.
Read Full post!Call option give the buyer the right but not the obligation to buy a given quantity of the underlying asset, at a given price on or before a given future date.
Read Full post!Coupon refers to the periodic interest payments that are made by the borrower to the lender. Coupon rate is the rate at which interest is paid, and is usually represented as a percentage of the par value of a bond.
Read Full post!A bond giving the investor the option to convert the bond into equity at a fixed conversion price.
Read Full post!Contract note is a confirmation note which contains all the trades done on a particular day on behalf of the client by a trading member. It entail a legally enforceable relationship between the trading member and client with respect to purchase/sale transactions and settlement of trades. It also helps to settle disputes/claims between the trader and the trading member. It is a prerequisite for filing any complaint or arbitration proceeding against the trading member in case of a dispute/claims. A valid contract note should be in the format, contain the details of trades, stamped with requisite value and duly signed by the authorized signatory.
Contract notes are kept in duplicate, the trading member and the client should keep one copy each. After verifying the details contained therein, the client keeps one copy and returns the second copy to the trading member duly acknowledged by him.
A broker has to issue a contract note to clients for all transactions in the form specified by the stock exchange. The contract note must contain the following:
1. Name, address and SEBI Registration number of the Member broker.
2. Name of partner/proprietor/Authorized Signatory.
3. Dealing Office Address/Tel. No./Fax no., Code number of the member given by the Exchange.
4. Contract number, date of issue of contract note, settlement number and time period for settlement.
5. Constituent (Client) name/Code Number.
6. Order number and order time corresponding to the trades.
7. Trade number and Trade time.
8. Quantity and kind of Security bought/sold by the client.
9. Brokerage and Purchase/Sale rate.
10. Service tax rates, Securities Transaction Tax and any other charges levied by the broker.
11. Appropriate stamps have to be affixed on the contract note or it is mentioned that the consolidated stamp duty is paid.
12. Signature of the Stock broker/Authorized Signatory.
In a book building process, the issuer is required to indicate either the price band or a floor price in the prospectus. The actual revealed issue price can be any price in the price band or any price above the floor price. This issue price is called “Cut-Off Price”. The issuer and lead manager decides this after considering the book and the investors’ desire for the stock.
Read Full post!Business entity concept treats the business owner as totally a separate and distinct entity from the business. In other words, "Owner of the business and business itself is different". The fund which is brought inside the firm by the proprietor, at the commencement of the business is known as capital.
Assets= Liabilities + Capital
The above accounting equation is an expression of the business entity concept because it shows that the business itself owns the assets and in turn owes the various applicants. Therefore, The amount of the capital, which was initially invested should be returned to the owner considered as due to the owner; who was nothing but the contributory of the capital.
Book closure/record date help a company determine exactly the shareholders of a company as on a given date. Book closure refers to the closing of the register of the names of investors in the records of a company. Companies declare book closure dates from time to time. Various benefits like dividends, bonus issues, rights issue accrue to investors whose name appears on the companies record as on a given date which is known as the record date and it is declared in advance by the company so that buyers have enough time to purchase the shares, get them registered in the books of the company and become entitled for the benefits such as bonus, rights, dividends etc.
Read Full post!The ‘Bid’ is the buyer’s price. It is this price that seller need to know when seller have to sell a stock. Bid is the rate/price at which there is a ready buyer for the stock, which seller intend to sell.
Read Full post!Bond is a negotiable certificate evidencing indebtedness. It is typically unsecured. A debt security is generally issued by a company or government agency. A bond investor offer fund to the issuer and in exchange, the issuer promises to reimburse the loan amount on a specified maturity date. The issuer usually pays periodic interest the holder of the bond over the life of the loan.
Read Full post!Bonus shares are shares which is issued by the companies to their existing shareholders at free of cost on the proposition of shares what the shareholder owns.
Read Full post!Book building is basically a process used in Initial Public Offers (IPOs) for efficient price discovery. It is a instrument where, during the period for which the IPO is open, bids are composed from investors at various prices, which are above or equal to the floor price. The offer price is determined after the bid closing date.
Read Full post!The term 'convention' indicates situations or customs which direct the accountants while preparing the accounting statements. There are three main accounting conventions, those are as fallows:
1. Convention of consistency
2. Convention of conservatism
3. Convention of disclosure
Despite the fact the existence of the business is longer in span, which is classified into the operating periods which are smaller in duration. The accounting span may be either calendar year (January -December) or fiscal year(April-March). The operating periods are not concept of synthesis in between the expenses and revenues.
According to entity concept owner and business organizations are two separate entities. Accounting concept for long lastingness of the business correspondent among the trading firms, which means that the operating period of one firm Financial Accounting may be shorter than another one.
The eventual aim of the concept is to quash the deviations of the operating periods of various traders in the trading practice. According to the Companies Act, 1956, the accounting period should not exceed more than 15 months. In other words to bring out the uniformity in trade period and profit recognition. Which eventually helps firm to understand the current financial position and helps to take decisions.
The entire transactions of the business enterprise are recorded in the business language, which in flight through accounting. The complete accounting system is administrate by the practice of accountancy. The accountancy is being practiced through the generally accepted principles which are wholly led by the concepts and conventions.
The entire principles of accounting are on the constructive accounting concepts and conventions.
The entire accounts of the enterprise is broadly classified into two categories i.e. Personal accounts and Impersonal Accounts. Impersonal accounts further classified into two, they are Real and Nominal account. The treatments of these accounts are called as accounting principles.
Personal Accounts: Personal Accounts is an account which deals with a due balance either to or from these individuals on a particular period. It is an account normally reveals the outstanding balance of the firm to individuals. All the accounts which falls under this category have same kind of treatment and that is, "Debit the Receiver, Credit the Giver."
Real Account: It is a most important classification which highlights the real worth of the assets. This is the account principally deals with the movement of assets. It is an account which reveals the value and movement of the assets taking place in between the firm and also other parties due to any transactions.
The movement of the assets can be classified into two categories, i.e. the assets which are going out of the firm and the assets which are coming into the firm. The accounting treatment for this account is, "Debit what comes in, Credit what goes out."
Nominal Account: This account deals with the amount of incomes earned or expenses incurred. It takes in all expenses and losses as well as incomes and gains of the enterprise. Nominal account records the expenses and incomes which are not carried forwarded to near future. The accounting treatment for this account is, "Debit all the expenses and losses, Credit all incomes and gains"
In addition to the accounting principle we have the following rules:
• Debits are always equal to credits
• Assets are always equal to liabilities and owners equity
The revenues are documented only at the time of occurrence and expenses are also documented only at the moment of incurring. Whether the cash is received or not out of the transaction, that will be registered/counted as total value of the respective transaction.
Read Full post!Accounting is a business language which makes clear the various kinds of transactions during the given period of time. Accounting is defined as either recording or recounting the information of the business enterprise, transpired during the specific period in the summarized form.
Accounting is broadly classified into three different functions, they are:
1. Recording
2. Classifying and
3. Summarizing
According to American Institute of Certified Public Accountants Association defines the term accounting as follows "Accounting is the process of recording, classifying, summarizing in a significant manner of transactions which are in financial character and finally results are interpreted."
Classifications of Accounting
i. Financial Accounting
ii. Cost Accounting
iii. Management Accounting
Arbitration is an alternative dispute resolution mechanism provided by a exchange for resolving disagreement between the trading members and their clients in admiration of trades done on the exchange. If no cordial settlement could be reached all the way through the normal complaint redressal mechanism of the exchange, then you can make application for orientation to arbitration under the terms of the concerned Stock exchange.
Read Full post!On account of non-delivery of scripts by the trading member on the pay-in day, those securities are put up for auction by the exchange on the forthcoming day. This ensures that the trader who buys receives the securities. The exchange buys the obligatory quantity in auction market and gives them to the buying trading member.
Read Full post!When investment decisions of the fund are at the carefulness of a fund manager(s) and they decides which company, instrument or asset class the fund should invest in based on experience, research, analysis, market news etc. such a fund is called as an actively managed fund.
The fund buys and sells instruments actively based on changed perceptions of market from time to time. Based on the classifications of scrip with different characteristics, ‘active’ investment managers builds different portfolio.
Two basic investment styles common among the mutual funds are, Growth Investing and Value Investing style and they are in detail as fallows:
1. Growth Investing Style: The primary objective of equity investment is to gain capital appreciation. A growth manager looks for companies that are expected to fetch above average earnings growth, where the manager feels that the earning predictions and therefore the price of the scrip in future will be even higher.
2. Value investment Style: A Value Manager looks to invest in companies which is currently undervalued in the market based on their belief and sentiments, but whose value they estimate will be documented in the market valuations in dew course.
The ‘Ask’ or 'offer' price is what you need to know when you are buying the financial instrument i.e. this is the rate/ price at which there is seller ready to sell his stock in open market. The seller will sell his stock only if he gets the quoted “Ask’ price.
Read Full post!American Depositary Receipts (ADR) is a U.S. dollar($) denominated form of share in a non-U.S. company. It represents the shares of the foreign company held on credit by a custodian bank in respective home country and it bears the corporate and economic rights of the foreign shares, subject to the terms and conditions specified on the ADR certificate.
ADRs can be represented by a physical ADR certificate. The terms "ADR" and "ADS" are habitually used interchangeably. ADSs provide U.S. investors with a suitable way to invest in securities in a foreign country and pave path to trade non-U.S. securities in the U.S. stock exchanges.
ADSs are issued by a depository bank. They are traded in the same mode as shares in U.S. companies, on the the American Stock Exchange (AMEX) and New York Stock Exchange (NYSE) or quoted on NASDAQ and the over-the-counter (OTC) market.
Although ADRs are U.S. dollar denominated certificates and pay dividends in U.S. dollars, they do not get rid of the currency exposure associated with an investment in a non-U.S. company.
Accounting concepts are the foundation of the accounts, they lays down set of rules that have to be adopted though out the process. This concepts helps to moderate and understand the accounting treatments of various accounts.
The accounting principles are formed based on the accounting concepts. The following are the most important accounting concepts :
1. Money Measurement concept
2. Business Entity concept
3. Going Concern concept
4. Matching concept
5. Accounting Period concept
6. Duality or Double Entry concept
7. Cost concept
An account is a homogeneous deal for recording financial information. In a standard accounting system, there exists a different accounts for each asset, each liability, and each type of proprietors equity, each item of revenue and expense.
Any account is like a coin which has two sides, namely, debit and credit side. In the ‘T-account format’ the Debit holds the left side and credit on right side. In accounting the two different terms ‘debit’ and ‘credit’ have their own treatments and they will not replicate each other but existence of corresponding entries will be there.
The entire accounts of the enterprise is broadly classified into two categories i.e. Personal accounts and Impersonal Accounts. Impersonal accounts further classified into two, they are Real and Nominal account. The treatments of these accounts are called as accounting principles.
Personal Accounts: Personal Accounts is an account which deals with a due balance either to or from these individuals on a particular period. It is an account normally reveals the outstanding balance of the firm to individuals. All the accounts which falls under this category have same kind of treatment and that is, "Debit the Receiver, Credit the Giver."
Real Account: It is a most important classification which highlights the real worth of the assets. This is the account principally deals with the movement of assets. It is an account which reveals the value and movement of the assets taking place in between the firm and also other parties due to any transactions.
The movement of the assets can be classified into two categories, i.e. the assets which are going out of the firm and the assets which are coming into the firm. The accounting treatment for this account is, "Debit what comes in, Credit what goes out."
Nominal Account: This account deals with the amount of incomes earned or expenses incurred. It takes in all expenses and losses as well as incomes and gains of the enterprise. Nominal account records the expenses and incomes which are not carried forwarded to near future. The accounting treatment for this account is, "Debit all the expenses and losses, Credit all incomes and gains"
In addition to the accounting principle we have the following rules:
• Debits are always equal to credits
• Assets are always equal to liabilities and owners equity
Abridged Prospectus’ is a shorter description of the prospectus and contains all the prominent features of a Prospectus. It go together with the application form of public issues. In other words it is executive summary of prospectus.
Read Full post!Inflation is the rate at which the cost of living increases.
The cost of living is simply what it costs to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or a service in the future as it does now or did in the past.
For example, if there was a 10% inflation rate for the next year, a
Rs. 100 purchase today would cost Rs. 110 in a year.
This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investment's 'real' rate of return, which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value.
For example, if the annual inflation rate is 10%, then the investment will need to earn more than 10% to ensure it increases in value. If the after-tax return on your investment is less than the inflation rate, then your assets have actually decreased in value; that is, they won't buy as much today as they did last year.
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