SMC Gyan !

29/1/2010

SMC GYAN


SMC GYAN

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Know everything about Finance,

Stock Market,Equities,Derivatives,Shares,

Mutual Funds and many more topics related to Finance 🙂

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Option Glossary

(Date: 12th of April,2010)


At-the-Money option:


An option whose strike price is the same as, or closest to, the current market price of the underlying share. For example, if the share price is Rs.260, an option with a strike price of Rs.260 would be precisely at-the-money.

Bid/offer spread:

The difference between quoted bid and offer prices.

Butterfly:

A recognized option strategy, which involves, in one single transaction, the simultaneous purchase (sale) of a call (put) at one exercise price, the sale (purchase) of two calls (puts) at a higher exercise price and the purchase (sale) of a call (put) at an equally higher exercise price.

Buyer of an option:

The party who, through purchase, acquires the right conveyed by the option. Also commonly referred to as the option holder, where the purchase is to open a position.

Call option:

An option that conveys to the option buyer the right but not the obligation to purchase shares at a fixed strike price per share at any time during the life of the option.


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Equity Glossary

(Date: 29th of January,2010)

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Balanced Fund:

Balanced Funds are a mix of both equity and debt funds.

They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme.

Equity part provides growth and the debt part provides stability in returns.

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Exchange Traded Fund:

ETFs are listed and traded on the stock exchange, thereby offering investors a convenient mode to buy and sell mutual fund units.

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Floating Rate Fund:

It can be utilised for parking surplus funds for shorter time frames.

The typical investment tenure would vary between 15 days to a month.

Floating rate instruments have their coupon rates reset in line with that of a benchmark rate (like Mumbai Inter Bank Offered Rate – MIBOR) at fixed time intervals.

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Liquid Fund:

Liquid Funds invest only in short-term money market instruments including treasury bills, commercial paper and certificates of deposit.

The objective is to provide liquidity and preserve the capital.

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Income Fund:

Income Fund invests in income bearing instruments such as corporate debentures, PSU bonds, gilts, treasury bills, certificates of deposit and commercial papers.

These funds are the least risky and are generally preferred by risk-averse investors.

🙂

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Equity Glossary

(Date: 22nd of January,2010)

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Equity Diversified Fund:


Equity Diversified Fund is a fund that invests in equity shares with a view to provide strong capital appreciation without any sector or market capitalisation bias.


The investment strategy of diversified equity fund is to spread investments among securities in different industries, with different risk levels.


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Index Fund:


Index schemes attempt to replicate the performance of a particular index, the portfolio of these schemes will consist of only those stocks that constitute the index.


The percentage of each stock to the total holding will be identical to the stocks index weightage.

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Sectoral Funds:


These are the funds/schemes that invest in the securities of only those sectors or industries as specified in the offer documents.


The returns in these funds are dependent on the performance of the respective sectors/industries.

While these funds may give higher returns, they are more risky compared to diversified funds.


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IPO Glossary


(Date: 28th of December, 2009)


Basis of Allocation/Basis of Allotment


After the closures of the issue, the bids received are aggregated under different categories i.e., firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail, etc.


The over subscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document.


Within each of these categories, the bids are then segregated into different buckets based on the number of shares applied for.


The over subscription ratio is then applied to the number of shares applied for and the number of shares to be allotted for applicants in each of the buckets is determined.


Then, the number of successful allottees is determined.


This process is followed in case of proportionate allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead manager.


Board of Directors


The composition of the Board of Directors is particularly critical for an IPO.


Typically, a board is composed of Directors who are also shareholders and independent directors.


Independent directors have no underlying financial or personal relationship with the company that could create a conflict of interest and are on the board for their experience, business judgment and contacts.


Independent directors may own the shares of the company but are not large shareholders.


Investors should look for a board that has at least two independent directors.


Typically, IPOs add their first outside directors at or immediately after the offering.


Book Building

Book building is a process of price discovery.


Hence, the Red Herring prospectus does not contain a price.


Instead, the red herring prospectus contains either the floor pric of the securities offered through it or a price band along with the range within which the bids can move.


The applicants bid for the shares quoting the price and the quantity that they would like to bid at.


Only the retail investors have the option of bidding at ‘cut-off’.


After the bidding process is complete, the ‘cut-off’ price is arrived at on the lines of Dutch auction.


The basis of allotment is then finalized and letters allotment/refund is undertaken.

The final prospectus with all the details including the final issue price and the issue size is filed with ROC, thus completing the issue process.


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IPO Glossary


(Date: 28th of December, 2009)

Abridged Prospectus

Abridged Prospectus means the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the Companies Act, 1956.

It contains all the salient features of a prospectus. It accompanies the application form of public issues.

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Allocation:

In case of book built issues, the basis of allotment is finalized by the Book Running lead Managers within 2 weeks from the date of closure of the issue.

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Aftermarket

Trading in the IPO subsequent to its offering is called the aftermarket.

Trading volume in IPOs is extremely high on the first day due to aftermarket purchases.

Trading volume can decline subsequently in the following days.

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Equity Glossary

(Date: 21st of December, 2009)

NCDEX:

National Commodity and Derivative Exchange of India is a de-mutualised online commodity exchange of India promoted by NSE, ICICI Bk, LIC, PNB, CRISIL, NABARD IFFCO and Canara Bk.


NCDEXRAIN:

NCDEXRAIN is a rainfall index of NCDEX which tell us what percentage of cumulative normal expected rainfall (till the date of the index) it has actually rained taking into consideration average actual rainfall at both Colaba and Santa Cruz weather stations in Mumbai.


NMCE:

National Multi Commodity Exchange is the first De-Mutualised Electronic Multi-Commodity Exchange of India located at Ahmedabad was granted the National status on a permanent basis by the Government of India and operational since 26th November 2002.

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Equity Glossary

(Date: 2nd of December, 2009)

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Blue Chip Stocks

Stock of  credit-worthy company, well known for the quality and wide acceptance of its products or services and its ability to make money and often pay dividends.

These stocks are usually less risky than other stocks.

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Buy Back

Companies, which have surplus of cash to invest, can offer to buy back shares from shareholders, thereby investing back into the company.

Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.

By reducing the number of shares outstanding on the market, buybacks increase the proportion of shares a company owns.

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Buyer

The investor who wants to purchase security and has placed the order to that effect.

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Equity Glossary

(Date: 1st of December, 2009)

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Hedge

It is tool used to reduce the risk of future price movements.


In Nut shell one can say making an investment to reduce the risk of adverse price movements in an asset.


Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.


An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.

Holding Company

A parent company holding maximum number of share of the company.


A parent corporation that owns enough voting stock in another corporation to control its board of directors (and, therefore, controls its policies and management).

This number should be at least 51%.


Also, a holding company must own at least 80% of voting stock to get tax consolidation benefits, such as tax-free dividends.


Hurdle rate

The minimum required rate of return on an investment in a discounted rate at which a project is acceptable.


This is the rate of return that will get someone “over the hurdle” and invest their money.

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Equity  Glossary

(Date: 27th November, 2009)

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Call price

The price at which an issuer may redeem a bond or a preferred stock is called Call price. It is also know as Redemption Price.

For example, let’s say the ABC Ltd. issues 100,000 preferred shares with a face value of  Rs.100 with a call provision built in at Rs. 110.

This means that if ABC  were to exercise its right to call the stock, the call price would be Rs. 110.

A company may exercise its right to call preferred stock if it wishes to discontinue payment of the dividend associated with the shares.

It may choose to do this in an effort to increase earnings for common shareholders.

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Capital Asset Pricing Model

A Model that describes the relationship between risk & required return.

In this model a security required rate of return is the risk free rate plus a premium based on the systematic risk of the security.

The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium.


If this expected return does not meet or beat the required return, then the investment should not be undertaken.

The security market line plots the results of the CAPM for all different risks (betas).

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Cash cycle

The length of time from the actual outlay of cash for purchase until the collection of receivables resulting from the sale of goods or services.

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Equity  Glossary

(Date: 26th November, 2009)

Debenture

A type of debt instrument that is not secured by physical asset or collateral.


Debentures are backed only by the general creditworthiness and reputation of the issuer.  Both corporations and governments frequently issue this type of bond in order to secure capital.


Like other types of bonds, debentures are documented in an indenture.

Debentures have no collateral. Bond buyers generally purchase debentures based on the belief that the bond issuer is unlikely to default on the repayment.

An example of a government debenture would be any government-issued Treasury bond (T-bond) or Treasury bill (T-bill).

T-bonds and T-bills are generally considered risk free because governments, at worst, can print off more money or raise taxes to pay these type of debts.

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Depreciation

The value of assets keeps on decreasing with the passage of time and usage. That decrease in value is termed as depreciation.

Every business is required to write off the depreciation over time for tax purposes.

Depreciation is used in accounting to try to match the expense of an asset to the income that the asset helps the company earn.

For example, if a company buys a piece of equipment for $1 million and expects it to have a useful life of 10 years, it will be depreciated over 10 years.

Every accounting year, the company will expense $100,000 (assuming straight-line depreciation), which will be matched with the money that the equipment helps to make each year.

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Deferred share

A share of stock that receives no rights to a company’s remaining assets in the event of bankruptcy until all common and preferred shareholders have been paid.


A method of stock payment to directors and executives of a company through the deposit of shares into a locked account.


The value of these shares fluctuate with the market and cannot be accessed by the beneficiary for the purpose of liquidation until they are no longer employees of the company.

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Equity  Glossary

(Date: 26th November, 2009)


Capital stock

The total number of shares authorized as per the Memorandum of Association of the company for the issuance, including both common stock and preferred stock.

In financial statement analysis, an increasing capital stock account tends to be a sign of economic health since the company can use the additional proceeds to invest in projects or machinery that will increase corporate profits and/or efficiency.

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Capital structure

The proportion of a firm’s permanent long term financing represented by debt, preferred stock, common equity stock & retained earning.

A company’s proportion of short and long-term debt is considered when analyzing capital structure.

When people refer to capital structure they are most likely referring to a firm’s debt-to-equity ratio, which provides insight into how risky a company is.

Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered.

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Capital turnover

Capital turnover calculates the rate of return of equity.

It is calculated by dividing total sales by stockholder equity.

Higher the ratio, more efficiently the management can utilize its capital.

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Equity  Glossary

(Date: 24th November, 2009)

Acid-test ratio

It is the ratio of current assets minus inventories divided by total current liabilities.

It is also called Quick Ratio.

It measures the ability to meet current debts with most – liquid current assets.

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ADR

ADR is an abbreviation of American Depositary Receipt.

It is a negotiable instrument issued by U.S stock exchange, which paves the way to Americans to invest in foreign companies.

There are various Indian companies that have issued ADRs in US market.

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Alpha

It is the coefficient measuring the risk-adjusted performance, considering the risks that are specific to the security, rather than the overall market.

A large alpha indicates that the stock has performed better what would be predicted given its volatility.

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Mutual Funds Glossary

(Date: 19th November, 2009)

Active Portfolio Management

It is a systematic and proactive approach to investment that involves the constant review of the portfolio of the fund.

The basic objective behind such investing style is to beat the market.

This investing style is based on the argument that markets are not efficient and at any point of time there is always a scope to earn abnormal profits through an active investment style.


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Alpha

Alpha measures the performance of fund managers .

If alpha is positive it means that fund manager is able to generate excess returns compared to expected return.

If alpha is negative fund manager is under performing.

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Annualized Return


This refers to the return that a fund can generate within a period of one year.

For the fund whose returns are not available for one year, the returns of the fund can be annualized.

Annualised returns are widely used to measure the performance of a fund.

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Glossary

(Date: 13th November, 2009)

Spot market:

A market in which commodities are bought and sold for cash and immediate delivery.

The spot market is also called the “cash market” or “physical market”, because prices are settled in cash on the spot at current market prices, as opposed to forward prices.

A commodities or securities market in which goods are sold for cash and delivered immediately. Contracts bought and sold on these markets are immediately effective.

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Spread:

The difference between current bid and offer ( ask ) prices for a commodity.

An options position established by purchasing one option and selling another option of the same class but of a different series.

The spread for an asset is influenced by a number of factors:

a) Supply or “float” (the total number of shares outstanding that are available to trade)
b) Demand or interest in a stock
c) Total trading activity of the stock

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Settlement date:

The date on which a contract must be fully paid for and delivered.

The date by which an executed security trade must be settled.

That is, the date by which a buyer must pay for the securities delivered by the seller.

The settlement date for stocks and bonds is usually three business days after the trade was executed.

For government securities and options, the settlement date is usually the next business day.


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Glossary

(Date: 12th November, 2009)

Short Position:

1. The sale of a borrowed security, commodity or currency with the expectation that the asset will fall in value.

2. In the context of options, it is the sale (also known as “writing”) of an options contract. Opposite of “long (or long position)”.

For example, an investor who borrows shares of stock from a broker and sells them on the open market is said to have a short position in the stock.

The investor must eventually return the borrowed stock by buying it back from the open market.

If the stock falls in price, the investor buys it for less than he or she sold it, thus making a profit.

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Short selling:

A strategy in which a speculator sells a commodity that he or she does not own in order to profit from a falling market.

The speculator will borrow the commodity from a third party and then immediately sell on to the buyer .

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Speculator:

A trader who takes an outright long or short position in the market.


A person who trades derivatives, commodities, bonds, equities or currencies with a higher-than-average risk in return for a higher-than-average profit potential.

Speculators are typically sophisticated, risk-taking investors with expertise in the market(s) in which they are trading and will usually use highly leveraged investments such as futures and options.

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Glossary

(Date: 7th November,2009)

Abridged Prospectus

Abridged Prospectus means the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of the Companies Act, 1956. It contains all the salient features of a prospectus.

It accompanies the application form of public issues.

Allocation:

In case of book built issues, the basis of allotment is finalized by the Book Running lead Managers within 2 weeks from the date of closure of the issue.

Aftermarket

Trading in the IPO subsequent to its offering is called the aftermarket.

Trading volume in IPOs is extremely high on the first day due to aftermarket purchases.

Trading volume can decline subsequently in the following days.

🙂

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Glossary

(Date: 5th November,2009)

MCX:

Multi Commodity Exchange of India is a de-mutualised online commodity exchange of India promoted by Financial Technologies (I) Ltd, SBI, Fidelity International, NSE, NABARD, HDFC Bk, SBI Life Insurance Co., Union Bank of India, Canara Bk, Bank of India, Bank of Baroda and Corporation Bank.

MSCCGMF –

Maharashtra State Co-operative Cotton Growers Marketing Federation.

MSCCGMF is the largest supplier of cotton in the world, merchandising over 3.5 million bales of cotton.

Its exports exceed US$400 Million


MSP –

Minimum Support Prices.

The minimum support prices are announced by the Govt. of India with a view to ensuring remunerative prices to the farmers for their produce on the basis of the Commission for Agricultural Costs and Prices (CACP) recommendations.

The minimum support prices are perceived by the farmers as a guarantee price for their produce from the Government.

These prices are announced by the Government at the commencement of the season to enable them to pursue their efforts with the assurance that the prices would not be allowed to fall below the level fixed by the Govt.


Such minimum support prices are fixed at incentive level, so as to induce the farmers to make capital investment for the improvement of their farm and to motivate them to adopt improved crop production technologies to step up their production and thereby their net income.

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Q and A

04/11/2009

What are the benefits in futures trading in commodities in Exchanges?

  • Base Value can never be Zero (or negative) i.e Low risk as compared to Equitites.
  • Provides the best opportunity mainly Gold and Silver to hedge against Inflation and Calamities.
  • Futures trading in commodities results in transparent and fair price discovery on account of large scale participations of entities associated with different value chains and reflects views and expectations of wider section of people related to that commodities.
  • This also provides effective platform for price risk management for all segments of players ranging from the producers, the traders, processors, exporters/importers and the end users of the commodity.
  • Commodity as a portfolio diversifier: Commodity as an asset class possesses low correlation with equity and debt markets which makes it attractive as a portfolio diversifier. Also, long term volatility witnessed in commodity markets is lower than those witnessed in equity markets.

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Glossary

(Date: 4th November,2009)

Commodity Deposit Form (CDF):

The client has to fill up the Commodity Deposit Form (CDF) and submit the same to the warehouse along with the assayer’s report after which the assayer gives a report of the quality of the commodities.

The Commodity Deposit Form is available with the warehouse.

Commodity spreads (or straddles):

Commodity spreads measure the price difference between two different contracts, usually futures contracts.

Contango:

Market scenario when the forward price of a commodity is higher than the spot price.

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What are commodity exchanges?

03/11/2009

Commodity exchanges are institutions, which provide a platform for trading in ‘commodity futures‘ just as how stock markets provide space for trading in equities and their derivatives.

They thus play a critical role in robust price discovery where several buyers and sellers interact and determine the most efficient price for the product.

Indian commodity exchanges offer trading in ‘commodity futures’ in a number of commodities.

Presently, the regulator, Forward Markets Commission allows futures trading in over 55 commodities.

There are 3 national level and 18 regional level commodity exchanges in India .

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Trading Commodity Futures.

A Timeline ——-

1875        Bombay Cotton Trade Association Established

1900        Future Trade in Oil Seeds Started

1920        Gold and Silver Futures Trading started in Bombay

1939        Cotton Derivatives banned by Government

1952        FCRA passed, ban on cotton futures removed

1953        Forward Market Commission Established

1955        Gold and Silver futures trading banned by Government

1980        Govt. removed ban on selected commodities like cotton, Jute, potatoes etc.

1994        Kabra Committee recommended removal of ban on futures trading for most commodities

2001        Govt. extended the list of commodities allowed for futures trading.

2003        NCDEX & MCX established.

Glossary

Cash commodity:

The actual physical product on which a futures contract is based.

This product can include agricultural commodities, financial instruments and the cash equivalents of index futures.

Close out price:

Close out price is the rate at which settlement of short delivery of commodities is completed.

Closing Price:

The price at the end of the day’s trading on a commodity market.

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Glossary

(Date: 31st October,2009)

OCEIL:

Online Commodity Exchange India Ltd. is a national multi-commodity exchange located at Ahmedabad.

Open interest:

The number of open or outstanding contracts on a commodity exchange for which the holders are still obligated to the commodity exchange concerned.

No offsetting sale or purchase has yet been made against it.

Open interest is used as an indicator of the level of commercial activity in a particular futures contract.

Open position:

A long or short trading position that is not yet closed.

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Glossary

(Date: 30th October,2009)

NCDEX:


National Commodity and Derivative Exchange of India is a de-mutualised online commodity exchange of India promoted by NSE, ICICI Bk, LIC, PNB, CRISIL, NABARD IFFCO and Canara Bk.


NCDEXRAIN:


NCDEXRAIN is a rainfall index of NCDEX which tell us what percentage of cumulative normal expected rainfall (till the date of the index) it has actually rained, taking into consideration average actual rainfall at both Colaba and Santa Cruz weather stations in Mumbai.

🙂


NMCE:


National Multi Commodity Exchange is the first De-Mutualised Electronic Multi-Commodity Exchange of India located at
Ahmedabad was granted the National status on a permanent basis by the Government of India and operational since 26th November 2002.

🙂

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Glossary

(Date: 29th October,2009)

FMC:

Forward Market Commission is the Regulatory Authority in India for commodity futures trading.

It is a statutory body set up in 1953 under the Forward Contracts (Regulation) Act, 1952.

Headquartered at Mumbai, it is overseen by the Ministry of Consumer Affairs, Food and Public Distribution, Govt. of India.

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Forward price:

The fixed price at which a specified amount of a commodity is to be delivered on a fixed date in the future.

Using the rational pricing assumption, we can express the forward
price in terms of the spot price and any dividends etc., so that there is no possibility for arbitrage.

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Futures contract:

An agreement to buy or sell a fixed quantity of a specified commodity , for delivery at a fixed date in the future at a fixed price.
Futures contracts are standardised agreements traded on
Futures Exchanges.

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Glossary

(Date: 27th October,2009)

Backwardation:

In futures market, when a commodity is in shortage, causing near month contract to sell at a premium

and distant month contract to sell at a discount i.e. spot price of the commodity, is higher than the forward price.

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Bandhani:

An Indian form of trading in which the contract price is not allowed to go beyond floor and ceiling prices, set on the first day, throughout the life of the contract, thus restricting excessive volatility.

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Basis:

Basis is price difference between a cash contract and a futures contract.

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Beneficiary Account:

A beneficiary account is a Demat account in the name of an Individual (single or jointly).

Such an account could also be in the name of a Corporate, a partnership firm, a society and a trust.

It is similar to a bank account.

This account is to be used for transacting in commodity balances held by the account holder at Exchange accredited warehouses.

These commodity balances would have been – in a physical process set up – represented through a warehouse receipt.

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Glossary

(Date: 22nd October,2009)

Liquid Fund:

Liquid Funds invest only in short-term money market instruments including treasury bills, commercial paper and certificates of deposit.

The objective is to provide liquidity and preserve the capital.

Income Fund:

Income Fund invests in income bearing instruments such as corporate debentures, PSU bonds, gilts, treasury bills, certificates of deposit and commercial papers.

These funds are the least risky and are generally preferred by risk-averse investors.

Gilt Fund:

Gilt Fund invests only in government securities of different maturities.

With virtually no default risk, they are very secure. While returns are steady and secure, they are lower than those from other debt funds.

Short Term Fund:

These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs).

Some portion of the corpus is also invested in corporate debentures.

They are meant for investment horizon for three to six months.

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Glossary

(Date: 21st September,2009)

Tax Saving Fund:

Tax saving fund is an equity fund, which offers a tax rebate to the investors under specific provisions of the Indian Income Tax laws.

Investments made in ELSS are allowed as deduction under section 80C of the Income-tax Act, 1961.

Global Fund:

Global Fund invests in international stocks to diversify portfolio across borders.

Balanced Fund:

Balanced Funds are a mix of both equity and debt funds.

They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme.

Equity part provides growth and the debt part provides stability in returns.

Exchange Traded Fund:

ETFs are listed and traded on the stock exchange, thereby offering investors a convenient mode to buy and sell mutual fund units.

🙂

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Glossary

(Date: 20th September,2009)

Equity Diversified Fund:

Equity Diversified Fund is a fund that invests in equity shares with a view to provide strong capital appreciation without any sector or market capitalisation bias.

The investment strategy of diversified equity fund is to spread investments among securities in different industries, with different risk levels.

Index Fund:

Index schemes attempt to replicate the performance of a particular index, the portfolio of these schemes will consist of only those stocks that constitute the index.

The percentage of each stock to the total holding will be identical to the stocks index weightage.

Sectoral Funds:

These are the funds/schemes that invest in the securities of only those sectors or industries as specified in the offer documents.

The returns in these funds are dependent on the performance of the respective sectors/industries.

While these funds may give higher returns, they are more risky compared to diversified funds.

🙂

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What is MCX and what is MCX stock Exchange?

(Date: 15th September,2009)

Multi Commodity Exchange of India is a de-mutualised online commodity exchange of India promoted by Financial Technologies (I) Ltd, SBI, Fidelity International, NSE, NABARD, HDFC Bk, SBI Life Insurance Co., Union Bank of India, Canara Bk, Bank of India, Bank of Baroda and Corporation Bank.

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MCX Stock Exchange is one of the most efficient exchanges in India.

It is recognized by the Securities and Exchange Board of India (SEBI) as a stock exchange.

MCX Stock Exchange enjoys good market share in trading currency futures and is fully geared to increase market depth and enhance reach and access in Indian securities market.

It is promoted by MCX, the no 1.commodity exchange in India and Financial Technologies that operates multi asset exchanges in different geographies and time zones.

With more than 600 members and trading terminals spread over several cities, MCX Stock Exchange is committed to deploy state of the art technology and global best practices in regulatory compliance and investor protection.

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What is Commodity exchange?

(Date: 14th September,2009)

A commodities exchange is an exchange where various commodities and derivatives products are traded.

Most commodity markets across the world trade in agricultural products and other raw materials (like wheat, barley, sugar, maize, cotton, cocoa, coffee, milk products, pork bellies, oil, metals, etc.) and contracts based on them.

These contracts can include spot prices, forwards, futures and options on futures.

Other sophisticated products may include interest rates, environmental instruments, swaps, or ocean freight contracts.

In short, a commodity exchange is an association, or a company or any other body corporate organizing futures trading in commodities.

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What is Sensex? What is Nifty ? Difference between these two !

(Date: 13th September,2009)

Sensex could be construed as Sensitive Index and Nifty as National Fifty.

Sensex is the index of BSE while NIFTY is the index of NSE.

Sensex consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange.

These companies account for around one-fifth of the market capitalization of the BSE, whereas Nifty consists of 50 stocks.

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What Is Insurance?

We face a lot of risks in our daily lives.
Some of these lead to financial losses.
Insurance is a way of protecting against these financial losses.
For a payment (premium), an insurance company will take the responsibility of compensating your financial losses.

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What is General Insurance?

Insuring anything other than human life is called general insurance.
Examples are insuring property like house and belongings against fire and theft or vehicles against accidental damage or theft. Injury due to accident or hospitalization for illness and surgery can also be insured.
Your liabilities to others arising out of the law can also be insured and is compulsory in some cases like motor third party insurance.

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Why Should One Insure?

One of the main reasons one should insure is to protect one’s belongings and assets against financial loss.

When one has earned and accumulated property, protecting it is prudent.

The law also requires us to be insured against some liabilities.

That is, in case we should cause a loss to another person, that person is entitled to compensation.

To ensure that we can afford to pay that compensation, the law requires us to buy liability insurance so that the responsibility of paying the compensation is transferred to an insurance company.

🙂

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(Date: 1st September,2009)

What Credit Card is Ideal For You?

As the features offered by each credit card varies, it is essential for you to understand which features will benefit you a lot.

🙂

If you are shopping regularly at a particular store, go for a credit card that offers your reward points or cash back or discount when you shop at that store.

🙂

Don’t select a card that offers you free air miles on usage, if you are not a regular flier.

🙂

Do you use the credit card to pay your utility bills? Then choose a card that provides you benefits for paying your bills.

🙂

Besides rewards, also take a look at the interest charged.

If you intend to carry outstanding balances each month, then it is advisable to choose a card offering a low interest rate.

🙂

But if you can manage to pay off the balance in full at the end of each month, it is advisable for you to go for a card with high interest rate but with low or nil joining and annual fees.

😉

If you are traveler, check out if the card has widespread acceptance.

🙂

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(Date: 21st August,2009)

Balanced Fund:

Balanced Funds are a mix of both equity and debt funds.

They invest in both equities and fixed income securities, which are in line with pre-defined investment objective of the scheme.

Equity part provides growth and the debt part provides stability in returns.

🙂

Exchange Traded Fund:

ETFs are listed and traded on the stock exchange, thereby offering investors a convenient mode to buy and sell mutual fund units.

🙂

Floating Rate Fund:

It can be utilised for parking surplus funds for shorter time frames.

The typical investment tenure would vary between 15 days to a month.

Floating rate instruments have their coupon rates reset in line with that of a benchmark rate (like Mumbai Inter Bank Offered Rate – MIBOR) at fixed time intervals.

🙂

Liquid Fund:

Liquid Funds invest only in short-term money market instruments including treasury bills, commercial paper and certificates of deposit.

The objective is to provide liquidity and preserve the capital.

🙂

Income Fund:

Income Fund invests in income bearing instruments such as corporate debentures, PSU bonds, gilts, treasury bills, certificates of deposit and commercial papers.

These funds are the least risky and are generally preferred by risk-averse investors.

🙂

🙂

🙂

(Date: 20th August,2009)

Equity Diversified Fund: Equity Diversified Fund is a fund that invests in equity shares with a view to provide strong capital appreciation without any sector or market capitalisation bias.

The investment strategy of diversified equity fund is to spread investments among securities in different industries, with different risk levels.

🙂

Index Fund: Index schemes attempt to replicate the performance of a particular index, the portfolio of these schemes will consist of only those stocks that constitute the index.

The percentage of each stock to the total holding will be identical to the stocks index weightage.

🙂

Sectoral Funds: These are the funds/schemes that invest in the securities of only those sectors or industries as specified in the offer documents.

The returns in these funds are dependent on the performance of the respective sectors/industries.

While these funds may give higher returns, they are more risky compared to diversified funds.

🙂

Tax Saving Fund: Tax saving fund is an equity fund, which offers a tax rebate to the investors under specific provisions of the Indian Income Tax laws.

Investments made in ELSS are allowed as deduction under section 80C of the Income-tax Act, 1961.

🙂

Global Fund: Global Fund invests in international stocks to diversify portfolio across borders.

🙂

🙂

🙂

Offer Document

Introduction

Whenever any mutual fund company wishes to introduce a new scheme of a mutual fund, then a mutual fund company has to register a document with Securities Exchange Board of India (SEBI) before announcing the scheme and inviting investors to subscribe to the new fund.

🙂

The document, which is filed with SEBI is known as the offer document.

🙂

Offer document contains all the information of the new scheme that a Asset Management Company (AMC) or sponsor is going to launch.

It is also known as a prospectus. 🙂

The offer document contains a statement as regards SEBI’s approval or disapproval concerning anything contained in the offer document & the trustees of the AMC also have to examine it before it is issued.

🙂

Contents of Offer Document:

The Offer Document issued by the mutual funds in India is required by SEBI to include the following information:

·Details of the Sponsor and the AMC.

·Description of the Scheme and the investment object of the fund.

·Terms of issue.

·Historical statistics of financial statement.

·Investors Rights and Services.

🙂

Registration of changes in Offer Documents:

In close-ended funds, the offer document is issued only at the time of New Fund Offer (NFO), as the units are normally not re-purchasable from investors.

🙂

But in open-ended funds, the offer document has to be revised and registered with SEBI at an interval of two years because the units in the open ended schemes are allowed to sell and purchase at any point of time.

🙂

Offer Document- How relevant is it to an investor?

It is the most important document from the investor’s point of view considering investing in the new fund offer.

🙂

Apart from the new fund schemes’ details, the offer document also gives much valuable information that are relevant, which help the investor in deciding whether he should subscribe for the new fund or not.

🙂

First of all, while reading an offer document, an investor can analyse whether the objective of the fund is similar to the investment objective of the investor.

🙂

An offer document is helpful for an investor to understand what he is buying.

The fund’s obligation to provide all the relevant information to the investor ends with the disclosures in the offer document.

🙂

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STOCK :

(Date: 11th August,2009)

Lets define what a stock is. 🙂

Simply speaking, stock is a share in the ownership of a company.

Stock represents a claim on the company’s assets and earnings.

Holding a company’s stock means that you are one of the many owners called shareholders of a company.

🙂
Generally, we are concerned with two types of stocks namely common stock or equity shares and preferred stock or preference share.

Stock prices are determined by market forces of supply and demand.

🙂
The system of trading stocks is an anonymous screen based order driven trading system, which eliminates the need for physical trading floors, i.e. open outcry systems. 🙂

Brokers can trade from their offices, using fully automated screen based processes. Their workstations are connected to a Stock Exchange’s central computer system via satellite using Very Small Aperture Terminus (VSATs).

The orders placed by brokers reach the Exchange’s central computer and are matched electronically.

🙂

Such kind of trading system exists in two of the national level stock exchanges i.e, Natonal Stock Exchange (NSE)&Bombay Stock Exchange (BSE).

==========================================

Equity trading :

In finance, equity trading is the buying and selling of company stock shares.

Shares in large are bought and sold through one of the major stock exchanges , such as the Newyork Stock exhanges, London Stock Exchanges or Bombay Stock exchange , which serve as managed auctions for stock trades.

Stock shares in smaller public companies are bought and sold in over the counter (OTC) markets.

Equity trading can be performed by the owner of the shares, or by an agent authorized to buy and sell on behalf of the share’s owner.

Proprietary trading or principal trading is buying and selling for the trader’s own profit or loss.

In this case, the principal is the owner of the shares.

Agency trading is buying and selling by an agent, usually a stock brokers, on behalf of a client.
Agents are paid a commissions for performing the trade.

🙂

Major stock exchanges have market makers who help limit price variation (Volatility) by buying and selling a particular company’s shares on their own behalf and also on behalf of others clients.

🙂


What is an Investment?

Investing money is putting that money into some form of “security” – an oft quoted word for anything that is “secured” by some assets.

Stocks, bonds, mutual funds, certificates of deposit – all of these are types of securities. As with anything else, there are many different approaches to investing.

For the purposes of this explanation, there are three basic styles of investing: conservative, moderate, and aggressive.

In brief, a conservative investor wants to protect principal and earn income;

a moderate investor is willing to take a certain amount of risk to achieve some stock price appreciation as well as current income; and

an aggressive investor is primarily concerned with high overall returns even though it means taking more risk.

🙂

What are the different modes of Investment?

There are three basic types of investments, also known as asset classes, all of which we are going to discuss.

These investments are stocks, bonds and cash.

You can buy stocks and bonds as individual investments, or you can invest in them by buying mutual funds that own stocks, bonds or a combination of the two. If you invest in cash, you can put money into bank accounts and money market mutual funds or you can buy what are known as cash equivalents: Treasury bills, Certificates of Deposit and similar investments.

While you may not think of bank accounts as investments because they currently pay an abysmally low rate of interest. On the other hand, stocks and stock mutual funds have been the most profitable investments over time.

🙂

What are the basic investment objectives, which drive the investor?

The options for investing our savings are continually increasing, yet every single investment vehicle can be easily categorized according to three fundamental characteristics – safety, income and growth – which also correspond to types of investor objectives.

While it is possible for an investor to have more than one of these objectives, the success of one must come at the expense of others.

Here we examine these three types of objectives, the investments that are used to achieve them and the ways in which investors can incorporate them in devising a strategy.

Safety

Probably there is truth in the fact that there is no such thing as a completely safe and secure investment. Yet we can get close to ultimate safety for our investment funds through the purchase of government-issued securities, or through the purchase of the highest quality commercial papers. Such securities are arguably the best means of preserving principal while receiving a specified rate of return.

Income

However, the safest investments are also the ones that are likely to have the lowest rate of income return, or yield. Investors must inevitably sacrifice a degree of safety if they want to increase their yields. This is the inverse relationship between safety and yield: as yield increases, safety generally goes down, and vice versa. In order to increase their rate of investment return and take on risk above that of money market instruments or government bonds, investors may choose to purchase corporate bonds or preferred shares with lower investment ratings. Most investors, even the most conservative-minded ones, want some level of income generation in their portfolios, even if it is just to keep up with the economy’s rate of inflation.

🙂


What is Inflation?

Inflation is the rate at which the general level of prices for goods and services is rising, and, subsequently, purchasing power of money is falling.

As inflation rises, every rupee will buy a smaller percentage of a good.

For example, if the inflation rate is 2%, then a Re.1 worth of a good will cost Rs.1.02 in a year.


What is Deflation?

Deflation is a fall in the price of goods and services. Deflation occurs when the inflation rate falls below zero per cent. This is the opposite of inflation.

When the inflation rate is negative, the economy is in said to be in a deflationary period.

Deflation leads to a lower level of demand in the economy. It increases the real value of money. It also increases unemployment.

The main effect of deflation is that it gives people a huge incentive not to buy goods. This means that if something costs Rs 100 today, it will cost only Rs 95 next week, thus making people hold off their purchases. The good news is that gives people an incentive to save money.

But as fewer people buy, manufacturers are left with excess inventory. That means they need to reduce their supply, which means they can either stop manufacturing, which causes factory closures and layoffs, or they can reduce prices even further.

But the latter causes even more deflation, leading to lower spending, leading to more deflation.

Once an economy is caught in this deflationary spiral, it is very hard to climb out. That’s why many economists are more worried about impending deflation rather than inflation.

Deflation is more of a hinder to a strong economy than inflation.

🙂

Q. What is a Capital Gain?

(Date: 16 July,2009)

A. An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price.

The gain is not realized until the asset is sold. A capital gain may be short term (one year or less) or long term (more than one year).

It is to be noted that the money invested grows with the passage of time. However the value of money received says n years later may not be of same value as it is today. This concept is explained in Time Value of Money.

————————————————————————————————-

What is a Derivative? (Date : 9 June,2009)

A derivative is a financial instrument, whose value is derived from its underlying security.

Underlying security can be of various types such as stocks, bonds, commodities, currencies, interest rates, warrant, convertible bonds and market indexes.

The underlying security may not necessarily be tradable and financial such as weather derivatives , value of which depends on index of weather conditions .

All derivative instruments can be categorized into two types:

  • Linear Derivatives
  • Non- linear Derivatives

Linear Derivatives : Linear derivatives are those instruments, which has a linear functional relationship with the underlying security such as Forward, Futures and Swaps.

Non- linear Derivatives : Non- linear Derivatives on the other hand are those instruments, which has a Non- linear functional relationship with the underlying security such as Options and Convertibles.

🙂

What is a Forward Contract? (Date : 9 June,2009)

A Forward Contract is a private agreement between two parties who agree to purchase or sale of a specific quantity of a commodity, government security, foreign currency, or other financial instrument at the agreed price, with delivery and settlement at a specified future date.

The terms and conditions of forward contracts are not standardised. Forward contracts are not traded on any designated stock and commodity exchanges of the world.

In case of International Forward Contracts both the parties agree to fix the exchange rate for delivery at a specified future date.

🙂

What is a Future Contract? (Date : 9 June,2009)

A Future Contract is a legally binding agreement to purchase or sell a standardized, exchange-traded stock, commodity, bond, currency, or stock index at a specified price, on a specified future date.

In future Contracts, both the parties have obligation to fulfill the contract.

🙂

Q. What are Option Contracts?

(Date: 11 June,2009)

An Option contract gives the buyer / holder the right, but not the obligation to buy /sell an underlying security at a specific price/strike price/exercise price on or before a certain date/expiration date. The seller/ writer has the obligation to honour the specified feature of the contract

Q. Of the entire Derivative, instruments discussed above which are the most popular contracts in India ?

(Date: 11 June,2009)

In India , the most popular derivative contracts are futures and options.

🙂


Q. What are the popular classes of Futures Contracts?

(Date: 11 June,2009)

Futures are commonly available in the following flavors (defined by the underlying “cash” product):

  • Agricultural commodity futures.
  • Bullion Futures (e.g.gold, silver and other precious metals
  • A commodity future, for example a Brent Crude Contract, gives you the right to take delievery of some standard lot size of Brent Crude at a fixed price on some date. Alternatively, if you sell the contract, you have the obligation to deliever the Brent Crude to someone.
  • Foreign Currency for example on the Euro.
  • Stock and Index Futures. Since you can not really buy index these are settled in cash.

Interest Rate Futures { Notional T – Bills , Notional 10 year bonds (coupon bearing and non-coupon bearing) futures} Again, since you cannot buy an interest rate, these are usually settled in cash as well.

Q. What is a Swap Contract?

(Date: 25th June,2009)

A Swap Contract is an over-the-counter (OTC) derivative (i.e they are negotiated outside exchanges), which is an agreement between two parties to exchange commodities, payments or other financial products.

For example, interest rate swaps, where floating rate interest is exchanged for fixed rate interest if the interest rates go down.


Q. How are Futures useful to an Investor?

(Date: 25th June,2009)

Futures are specifically designed to allow the transfer of risk from those investors who want less risk to those who are willing to take on some risk in exchange for compensation.

A futures instrument accomplishes the transfer of risk by offering several features:

Liquidity

Leverage (a small amount of money gives exposure to a much larger amount)

A high degree of correlation between changes in the futures price and changes in price of the underlying instrument.

Here are a couple of examples illustrate how futures might be traded:

If the price of the future becomes very high relative to the price of the underlying instrument (Index/Stocks/Commodities/Bonds/Currency) today, I can borrow money to buy the underlying instrument now and sell a futures contract (on margin).

If the difference in price between the two is great enough then I will be able to repay the interest and principal on the loan and still have some riskless profit; i.e., a pure arbitrage (although I might have to pay some cost of carry).

Conversely, if the price of the future falls too far below that of the underlying instrument, then I can short-sell the underlying instrument and purchase the future.

I can (presumably) borrow the money until the futures delivery date and then cover my short when I take delivery of some of the underlying instrument at the futures delivery date.

Lets define what a stock is. Simply speaking, stock is a share in the ownership of a company. Stock represents a claim on the company’s assets and earnings. Holding a company’s stock means that you are one of the many owners called shareholders of a company. Generally, we are concerned with two types of stocks namely common stock or equity shares and preferred stock or preference share. Stock prices are determined by market forces of supply and demand. The system of trading stocks is an anonymous screen based order driven trading system, which eliminates the need for physical trading floors, i.e. open outcry systems. Brokers can trade from their offices, using fully automated screen based processes. Their workstations are connected to a Stock Exchange’s central computer system via satellite using Very Small Aperture Terminus (VSATs) The orders placed by brokers reach the Exchange’s central computer and are matched electronically. Such kind of trading system exists in two of the national level stock exchanges i.e, Natonal Stock Exchange (NSE)&Bombay Stock Exchange (BSE).

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