investment proposal  

Definition

Document prepared by the sponsor of a new investment project, or the management of an existing firm, for prospective investors and/or lenders. It details the (1) nature of the project or business, (2) its history (if any), (3) growth potential, (4) objectives and the amount of finance required to realize them, (5) promised collateral or security, and (6) a plan for timely repayment of interest and principal.

Definition of 'Capital Rationing'

The act of placing restrictions on the amount of new investments or projects undertaken by a company. This is accomplished by imposing a higher cost of capital for investment consideration or by setting a ceiling on the specific sections of the budget.

Companies may want to implement capital rationing in situations where past returns of investment were lower than expected. For example, suppose ABC Corp. has a cost of capital of 10% but that the company has undertaken too many projects, many of which are incomplete. This causes the company's actual return on investment to drop well below the 10% level. As a result, management decides to place a cap on the number of new projects by raising the cost of capital for these new projects to 15%. Starting fewer new projects would give the company more time and resources to complete existing projects.

How to Ration Capital

The main device for capital rationing is increasing the cost of capital. "Cost of capital" is a term used to describe the cost of debt and equity, and it can be raised or lowered based on the company's willingness to borrow money or issue stocks. A company can increase the cost of capital by borrowing less, thus making it more challenging to invest. The company would engage in new products only if the anticipated return is higher than the new cost of capital. For example, raising the cost of capital from 10 percent to 5 percent would demand the company see a 5 percent higher return on any future investment than on those in the past. 

What are the benefits of capital rationing?

The main benefit of capital rationing is budgeting a company's corporate resources. When a company issues stock or borrows money , it can use these resources for new investments. However, if the company does not see a good return on investments, it is wasting these resources. By capital rationing, which is the process of increasing the cost of capital, the company can make sure it takes on fewer projects. Further, it can take on only projects for which the anticipated return on investment is high. This will prevent the company from over-extending its finances, which would cause a decrease in stock price and stability.

Read more: http://www.finweb.com/financial-planning/what-is-capital-rationing.html#ixzz38VlyeJ1p

Definition of 'Capital Structure'

A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds .

Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock , preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure.

Investopedia explains 'Capital Structure'

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 lever.

Definition of 'Portfolio'

A grouping of financial assets such as stocks, bonds and cash equivalents, as well as their mutual, exchange-traded and closed-fund counterparts. Portfolios are held directly by investors and/or managed by financial professionals.

Investopedia explains 'Portfolio'

Prudence suggests that investors should construct an investment portfolio in accordance with risk tolerance and investing objectives. Think of an investment portfolio as a pie that is divided into

pieces of varying sizes representing a variety of asset classes and/or types of investments to accomplish an appropriate risk-return portfolio allocation.

For example, a conservative investor might favor a portfolio with large cap value stocks, broad-based market index funds, investment-grade bonds and a position in liquid, high-grade cash equivalents. In contrast, a risk loving investor might add some small cap growth stocks to an aggressive, large cap growth stock position, assume some high-yield bond exposure, and look to real estate, international, and alternative investment opportunities for his or her portfolio.

Question: What is the Market Price Per Share and How do you Calculate it?

Answer:

The market price per share of stock or the price per share of stock is a current measure of price not an accounting, or historical, measure of the value of stock like the book value per share, which is based on the information from a company's balance sheet. The market price per share is a financial metric that investors use to determine whether or not to purchase a stock.

Calculation of Market Price Per Share

There are several steps you must take in order to calculate the market price per share. The first step is to determine the date on which you want to calculate the market price per share. The second step is to find the price on that particular date. You can look at the company's monthly, quarterly, or annual report to get the stock price on that particular date.

Third, you must consider the preferred stock, if any, that this company owns. If the company owns and has paid dividends on its preferred stock, subtract those dividends from the stock price you have found from the financial report. Fourth, determine the number of shares of stock outstanding by looking at the company's quarterly or annual report.

After you have gone through these four steps, you have the information you need to calculate the market price per share. Step 3 gives you the numerator of the equation and Step 4 gives you the denominator of the equation:

Market Price Per Share = Net Income - Preferred Dividends/Number of Shares of Common Shares Outstanding = $________

Interpretation of Market Price Per Share vs Current Trading Price

The market price per share and the current price at which the stock is being traded are not necessarily the same. The market price per share is also called the intrinsic value of a share of stock or the actual value based on the actual variables taken from the company's financial statements. The current trading price is based on investor buying and selling behavior. If investors are paying more than the intrinsic value, then the stock is overvalued. If investors are paying less than the intrinsic, then the stock is undervalued and is a good buy.

Earnings Per Share - EPSDEFINITIONThe portion of a company's profit allocated to each outstanding share of common stock . Earnings per share serves as an indicator of a company's profitability.

Calculated as:

When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period.

Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number.

Definition of 'Dividend Per Share - DPS'

The the sum of declared dividends for every ordinary share issued. Dividend per share (DPS) is the total dividends paid out over an entire year (including interim dividends but not including special dividends) divided by the number of outstanding ordinary shares issued.

DPS can be calculated by using the following formula:

D - Sum of dividends over a period (usually 1 year)SD - Special, one time dividendsS - Shares outstanding for the period

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Investopedia explains 'Dividend Per Share - DPS'

Dividends per share are usually easily found on quote pages as the dividend paid in the most recent quarter which is then used to calculate the dividend yield. Dividends over the entire year (not including any special dividends) must be added together for a proper calculation of DPS, including interim dividends. Special dividends are dividends which are only expected to be issued once so are not included. The total number of ordinary shares outstanding is sometimes calculated using the weighted average over the reporting period.

For example: ABC company paid a total of $237,000 in dividends over the last year of which there was a special one time dividend totalling $59,250. ABC has 2 million shares outstanding so its DPS would be ($237,000-$59,250)/2,000,000 = $0.0889 per share.

Dividends are a form of profit distribution to the shareholder. Having a growing dividend per share can be a sign that the company's management believes that the growth can be sustained.

DEFINITIONA performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio.

The return on investment formula:

In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken.

Definition of 'Cost Of Capital'

The cost of funds used for financing a business. Cost of capital depends on the mode of financing used – it refers to the cost of equity if the business is financed solely through equity, or to the cost of debt if it is financed solely through debt. Many companies use a combination of debt and equity to finance their businesses, and for such companies, their overall cost of capital is derived from a weighted average of all capital sources, widely known as the weighted average cost of capital (WACC). Since the cost of capital represents a hurdle rate that a company must overcome before it can generate value, it is extensively used in the capital budgeting process to determine whether the company should proceed with a project.

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Investopedia explains 'Cost Of Capital'

The cost of various capital sources varies from company to company, and depends on factors such as its operating history, profitability, credit worthiness, etc. In general, newer enterprises with limited operating histories will have higher costs of capital than established companies with a solid track record, since lenders and investors will demand a higher risk premium for the former.

Every company has to chart out its game plan for financing the business at an early stage. The cost of capital thus becomes a critical factor in deciding which financing track to follow – debt, equity or a combination of the two. Early-stage companies seldom have sizable assets to pledge as collateral for debt financing, so equity financing becomes the default mode of funding for most of them.

The cost of debt is merely the interest rate paid by the company on such debt. However, since interest expense is tax-deductible, the after-tax cost of debt is calculated as: Yield to maturity of debt x (1 - T) where T is the company’s marginal tax rate.

The cost of equity is more complicated, since the rate of return demanded by equity investors is not as clearly defined as it is by lenders. Theoretically, the cost of equity is approximated by the Capital Asset Pricing Model (CAPM) = Risk-free rate + (Company’s Beta x Risk Premium).

The firm’s overall cost of capital is based on the weighted average of these costs. For example, consider an enterprise with a capital structure consisting of 70% equity and 30% debt; its cost of equity is 10% and after-tax cost of debt is 7%. Therefore, its WACC would be (0.7 x 10%) + (0.3 x 7%) = 9.1%. This is the cost of capital that would be used to discount future cash flows from potential projects and other opportunities to estimate their Net Present Value (NPV) and ability to generate value.

Companies strive to attain the optimal financing mix, based on the cost of capital for various funding sources. Debt financing has the advantage of being more tax-efficient than equity financing, since interest expenses are tax-deductible and dividends on common shares have to be paid with after-tax dollars. However, too much debt can result in dangerously high leverage, resulting in higher interest rates sought by lenders to offset the higher default risk.

Differences Between Sole Proprietorship, Partnership and Corporationby Christopher Carter, Demand Media

A sole proprietorship is a business that has a single owner who is responsible for making decisions for the company. A partnership consists of two or more individuals who share the responsibility of running the company. A corporation is one of the most recognizable business structures and has a separate identity from the owners of the company. One or more owners may participate as shareholders of a corporation.

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Formation

A partnership business automatically begins when two or more people decide to go into business. Sole proprietorships begin automatically when a single business owner decides to open a business. There are no documents to file to begin a sole proprietorship or a partnership. However, businesses are required to file articles of incorporation, also known as a certificate of formation, to legally form a corporation in any state. Each state charges a fee, which varies from state to state, to file articles of incorporation. In addition, corporations are required to register with each state where the company intends to make business transactions. This requirement is not imposed on sole proprietorships or partnerships.

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Liability

Sole proprietors and partners in a partnership business have unlimited liability for all debts and liabilities that occur while operating the business. This means partners and sole proprietors may lose their homes, cars and other personal assets, if the company's assets are insufficient to cover the company's debts. Corporations provide owners of the company with limited liability protection against business losses and obligations. This means owners of a corporation will not lose their home, if the company goes bankrupt. Owners of a corporation are liable for company debts and obligations up to the extent of their investment in the company.

Related Reading: The Advantages of Going From a Sole Proprietorship to a Limited Partnership

Taxation

Partnerships and sole proprietorships are referred to as pass-through entities. This is because sole proprietors and partners in a partnership report their share of company profits and losses directly on their personal income tax return. Sole proprietorships and partnerships are not required to file business taxes with the Internal Revenue Service. Corporations are subject to double taxation. This occurs when the corporation pays taxes on the company's profits at the business level, and shareholders pay taxes on income received from the corporation on their personal tax return.

Structure

Corporations have a structure consisting of shareholders, directors, officers and employees. Every corporation must select at least one person to serve on its board of directors. The board of directors is responsible for allocating the company's resources and increasing the shareholders' profits. Officers are required to manage the day-to-day activities of the company and implement the decisions made by the company's shareholders and directors. Sole proprietorships and partnerships have a more informal structure that does not require the selection of officers and directors. Sole proprietors have full control over every aspect of their business, whereas partnerships and corporations have to vote on important company issues.

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Formalities

Partnerships and sole proprietorships have far less paperwork and fewer ongoing formalities to adhere to in comparison to a corporation. Corporations are required to hold at least one annual meeting, while sole proprietorships and partnerships do not have to hold company meetings. A corporation must keep strict financial records and keep a ledger detailing how the company reached certain decisions. Unlike a corporation, sole proprietorships and partnerships are not required to file annual reports with the state or create financial statements.

The main difference between cooperative organisation and company organisation are given below:

1. Basic objects:

The primary objective of a cooperative society is to provide service, whereas a company seeks to earn profits. This does not mean that a cooperative society does not earn profits or a company does not render service to society.

It simply means that all the activities of a cooperative society are guided by service motive and profits are incidental to this objective. On the other hand, the activities of a company are inspired by profit taking and services rendered to society are incidental to profit motive.

2. Number of members:

The minimum number of persons is 7 in a public company and 2 in a private company. A cooperative requires at least 10 members. The maximum number of members is 50 in a private company and 100 in cooperative credit society. There is no maximum limit in case of public companies and non-credit cooperative societies.

3. Member's liability:

The liability of members of a company is generally limited to the face value of shares held or the amount of guarantee given by them though the Companies Act permits unlimited liability to companies. The members of a cooperative society can opt for unlimited liability. But in practice their liability is generally limited.

4. Membership:

The membership of a cooperative society is open at all times and new members have to pay the same amount per share as old ones have paid. A company, on the other hand, closes the list of members as soon as its capital is fully subscribed. People who want to become members later on have to buy shares at the stock exchange.

5. Management and control:

The management of a cooperative society is democratic as each member has one vote and there is no system of proxy. In a company, the number of votes depends upon the number of shares and proxies held by a member.

There is little separation between ownership and management in a cooperative society due to limited and local membership.

6. Distribution of surplus:

The profits of a company are distributed as dividends in proportion to the capital contributed by the members.

In a cooperative society a minimum part of surplus must be set aside as a reserve and for the general welfare of the public. The rest is distributed in accordance with the patronage provided by different members after paying dividend up to 10 per cent on capital.

7. Share capital:

In a company, one member can buy any number of shares but an individual cannot buy more than 10 per cent of the total number of shares or shares worth Rs. 1,000 of a cooperative society.

A public company must offer new shares to the existing members while a cooperative society issues new shares generally to increases its membership.

The subscription list of a cooperative society is kept open for new members whereas, the subscription list of a company is closed after subscriptions. A company is thus capitalistic in nature while a cooperative society is socialistic.

8. Transferability of interest:

The shares of a public limited company are freely transferable while the shares of cooperative society cannot be transferred but can be returned to the society in case a member wants to withdraw his membership.

A member of a cooperative society can withdraw his capital by giving a notice to the society. A shareholder, on the other hand, cannot demand back his capital from the company until it's winding up.

9. Coverage:

A cooperative society generally draws its membership from a limited local area. The members have common bond in the form of a common occupation or employer or locality. In a company members have no such relationship and are usually drawn from different parts of the country and even from abroad.

10. Exemptions and privileges:

A cooperative society enjoys several exemptions and privileges regarding income tax, stamp duty, etc. This is because the Government seeks to encourage the growth of the cooperative movement.

No such exemptions, privileges and assistance is available to a public limited company. A private limited company, however, enjoys a number of exemptions and privileges under the Companies Act.

11. Governing statute:

A company is governed by the Companies Act, 1956 while a cooperative organisation is subject to the provisions of the Cooperative Societies Act, 1912 or State Cooperative Societies Acts.

Formation of a Cooperative Society

In order to get a Cooperative society registered, an application in the prescribed form must be submitted to the Registrar of Cooperative Societies of the State in which the society's regis-tered office is to be situated.

Any ten persons above the age of 18 years and having common interest may submit a joint application for being formed into a Cooperative society. The application should contain the following information:

(i) The name and address of the society.

(ii) The aims and objects for which the society is being registered.

(iii) The names, address and occupations of the members.

(iv) Share capital and its division.

(v) Method of admission of new members, and

(vi) Two copies of the bylaws (rules and regulations) of the society.

A Cooperative may adopt model bylaws given in the Cooperative Societies Act instead of framing its own bylaws.

Once the application for registration along with the copies of bylaws is submitted, the Registrar of Cooperative Societies will carefully scrutinise them in order to ensure that they are in accordance with the provisions and spirit of the Cooperative Societies Act.

When he is fully satisfied in this connection he will enter the name of the society in his register and will issue a certificate of registration.

After getting the certificate of registration, the society becomes a body corporate having a separate legal entity of its own, with perpetual succession and limited liability of its members.

A cooperative society can be registered only when it satisfies the prescribed conditions. Some of these are as follows:

(1) There must be at least ten adult members.

(2) The members should be bound together by some common interest e.g., they may belong to the same occupation, locality or employer.

(3) They must put up a joint application to the Registrar of Cooperative Societies.

(4) Each member must give an undertaking to buy at least one share.

(5) A copy of bylaws must be submitted to the Resistrar.

The management of a cooperative society lies in the hands of a managing committee. Members of this committee are elected directly by the members at the annual general meeting of the society.

The managing committee consists of a number of members who elect from among themselves the following office bearers:

1. President,

2. Vice-president(s),

3. Secretary

4. Joint Secretary, if any, and

5. Treasurer.

The general body of shareholders lays down the broad objectives and policies of the co-operative society. The managing committee determines detailed programmes and procedures of the society.

The committee also gets progress reports from the office-bearers and it is accountable to the annual general meeting of members. The office-bearers of the society work mainly in an honorary capacity.

The annual accounts of the society are audited and its annual report is submitted to the Registrar of Cooperative Societies.

Definition of 'Registrar'

An institution or organization that is responsible for keeping records of bondholders and shareholders. If you are the owner of a bond or a share in a company you will be registered as a owner by one of these institutions.

Investopedia explains 'Registrar'

The role of the registrar is to make sure that the amount of shares outstanding in the market matches the amount of shares authorized by the company. For bonds, the registrar also makes sure that the company's obligation from a bond issue is certified as being an actual legal obligation.

Definition of 'Agency Costs'

A type of internal cost that arises from, or must be paid to, an agent acting on behalf of a principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish for management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of shareholders.

Investopedia explains 'Agency Costs'

Some common examples of the principal-agent relationship include: management (agent) and shareholders (principal), or politicians (agent) and voters (principal).

Agency costs are inevitable within an organization whenever the principals are not completely in charge; the costs can usually be best spent on providing proper material incentives (such as performance bonuses and stock options) and moral incentives for agents to properly execute their duties, thereby aligning the interests of principals (owners) and agents.

Definition of 'Business Ethics'

The study of proper business policies and practices regarding potentially controversial issues, such as corporate governance, insider trading , bribery, discrimination, corporate social responsibility and fiduciary responsibilities. Business ethics are often guided by law, while other times provide a basic framework that businesses may choose to follow in order to gain public acceptance. Investopedia explains 'Business Ethics'

Business ethics are implemented in order to ensure that a certain required level of trust exists between consumers and various forms of market participants with businesses. For example, a portfolio manager must give the same consideration to the portfolios of family

members and small individual investors. Such practices ensure that the public is treated fairly.

Equity A A A

Related Searches: Statement of Cash Flows, Financial Ratios, Retained Earnings, Ratio Analysis, Examples of Balance Sheets

Definition of 'Equity '

1. A stock or any other security representing an ownership interest.

2. On a company's balance sheet, the amount of the funds contributed by the owners (the stockholders) plus the retained earnings (or losses). Also referred to as "shareholders' equity".

3. In the context of margin trading , the value of securities in a margin account minus what has been borrowed from the brokerage.

4. In the context of real estate, the difference between the current market value of the property and the amount the owner still owes on the mortgage. It is the amount that the owner would receive after selling a property and paying off the mortgage.

5. In terms of investment strategies, equity (stocks) is one of the principal asset classes. The other two are fixed-income (bonds) and cash/cash-equivalents. These are used in asset allocation planning to structure a desired risk and return profile for an investor's portfolio.

Investopedia explains 'Equity '

The term's meaning depends very much on the context. In finance, in general, you can think of equity as ownership in any asset after all debts associated with that asset are paid off. For example, a car or house with no outstanding debt is considered the owner's equity because he or she can readily sell the item for cash. Stocks are equity because they represent ownership in a company.

Definition of 'Debenture'

A type of debt instrument that is not secured by physical assets 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.

Investopedia explains 'Debenture'

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.

Definition of 'Capital Markets'

Markets for buying and selling equity and debt instruments. Capital markets channel savings and investment between suppliers of capital such as retail investors and institutional investors, and users of capital like businesses, government and individuals. Capital markets are vital to the functioning of an economy, since capital is a critical component for generating economic output. Capital markets include primary markets, where new stock and bond issues are sold to investors, and secondary markets, which trade existing securities.

Investopedia explains 'Capital Markets'

Capital markets typically involve issuing instruments such as stocks and bonds for the medium-term and long-term. In this respect, capital markets are distinct from money markets, which refer to markets for financial instruments with maturities not exceeding one year.

Capital markets have numerous participants including individual investors, institutional investors such as pension funds and mutual funds, municipalities and governments, companies and organizations and banks and financial institutions. Suppliers of capital generally want the maximum possible return at the lowest possible risk, while users of capital want to raise capital at the lowest possible cost.

The size of a nation’s capital markets is directly proportional to the size of its economy. The United States, the world’s largest economy, has the biggest and deepest capital markets. Capital markets are increasingly interconnected in a globalized economy, which means that ripples in one corner can cause major waves elsewhere. The drawback of this interconnection is best illustrated by the global credit crisis of 2007-09, which was triggered by the collapse in

U.S. mortgage-backed securities. The effects of this meltdown were globally transmitted by capital markets since banks and institutions in Europe and Asia held trillions of dollars of these securities.

Primary Market - Definition:The primary markets deal with the trading of newly issued securities. The corporations, governments and companies issue securities like stocks and bonds when they need to raise capital. The investors can purchase the stocks or bonds issued by the companies.

Money thus earned from the selling of securities goes directly to the issuing company. The primary markets are also called New Issue Market (NIM). Initial Public Offering is a typical method of issuing security in the primary market. The functioning of the primary market is crucial for both the capital market and economy as it is the place where the capital formation takes place.

Secondary Market - Definition:The secondary market is that part of the capital market that deals with the securities that are already issued in the primary market.The investors who purchase the newly issued securities in the primary market sell them in the secondary market. The secondary market needs to be transparent and highly liquid in nature as it deals with the already issued securities. In the secondary market, the value of a particular stock also varies from that of the face value. The resale value of the securities in the secondary market is dependant on the fluctuating interest rates.

The National Stock Exchange is India's largest financial market. Established in 1992, the NSE has developed into a sophisticated, electronic market, which ranks third in the world for transacted volume. The NSE conducts transactions in the wholesale debt, equity and derivative markets .

Investopedia explains 'National Stock Exchange Of India Limited - NSE'

Based in Mumbai, India, the National Stock Exchange is a leader in market technology. The exchange's supports more than 3,000 VSAT terminals, making the NSE the largest private wide-area network in the country. The National Stock Exchange has been a pioneer for Indian financial markets, being the first electronic limit order book to trade derivatives and ETFs.

NSE has a market capitalisation of more than US$1.5 trillion and Number of securities (equities segment) available for trading are 3,091 as on June 2014.[2]Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two most significant stock exchanges in India, and between them are responsible for the vast majority of share transactions. NSE's flagship

index, the S&P CNX Nifty, is used extensively by investors in India and around the world to take exposure to the Indian equities market.

Definition of 'Bombay Stock Exchange (BSE) .BO'

The first and largest securities market in India, the Bombay Stock Exchange (BSE) was established in 1875 as the Native Share and Stock Brokers' Association. Based in Mumbai, India, the BSE lists over 6,000 companies and is one of the largest exchanges in the world. The BSE has helped develop the country's capital markets, including the retail debt market, and helped grow the Indian corporate sector.

Investopedia explains 'Bombay Stock Exchange (BSE) .BO'

In 1995 the BSE switched from an open-floor to an electronic trading system. Securities listed by the BSE include stocks, stock futures, stock options, index futures, index options and weekly options. The BSE's overall performance is measured by the Sensex, an index of 30 of the BSE's largest stocks covering 12 sectors.

More than 5000 companies are listed on BSE, making it the world's top exchange in terms of listed members. The companies listed on BSE Ltd. command a total market capitalization of USD 1.51 Trillion as of May 2014.[1] It is also one of the world’s leading exchanges (3rd largest in March 2014) for Index options trading (Source: World Federation of Exchanges).

Definition of 'Over-The-Counter Exchange Of India - OTCEI'

An electronic stock exchange based in India that is comprised of small- and medium-sized firms looking to gain access to the capital markets . Like electronic exchanges in the U.S. such as the Nasdaq, there is no central place of exchange and all trading is done through electronic networks.

The OTC Exchange Of India (OTCEI), also known as the Over-the-Counter Exchange of India, is based in Mumbai, Maharashtra. It is India's first exchange for small companies,[3] as well as the first screen-based nationwide stock exchange in India.[4] OTCEI was set up to access high-technology enterprising promoters in raising finance for new product development in a cost-effective manner and to provide a transparent and efficient trading system to investors.[5]

OTCEI is promoted by the Unit Trust of India, the Industrial Credit and Investment

Corporation of India, the Industrial Development Bank of India, the Industrial Finance Corporation of India, and other institutions, and is a recognised stock exchange under the SCR Act.

OTCEI was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading.

Modelled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scripless trading. As a measure of success of these efforts, the Exchange today has 115 listings and has assisted in providing capital for enterprises that have gone on to build successful brands for themselves like VIP Advanta, Sonora Tiles & Brilliant mineral water, etc.

Definition of 'Central Bank'

The entity responsible for overseeing the monetary system for a nation (or group of nations). Central banks have a wide range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment. Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort.

Repo is short for repurchase agreement. Those who deal in government securities use repos as a form of overnight borrowing. A dealer or other holder of government securities (usually T-bills) sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price. They are usually very short-term, from overnight to 30 days or more. This short-term maturity and government backing means repos provide lenders with extremely low risk.

Repos are popular because they can virtually eliminate credit problems. Unfortunately, a number of significant losses over the years from fraudulent dealers suggest that lenders in this market have not always checked their collateralization closely enough

Reverse Repo - The reverse repo is the complete opposite of a repo. In this case, a dealer buys government securities from an investor and then sells them back at a later date for a higher price

Definition of 'Private Letter Ruling - PLR'

An interpretation of statute or administrative rules and their application to a particular set of facts or circumstances. The private letter ruling addresses unusual or complex questions pertaining to a particular taxpayer and his or her tax situation. The purpose of the letter ruling is to advise the taxpayer regarding the tax treatment he or she can expect from the IRS in the circumstances specified by the ruling. Also known as "letter ruling" or "LTR".

Investopedia explains 'Private Letter Ruling - PLR'

In other words, if a taxpayer has a tax issue with the IRS, that person, before completing a certain action (i.e. paying the required taxes), can request the IRS to rule on that tax issue. The private letter ruling is the letter the IRS sends back to the taxpayer, which explains the rulings and the rational for the decision. The PLR is specific and applicable to that tax situation and that taxpayer only. Moreover, private letter rulings of other taxpayers cannot be used as precedence by a person requesting a ruling regarding his or her own issue, and in no way binds the IRS to take a similar position when dealing with different taxpayers

Definition of 'Depreciation'

1. A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes.

2. A decrease in an asset's value caused by unfavorable market conditions.

Investopedia explains 'Depreciation'

1. For accounting purposes, depreciation indicates how much of an asset's value has been used up. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with IRS rules about how and when the deduction may be taken based on what the asset is and how long it will last.

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.

2. Currency and real estate are two examples of assets that can depreciate or lose value. During the infamous Russian ruble crisis in 1998, the ruble lost 25% of its value in one day. During the housing crisis of 2008, homeowners in the hardest-hit areas, such as Las Vegas, saw the value of their homes depreciate by as much as 50%.

Definition of 'Amortization'

1. The paying off of debt with a fixed repayment schedule in regular installments over a period of time. Consumers are most likely to encounter amortization with a mortgage or car loan.

2. The spreading out of capital expenses for intangible assets over a specific period of time (usually over the asset's useful life) for accounting and tax purposes. Amortization is similar to depreciation, which is used for tangible assets, and to depletion, which is used with natural resources. Amortization roughly matches an asset’s expense with the revenue it generates.

Investopedia explains 'Amortization'

1. With auto loan and home loan payments, at the beginning of the loan term, most of the monthly payment goes toward interest. With each subsequent payment, a greater percentage of the payment goes toward principal. For example, on a 5-year, $20,000 auto loan at 6% interest, the first monthly payment of $386.66 would be allocated as $286.66 to principal and $100 to interest. The last monthly payment would be allocated as $384.73 to principal and $1.92 to interest. At the end of the loan term, all principal and all interest will be repaid.

2. Suppose XYZ Biotech spent $30 million dollars on a patent with a useful life of 15 years. XYZ Biotech would record $2 million each year as an amortization expense.

The IRS allows taxpayers to take a deduction for the following amortized expenses: geological and geophysical expenses incurred in oil and natural gas exploration, atmospheric pollution control facilities, bond premiums, research and development, lease acquisition, forestation and reforestation, and certain intangibles such as goodwill, patents, copyrights and trademarks. Amortization can be calculated easily using most modern financial calculators, spreadsheet software packages such as Microsoft Excel or amortization charts and tables.

Definition of 'Bankruptcy'

A legal proceeding involving a person or business that is unable to repay outstanding debts. The bankruptcy process begins with a petition filed by the debtor (most common) or on behalf of creditors (less common). All of the debtor's assets are measured and evaluated, whereupon the assets are used to repay a portion of outstanding debt. Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations incurred prior to filing for bankruptcy.

Investopedia explains 'Bankruptcy'

Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply can't be paid while offering creditors a chance to obtain some measure of repayment based on what assets are available. In theory, the ability to file for bankruptcy can benefit an overall economy by giving persons and businesses another chance and providing creditors with a measure of debt repayment.

Bankruptcy filings in the United States can fall under one of several chapters of the Bankruptcy Code, such as Chapter 7 (which involves liquidation of assets), Chapter 11 (company or individual "reorganizations") and Chapter 13 (debt repayment with lowered debt covenants or payment plans). Bankruptcy filing specifications vary widely among different countries, leading to higher and lower filing rates depending on how easily a person or company can complete the process.

Definition of 'Opportunity Cost'

1. The cost of an alternative that must be forgone in order to pursue a certain action. Put another way, the benefits you could have received by taking an alternative action.

2. The difference in return between a chosen investment and one that is necessarily passed up. Say you invest in a stock and it returns a paltry 2% over the year. In placing your money in the stock, you gave up the opportunity of another investment - say, a risk-free government bond yielding 6%. In this situation, your opportunity costs are 4% (6% - 2%).

Investopedia explains 'Opportunity Cost'

1. The opportunity cost of going to college is the money you would have earned if you worked instead. On the one hand, you lose four years of salary while getting your degree; on the other hand, you hope to earn more during your career, thanks to your education, to offset the lost wages.

Here's another example: if a gardener decides to grow carrots, his or her opportunity cost is the alternative crop that might have been grown instead (potatoes, tomatoes, pumpkins, etc.).

In both cases, a choice between two options must be made. It would be an easy decision if you knew the end outcome; however, the risk that you could achieve greater "benefits" (be they monetary or otherwise) with another option is the opportunity cost.

Definition of 'Fixed Cost'

A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses that have to be paid by a company, independent of any business activity. It is one of the two components of the total cost of a good or service, along with variable cost.

Investopedia explains 'Fixed Cost'

An example of a fixed cost would be a company's lease on a building. If a company has to pay $10,000 each month to cover the cost of the lease but does not manufacture anything during the month, the lease payment is still due in full.

In economics, a business can achieve economies of scale when it produces enough goods to spread fixed costs. For example, the $100,000 lease spread out over 100,000 widgets means that each widget carries with it $1 in fixed costs. If the company produces 200,000 widgets, the fixed cost per unit drops to 50 cents.

Definition of 'Variable Cost'

A corporate expense that varies with production output. Variable costs are those costs that vary depending on a company's production volume; they rise as production increases and fall as production decreases. Variable costs differ from fixed costs such as rent, advertising, insurance and office supplies, which tend to remain the same regardless of production output. Fixed costs and variable costs comprise total cost.

nvestopedia explains 'Variable Cost'

Variable costs can include direct material costs or direct labor costs necessary to complete a certain project. For example, a company may have variable costs associated with the packaging of one of its products. As the company moves more of this product, the costs for packaging will increase. Conversely, when fewer of these products are sold the costs for packaging will consequently decrease.

Definition of 'Book Value'

1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated depreciation.

2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.

3. The initial outlay for an investment. This number may be net or gross of expenses such as trading costs, sales taxes, service charges and so on.

Also known as "net book value (NBV)."

In the U.K., book value is known as "net asset value."

Investopedia explains 'Book Value'

Book value is the accounting value of a firm. It has two main uses:

1. It is the total value of the company's assets that shareholders would theoretically receive if a company were liquidated.

2. By being compared to the company's market value, the book value can indicate whether a stock is under- or overpriced.

3. In personal finance, the book value of an investment is the price paid for a security or debt investment. When a stock is sold, the selling price less the book value is the capital gain (or loss) from the investment.

Definition of 'Par Value'

The face value of a bond. Par value for a share refers to the stock value stated in the corporate charter. Par value is important for a bond or fixed-income instrument because it determines its maturity value as well as the dollar value of coupon payments. Par value for a bond is typically $1,000 or $100. Shares usually have no par value or very low par value, such as 1 cent per share. The market price of a bond may be above or below par, depending on factors such as the level of interest rates and the bond’s credit status. In the case of equity, par value has very little relation to the shares' market price.

Also known as nominal value or face value.

nvestopedia explains 'Par Value'

For example, a bond with par value of $1,000 and a coupon rate of 4% will have annual coupon payments of $40. A bond with par value of $100 and a coupon rate of 4% will have annual coupon payments of $4.

One of the main factors that causes bonds to trade above or below par value is the level of interest rates in the economy, as compared to the bonds’ coupon rates. A bond with a 4% coupon will trade below par if interest rates are at 5%. This is because in such a scenario, investors have a choice of buying similar-rated bonds that have a 5% coupon. The price of a lower-coupon bond therefore must decline to offer the same 5% yield to investors. Likewise, a bond with a 4% coupon will trade above par if interest rates are at 3%.

A bond that is trading above par is said to be trading at a premium, while a bond trading below par is regarded as trading at a discount. During periods when interest rates are low or have been trending lower, a larger proportion of bonds will trade above par or at a premium. When interest rates are high, a larger proportion of bonds will trade at a discount.

If an investor buys a taxable bond for a price above par, the premium can be amortized over the remaining life of the bond, offsetting the interest received from the bond and hence reducing the investor’s taxable income from the bond. Such premium amortization is not available for tax-free bonds purchased at a price above par.

Par value, in finance and accounting, means stated value or face value.

A bond selling at par is priced at 100% of face value. Par is also used to refer to its original issue value or its value upon redemption at maturity. This amount is typically $1000 per bond.

Par value stock has no relation to market value and, as a concept, is somewhat archaic. The par

value of a share of stock is the value stated in the corporate charter below which shares of that class cannot be sold upon initial offering; the issuing company promises not to issue further shares below par value, so investors can be confident that no one else will receive a more favorable issue price. Thus, par value is the nominal value of a security which is determined by the issuing company to be its minimum price. This was far more important in unregulated equity markets than in the regulated markets that exist today.[why?] The par value of stock remains unchanged in a bonus stock issue but it changes in a stock split

Definition of 'Venture Capital'

Money provided by investors to startup firms and small businesses with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets . It typically entails high risk for the investor, but it has the potential for above-average returns.

Investopedia explains 'Venture Capital'

Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies or ventures with limited operating history, which cannot raise funds by issuing debt. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity

Definition of 'Initial Public Offering - IPO'

The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.

In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market .

Also referred to as a "public offering."

Investopedia explains 'Initial Public Offering - IPO'

IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, which are subject to additional uncertainty regarding their future values.

Definition of 'Qualified Institutional Buyer - QIB'

A corporate entity that falls within the "accredited investor" category, defined in SEC Rule 501 of Regulation D. A Qualified Institutional Buyer (QIB) is one that owns and invests, on a discretionary basis, at least $100 million in securities; for a broker -dealer the threshold is $10 million. QIBs encompass a wide range of entities, including banks, savings and loans associations, insurance companies, investment companies, employee benefit plans or entities owned entirely by accredited investors. Banks and S&L associations must also have a net worth of at least $25 million to satisfy the QIB criteria.

Investopedia explains 'Qualified Institutional Buyer - QIB'

QIBs must be either domestic or foreign institutions. Individuals are not permitted to be QIBs, regardless of their level of wealth or financial sophistication.

QIBs are permitted to participate in the market for securities under Rule 144A, which is a safe harbor exemption from the SEC's registration requirements for securities. Transactions generally conducted under Rule 144A include: private placements of debt or preferred securities by public issuers, offerings by foreign issuers who wish to avoid U.S. reporting requirements, and common stock offerings by non-reporting issuers.

Definition of 'Book Building'

The process by which an underwriter attempts to determine at what price to offer an IPO

based on demand from institutional investors.

Investopedia explains 'Book Building'

An underwriter "builds a book" by accepting orders from fund managers indicating the number of shares they desire and the price they are willing to pay.

Book building refers to the process of generating, capturing, and recording investor demand for shares during an Initial Public Offering (IPO), or other securities during their issuance process, in order to support efficient price discovery.[1] Usually, the issuer appoints a major investment bank to act as a major securities underwriter or bookrunner. The “book” is the off-market collation of investor demand by the bookrunner and is confidential to the bookrunner, issuer, and underwriter. Where shares are acquired, or transferred via a bookbuild, the transfer occurs off-market, and the transfer is not guaranteed by an exchange’s clearing house. Where an underwriter has been appointed, the underwriter bears the risk of non-payment by an acquirer or non-delivery by the seller.

When a company wants to raise money it plans on offering its stock to the public. This is typically takes place through either an IPO or an FPO (follow-on public offers). The book building process helps determine the value of the security. Once a company determines it wants to have an IPO, it will then contact a book runner or a lead manager. The book runner will determine the price range it is willing to sell the stock. The book runner will then send out the draft prospectus to potential investors. Generally, the issue stays open for five days. At the end of the five days, the book runner determines the demand of the stock for its given price range. Once the cost of the stock has been determined, then the issuing company can decide how to divide its stock at the determined price to its bidders.[2][3]

MERGER AND ACQUISITION:The Main Idea One plus one makes three: this equation is the special alchemy of a merger or an acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies - at least, that's the reasoning behind M&A.

This rationale is particularly alluring to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or to achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

Distinction between Mergers and Acquisitions Although they are often uttered in the same breath and used as though they were synonymous, the terms merger and acquisition mean slightly different things.

When one company takes over another and clearly established itself as the new owner, the

purchase is called an acquisition. From a legal point of view, the target company ceases to exist, the buyer "swallows" the business and the buyer's stock continues to be traded.

In the pure sense of the term, a merger happens when two firms, often of about the same size, agree to go forward as a single new company rather than remain separately owned and operated. This kind of action is more precisely referred to as a "merger of equals." Both companies' stocks are surrendered and new company stock is issued in its place. For example, both Daimler-Benz and Chrysler ceased to exist when the two firms merged, and a new company, DaimlerChrysler, was created.

In practice, however, actual mergers of equals don't happen very often. Usually, one company will buy another and, as part of the deal's terms, simply allow the acquired firm to proclaim that the action is a merger of equals, even if it's technically an acquisition. Being bought out often carries negative connotations, therefore, by describing the deal as a merger, deal makers and top managers try to make the takeover more palatable.

A purchase deal will also be called a merger when both CEOs agree that joining together is in the best interest of both of their companies. But when the deal is unfriendly - that is, when the target company does not want to be purchased - it is always regarded as an acquisition.

Whether a purchase is considered a merger or an acquisition really depends on whether the purchase is friendly or hostile and how it is announced. In other words, the real difference lies in how the purchase is communicated to and received by the target company's board of directors, employees and shareholders.

Synergy Synergy is the magic force that allows for enhanced cost efficiencies of the new business. Synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from the following:

Staff reductions - As every employee knows, mergers tend to mean job losses. Consider all the money saved from reducing the number of staff members from accounting, marketing and other departments. Job cuts will also include the former CEO, who typically leaves with a compensation package.

Economies of scale - Yes, size matters. Whether it's purchasing stationery or a new corporate IT system, a bigger company placing the orders can save more on costs. Mergers also translate into improved purchasing power to buy equipment or office supplies - when placing larger orders, companies have a greater ability to negotiate prices with their suppliers.

Acquiring new technology - To stay competitive, companies need to stay on top of technological developments and their business applications. By buying a smaller company with unique technologies, a large company can maintain or develop a competitive edge.

Improved market reach and industry visibility - Companies buy companies to reach new markets and grow revenues and earnings. A merge may expand two companies' marketing and distribution, giving them new sales opportunities. A merger can also

improve a company's standing in the investment community: bigger firms often have an easier time raising capital than smaller ones.

That said, achieving synergy is easier said than done - it is not automatically realized once two companies merge. Sure, there ought to be economies of scale when two businesses are combined, but sometimes a merger does just the opposite. In many cases, one and one add up to less than two.

Sadly, synergy opportunities may exist only in the minds of the corporate leaders and the deal makers. Where there is no value to be created, the CEO and investment bankers - who have much to gain from a successful M&A deal - will try to create an image of enhanced value. The market, however, eventually sees through this and penalizes the company by assigning it a discounted share price. We'll talk more about why M&A may fail in a later section of this tutorial.

Varieties of Mergers From the perspective of business structures, there is a whole host of different mergers. Here are a few types, distinguished by the relationship between the two companies that are merging:

Horizontal merger - Two companies that are in direct competition and share the same product lines and markets.

Vertical merger - A customer and company or a supplier and company. Think of a cone supplier merging with an ice cream maker.

Market-extension merger - Two companies that sell the same products in different markets.

Product-extension merger - Two companies selling different but related products in the same market.

Conglomeration - Two companies that have no common business areas.

There are two types of mergers that are distinguished by how the merger is financed. Each has certain implications for the companies involved and for investors:

o Purchase Mergers - As the name suggests, this kind of merger occurs when one company purchases another. The purchase is made with cash or through the issue of some kind of debt instrument; the sale is taxable.

Acquiring companies often prefer this type of merger because it can provide them with a tax benefit. Acquired assets can be written-up to the actual purchase price, and the difference between the book value and the purchase price of the assets can depreciate annually, reducing taxes payable by the acquiring company. We will discuss this further in part four of this tutorial.

o Consolidation Mergers - With this merger, a brand new company is formed and both companies are bought and combined under the new entity. The tax terms are the same as those of a purchase merger.

Acquisitions As you can see, an acquisition may be only slightly different from a merger. In fact, it may be different in name only. Like mergers, acquisitions are actions through which companies seek

economies of scale, efficiencies and enhanced market visibility. Unlike all mergers, all acquisitions involve one firm purchasing another - there is no exchange of stock or consolidation as a new company. Acquisitions are often congenial, and all parties feel satisfied with the deal. Other times, acquisitions are more hostile.

In an acquisition, as in some of the merger deals we discuss above, a company can buy another company with cash, stock or a combination of the two. Another possibility, which is common in smaller deals, is for one company to acquire all the assets of another company. Company X buys all of Company Y's assets for cash, which means that Company Y will have only cash (and debt, if they had debt before). Of course, Company Y becomes merely a shell and will eventually liquidate or enter another area of business.

Another type of acquisition is a reverse merger, a deal that enables a private company to get publicly-listed in a relatively short time period. A reverse merger occurs when a private company that has strong prospects and is eager to raise financing buys a publicly-listed shell company, usually one with no business and limited assets. The private company reverse merges into the public company, and together they become an entirely new public corporation with tradable shares.

Regardless of their category or structure, all mergers and acquisitions have one common goal: they are all meant to create synergy that makes the value of the combined companies greater than the sum of the two parts. The success of a merger or acquisition depends on whether this synergy is achieved.

Definition of 'Lease '

A legal document outlining the terms under which one party agrees to rent property from another party. A lease guarantees the lessee (the renter) use of an asset and guarantees the lessor (the property owner) regular payments from the lessee for a specified number of months or years. Both the lessee and the lessor must uphold the terms of the contract for the lease to remain valid.

Investopedia explains 'Lease '

Leases are the contracts that lay out the details of rental agreements in the real estate market. For example, if you want to rent an apartment, the lease will describe how much the monthly rent is, when it is due, what will happen if you don't pay, how much of a security deposit is required, the duration of the lease, whether you are allowed to have pets, how many occupants may live in the unit and any other essential information. The landlord will require you to sign the lease before you can occupy the property as a tenant.

Definition of 'Hire Purchase'

A method of buying goods through making installment payments over time. The term hire purchase originated in the U.K., and is similar to what are called "rent-to-own" arrangements in the United States. Under a hire purchase contract, the buyer is leasing the goods and does not obtain ownership until the full amount of the contract is paid.

Investopedia explains 'Hire Purchase'

Leasing goods in this manner is a tactic commonly employed by businesses in order to enhance the appearance of earnings metrics. For instance, by leasing assets, it may be possible to keep the debt used to pay for the assets and the asset itself off the balance sheet, resulting in higher operational and return-on-asset figures. In the U.S., consumer rent-to-own arrangements are controversial because they can be used in a way which attempts to circumvent proper accounting standards.

Shareholders are stakeholders in a corporation, but stakeholders are not always shareholders. A shareholder owns part of a company through stock ownership, while a stakeholder is interested in the performance of a company for reasons other than just stock appreciation.

Stakeholders could be:

employees who, without the company, would not have jobs bondholders who would like a solid performance from the company and, therefore, a

reduced risk of default customers who may rely on the company to provide a particular good or service suppliers who may rely on the company to provide a consistent revenue stream

Although shareholders may be the largest stakeholders because shareholders are affected directly by a company's performance, it has become more commonplace for additional groups to be considered stakeholders, too.

Definition of 'Privatization'

1. The transfer of ownership of property or businesses from a government to a privately owned entity.

2. The transition from a publicly traded and owned company to a company which is privately owned and no longer trades publicly on a stock exchange. When a publicly traded company becomes private, investors can no longer purchase a stake in that company.

Investopedia explains 'Privatization'

1. One of the main arguments for the privatization of publicly owned operations is the estimated increases in efficiency that can result from private ownership. The increased efficiency is thought to come from the greater importance private owners tend to place on profit maximization as compared to government, which tends to be less concerned about profits.

2. Most companies start as private companies funded by a small group of investors. As they grow in size, they will often access the equity market for financing or ownership transfer through the sale of shares. In some cases, the process is subsequently reversed when a group of investors or a private company purchases all of the shares in a public company, making the company private and, therefore, removing it from the stock market.

Definition of 'Exchange Rate'

The price of a nation’s currency in terms of another currency. An exchange rate thus has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly. In a direct quotation, the price of a unit of foreign currency is expressed in terms of the domestic currency. In an indirect quotation, the price of a unit of domestic currency is expressed in terms of the foreign currency. An exchange rate that does not have the domestic currency as one of the two currency components is known as a cross currency, or cross rate.

Investopedia explains 'Exchange Rate'

An exchange rate has a base currency and a counter currency. In a direct quotation, the foreign currency is the base currency and the domestic currency is the counter currency. In an indirect quotation, the domestic currency is the base currency and the foreign currency is the counter currency.

Most exchange rates use the US dollar as the base currency and other currencies as the counter currency. However, there are a few exceptions to this rule, such as the euro and Commonwealth currencies like the British pound, Australian dollar and New Zealand dollar.

Exchange rates for most major currencies are generally expressed to four places after the decimal, except for currency quotations involving the Japanese yen, which are quoted to two places after the decimal.

Let’s consider some examples of exchange rates to enhance understanding of these concepts.

US$1 = C$1.1050. Here the base currency is the US dollar and the counter currency is the Canadian dollar. In Canada, this exchange rate would comprise a direct quotation of the Canadian dollar. This is easy to understand intuitively, since prices of goods and services in Canada are expressed in Canadian dollars; therefore the price of a US dollar in Canadian dollars is an example of a direct quotation for a Canadian resident.

C$1 = US$ 0.9050 = 90.50 US cents. Here, since the base currency is the Canadian dollar and the counter currency is the US dollar, this would be an indirect quotation of the Canadian dollar in Canada.

If US$1 = JPY 105, and US$1 = C$1.1050, it follows that C$1.1050 = JPY 105, or C$1 = JPY 95.02. For an investor based in Europe, the Canadian dollar to yen exchange rate constitutes a cross currency rate , since neither currency is the domestic currency.

Exchange rates can be floating or fixed. While floating exchange rates – in which currency rates are determined by market force – are the norm for most major nations, some nations prefer to fix or peg their domestic currencies to a widely accepted currency like the US dollar.

Exchange rates can also be categorized as the spot rate – which is the current rate – or a forward rate, which is the spot rate adjusted for interest rate differentials.

Definition of 'Exchange Rate'

The price of a nation’s currency in terms of another currency. An exchange rate thus has two components, the domestic currency and a foreign currency, and can be quoted either directly or indirectly. In a direct quotation, the price of a unit of foreign currency is expressed in terms of the domestic currency. In an indirect quotation, the price of a unit of domestic currency is expressed in terms of the foreign currency. An exchange rate that does not have the domestic currency as one of the two currency components is known as a cross currency, or cross rate.

Investopedia explains 'Exchange Rate'

An exchange rate has a base currency and a counter currency. In a direct quotation, the foreign currency is the base currency and the domestic currency is the counter currency. In an indirect quotation, the domestic currency is the base currency and the foreign currency is the counter currency.

Most exchange rates use the US dollar as the base currency and other currencies as the counter currency. However, there are a few exceptions to this rule, such as the euro and Commonwealth currencies like the British pound, Australian dollar and New Zealand dollar.

Exchange rates for most major currencies are generally expressed to four places after the decimal, except for currency quotations involving the Japanese yen, which are quoted to two places after the decimal.

Let’s consider some examples of exchange rates to enhance understanding of these concepts.

US$1 = C$1.1050. Here the base currency is the US dollar and the counter currency is the Canadian dollar. In Canada, this exchange rate would comprise a direct quotation of the Canadian dollar. This is easy to understand intuitively, since prices of goods and services in Canada are expressed in Canadian dollars; therefore the price of a US dollar in Canadian dollars is an example of a direct quotation for a Canadian resident.

C$1 = US$ 0.9050 = 90.50 US cents. Here, since the base currency is the Canadian dollar and the counter currency is the US dollar, this would be an indirect quotation of the Canadian dollar in Canada.

If US$1 = JPY 105, and US$1 = C$1.1050, it follows that C$1.1050 = JPY 105, or C$1 = JPY 95.02. For an investor based in Europe, the Canadian dollar to yen exchange rate constitutes a cross currency rate , since neither currency is the domestic currency.

Exchange rates can be floating or fixed. While floating exchange rates – in which currency rates are determined by market force – are the norm for most major nations, some nations prefer to fix or peg their domestic currencies to a widely accepted currency like the US dollar.

Definition of 'Systematic Risk'

The risk inherent to the entire market or an entire market segment. Systematic risk, also known as “undiversifiable risk,” “volatility” or “market risk,” affects the overall market, not

just a particular stock or industry. This type of risk is both unpredictable and impossible to completely avoid. It cannot be mitigated through diversification, only through hedging or by using the right asset allocation strategy.

Investopedia explains 'Systematic Risk'

For example, putting some assets in bonds and other assets in stocks can mitigate systematic risk because an interest rate shift that makes bonds less valuable will tend to make stocks more valuable, and vice versa, thus limiting the overall change in the portfolio’s value from systematic changes. Interest rate changes, inflation, recessions and wars all represent sources of systematic risk because they affect the entire market. Systematic risk underlies all other investment risks.

The Great Recession provides a prime example of systematic risk. Anyone who was invested in the market in 2008 saw the values of their investments change because of this market-wide economic event, regardless of what types of securities they held. The Great Recession affected different asset classes in different ways, however, so investors with broader asset allocations were impacted less than those who held nothing but stocks.

If you want to know how much systematic risk a particular security, fund or portfolio has, you can look at its beta, which measures how volatile that investment is compared to the overall market. A beta of greater than 1 means the investment has more systematic risk than the market, less than 1 means less systematic risk than the market, and equal to one means the same systematic risk as the market.

Whereas this type of risk affects a broad range of securities, unsystematic risk affects a very specific group of securities or an individual security. Unsystematic risk can be mitigated through diversification.

Definition of 'Unsystematic Risk'

Company- or industry-specific hazard that is inherent in each investment . Unsystematic risk, also known as “nonsystematic risk,” "specific risk," "diversifiable risk" or "residual risk," can be reduced through diversification. By owning stocks in different companies and in different industries, as well as by owning other types of securities such as Treasuries and municipal securities, investors will be less affected by an event or decision that has a strong impact on one company, industry or investment type. Examples of unsystematic risk include

a new competitor, a regulatory change, a management change and a product recall.

Investopedia explains 'Unsystematic Risk'

For example, the risk that airline industry employees will go on strike, and airline stock prices will suffer as a result, is considered to be unsystematic risk. This risk primarily affects the airline industry, airline companies and the companies with whom the airlines do business. It does not affect the entire market system, so it is an “unsystematic” or “nonsystematic” risk.

An investor who owned nothing but airline stocks would face a high level of unsystematic risk. By diversifying his or her portfolio with unrelated holdings, such as health-care stocks and retail stocks, the investor would face less unsystematic risk. However, even a portfolio of well-diversified assets cannot escape all risk. It will still be exposed to systematic risk, which is the uncertainty that faces the market as a whole. Even staying out of the market completely will not take an investor’s risk down to zero, because he or she would still face risks such as losing money from inflation and not having enough assets to retire.

Investors may be aware of some potential sources of unsystematic risk, but it is impossible to be aware of all of them or to know whether or when they might occur. An investor in health-care stocks may be aware that a major shift in government regulations could affect the profitability of the companies they are invested in, but they cannot know when new regulations will go into effect, how the regulations might change over time or how companies will respond.

Definition of 'Sensitivity Analysis'

A technique used to determine how different values of an independent variable will impact a particular dependent variable under a given set of assumptions. This technique is used within specific boundaries that will depend on one or more input variables, such as the effect that changes in interest rates will have on a bond's price.

Sensitivity analysis is a way to predict the outcome of a decision if a situation turns out to be different compared to the key prediction(s).

Investopedia explains 'Sensitivity Analysis'

Sensitivity analysis is very useful when attempting to determine the impact the actual

outcome of a particular variable will have if it differs from what was previously assumed. By creating a given set of scenarios, the analyst can determine how changes in one variable(s) will impact the target variable.

For example, an analyst might create a financial model that will value a company's equity (the dependent variable) given the amount of earnings per share (an independent variable) the company reports at the end of the year and the company's price-to-earnings multiple (another independent variable) at that time. The analyst can create a table of predicted price-to-earnings multiples and a corresponding value of the company's equity based on different values for each of the independent variables.

Simulation Analysis

A risk measurement technique based on ranges of historical price changes and/or Monte Carlo methods. Typically, the position or portfolio is revalued at each price or set of prices generated by the price generation mechanism. Either the largest absolute loss or a conservative percentile of losses reflecting a confidence interval analysis is selected as the appropriate measure of the “worst case” position or portfolio risk.

Definition of 'Global Depositary Receipt - GDR'

1. A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a foreign branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches.

2. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros.

Investopedia explains 'Global Depositary Receipt - GDR'

1. A GDR is very similar to an American Depositary Receipt.

2. These instruments are called EDRs when private markets are attempting to obtain euros.

Definition of 'Mumbai Interbank Offered Rate - MIBOR'

The interest rate at which banks can borrow funds, in marketable size, from other banks in the Indian interbank market. The Mumbai Interbank Offered Rate (MIBOR) is calculated everyday by the National Stock Exchange of India (NSEIL) as a weighted average of lending rates of a group of banks, on funds lent to first-class borrowers.

Investopedia explains 'Mumbai Interbank Offered Rate - MIBOR'

The MIBOR was launched on June 15, 1998 by the Committee for the Development of the Debt Market, as an overnight rate. The NSEIL launched the 14-day MIBOR on November 10, 1998, and the one month and three month MIBORs on December 1, 1998. Since the launch, MIBOR rates have been used as benchmark rates for the majority of money market deals made in India.

Definition of 'Securities And Exchange Board Of India - SEBI'

The regulatory body for the investment market in India. The purpose of this board is to maintain stable and efficient markets by creating and enforcing regulations in the marketplace.

Investopedia explains 'Securities And Exchange Board Of India - SEBI'

The Securities and Exchange Board of India is similar to the U.S. SEC. The SEBI is relatively new (1992) but is a vital component in improving the quality of the financial markets in India, both by attracting foreign investors and protecting Indian investors.

Definition of 'Covenant'

A promise in an indenture, or any other formal debt agreement, that certain activities will or will not be carried out. Covenants in finance most often relate to terms in a financial contracting, such as loan documentation stating the limits at which the borrower can further lend or other such stipulations. Covenants are put in place by lenders to protect themselves from borrowers defaulting on their obligations due to financial actions detrimental to themselves or the business.

Investopedia explains 'Covenant'

Covenants are most often represented in terms of financial ratios which must be maintained for businesses which lend, such as a maximum debt-to-asset ratio or other such ratios. Covenants can cover everything from minimum dividend payments to levels that must be maintained in working capital to key employees remaining with the firm. Once a covenant is broken, the lender will typically have the right to call back the obligation from the borrower.

Definition of 'Record Date'

The date established by an issuer of a security for the purpose of determining the holders who are entitled to receive a dividend or distribution.

Investopedia explains 'Record Date'

On the record date, a company looks to see who its shareholders or "holders of record" are. Essentially, a date of record ensures the dividend checks get sent to the right people.

Definition of 'Inventory'

The raw materials, work-in-process goods and completely finished goods that are considered to be the portion of a business's assets that are ready or will be ready for sale. Inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders/owners.

Definition of 'Economic Order Quantity - EOQ'

An inventory-related equation that determines the optimum order quantity that a company should hold in its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs. The full equation is as follows:

where : S = Setup costs D = Demand rate P = Production cost I = Interest rate (considered an opportunity cost, so the risk-free rate can be used)

Investopedia explains 'Economic Order Quantity - EOQ'

The EOQ formula can be modified to determine production levels or order interval lengths, and is used by large corporations around the world, especially those with large supply chains and high variable costs per unit of production.

Despite the equation's relative simplicity by today's standards, it is still a core algorithm in the software packages that are sold to the largest companies in the world.

Definition of 'Dematerialization - DEMAT'

The move from physical certificates to electronic book keeping. Actual stock certificates are slowly being removed and retired from circulation in exchange for electronic recording.

Investopedia explains 'Dematerialization - DEMAT'

With the age of computers and the Depository Trust Company, securities no longer need to be in certificate form. They can be registered and transferred electronically.