Financial Terms

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Glossary of financial terms :

Glossary of financial terms By-Binny Bhogal Rawat HLCPE College,Ahmedabad


ADR An acronym for American Depository Receipt. It is an instrument traded at U.S. exchanges representing a fixed number of shares of a foreign company that is traded in the foreign country. The ADR route enables companies to raise funds in the U.S. financial markets, provided they meet the stringent regulatory norms for disclosure and accounting.


Amortization The reduction of an amount at regular intervals over a certain time period. This term is used to refer to the reduction of debt by regular payment of loan installments during the life of a loan. It is also used to described the accounting process of writing off an intangible ASSET.

Arbitrage :

Arbitrage The simultaneous purchase and sale transactions in a security or a commodity, undertaken in different markets to profit from price differences.

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For example, an arbitrageur may find that the share of The Tata Iron and Steel Company (TISCO) is trading at a lower price, at the Vadodara Stock Exchange compared to the exchange at Bombay. Hence, he may simultaneously purchase TISCO stock in Vadodara at, say Rs.250, and sell in Bombay at a higher price, say Rs.256, making a profit of Rs.6 per share less expenses.

Beta (b) :

Beta (b) A measure of the volatility of a stock in relation to the market. More specifically, it is the index of SYSTEMATIC RISK, indicating the sensitivity of return on a security or a PORTFOLIO to return from the market. It is the slope of the regression line, known as the CHARACTERISTIC LINE, which shows the relationship of an ASSET with the market. For measuring market returns, a proxy such as a broad-based index is used.

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If b exceeds 1, the security is more volatile than the market, and is termed an ‘Aggressive Security’. For example, a beta of 1.3 implies that a security’s return will increase by 13 percent when the return from the market goes up by 10 percent. An asset whose beta is less than 1 is termed a ‘defensive security’.

Bought-out Deal :

Bought-out Deal The sale of securities under a negotiated agreement between an issuer and the investing institution, as an alternative to a PUBLIC ISSUE. The intent on the part of the buyer is to offload the securities later in the market at a profit. Bought-out deals are commonplace in issues of the Over the Counter Exchange of India (OTCEI). The advantage to the issuing company is the saving in time and cost that a public issue would entail

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It is a big help to unlisted companies and projects, which must see through a gestation period before tapping the PRIMARY MARKET.

Capital Adequacy Ratio :

Capital Adequacy Ratio A requirement imposed on banks to have a certain amount of capital in relation to their ASSETS . In simple terms, this means that for every Rs.100 of risk-weighted assets, a bank must have Rs. X in the form of capital. Capital is classified into Tier I or Tier II

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Tier I comprises share capital and disclosed reserves, whereas Tier II includes revaluation reserves, hybrid capital and subordinated debt. Further, Tier II capital should not exceed Tier I capital. The capital risk-weighted assets ratio system introduced by the Reserve Bank of India (RBI) in 1992, in accordance with the standards of the Bank for International Settlements (BIS),

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Foreign banks operating in India -8% Indian banks with branches abroad -8% All other banks -8% But , The ratio is being raised to 9% , to take effect from March 31, 2000.

Chit Fund :

Chit Fund This is a non-banking financial intermediary. A chit fund scheme typically involves the collection of periodic subscriptions from enrolled members, which is then disbursed as a loan to a member. The member is selected either by lot or through an auction. The promoter is also called the ‘Foreman’ and the capital given out is called ‘Prize Money’.


Consortium A term generally used in banking: It refers to a group of banks associating for the purpose of meeting the financial requirements of a borrower, such as WORKING CAPITAL or a term loan. In business, the term applies to a group of companies, national or international, working together as a joint venture, sharing resources and having interlocking financial agreements.

Corporate Governance :

Corporate Governance The manner in which a company is managed. The term, Corporate Governance connotes the importance of responsibility and accountability of a company’s management to its shareholders and other stakeholders, viz., employees, suppliers, customers and the local community.

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It calls for ethics, morals and good practices running in a company. Good corporate governance would be reflected in generally good performance, clean business practices, improved disclosure and sound policies relating to capital expenditure, financing and dividend payment, which will enhance shareholders’ wealth


Disinvestments The sale of shareholding by an individual or institution in order to raise cash.

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