Finance Concepts and terminologies, Study notes of Finance

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THE BEGINNER’S MODULE

LET THE GAME BEGIN….

ALKESH DINESH MODY INSTITUTE FOR

FINANCIAL AND MANAGEMENT STUDIES

(ADMIFMS)

Director’s Message Dear Students, Heartiest congratulations for achieving one of the most sought after management seat in today’s competitive world. Today after completing over 15 glorious years in imparting management and entrepreneurship education, ADMI boasts of its expert industry faculty and alumni who now occupy top management positions across the globe. I can wholehearted promise your journey at ADMI to be exciting and one aided by promising infrastructural facilities on campus, hitherto unknown amongst university run institutes which include a fully equipped conference hall, air-conditioned class rooms, Wi-Fi enabled campus, a library with over 22000 books on diverse fields and topics with business journals, two computer labs, and not to mention constant guidance from faculty members and seniors. Apart from regular management training, you shall also be interacting with the corporate community through various endeavours. So, at ADMI, if you put in your 100% in these coming two years, you can reach far ahead than your expected career goals! I welcome you on our campus with a hope that in the coming two years there would be your overall development and you shall make a positive difference to society and to your college, ADMI. All the Best!!! Regards, I/C Director, Dr. Smita Shukla

Table of Contents

Introduction to Finance .......................................................................................................................... Capital Market.................................................................................................................................... Money Market .................................................................................................................................. Introduction to Banking ........................................................................................................................ Type of Banks .................................................................................................................................... Types of Deposits .............................................................................................................................. Investment Banking .......................................................................................................................... Risk and Risk Management ................................................................................................................... Principles of risk management.......................................................................................................... Introduction to Mutual Funds............................................................................................................... Important Terminologies in MFs....................................................................................................... Introduction to Derivatives................................................................................................................... Introduction to Economics.................................................................................................................... Fiscal Policy ....................................................................................................................................... Methods of funding ...................................................................................................................... GDP ............................................................................................................................................... Monetary Policy ................................................................................................................................ Inflation:........................................................................................................................................ Foreign Policy .................................................................................................................................... FDI: Foreign direct investment...................................................................................................... FII: Foreign Institutional Investments ........................................................................................... Introduction to Accounting................................................................................................................... Assumptions underlying accounting information:............................................................................ The Accounting Equation .................................................................................................................. The Double Entry System.................................................................................................................. The T Account ............................................................................................................................... Debit and Credit Rules .................................................................................................................. Introduction to Marketing .................................................................................................................... Marketing Management ................................................................................................................... Marketing Mix................................................................................................................................... Bottom-of-the-pyramid ....................................................................................................................

Needs, Wants, and Demands............................................................................................................ Brands .............................................................................................................................................. Brand Terminologies .................................................................................................................... Competition ...................................................................................................................................... Customer Needs................................................................................................................................ SWOT Analysis................................................................................................................................... PEST (Political, Economic, Social and Technological Factors) Analysis ............................................. Five Forces Model ............................................................................................................................. The Boston Consulting Group (BCG) Matrix ..................................................................................... Product Life Cycle.............................................................................................................................. Marketing Research .......................................................................................................................... Consumer Behaviour......................................................................................................................... Freud’s Theory .............................................................................................................................. Maslow’s Theory ........................................................................................................................... Herzberg’s Theory ......................................................................................................................... Consumer buying procedure ........................................................................................................ Factors affecting Consumer Behaviour......................................................................................... Ansoff Matrix ................................................................................................................................ Selecting a Product-Market Growth Strategy................................................................................... Segmentation, Targeting and Positioning......................................................................................... Segmentation and Targeting......................................................................................................... Positioning..................................................................................................................................... Introduction to Systems........................................................................................................................ Information System Resources: ........................................................................................................ Classification of Information Systems:.............................................................................................. Operation Support systems: ......................................................................................................... Management Support Systems..................................................................................................... Important Terminologies in Systems ................................................................................................ E-commerce .................................................................................................................................. E-business ..................................................................................................................................... ERP ................................................................................................................................................ Business Intelligence ..................................................................................................................... Networking.................................................................................................................................... Area Networks ..............................................................................................................................

Introduction to Finance Indian Financial System

Classification of Financial Markets Debt : An amount of money borrowed by one party from another. Many corporations / individuals use debt as a method for making large purchases that they could not afford under normal circumstances. A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest. Equity : What Does Equity Mean?

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’. Financial market is a generic term for the market in which financial instruments are traded. It enables investors to buy & sell financial securities (eg shares, bonds), commodities (eg metals, agricultural goods) at low transaction costs. Financial markets facilitate –
   • The raising of capital (capital markets)
   • The transfer of risk (derivatives markets)
   • International trade (currency markets) On the basis of term of credit i.e whether credit is supplied for a long term or short term loan, financial markets are classified into Money Market and Capital Market.

Initial Public Offering (IPO) IPO is an abbreviation for "Initial Public Offering" which signifies a company's first sale of shares to the public. When a company declares an IPO, it is on its way to becoming a "Public" company, hence the term "going public." With an IPO, a company raises money from the public for the first time through sale of Shares and Debentures. Important Points to consider in IPO: a. At an IPO, a company can sell the shares at Par (at Nominal or Face Value) or at a Premium (above Nominal or Face value) depending on how long the company has been in existence, its profitability, current Assets and many other factors. b. If we apply for an IPO and are allocated some New Issues, we are said to be purchasing from the Primary Market. However, if we purchase shares or debentures already listed and trading at the Stock Exchange through Brokers, we are said to be purchasing from the Secondary Market. c. IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value. b. Secondary Market A market where investors purchase securities or assets from other investors, rather than from issuing companies themselves. The national exchanges - such as National Stock exchange (NSE), New York Stock Exchange (NYSE) etc. are secondary markets. A newly issued IPO will be considered a primary market trade when the shares are first purchased by investors directly; after that any shares traded will be on the secondary market, between investors themselves. In the primary market prices are often set beforehand, whereas in the secondary market, basic forces like

supply and demand determine the price of the security. Secondary markets are characterized by:

1. High liquidity: - In the secondary market, securities are sold by and transferred from one investor or speculator to another. Hence, the secondary market is highly liquid.
2. High Volatility: - The prices of securities are subject to changes in the policies of the government, market and company itself thus making them highly volatile. Bond Market: Bond market provides financing through the issuance of bonds, and enables subsequent trading. It deals with long term loan given by financial institutions for a period exceeding 1 year. Money Market It is a market for short term assets which deals with financial claims, assets and securities having a maturity period of 1 year. The money market is the global financial market for short-term borrowing and lending. It provides short-term liquid funding for the global financial system. Money market is further categorized into: a. Call Money Market: Lending and borrowing transactions in the call money market are for a short duration ranging from overnight to fortnight. Overnight means when money can be borrowed or lent for a day or up to 14 days. Call Loans are repayable on demand, at the option of the borrower or lender. Therefore all loans are very liquid and next only to cash. b. Treasury bill market: It is an important instrument of short term borrowing by the government due to its high liquidity, zero default risk, ready availability, low transaction cost, assured yield and negligible risk of capital depreciation. The Treasury bill loan ranges from duration of 14 days to 364 days. c. Commercial bill market: It is keystone of a well developed and active money market. They are generally associated with business lending or high end investment lending. d. Collected loan market: This refers to a market for loans against collateral securities.

Index Methodology: Eligibility Criteria for Selection of Constituent Stocks: i. Market impact cost is the best measure of the liquidity of a stock. It accurately reflects the costs faced when actually trading an index. For a stock to qualify for possible inclusion into the NIFTY50, have traded at an average impact cost of 0.50% or less during the last six months for 90% of the observations, for the basket size of Rs. 100 Million. ii. The company should have a listing history of 6 months. iii. Companies that are allowed to trade in F&O segment are only eligible to be constituent of the index. iv. A company which comes out with an IPO will be eligible for inclusion in the index, if it fulfills the normal eligibility criteria for the index for a 3 month period instead of a 6 month period. Index Re-Balancing: Index is re-balanced on semi-annual basis. The cut-off date is January 31 and July 31 of each year, i.e. For semi-annual review of indices, average data for six months ending the cut-off date is considered. Four weeks prior notice is given to market from the date of change. Index Governance: A professional team manages all NSE indices. There is a three-tier governance structure comprising the Board of Directors of NSE Indices Limited, the Index Advisory Committee (Equity) and the Index Maintenance Sub-Committee. About Sensex: The Sensex measures the stock prices of 30 listed companies of the Bombay Stock Exchange. If the Sensex rises up, then it shows that the stock price of most companies of Bombay Stock Exchange (BSE) has increased and if the Sensex decreases; it shows that the stock price of most companies of BSE has dropped down. The main reason for the ups and downs in the Sensex is the fluctuations in the prices of these 30 companies. Methodology Free Float Market Capitalization No. Of Constituents 30 Launch Date January 1, 1986 Base Year 1978 - 79 Base Value 100 Calculation Frequency Real- Time – Every minute basis For Example: Suppose that the Sensex is currently at 20000 points. For convenience, we assume that there are only 2 registered companies in BSE , one of which is named "Delta" and the other is "Gamma". Assume that the value of one share of “Delta” is Rs. 200 and it has a total outstanding share of 10000 whereas the value of one share of “Gamma” is Rs. 500 and its total outstanding share is

Both of these companies will have the total market capitalization of the BSE (200 x 10000) + (500 x 7500) = Rs. 57.50 lacs. Now suppose that the next day the share price of the “Delta” company rises to 250 (25% hike), and the price of the “Gamma” company's shares decreases to 450 (10% slump). Now the total market capitalization of BSE at these new share prices will be: (250 x10000) + (450x 7500) = Rs. 58.75 lacs.

Due to the fluctuations in the prices of the two companies, the market capitalization of BSE rose to the level of 58.75 lacs form the previous level of Rs. 57.50 lacs; which is showing 2.17% increase in the market capitalization of the BSE. So due to this increase in price the Sensex will reach 20434, which is 2.17% higher than 20000.

markets for previously issued securities, and offer advisory services to investors. Investment banks are essentially financial intermediaries, who primarily help businesses and governments with raising capital, corporate mergers and acquisitions, and securities trade. In USA such banks are the most important participants in the direct market by bringing financial claims for sale. They help interested parties in raising capital, whether debt or equity in the primary market to finance capital expenditure. Private and Offshore Banks Private Banks are involved in asset management of wealthy clients (called High Net worth clients). Offshore Banks refer to banks in low taxation/supervisory locations such as Switzerland. A majority of these banks are private banks. United Bank of Switzerland is one of the largest private banks. Switzerland is the hub for global private banking activities. Swiss banks are legendary for their discreetness. They are prohibited by Swiss law from divulging their client details to any third party including legal, national or law enforcement agencies. Savings Bank A Savings Bank is a traditional bank that accepts deposits. However, now its functional areas have widened. They offer multiple services to the end customers in addition to the primary service of accepting deposits. Commercial Bank A commercial bank is a bank that works with businesses. Commercial banks handle banking needs for large and small businesses, including:

• Basic accounts such as savings and checking
• Lending money for real and capital purchases
• Letters of credit
• Payment and transaction processing
• Foreign exchange

Types of Deposits The primary types of deposits offered by banks are:

• Demand Deposits – Savings and Current
• Time/Term deposits
• Flexi deposits Banks offer a number of deposits, which could be combinations of the above basic types of accounts. E.g. ICICI Bank’s Money Multiplier Account combines the features of a fixed deposit and a savings account. Demand Deposit: A demand deposit is one where the deposit amount needs to be paid to the depositors on demand. This type of deposit account is also called an operating account. The types of demand deposits include Saving Account and Current Account. Savings Account: Savings Deposit is a form of demand deposit, which is subject to restrictions as to the number and amount of withdrawals allowed by the bank during a given period. Current Account: A current account is a running and active account opened by a businessman / companies / partnership firms. Banks normally do not pay interest for these accounts. A current account is a kind of demand deposit where withdrawals are permitted any number of times as long as the required balance exists. Generally, a current account is meant for businesses or high net-worth individuals characterized by high transaction volume. Term Deposit: A term deposit, also called Time Deposit, is one which is invested for a fixed term for a fixed rate of interest (applies for the duration of the term). When the term is over it can be withdrawn or it can be renewed for another term. The longer the term, the better the yield (returns) on the money. Notice Deposit: Notice Deposit is a interest-bearing term deposit for specific period, but withdrawal is possible on giving at least one complete banking day’s notice. This type

Main activities and units Front office Investment banking Investment management Structuring Merchant banking Research Strategy Middle Office Risk Management Finance Compliance Back Office Operations Technology Thus, functions of Investment banks include:

1. Raising Capital Corporate Finance is a traditional aspect of Investment banks, which involves helping customers raise funds in the Capital Market and advising on mergers and acquisitions. Generally the highest profit margins come from advising on mergers and acquisitions. Investment Bankers have had a palpable effect on the history of global business, as they often proactively meet with executives to encourage deals or expansion.
2. Brokerage Services Brokerage Services, typically involves trading and order executions on behalf of the investors. This in turn also provides liquidity to the market. These brokerages assist in the purchase and sale of stocks, bonds, and mutual funds.
3. Proprietary trading Under Investment banking proprietary trading is what is generally used to describe a situation when a bank trades in stocks, bonds, options, commodities, or

other items with its own money as opposed to its customer’s money, with a view to make a profit for itself. Though Investment Banks are usually defined as businesses, which assist other business in raising money in the capital markets (by selling stocks or bonds); they are not shy of making profit for itself by engaging in trading activities.

4. Research Activities Research, is usually referred to as a division which reviews companies and writes reports about their prospects, often with "buy" or "sell" ratings. Although in theory this activity would make the most sense at a stock brokerage where the advice could be given to the brokerage's customers, research has historically been performed by Investment Banks (JM Morgan Stanley, Goldman Sachs etc). The primary reason for this is because the Investment Bank must take responsibility for the quality of the company that they are underwriting Vis a Vis the prices involved to the investor.
5. Sales and Trading Often referred to as the most profitable area of an investment bank, it is usually responsible for a much larger amount of revenue than the other divisions. In the process of market making, investment banks will buy and sell stocks and bonds with the goal of making an incremental amount of money on each trade. Sales are the term for the investment banks sales force, whose primary job is to call on institutional investors to buy the stocks and bonds, underwritten by the firm.