Wednesday, July 10, 2013




01. Financial instruments are bought and sold in the financial market
02. Banks, mutual funds, insurance companies, stock exchanges are financial shops and constitute the financial market place
03. The financial market consists of two parts:
·         Money market and
·         Capital market
04. Money market deals with financial instruments which mature in less than one year
05. These instruments are:
·         Cash
·         Call money(also called overnight money)
·         Notice money
·         Term money
·         Fixed deposits maturing in less than one year
·         Treasury bills
06. Call money is the money borrowed from other banks or from financial institutions for one night
·         It helps the borrowing bank to satisfy the statutory requirement to have minimum cash balances
07. Notice money is the money borrowed by banks from other banks or financial institutions for less than fifteen days
08. Notice money helps the borrowing bank to satisfy the requirement of maintaining the deposits with the Reserve Bank of India
09. Cash Reserve Ratio called as CRR is stipulated by the Reserve Bank of India from time to time
10. Term money is the money lent for fifteen days or more but for less than 365 days
11. Treasury bills are issued by Reserve Bank of India
12. Treasury bills are for durations of 91 days or 364 days
13. The modality of issue of these bonds is auction. The rate of return will depend on the bond duration and the bid price at which bonds are bought
14. Fixed deposit receipts remain with banks for durations of less than one year
15. Commercial papers are issued by corporate to fund their working capital requirement for periods ranging from seven days to a year
16. Corporates with tangible net worth (capital plus free reserves) of not less than Rs. 4 crores are allowed to issue commercial papers as working capital within the limits sanctioned by banks
17. The commercial paper is issued in denominations of Rs. 5 lakhs or multiples thereof.
18. A commercial paper represents as unsecured loan


19. Financial instruments having maturity of one year or more, form the capital market instruments. These include debt instruments which promise to reply a borrowed amount.
20. A debt instrument will state:
·         Amount lent/borrowed through the instrument
·         Duration of the loan and therefore a date of maturity
·         Rate of interest which may be fixed or varying in specified ways
21. Bonds, certificates of deposits, commercial paper are all debt instruments and they may be secured or unsecured
22. A rise in the interest rates leads to a fall in the prices of debt instruments, as fewer investors would like to buy instruments offering lower interest
23. A public limited company can raise capital by issuing
·         Debt instruments also known as bonds or debentures and/or
·         Equity meaning shares
24. A bond or debenture holder receives interest as provided in the bond and return of capital in maturity
25. A debentureholder or bond holder is the creditor to the company whereas the shareholder is the owner of the company
26. The shareholder is entitled to share the profits earned by the company, whereas the debentureholder is not entitled to share the profits earned by the company
27. The shareholder receives his share in the form of dividends
28. The debentureholder receives interest for the amount lent out by him to the company
29. Shares are classified into ordinary shares or preference share shares
30. Ordinary shares can also be called as equity shares
31. If a company makes a profit and decides to pay dividends, then the preference share holders will be paid first.
32. In the case of cumulative preference share holders, even if profits are not declared in a particular year, they will be entitled to receive dividend for that year also, when the company pays dividends any time in future
33. In the case of non cumulative preference shares, however, the dividend for the year will lapse, if so dividend is declared
34. Ordinary shareholders are paid dividends from the profits remaining after paying the preference shareholders
35. The rate of dividend in preference shares is predetermined
36. It is included in the nomenclature of the preference shares. It is similar to the interest rate on a debt instrument
37. The difference is that in the case of debt instruments, the interest has to be paid regardless of the performance of the company, while dividends on preference shares depend on the profits
38. There is no limit on the dividends payable to ordinary shareholders
39. Preference shares are not traded in the stock exchange
40. However, they can be sold back to the issuing company or to other buyers through negotiated deals
41. Ordinary shares are traded in the market, mostly through stock exchanges
42. Depending on the dividends paid in the past and the prospects of the company, in the future, the demand for, and therefore, the prices of ordinary shares may fluctuate, sometimes even during the course of a day
43. The ordinary shareholder is an owner of the company to the extend of his/her holding
44. As the owner he has the privilege through voting rights in shareholders’ meetings of appointing the Board of directors approving the accounts and other major decisions pertaining to the management of the company
45. In practice this is nominal as the weight of the vote is related to the number of shares held and bigger shareholders like the promoters or institutions, will effectively make all the decisions


46. The capital pertaining to a company can be classified as authorized capital, issued capital, subscribed capital and paid up capital
47. Authorised capital is the amount which the company can raise through issue of equity shares
48. Issued capital is the amount for which shares have been issued either through initial public offering or through private placements
49. Float refers to the shares which are available for trading
50. Outstanding shares is the sum total of float and shares which are not traceable (viz. issued to employees as stock options)
51. Market capitalization is the market price of the outstanding shares of a company
52. Earnings per share refers to the post tax profits of a company for a year divided by the number of equity shares
53. Price earning ratio shows the wealth created
54. Beta value of a share shows whether the share’s market price is going to fluctuate in tune with the market, more than the market or less than the market
55. Risk premium is the higher return which an investor in shares expects over and above the interest on fixed deposit or a debt instrument. In case the average return in a debt instrument is 6% and the average return in shares is 13% the 7% differential is called risk premium because of the risk an investor in share bears
56. Relationship between interest rates and stock prices – generally stock prices fall when interest rates rise
57. In the above example, if the interest rates are increased to 8% the risk premium will come down to 5%
58. This makes the share less attractive relatively. Some investors are likely to switch their preferences to debt instruments and to that extent the demand for share will register a fall and consequential fall in prices
59. Relationship between inflation rates and stock prices – rising inflation rate pushes the cost of production and distribution high and this brings down the profits and dividends to shareholders and results in fall in the share prices
60. Mutual fund schemes can be classified in the following manner:
·         Investment goals
·         By time horizon
·         By specific needs and choices
61. When it comes to investment goals, the schemes are classified into income schemes, growth schemes and balanced schemes
62. When it comes to time horizon, the schemes are classified into open ended schemes, close ended schemes and interval schemes
63. When it comes to specific needs and choices, the schemes are classified into tax savings schemes, sectoral schemes and index schemes
64. Under income scheme, the goal is to provide regular income to investors and the fund is invested in debt instruments, fixed income government bonds and commercial securities including bond and debentures
65. Under growth scheme, the goal is to provide capital appreciation over a period of time and the majority of investment is made in equities
66. Under balanced schemes, the goal is to provide capital appreciation coupled with income and these funds are invested both in debt and equity. The schemes provide periodical dividend distribution apart from moderate growth
67. Any of the aforesaid schemes may be open ended scheme and one can purchase the units of the scheme at the current net asset value and so can one sell the units at the prevailing net asset value and the liquidity is the great advantage
68. Close ended schemes are for a period generally from three to fifteen years. The scheme accepts subscriptions during an open window of a few days. The units are redeemed (repurchased) by the fund, at the end of the scheme period
69. Under close ended scheme the units of such schemes are listed for trading on the stock exchange to provide and term liquidity to investors
70. Some funds also provide for periodic mid term buy back at prevailing net asset value. Investors may be allowed at least one of the two mid term exit routes out of the close ended schemes
71. The interval schemes combine the features of open ended and close ended schemes. These are open for sale or redemption during a defined interval at the prevailing net asset value
72. Tax savings schemes are approved by the Government of India and investments therein quality for income tax relief
73. Sectoral schemes aim to invest the funds in particular sectors of economy viz. infrastructure, IT, Pharma etc. The sectoral profile of a scheme is likely to be always riskier than a diversified profits
74. Index schemes mimic an index and the funds for such scheme shall be invested in the securities which constitute the sensex and in the same proportion as in the sensex
75. While dealing with unit linked policies, the following features are to be studied:
·         Amount of risk cover
·         Amount in the policy fund
·         Amount in the policy fund which can be withdrawn
·         Impact of withdrawal (on guarantees of any kind)
·         Impact on policy benefits if premium payments are stopped
·         Internal rate of return from year to year
·         Forfeiture provisions in the policy
·         Number of free withdrawals
·         Number of free switches between funds
·         Whether allocation to multiple funds possible

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