Financial terms
Green Shoe
Option:-An option that allows the
underwriting of an IPO to sell additional shares to the public if the demand is
high.
Underwriters:-A company or other entity
that administers the public issuance and distribution of securities from a
corporation or other issuing body. An underwriter works closely with the
issuing body to determine the offering price of the securities, buys them from
the issuer and sells them to investors via the underwriter's distribution
network.
Underwriters generally receive underwriting fees
from their issuing clients, but they also usually earn profits when selling the
underwritten shares to investors. However, underwriters assume the
responsibility of distributing a securities issue to the public. If they can't
sell all of the securities at the specified offering price, they may be forced
to sell the securities for less than they paid for them, or retain the
securities themselves.
Underwriting
:- 1. The process by which investment bankers
raise investment capital from investors on behalf of corporations and
governments that are issuing securities (both equity and debt).
2. The process of issuing insurance policies
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 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), best offering price and time to bring it to market.
Also referred to as a "public offering".
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 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.
Prospectous:-1. A formal legal document
describing details of a corporation. The prospectus is generally created for a
proposed offering (usually an IPO), but it can still be obtained from existing
businesses as well. The prospectus includes company facts that are vitally
important to potential investors.
2. In the case of mutual funds, a prospectus
describes the fund's objectives, history, manager background and financial
statements.
Red herring:-A preliminary registration
statement that must be filed with the SEC describing a new issue of stock and
the prospects of the issuing company.
There is no price or issue size stated in the red
herring, and it is sometimes updated several times before being called the
final prospectus. It is known as a red herring because it contains a passage in
red that states the company is not attempting to sell its shares before the
registration is approved by the SEC.
Minority
interest:-A
significant but non-controlling ownership of less than 50% of a company's
voting shares by either an investor or another company.
In accounting terms, if a company owns a minority
interest in another company but only has a minority passive position (i.e. it
is unable to exert influence), then all that's recorded from this investment
are the dividends received from the minority interest. If the company has a
minority active position (i.e. it is able to exert influence), then both
dividends and a percent of income are recorded on the company's books.
Consolidate:-To combine the assets,
liabilities, and other financial items of two or more entities into one.
Annual
Report:-A
corporation's annual statement of financial operations. Annual reports include
a balance sheet, income statement, auditor's report, and a description of the
company's operations.
Cash Flow:- An accounting statement -
the statement of cash flows - that shows the amount of cash generated and used
by a company in a given period, calculated by adding non-cash charges (such as
depreciation) to net income after taxes. Cash flow can be attributed to a
specific project, or to a business as a whole. Cash flow can be used as an
indication of a company's financial strength.
Burn Rate:-The rate at which a new
company uses up its venture capital to finance overhead before generating
positive cash flow from operations. In other words, it's a measure of negative
cash flow.
Venture Capital:-Financing for new businesses. In
other words, 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 and typically
entails high risk for the investor but has the potential for above-average
returns.
Off balance
sheet financing:-A form of financing in which large capital expenditures are kept off
of a company's balance sheet through various classification methods. Companies
will often use off-balance-sheet financing to keep their debt to equity (D/E)
and leverage ratios low, especially if the inclusion of a large expenditure
would break negative debt covenants
Lease:-An agreement in which one
party gains a long-term rental agreement, and the other party receives a form
of secured long-term debt.
Capital
lease:-A
lease considered to have the economic characteristic of asset ownership.
Operating
lease:-A
lease contract that allows the use of an asset, but does not convey rights
similar to ownership of the asset.
Stock
Option:-A
privilege, sold by one party to another, that gives the buyer the right, but
not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price
within a certain period or on a specific date.
In the U.K.
American options can be exercised anytime between
the date of purchase and the expiration date. European options may only be
redeemed at the expiration date. Most exchange-traded stock options are
American.
Derivative:- In finance, a security
whose price is dependent upon or derived from one or more underlying assets.
The derivative itself is merely a contract between two or more parties. Its
value is determined by fluctuations in the underlying asset. The most common
underlying assets include stocks, bonds, commodities, currencies, interest
rates and market indexes. Most derivatives are characterized by high
leverage.
Futures contracts, forward contracts, options and
swaps are the most common types of derivatives. Because derivatives are just
contracts, just about anything can be used as an underlying asset. There are
even derivatives based on weather data, such as the amount of rain or the
number of sunny days in a particular region.
Derivatives are generally used to hedge risk, but
can also be used for speculative purposes. For example, a European investor
purchasing shares of an American company off of an American exchange (using
American dollars to do so) would be exposed to exchange-rate risk while holding
that stock. To hedge this risk, the investor could purchase currency futures to
lock in a specified exchange rate for the future stock sale and currency
conversion back into euros.
Forward
Contracts:-A
cash market transaction in which delivery of the commodity is deferred until
after the contract has been made. Although the delivery is made in the future, the
price is determined on the initial trade date.
Most forward contracts don't have standards and
aren't traded on exchanges. A farmer would use a forward contract to
"lock-in" a price for his grain for the upcoming fall harvest.
Futures:-A financial contract
obligating the buyer to purchase an asset (or the seller to sell an asset),
such as a physical commodity or a financial instrument, at a predetermined
future date and price. Futures contracts detail the quality and quantity of the
underlying asset; they are standardized to facilitate trading on a futures
exchange. Some futures contracts may call for physical delivery of the asset,
while others are settled in cash. The futures markets are characterized by the
ability to use very high leverage relative to stock markets.
Futures can be used either to hedge or to speculate
on the price movement of the underlying asset. For example, a producer of corn
could use futures to lock in a certain price and reduce risk (hedge). On the
other hand, anybody could speculate on the price movement of corn by going long
or short using futures
The primary difference between options and futures
is that options give the holder the right to buy or sell the underlying asset
at expiration, while the holder of a futures contract is obligated to fulfill
the terms of his/her contract.
In real life, the actual delivery rate of the
underlying goods specified in futures contracts is very low. This is a result
of the fact that the hedging or speculating benefits of the contracts can be
had largely without actually holding the contract until expiry and delivering
the good(s). For example, if you were long in a futures contract, you could go
short the same type of contract to offset your position. This serves to exit
your position, much like selling a stock in the equity markets would close a
trade.
Hedge:-Making an investment to
reduce the risk of adverse price movements in an asset. Normally, a hedge
consists of taking an offsetting position in a related security, such as a
futures contract.
An example of a hedge would be if you owned a stock,
then sold a futures contract stating that you will sell your stock at a set
price, therefore avoiding market fluctuations.
Investors use this strategy when they are unsure of
what the market will do. A perfect hedge reduces your risk to nothing (except
for the cost of the hedge).
Leverage:-1. The use of various financial
instruments or borrowed capital, such as margin, to increase the potential
return of an investment.
2. The amount of debt used to finance a firm's
assets. A firm with significantly more debt than equity is considered to be
highly leveraged.
Leverage helps both the investor and the firm to
invest or operate. However, it comes with greater risk. If an investor uses
leverage to make an investment and the investment moves against the investor,
his or her loss is much greater than it would've been if the investment had not
been leveraged - leverage magnifies both gains and losses. In the business
world, a company can use leverage to try to generate shareholder wealth, but if
it fails to do so, the interest expense and credit risk of default destroys
shareholder value.
Operating leverage:-A measurement of the degree to
which a firm or project relies on fixed rather than variable costs.
The higher the degree of operating leverage, the
greater the potential danger from forecasting risk. That is, if a relatively
small error is made in forecasting sales, it can be magnified into large errors
in cash flow projections. If the majority of costs for a company or project are
fixed, then the costs will remain high while sales are dropping.
Over
hedging:-A
hedged position in which the offsetting position is for a greater amount than
the underlying position held by the firm entering into the hedge. While hedging
ensures price certainty, over-hedging can in effect become partly a hedge and
partly a speculative investment and can unduly hurt a firm.
1. What
is Mutual Fund?
Mutual
Fund is a security that gives small investors access to a well-diversified
portfolio of equities, bonds and other securities. Each shareholder
participates in the gain or loss of the fund. Shares are issued and can be
redeemed as needed. The fund's net asset value (NAV) is determined each day.
Each mutual fund portfolio is invested to match the objective stated in the
prospectus.
2. What
is meant by Portfoilo Management?
The
art and science of making decisions about investment mix and policy, matching
investments to objectives, asset allocation for individuals and institutions,
and balancing risk vs. performance. Portfolio management is all about
strengths, weaknesses, opportunities, and threats in the choice of debt vs.
equity, domestic vs. international, growth vs. safety, and numerous other
trade-offs encountered in the attempt to maximize return at a given appetite
for risk.
3. What
are Primary Markets and Secondary Markets?
Primary
Markets: Primary Markets are places where a newly issue security is first
offered. All subsequent trading of this security occurs is done in the
secondary market. Secondary Market is a place where securities are traded after
they are initially offer in the primary market. Most trading occurs in the secondary market. The NYSE, as
well as all other stock exchanges and the bond markets, are secondary markets. seasoned
securities are traded in the secondary market. Security is a piece of paper
that proves ownership of stock and other investment
4. What
is meant by Amortization and Impairment?
Amortization
Definition 1: The gradual elimination of a liability,
such as a mortgage, in regular payments over a specified period of time. Such
payments must be sufficient to cover both principle and interest.
Definition 2: Writing off an intangible asset and
investments over the projected life of the asset.
Negative amortization: A gradual increase in mortgage debt that
occurs when the monthly payment is insufficient to cover the interest due, and
the balance owed keeps increasing (at least in the first few years).
Amortization method: A distribution calculation method for making penality-free
early withdrawal from retirement
accounts. An assumed earnings rate is applied over the duration of the
individual's life expectancy, while the life expectancy is determined using IRS
tables. Generally, the rate must be within 120% of the applicable federal
long-term rate. Once the rate is determined, the withdrawal remains fixed each
year.
Impairment
The
amount by which, stated capital is reduced by distributions and losses is
called impairment.
5.Definition of buyout
Buyout is defined as the purchase of a
company or a controlling interest of a corporation's shares or product line or
some business. A leveraged buyout is
accomplished with borrowed money or by issuing more stock.
Definition
of leveraged buy-out - LBO
Leveraged Buy-out or LBO is an acquisition
of a business using mostly debt and a small amount of equity. The debt is
secured by the assets of the business. In LBO, the acquiring company uses its
own assets as collateral for the loan in hopes that the future cash flows will
cover the loan payments.
Definition of management buy-in - MBI
Management Buy-in or MBI is the purchase
of a business by an outside team of managers who have found financial backers
and plan to manage the business actively themselves.
Definition
of management buy-out – MBO
Management Buy-out or MBO is the term used
for the funds provided to enable operating management to acquire a product line
or business, which may be at any stage of development, from either a public or
private company.
6.Recapitalisation
recapitalization
- Recapitalization is a financing technique used by companies to defend against
hostile takeovers. By recapitalization, a company restructures it's debt and
equity mixture without affecting the total amount of balance sheet equity.
7. seed capital
Seed
Capital is the money used to purchase equity-based interest in a new or
existing company. This seed capital is usually quite small because the venture
is still in the idea or conceptual stage.
8. Definition of escrow
Escrow is a way of transferring or
exchanging property and/or money using a neutral third party. the escrow
process is covered by significant regulation and protection through the use of
licensing and/or bonding.**The holding of funds, documents, securities, or other property by an impartial third party for the other two participants in a business transaction. When the transaction is completed, the escrow agent releases the entrusted property.
Escrow is most commonly associated with real estate transactions. When a home or property changes hands, the seller of the property transfers the property title to the escrow agent. Similarly, the buyer either transfers funds or has a bank transfer mortgage proceeds to the escrow agent. When all conditions of the purchase agreement are met, the escrow agent assigns the property title to the purchaser and distributes the funds to the seller.
With the Internet age, escrow services have gone digital. Many online businesses allow geographically remote buyers and sellers to purchase goods and services from each other. With large purchases, the potential for fraud is significant. To deal with this issue, online escrow services have been established to provide a reliable third-party means of completing a sale. In response, fraudulent operators have increased their own level of sophistication and established illegitimate escrow services; it is vital that anyone using such a service proceed with caution!
Escrow can also be used to exchange non-tangible goods. In the sale of intellectual property such as software or industrial designs, a balance must be struck between how much detail is revealed by the seller while simultaneously confirming the legitimacy of the potential buyer. With each side opening its position to an escrow agency instead of to each other, everyone remains protected. Software escrow can also be used to hold source code in escrow in case a licensee runs into a problem the licensor won’t or can't fix. If such a situation occurs, the escrow agent can release the source code to the licensee, allowing them to fix the problem for themselves
