Glossary of Financial Terms

Financial Terms (Listed Alphabetically):

AAI – Alliance Of American Insurers
American Depositary Receipt – ADR
Alligator Spread
American Option
Asian Option
At The Money
Automatic Exercise
Balloon Option
Arbitrage Pricing Theory
Adjusted Present Value
Average Revenue Per User
Book Value
Compounded Annual Growth Rate
Competitive Advantage Period
Capital Expenditures
Competitive Disadvantage Period
Chief Executive Officer
Certainty Equivalent
Cash Flow
Cash Flow To Bondholders
Cash Flow From Investing Activities
Operating Cash Flow
Cash Flow Return On Investment
Cost Of Goods Sold
Depreciating Asset
Depreciation and Amortization
Discounted Cash Flow
Net Debt Issuance
Dividend Discount Model
Dividend Growth Model
Dividend Per Share
Earnings Before Interest and Tax or EBIT
Earnings Before Interest, Tax, Depreciation and Amortization or EBITDA
Economic Book Value
Economic Growth Quotient
Economic Profit
Earnings Per Share or EPS
Equity Risk Premium
Employee Stock Option
Economic Value
Economic Value Added
Free Cash Flow or FCF
Free Cash Flow To Equity or FCFE
Free Cash Flow To The Firm Or FCFF
Future Value
Fiscal Year End
Generally Accepted Accounting Principles – GAAP
Gross Cash Flow
Gross Domestic Product or GDP
Gross Investment
Invested Capital
Interest Payments
Initial Public Offering Or IPO
Internal Rate of Return
Leveraged Buyout
London Interbank Offered Rate
Last In, First Out
Non-Depreciating Assets
Net Financial Expense
Net Financial Obligations
Non-Interest-Bearing Current Liability
Non-Operating Asset
Net Operating Profit After Tax (NOPAT)
Net Operating Profit Before Tax (NOPBT)
Net Operating Profit Before Taxes and Amortization
Net Operating Profit Less Adjusted Taxes
Net Present Value or NPV
Operating Income
Operating Asset Turnover
Operating Margin
Operating Expenses
Price Earnings Ratio
Price Earnings To Growth Ratio
Property, Plant And Equipment
Present Value
Present Value Of Growth Opportunities
Residual Income Valuation Model
Risk Neutral Probability
Return On Assets
Return On Equity
Return On Gross Investment
Return On Invested Capital (ROIC)
Special Purpose Entity
Terminal Value
Value Creation Analysis Model
Weighted Average Cost Of Capital Or WACC
American Depository Receipts (ADR)
Accredited Investors
After-Hours Trading
Account closure (depositor account)
Accounts Payable
Accounts Receivable
Accrued Interest
Acid Test Ratio
Active Portfolio Strategy
Ad-hoc Margin
Adjustable Peg
Adjusted beta
Admission to Dealing
Advance/Decline Line
Agency Orders
Allotment Advice
Allotment Letter
American Depository Receipts (ADR) (U.S.)
Approved intermediary
Asset Allocation
Asset allocation fund
Asset-backed securities
Asset based Securitization

Asset Management
Asset Management Company
Asset Strippers
Asymmetric Information
At Best
At-the-Money Option
Aunt Jane/Aunt Agatha
Authorized Assistants
Authorized Capital
Automatic Reinvestment
Average Annual Growth Rate – AAGR
Baby Bond (U.S.)
Back Office
Backwardation/Ulta Badla/Undha Badla
Bail out of Issue
Balance Sheet
Balanced Fund
Bankers Acceptance
Bank Investment Contract
Banker to an Issue
Basis Point
Basis Risk
Basis of Allotment
Banking Regulators
Bear Hug
Bear Market
Bear Trap
Bearer Securities/Bearer Bonds
Behavioral Economics
Bench Mark
Benchmark Index
Beneficial Owner
Benefit Cost Ratio
Bid Spread
Bid-Ask Spread
Bilateral Netting
Black-Scholes model
Blank Transfer
Block Trading
Blow Out
Blue Chip
Blue Sky laws (U.S.)
Boiler Room (U.S.)
Bond Trust
Bonus Shares
Book Building Process
Book Closure
Book Runner
Breadth of the Market
Break Even Point
Broad based Fund (sub account)
Broker Dealer
Bucket Shop (U.S.)
Bull Market
Bulldog Bond
Business Day
Butterfly Spread
Buy Back
Buyer’s Comparison Memo/Objection Statement
Buy on Margin
Commodity Index
Commodity Trading
Commodity Futures
Commodity Options
Convertible Securities
Corporate Reports
Calendar Spread
Call Money
Call Option
Capital Asset Pricing Model (CAPM)
Capital Gain Distribution
Carry Over margin
Cash List
Cash Market
Cash Settlement
Cats and Dogs (U.S.)
CDSC (Contingent deferred sales charge)
Central Listing Authority
Certificate of Deposit
Chartist analysis
Cheapest to Deliver Issue
Chinese Walls
Day Trading
Defunct Company
Direct Investment Plans
Exchange Traded Fund (ETF)
Ex-Dividend Dates
Executive Compensation
Fake Seals
Phony numbers
Federal Securities Laws
Financial Planners
Foreign Direct Investment (FDIs)
Gilt Edged
Global Depository Receipts (GDR)
Golden Handcuffs
Golden Parachute
Golden Share
Good Delivery
Green Shoe Option
Gross Spread
Growth Fund
Guaranteed Coupon
Gun Jumping
Going Private

High Yields
Hammering the Market
Hand Delivery
Hedge Funds
Hedge Ratio
Identity Theft
Index Funds
Initial Public Offering (IPOs)
Insider Trading
Margin Requirements
Radar Alter (U.S)
Random Walk Theory
Retirement Options
Real time Gross Settlement (RTGS)
Record Date
Red Herring
Redemption Price
Registered Bonds
Regulation T/Regulation U
Regulatory Arbitrage
Repurchase Agreement (REPO)
Repurchase Price
Reverse Book Building
Reverse REPO
Rigged Market
Rights Issue / Rights Shares
Rolling Settlements
Ruling Price
Security and Exchange Commission: (SEC)
Securities Investor Protection Corporation: (SIPC)
Safe Harbor
Samurai Bonds
Saturday Night Special
Scorched Earth policy
Screen Based Trading
Sector Fund
Secondary Market
System for Electronic Document Analysis Retrieval (SEDAR)
Selling Short
Settlement Date
Settlement Period
Settlement Risk
Shark Repellent
Shelf Registration
Short Covering
Short Position
Short Squeeze
Sleeping Beauty
Small Firm Effect
Spin Out
Spot Delivery Contract
Staggered Board
Standard Price
Stock Dividend
Stock Index Future
Stop Order
Stock Exchange
Stock Option
Stock Splits
Straight Through Processing
Strike Price
Sub Broker
Subscribed Capital
Swap buyback
Swap Reversal
Sweat Equity
Society of World Interbank Financial Telecommunications (SWIFT)
Synchronized or Pre-arranged trading
Systematic Risk
Target Company
Tender Offers
Thin Markets
Tracking Error
Tracking Stock
Trade Netting
Transaction Statement
Transfer Agent
Transfer Forms
Treasury Bills
Trust Promoter
Two Sided Market
Unit of Trading
Unsystematic risk
Upstairs Market
Value Investing
Value at Risk (VAR)
Vanilla Issue
Venture Capital
Venture Capital Fund
Vertical Spread
Volume of Trading
Voluntary Delisting
Voting Rights
Wash Sale
White Knight
Window Dressing
Winner’s Curse
X Dividend
Yankee Bonds
Yield to Maturity (YTM)
Yuppie Scam
Zero Coupon Bonds
Zero Coupon Yield Curve

A coalition consisting primarily of property-casualty insurance carriers. The Alliance of American Insurers was formed in order to provide political clout for the property-casualty insurance industry. It pursues various activities directed toward promoting its objectives to both politicians and the public. The Alliance of American Insurers is headquartered in Chicago, Illinois. The alliance promotes its objectives through various means, such as the distribution of printed material. It also conducts demographic research and provides educational programs to employees of member companies.

It refers to the closing of beneficiary and pool accounts by the investors and the clearing member at the participant’s discretion, if the client has failed in its obligations towards the participants.

It is the current liability of a corporation which appears in the balance sheet and highlights the amount due to others resulting from the purchase or manufacturing of inventory within one financial year.

It is treated as a current asset in the balance sheet and refers to the amount due to be received by a business or merchandise from a customer for services or goods provided on credit.

This term is defined by various securities laws that characterize investors who can be allowed to invest in certain high risk investments which include limited partnerships, seed money, hedge funds and angel investor networks.

In the United States, this term is used by the Securities and Exchange Commission (SEC) under Regulation D to identify investors who have less requirements for the financial assistance provided by certain government filings.

It refers to range of instruments like caps, swaps, and collars, where the notional principal amount on which the instrument is based increases successively during its life.

It is the interest which has accumulated since the previous coupon date. A buyer usually compensates the seller, either in the same price or as a separate payment, for the interest accrued if the security is sold between two payment dates.

Also known as quick asset ratio or liquidity ratio, it is a measurement of corporate liquidity and is obtained as the value of cash equivalents and accounts receivable divided by current liabilities.

Any individual or corporation, having a legal entity, who intends to acquire or gain financial control over another corporation through cash payment or exchange of shares.

A strategy which uses available information and forecasting techniques to seek better performance than a buy or hold portfolio which is widely diversified.

It is the margin which is collected by the stock exchanges from members having excessive purchase positions, or unduly large outstanding position keeping in view the risk perspective.

The exchange rate of a country which is pegged or fixed compared to the dollar, and the rate may be changed from time to time.

An estimate of a security’s future beta, which is derived from the historical data, that involves modifying the security’s measured beta assuming that the security’s real beta has the tendency to move over time toward the market average beta.

Adjusted present value is the sum of net Present Value of a project, if financed solely by ownership equity, and the Present Value of any financing benefits (the additional effects of debt). This method is especially useful in case of highly leveraged transactions such as leveraged buyout where the company is loaded with an extreme amount of debt.

Finance Professionals

The formula of Adjusted Present Value (APV) is given by:

APV = Base-case Net Present Value +Net Present Value of each set of cash flows that results from financing.

It is the process of granting permission to companies to list their securities in a Stock Exchange and gaining trading facilities in the market.

It is a technical analysis tool which highlights the total of differences between advances and decline of security prices.

A financial planner who offers advice on financial matters.

The trading of shares after specified regular timing occurring at major stock exchanges like NYSE and NASDAQ is called After-Hours Trading. On a marketing day, the normal after-hours trading session continues from 4 to 8 pm EST.

These are the orders which a broker or dealer executes on behalf of a customer with another professional or retail investor.

This term is used to define unprofitable spread positions due to extremely high transaction and commission costs. Even though the trade in theory is profitable, the net profit is a loss because of these expenses.

It is the letter sent by the company to successful applicants stating allotment of shares, debentures or other securities against their applications.

It is document of title, which is negotiable in the market, issued by the company to investors stating allotment of shares, debentures or other securities to applicants.

In a Jensen index, it is used to measure the abnormal return of a security or portfolio of securities that diverges from its beta and represent the manager’s performance.

AMBI or Association of Merchant Bankers of India works in consultation with SEBI to provide efficient services and establish standard practices in merchant banking and financial services.

An ADR is a dollar-denominated negotiable certificate traded on the U.S. equity markets. This represents ownership of shares in a non-U.S. company. ADR’s are used to reduce transaction costs, and make it easier to invest in foreign companies.

This is a certificate issued by a U.S. bank as a proof of possession of the shares of a non-US company trading in a US stock exchange. ADRs can be denominated in US dollars.

It is a certificate issued in the United States representing the ownership in the shares of a foreign company that trades in the United States financial markets.

An option contract that can be exercised at any point throughout the life of the contract including the expiration date.

AMFI or Association of Mutual Funds in India is an apex body which is registered with SEBI and protects and promotes the interests of mutual funds and their unit holders.

Analyst can be an individual or a company who regularly publishes securities recommendations based on research either through print media or electronic media, on his own behalf or on the behalf of any other organization.

In finance marketing sector Analysts can be classified as: Marketing analysts, Accounting analyst or Business analyst. A marketing analyst study economic data, customer surveys, and competitors’ performance to determine company’s position and to decide its future strategy. In stock market analysts study the trend of stocks, market affecting factors, recent development of companies to estimate the future of stocks.

It is the rise in the value of a security or currency compared to another security or currency.

A person who is authorised by SEBI Board through whom the lender can deposit the securities and the borrower can borrow the securities.

It is the practice of purchasing an asset at a lower price and immediately selling it on a different market for a higher price to take advantage of the price difference between two or more markets.

Developed by economist Stephen Ross in 1976, arbitrage pricing theory is a general theory of asset pricing which contends that a relationship between the returns of a portfolio and the returns of a single asset may be charted through a linear combination of many independent macro-economic variables. These macro-economic variables are called as risk factors. In other words, the arbitrage pricing theory asserts that if two or more securities or portfolios have identical return and risk, then they should sell for one price. Since, the arbitrage pricing theory (model) gives the expected price of an asset, arbitrageurs use APT to identify and take advantage from mispriced securities.

Finance Professionals

APT gives the expected return on asset i as:

E(Ri) = Rf + b1*(E(R1) – Rf) + b2*(E(R2) – Rf) + b3*(E(R3) – Rf) + …+ bn*(E(Rn) – Rf)


Rf = Risk free interest rate (i.e. interest on Treasury Bonds)

bi = Sensitivity of the asset to factori

E(Ri) – Rf) = Risk premium associated with factori where i = 1, 2,…n

Few factors that tend to influence the price of the security are

a.) Change in GDP or industrial production

b.) Surprises in inflation (or deflation)

c.) Shifts in the Yield Curve.

APT seeks to overcome the weaknesses of Capital Asset Pricing Model as it uses fewer assumptions. While the CAPM formula requires the market’s expected return, APT uses the risky asset’s expected return and the risk premium of a number of macro-economic factors.

An arbitrageur is one who seeks to profit from imbalances between two or more markets. For example if a stock was trading on two exchanges but had different values the arbitrageur would short-sell the higher priced asset while buying the lower priced asset, thus capturing a risk-free profit.

This is an outside court settlement of financial disputed by two parties. It is also known as alternative dispute resolution (ADR) where decision is given by a third party which is legally binding to both parties.

A Share is one of the four multi-class mutual funds. This is the class that is usually characterized by a loaded fee structure.

Finance Professionals

Class A mutual fund units will commonly have a front- or rear-end load, to compensate for the sales person’s commission. Not all fund companies follow this class structure; however, it is the prominent method of distinction. Typically, the class A fund has a lower management expense ratio compared to the other classes within the same family. This is due to the load that is added to the acquisition cost, or redemption.

For the other classes refer to following

A multi-class fund with three classes of shares that are sold to the general public—Class A, Class B, and Class C—and a class that is sold only to institutional investors—Class I.

Class A shares might have a front-end sales load (a type of fee that investors pay when they purchase fund shares).

Class B shares might not have any front-end sales load, but might have a contingent deferred sales load (CDSL) (a type of fee that investors pay only when they redeem fund shares, and that typically decreases to zero if the investors hold their shares long enough) and a 12b-1 fee (an annual fee paid by the fund for distribution and/or shareholder services). Class B shares also might convert automatically to a class of shares with a lower 12b-1 fee if held by investors long enough.

Class C shares might have a 12b-1 fee and a CDSL or front-end sales load, but the CDSL or sales load would be lower than Class B’s CDSL or Class A’s front-end sales load, and the Class would not convert to another class.

Class I would be sold only to institutional investors and might have different fees and expenses.

If a fund offers multiple classes, it may describe them all in a single prospectus, or it may describe them separately in separate prospectuses. The decision as to which class best suits an investor’s investment goals should be made after careful consideration of the information disclosed in the prospectus (or prospectuses). To figure out how the costs of a mutual fund add up over time and to compare the costs of different mutual funds, you should use the a mutual fund cost calculator.

Mutual fund classes are regulated primarily under the Investment Company Act of 1940 and the rules and registration forms adopted under that Act, in particular Rule 18f-3.

For more information on this topic, please read FINRA’s “investor alert” concerning Class B shares. A seven-minute video webcast providing an overview of Class A, Class B, and Class C shares and briefly discussing breakpoints is also available on FINRA’s website.

This type of option has a payout that uses the average price over a set time period, rather than the price at maturity.

It is a part of financial planning where asset allocation to an investor is determined on the basis of the investor’s profile and his ability to take responsibilities.

It is a single mutual fund which tries to accomplish the goals of asset allocation by splitting the investment assets among stocks, bonds, and other securities to provide a consistent return to the investors.

It is a process of creating a series of assets which is collateralized by assets mortgaged against loans, and pooling the assets into financial instruments so that it can be sold to general investors.

It is the professional management of assets or investments on behalf of a customer for a fee.

It is an investment management company which handles the operations and investment decisions of a unit trust and provides management consulting services for a fee.

They are a form of corporate raiders who gains ownership of a company and sales off its assets to handle the outstanding debt incurred and make sure that the remaining assets are enough to operate the company at a profit.

These are securities whose value and income payments are derived from and collateralized by a specified pool of underlying assets.

Calls for the notification to the writer that the option has been exercised by the buyer.

It is an economic model which determines what happens when one party in a transaction knows more than his counterpart, and it is used as a source of power to determine the outcome of the transaction.

It is an instruction by the client to the dealer or broker to avail the best price or rate for the order in the market.

A term used in options trading that is used when the market price of the underlying security is at the strike price

It is a term used to describe a stock option or a warrant, whose strike price is nearly equal to the prevailing market price of the underlying stock.

It is a process of buying or selling goods or services by offering them up for bids, and then selling them to the highest bidder.

A professionally educated and trained person who can scrutinize records, and reports on the financial position of the company.

Financial auditors provide their own view on a financial audit a.k.a. audit of financial statements. They review the financial statements of a company or any other legal financial institution including governments producing an independent view on various aspects of the statement like relevancy, completeness, accuracy and presentation of the statement. Organizations can employ internal or external auditors or they can take services of Audit firms.

It is a term used to describe passive investors who don’t play active role in the management of their investments.

They are the assistants or clerks who are authorized by members to do business on their behalf, and the latter takes responsibility of all business commitments made by the formers.

It is the amount of capital which a company is authorized in its Articles of Association or Memorandum of Association to raise in the by way of equity or preference shares.

There are certain program which allows investors to set trading criteria. The buy and sell orders are executed by the program upon matching the criteria. The auto-trading system is used in various markets like stock, futures and Forex.

A procedure where the OCC (Options Clearing Corporation) automatically exercises an in-the-money option for the buyer.

It is a mechanism to encourage the shareholders to buy additional shares using their dividends or distribution out of their capital gains.

It is the average increase in the value of an individual investment in the portfolio over the period of a year.

Average revenue per user or ARPU is a widely used metric in telecommunications industry. It is derived by dividing the total revenue generated by the telecommunication company by total number of subscribers. It helps investors in determining how much a telecom company is successful in exploiting its customers’ revenue potential. Usually, the companies tend to boost ARPU by offering value added services such as messaging, data plans and downloadable contents.

It is an investment strategy of buying or selling securities in a declining market in order to balance out the purchase or sell price.

These are bonds having a face value of less than $1,000 and usually in $100 denominations.

It is a part of the office which can be a single department or multiple units which are responsible for post-trade activities.

A trading strategy where an investor owns more long options positions than short options positions.

It is a market condition in which the future prices are lower in the distant delivery months than in the near months.

It is the process in which the promoters approaches the financiers or any other persons to arrange subscriptions to bail out the issue of consideration of buy-back shares, when the public issue do not get good response from the public.

It is an accounting statement which summarizes the financial position of the company’s assets, liabilities and ownership equity as listed on a specific date like the end of the financial year.

It is a fund which combines common stock, preferred stock, bonds and short-term bonds, which provide growth and regular income while avoiding excessive risks.

This type of trading strategy is typically used in FOREX contracts whereby after a certain point the value of the payout increases to a greater ratio.

It is a phenomenon whereby an insurance company combines with a bank to sell insurance products using the bank’s sales channel.

It is a contract issued by the bank to a large corporate investor guaranteeing a specific yield on an investment over a specific period.

It is scheduled bank, as per SEBI, which performs all or any of the following activities which include acceptance of application and application monies, acceptance of allotment or call monies, refund of application monies and payment of dividend or interest warrants.

It is the terminology used to describe a short-term credit investment which is created by non-financial institutions and guaranteed by the bank.

Banking is a financial intermediary by banks which allow customers to deposit, transfer or borrow money from them. Banking rules set by government vary in different countries. Banks use deposited money for investment or lending activities.

This is the set of rules made by government bodies to accomplish bank’s objectives. Some common objectives of a bank are: Prudential, Systemic risk reduction, maintaining banking confidentiality, avoids misuse of banks, making profits from investing in business.

Bankruptcy is a legal announcement made by an individual or an organization to show its complete incapacity to pay back to its creditors and to get relief from debt or getting the debt restructured. An involuntary bankruptcy petition can be filed against a business or corporate debtor to recoup a portion of the credits.

It is the difference between the cash price or spot price and future price of future contracts which is traded in the futures market.

It is a pattern of allotment which takes into account different categories of the applicant.

It is one hundredth of a percentage point, 0.01%, which is used to measure changes in the differences between yields on fixed income securities, as these changes are of very small amounts.

It is the risk that the change in price of a hedge may vary with the change in price of assets it hedges and thereby reduces the effectiveness of the hedge.

It refers to the pessimist market operator who expects a decline in the market price of shares, and sales shares which he doesn’t posses with a hope of buying them back when the prices of shares decline.

It is a takeover strategy in which one company gives the offer to another company to buy the latter’s share at a much higher per-share price.

It is a weak or falling market which is characterized by the dominance of sellers.

It is a false signal that the rising trend of a stock has reversed when it has not, and the short sellers get trapped and forced to cover their position at higher price.

It is a debt security issued by a business entity or government, which do not require registration in the name of the owner, and both the interest and the principal are paid to the bearer of the bonds.

It is a combine study of economics and finance which uses social, cognitive and emotional factors to understand the economical decisions of individuals and institutions performing economic functions.

It is the type of security which influences the market price and future happenings.

It is the security which is used as a basis for interest rate calculations and for pricing other securities.

It is the indicator which is used as a point of reference for evaluating the performance of funds.

He is the true owner of a security although it is registered in another person’s name.

It is an indicator used in the cost-benefit analysis and used to identify the relation between the cost and benefits of a proposed project. It is used to measure both quantitative and qualitative projects.

It is a number which describes the relation of returns of stock or portfolio with the financial market as a whole.

It is the price which an individual or company is willing to pay for a security.

It is the difference between the highest price at which a market maker is willing to sell a security and the price at which a seller is willing to buy it.

It is the difference between the highest price at which a buyer is willing to pay for a security and the lowest price at which a seller is willing to sell it.

It is a legal arrangement between two parties in which they exchange only the net difference in their obligations to avoid credit or settlement risk.

It is a mathematical description of financial markets and derivative investment instruments which provides a technique for options.

When on a share transfer fund, the name of the transferee is left blank it is called as blank transfer. When the transferee fails to repay his loan, the mortgager’s name can be written onto the blank transfer and the shares will belong to the latter.

It refers to the trading of a large quantity of securities when restructuring or liquidating a large portfolio.

It refers to the securities which are sold out quickly.

It is the stock of a company having the reputation for quality, reliability and ability to generate profits in good and bad times.

It is a law in the U.S. which requires the new sellers to provide their financial details and the investors can base their judgements on the data. It protects the investors from securities fraud.

It is a high pressure sales tactics sometimes adopted by stock brokers to sell investors the firm’s house stock.

It is a negotiable certificate showing indebtedness which is issued for a period of more than one year. The bond investor lends money to the issuer and the latter, in exchange, promises to repay the loan amount on a specified maturity date plus periodic interest payments over the life of the bond.

It is a public unit trust which invests in securities and investments which have government or corporate fixed interest.

These are the shares which are issued by the companies free of cost to the shareholders in proportion to their current stocks, from the profits earned in the earlier years.

It is a process of generating, capturing and recording the investors demand for the securities during their issuance process in order to support efficient price discovery.

It is the periodic closure of the registers of members and transfer books after which the company announces the dividend or bonus to investors.

Refers to the lead merchant banker who maintains the books of securities sold for a news issue.

Book value refers to a company’s actual worth as on a balance sheet, and is equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill. It can be also defined as amount that shareholders would (in theory) receive if a company were liquidated, and all of its debts are paid off. In most cases, the book value of a company is actually less than the market capitalization of a particular company because companies are expected, generally, to grow in profit and become more profitable in the future. Usually, value investors attach a lot of importance to book value.

Finance Professionals

Book value is sometimes used in the valuation of companies which are losing money.

It refers to a rapid and strong economic or stock growth which denotes increased activity with rising prices and higher volume of business resulting from greater demand for securities.

It refers to the number of securities which are listed in the market for trading.

It refers to the sharp decline of securities or indexes in the market.

BEP refers to a no net loss or gain point as the expenses and revenue are equal in a particular strategy of stock transaction.

A fund of minimum 20 shareholders and none of the investors holding more than 10 percent of shares or units.

An agent for clients in the stock exchange who do the trading on the latter’s behalf in the market.

It refers to any individual or business entity other than banks that have the right to purchase or sell securities in the market on its own behalf of for others.

It is the commission which is paid by the clients to the brokers for buying or selling securities on their behalf in the market.

It refers to the sudden rise in share prices out of speculation and which is expected to fall soon.

It refers to fraud brokerage firms which uses telephonic sales tactics to sell securities which it wants to get rid of and has poor investment opportunities.

It refers to the illegal practice adopted by a broker in which it confirms an order to a client without even executing hope of profiting from an offsetting transaction at a future time.

It refers to an optimist market player who believes that the value of a particular security or the market as whole is going to rise.

It refers to the market condition during economic recovery when the prices of investment rise faster than their historical average as the market has lots of buyers and few sellers.

It refers to bonds which are denominated by sterling and issued in London by a non-British company.

It refers to a situation in the market when the prices tend to rise.

It is the day when trading takes place in stock exchanges.

It refers to the combined option strategy involving both bull and bear spread when their limited risk and limited profit.

It refers to the strategy of companies to repurchase their own securities.

It refers to the process of buying shares from the stockbroker in cash and the latter maintains a margin account for the customer.

It is issued to the buyers who may not have any idea about the rejection of any transaction by the computer till the sellers contact him.

It refers to a strategy adopted by buyers to enforce against the seller in an auction when the latter fails to deliver shares on the stipulated date.

It refers to the spread trade which involves both the simultaneous purchase of futures or options expiration at a particular date and the sale of the same expiring on another date.

It is the unpaid instalment of the share capital which the shareholder is called upon to pay by the company.

It refers to a financial agreement between two the buyer and the seller where the latest has the right but not the obligation to buy a security at a known price by a specified date and has to pay premium for the privilege.

It is an economic theory which serves as a model for pricing the securities which have non-diversifiable risks and determine a theoretically appropriate required rate of return of an asset, if it is added to an already well-diversified portfolio.

A capital expenditure refers to the money spent by company to buy new fixed assets or upgrade an existing fixed asset that will benefit its business beyond the taxable year. Examples of such expenditures include acquisition or up-gradation of physical assets such as equipment, property, or industrial buildings.

It is the profit which results from the sale of securities held in the fund’s portfolio for more than a year and distributed among shareholders or unit holders.

Originally developed by Harry Markowitz in 1952, capital asset pricing model shows the relationship between expected return and expected risk. It is based on the assumption that investors look for additional expected return (called the risk premium) if asked to accept additional risk.

Finance Professionals

According to this model, the expected return of a security or a portfolio is equal to the rate on a risk-free security plus a risk premium multiplied by the asset’s systematic risk.

The formula of CAPM is given by:

r= Rf + Beta*(Rm-Rf)


r= expected rate of return on the security.

Rf= rate of a risk free investment

Rm= expected excess return of the market

CAPM is useful for estimating the correct equilibrium market price of company’s shares as well as the cost of a company’s equity, taking account of the risk characteristics of a company’s investments, both business and financial risk.


a. Investors have homogenous expectation about asset returns.

b. Markets are frictionless—the borrowing rate is equal to the lending rate.

c. There are no market imperfections such as taxes etc.

It refers to the margin which the members have to pay for carrying over transactions from one settlement period to another. It is fixed by the stock exchanges.

Cash flow essentially refers to the study of cycle of cash inflows and outflows of a business, a project, or a financial product. In accounting terms, cash flow refers to the difference between the available cash at the beginning of an accounting period and that at the end of the period. If the closing balance is higher than the opening balance, then cash flow is positive. Conversely, it is negative if the opening balance is higher than the closing balance. Sales, loan proceeds, investments and the sale of assets etc. result in cash inflow while operating and direct expenses, principal debt service, and the purchase of assets etc. result in cash outflow. Cash flow indicates the health of a company or a project a positive cash flow a business/project may not survive, even if it is profitable. It is used for a number of purposes like determination of a project’s rate of return or value. Cash flow is also used to determine problems with a business’s liquidity and to find the quality of earnings.

It refers to the amount of money that the company has generated or lost from its investing activities. It includes cash flows from stocks, bonds, money received or lost from the buying and selling of subsidiaries and cash spent on physical property (such as plants and equipment). Negative Cash Flows from Investing Activities are not necessarily bad as growing companies usually require more physical investments – property, plant, and equipment (PP&E) – to ensure growth. Positive Cash Flows from Investing Activities may not be necessarily good as it may imply that the company has divested investments to generate short-term cash, potentially even at a loss from the original price paid for the investment.

Cash flow return on investment or CFROI is a valuation model that evaluates a company or business or project on the basis of cash flow. It avoids focus on corporate performance and earnings. The cash flow return on investment is calculated by dividing cash flows by the market value of the type of capital employed. Sometimes it is compared to hurdle rate to determine whether a project is worth pursuing. CFROI must be higher than hurdle rate

The basic formula is given by:

CFROI = Gross Cash Flow / Gross Investment

Cash flow to bondholder is defined as the difference between the interest paid by the firm to the bondholders and net new borrowings.

The formula is given by:

Cash flow to bondholders = interest paid by the firm to the bondholders- net new long term borrowings.

It is the list of non-specified securities which are traded usually for hand delivery, special delivery and spot delivery.

It is the market for trading of security as opposed to the market for its futures contract.

It is a settlement method used in some options and futures contracts whereby, upon the expiry or exercise, the seller do not have to deliver the actual underlying security but transfer the associated cash position.

Refers to stocks in those companies which are poorly financed.

It refers to the fee paid when a shareholder sells shares in a mutual fund within a certain number of years. It is the formal name for the load in a back-end load fund.

It is one of the two major clearing organizations in the Eurobond market which was founded in 1971 and owned by 92 banks.

CLA is enumerated in SEBI to address the issue of multiple listing of same security and to bring about uniformity in the due diligence exercise while scrutinizing all listing applications on any stock exchanges.

It is the minimum return that will compensate an investor for participating in a venture with uncertain but greater payoff. Certainty equivalents are commonly used in evaluating risk. For risk averse investors, the certainty equivalent will always be lower than the expected payoff of a risky investment.

It is a negotiable instrument which is issued by the bank and can be offered as at discount. It is usually offered for a period varying from one month to one year as an evidence of an interest bearing time deposits.

It refers to the use of charts of financial asset price movements to infer the likely course of future prices.

It refers to the least expensive underlying product that can be delivered upon expiry to satisfy the requirements of a derivative contract.

A chief executive officer (CEO) or chief executive is the highest-ranking corporate officers or executives or administrators who play the most important role in the management of an organization. Broadly speaking, the primary responsibilities of chief executive officer include developing and implementing high-level strategies, making major corporate decisions, managing the overall operations and resources of a company, and acting as the main point of communication between the board of directors and the corporate operations.

It refers to an artificial information barriers implemented within a company to avoid conflict of interest problems by separating persons who make investment decisions from persons from those who can influence their decisions.

A dividend clawback is an arrangement whereby the equity owners commit to use dividends they have received in the past to finance the cash needs of the project or corporation in the future. Clawback has a more general definition. For example, premiums paid on an insurance policy may be refunded (or clawed back) if the policy is cancelled in a certain time frame. Such an arrangement is specified in the contract and referred to as a clawback provision.

A very risky type of Real Estate Investment Trust investing in the residual cash flows of Collateralized Mortgage Obligation (CMOs). CMO cash flows are derived from the difference between the rates paid by the mortgage loan holders and the lower, shorter-term rates paid to CMO investors.

They are financial products such as currency, stock, or bond indexes which are traded in the financial markets. Its price is determined as a function of its market as a whole and is supplied without qualitative differentiation across a market.

They are agreements of contracts which are utilized to purchase or sell a specified amount of given commodity, and legally commit the buyers and sellers to a fixed price. These are based on physical commodities which include gold, silver, other precious metals and grains.

It is an index which tracks commodities to measure their performance, and allows investors to gain easier access to commodities without entering the future market.

These are contracts which allow an option writer to sell an investor the right to buy or sell a commodity at a guaranteed price for a fixed period of time, and traded on a wide array of commodities including, currencies, grains and meats.

It is a market activity, which links the producers of commodities with their commercial consumers, and generally takes place in the commodity markets.

Also known as value-growth duration, competitive advantage period is the time during which a company is expected to generate returns on incremental investment that exceed its cost of capital. The concept of CAP was first expressed by by Miller & Modigliani in 1961.

Finance Professionals

A number of factors, both internal and external, determine a company’s competitive advantage period. Important internal factors include the company’s competitive position within that industry, and management strategies while government regulations and antitrust policies comprise the key external factors.

The formula of competitive advantage period is given by



CAP = competitive advantage period

NOPAT = net operating profit after tax

WACC = weighted average cost of capital

I = annualized new investment in working and fixed capital

R = rate of return on invested capital

Competitive advantage period refers to the time during which a company is expected to generate returns on incremental investment that will be lower than its cost of capital.

Compounded annual growth rate is the geometric average of annual growth rates over a specified investment period. It is also called a “smoothed” rate of return as it minimizes the impact of volatility of periodic returns.

CAGR = {(ending value/starting value)^1/(number of years)} – 1

These are securities which have the potential to be exchanged for other forms of securities offered by the same party under certain conditions. Both the issuer and the investor must have the ability to initiate the conversion process.

They are the financial reports or formal records of companies which contains information about the financial position, performance and changes in financial position of a company that is useful to a wide range of users in making economic decisions. These are presented in a structured manner and easy to understand format called the financial statements, which are basically of four types, balance sheet, income statement, statement of retained earnings and statement of cash flows.

It refers to the expense incurred by the company in order to obtain raw materials and producing finished goods that are sold to consumers. It includes labor, materials, overhead, and depreciation. Typically, it is calculated by deducting ending inventory from the sum of beginning inventory and cost of goods purchased.

It is a practice in the financial market of buying and selling financial instruments like stocks, stock options and host of future contacts like equity index futures, interest rate futures and commodity futures, over a very short period of time and closed within the same trading day.

A company which is not carrying on business or any operations.

A depreciating asset is usually refers to a tangible asset that has a limited useful life. The value of a depreciating asset declines over the time it is used due to usage, passage of time, wear and tear, technological outdating or obsolescence, depletion, inadequacy, rot, rust, decay or other such factors.

The gradual decline in the value of an asset due to wear and tear, age, or obsolescence etc. is called depreciation. The concept of depreciation comes into play as most tangible assets have limited useful life. It distributes the cost of an asset across time periods when the asset is employed to generate revenues. Typically, depreciation expense is calculated by either a straight line depreciation method or an accelerated depreciation method. The straight line method calculates depreciation by distributing the cost evenly over the useful life of the fixed asset. On the other hand, Accelerated depreciation methods such as declining balance and sum of years digits calculate depreciation by expensing a large part of the cost at the beginning of the life of the fixed asset.

Amortization is the practice of writing off the capital expense especially the expense on intangible assets over a particular period of time. It should not be confused with depreciation as depreciation is with regard to tangible assets only. Amortization also refers to the process of paying off debt over a period of time through regular payments. The payment usually has two components. One portion of each payment is for interest while the remaining amount is applied towards the principal balance.

It is a cheap and easier way to invest without involving the stockbrokers. These are of two types, direct stock plan (DSP) and dividend reinvestment plan (DRIP).

Formally expressed by John Burr Williams for the first time in 1938, DCF is a valuation model that involves the evaluation of a project, company, or an asset by estimating future cash flows and taking into consideration the time value of money. Under this approach, all future cash flows are estimated and discounted to give their present values. Typically, the appropriate Weighted average cost of capital (WACC) is taken as the discount rate to arrive at a present value. If the value obtained through DCF model is greater than the current cost of the investment, the opportunity may be worthwhile.

DCF= CF1/(1+r)^1 + CF2/(1+r)^2 +……+CFn/(1+r)^n

CF= Cash Flow

r= discount rate (WACC)

Finance Professionals

DCF is also called the sum of a series of future cash flows, on a present value basis. Reasonable estimation of projected cash flows is quite crucial and a professional must work with management to gain an insight thorough comprehensive understanding of the project, company, or asset. Sometimes, it is quite difficult to estimate for e.g research and development costs etc. The model assumes that all cash inflows are reinvested in other projects of the company.

It is a method of stock valuation in which the value of the stock is obtained by discounting the sum of all of its future dividend payments. The stocks’ value is the net present value of all future dividends. This approach relies upon the assumption that dividends are fixed and steady, or grow at a constant rate indefinitely.

The formula is given by:

Value of Stock= D/r-g


D= Expected dividend per share

r= required rate of return

g= expected growth rate in perpetuity

Dividend growth model is a valuation method which takes into consideration dividend per share and its expected growth. This model assumes that dividends grow at a constant rate in perpetuity. Thus, it is usually employed during the valuation of companies belonging to for mature and stable industries, having steady dividend growth.

The formula is given by:

Intrinsic Value= Current Dividend* (1+Dividend Growth)/(Required Return-Dividend Growth)

Dividend per share or DPS is the amount of dividend that a stockholder will receive for each ordinary share they hold. It is calculated by dividing the total amount of dividends paid by the company by number of common shares outstanding.


Dividend Per Share = Total Amount Of Dividends Paid Outstanding.

EBIT is an indicator of a company’s profitability, calculated as revenue minus expenses, excluding tax and interest. It is widely used in cross company observations and comparisons as it eliminates the effect of capital structure and taxes. It is also called as Operating Profit or Operating Earnings.

The formula is given by:

EBIT = Revenue – Operating Expenses

EBITDA is essentially net income with interest, taxes, depreciation, and amortization added back to it. EBITDA can be used to analyze and compare profitability between companies and industries because it nullifies the effects of financing and accounting decisions. However, this is a non-GAAP measure that allows a greater amount of discretion as to what is (and is not) included in the calculation. This also means that companies often change the items included in their EBITDA calculation from one reporting period to the next.

Finance Professionals

It is sometimes used by debtholders to measure the creditworthiness of a company. In theory, companies with higher EBITDA are supposed to adequately cover their debt payments. However, many experts don’t find it a much useful metric as companies have to ultimately pay interest, taxes, depreciation, and amortization.

EPS is defined as total earnings divided by the number of shares outstanding. It is an important indicator of a firm’s profitability. Comparing EPS of two companies is a convenient way to compare the earnings of companies since it is unlikely that any two companies will have the same number of shares outstanding. Moreover, it also useful in comparing the performance trend of a company in different accounting periods.

Net Income- Dividends On Preferred Stocks/Average Outstanding Shares

It is defined as book value of a company that allows for valuation of goodwill, inventories, real estate, and other assets at their current market value. The economic book value is a better measure of the cash that investors have put at risk in the firm and upon which they expect to accrue some returns.

Economic Growth Quotient is a ratio that represents the value of expected economic profit growth relative to current earnings in perpetuity.

Broadly speaking, economic profit is defined as the difference between the revenue generated from the sale of an output and its opportunity costs of the inputs used. Opportunity costs here imply the alternative returns that must be forgone in order to pursue a certain action.

The basic formula is given by

Economic profit = NOPAT – opportunity cost of capital.

A positive economic profit indicates that a firm has added value for shareholders.

It is a useful measure to determine the value of assets and services. It is defined as the amount of money or goods or services that is considered to be a fair equivalent for something else and is measured by the maximum amount of other things that a person is willing to give up for a particular asset or service.

Devised by Stern Stewart & Co., economic value added is useful in finding the true economic profit of a company by deducting the capital costs from its operating profit (adjusted for taxes on a cash basis.)

The formula for calculating EVA is as follows:

= Net Operating Profit After Taxes (NOPAT) – (Capital * Cost of Capital)

EDGAR or Electronic Data-Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required by law to fill forms with the U.S. Securities and Exchange Commission (SEC).

In order to compensate, retain, and attract employees, many companies reward their employees by issuing a call option on the common stock of a company in the form of non-cash compensation. Employee stock options (ESOs) are non-standardized calls and are not generally traded on an exchange. They come with what is called a vesting period, i.e the option can be exercised the option only after this period elapses, which is generally a few years.

It refers to the additional return that an individual stock or the overall stock market provides over a risk-free interest rate. This excess return entices investors for taking on the relatively higher risk of the equity market. Typically, the rate paid on Treasury bills is taken as risk-free rate. Riskier the investment, higher is the equity risk premium.

In terms of the Capital Asset Pricing Model (CAPM), equity risk premium is the slope of the Securities Market Line (SML).

The Ex-Dividend Date or Reinvestment date is the first date after the declaration of dividend on which the buyer of a stock is not entitled to receive the next dividend payment.

It is an investment fund which is traded on stock exchanges like stocks, and is the most popular type of exchange-traded product.

It is the total pay or financial compensation which an executive officer receives within a corporation.

These are bogus seal created by fraudsters after misusing the official seal or logo from the regulator’s website.

FSL comprises of series of statutes, which in turn authorize a series of regulations announced by the Securities and Exchange Commission to regulate the securities industry. The Securities Act of 1933 and the Securities Exchange Act of 1934 are the two main statutes involved in FSL.

Financial planners are professionals who help people in personal financial planning and dealing with different financial issues like retirement planning, risk management, tax planning, business succession planning etc.

Fiscal year end refers to the completion of one-year, or 12-month, accounting period. Companies can choose to have fiscal year periods that end on on any day throughout the year.

FDIs are the direct investment in productive assets by companies incorporated in foreign countries. Inward foreign direct investment and outward foreign direct investment are the two types of FDI.

It is a crime and civil law violation, which aims at cheating people or entities of money or any other valuables.

FCF refers to the amount of cash flow available for distribution among all the claim holders of an including equity holders, debt holders, preferred stock holders, convertible security holders, etc. In other words, FCF is the amount of cash that is left with the firm, after the payment of all cash expenses and investments.

The formula of FCF is given by:

FCF= Net Income+ Amortization and Depreciation- Changes In Working Capital- Capital Expenditures.

FCF gives a fair idea about the quality of a firm’s earnings. It also helps in determining the ease with which firms can grow and pay dividends to shareholders. Sometimes, even profitable businesses have negative cash flows. Companies having sound financial health generate positive free cash flow, which means they have surplus cash they can use to pay dividends and buyback shares.

FCFE is a measure used to determine how much cash is available to pay to a company’s equity shareholders after accounting for all expenses, reinvestment, and debt repayment. FCFE is commonly used to gauge the health of companies. Positive FCFE indicates what can be paid out to equity holders (as a dividend or repurchased stock) without harming the firm’s operations or growth opportunities while negative FCFE, it implies that the firm must issue new equity to raise cash.

The formula is given by:

FCFE = Net Income – Net – Change in Net Working Capital + New Debt – Debt Repayment.

FCFF is a metric used to determine a firm’s financial health and profitability by measuring how much cash is available for all claim holders in the firm (debt holders and share holders) after all taxes and needs for reinvestment have been met.

The formula of FCFF is given by:

FCFF = EBIT(1 – tax rate) – CapEx + Depreciation – Change in non-cash working capital

This model assumes that there is no interest expense or tax benefit from that interest expense.

Positive FCFF implies that there is sufficient cash to either service debt (through interest payments or principal repayments) and / or service the equity holders (through dividends or share repurchases). On the other hand, negative FCFF means that the firm has not generated sufficient revenue to cover its costs and will have to raise more cash, either through issuing more debt or selling more equity.

Simply put, future value is the principal plus any interest or return gained from an investment over time. It denotes the value of an investment at a certain date in the future, expressed in terms of its equivalent value to a specified sum today, taking into account the effects of inflation, interest rates, or currency values. The concept is primarily used in time value of money calculations.

The basic formula of Future Value is

FV = PV*(1+r)^t


FV= Future Value

PV= Present Value

r= Rate of interest

t= Time

It is a Small trading area just outside the New York Stock Exchange.

Generally Accepted Accounting Principles or GAAP is a collection of accounting principles, standards and procedures that companies use while preparing financial statements and handling specific accounting situations. The Financial Accounting Standards Board, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission provide guidance about acceptable accounting practices. GAAP has been imposed on companies primarily to standardize the reporting of financial statements in the United States.

It is a mutual fund that invests in various Governments issued securities, in addition to the top quality corporate debt.

It is a certificate issued by a depository bank, which purchases shares of foreign companies and deposits it on the account.

It is a trading platform used for derivatives, futures and commodity contracts. It is used mainly for after hours trading.

A company is said to be going private when the outstanding stocks of a company are repurchased by employees or private investors, and the company stops being publicly traded.

It is a system of financial incentives usually in a broking firm, to keep an employee from leaving the company.

It is an agreement between the company and an employee, usually upper management, awarding generous compensation to them in the anticipation of a takeover.

It is a type of share, which gives the power to outvote all other shares in certain specified condition, usually the take over bids. It is held by the government in most cases after the privatization.

It means that the security traded fulfills all the requirements and no additional documents are required to complete the transfer.

It is a term used to show a prudent value of the company which comprises of good customer relation, high employee morale, and other factors.

It is a provision contained in the agreement with the underwriter that gives the underwriter the right to sell more securities to the investors than originally agreed upon.

It is a practice of purchasing large chunks of shares in a company and then threatening them of a takeover and thereby the company buy backs the shares at a higher price than paid by the greenmailer.

Gross Cash Flow is net profit after tax, plus non-cash charges against earnings, such as depreciation and amortization. This has to be done because depreciation has no cash effect and thus does not really reduce the cash generated. It represent the total amount of cash that the business generates each year.

GDP is defined as the total monetary value of all final goods and services produced in a country in a given year. It is calculated by adding all the four possible types of expenditures namely Consumption, Investment, Government Spending and Net Exports. It is one of the most important indicators to determine the health of an economy.

GDP = C+I+G+(X-M)


C=Private consumption

I=Gross investment

G= Government spending

X= Exports

M= Imports

Gross investment refers to the total value of before taking away depreciation. It includes all the machines, factories, and houses built during a year even though some were bought simply to replace some old capital goods. This concept is widely used in the calculation of Gross Domestic Product.

It is the difference between a security’s public offering price and the price paid by the underwriter to the issuer, to sell the security.

Bonds that are issued by the Subsidiary Corporation and interest and principal are guaranteed by the parent corporation.

It is a mutual fund which aims to achieve capital appreciation by investing in growth stocks.

Bonds that are issued by the Subsidiary Corporation and interest and principal are guaranteed by the parent corporation.

It is an illegal practice of soliciting orders for securities which are not yet registered for the Initial Public Offering. Buying of securities on information not publicly available yet is also called Gun jumping.

1. It is the difference between the prices at which a person can buy or sell a security.

2. The percentage, by which the assets market value is reduced for the purpose of calculating margins, collateral levels, and capital requirement.

It is the selling of large quantity of stocks by speculators believing that the stock will soon fall.

Payments and delivery made on the date stipulated by the stock exchange.

An investment made in asset or other financial commitment that protects against any adverse changes from another investment in assets or financial commitments. In case of a security hedging is done by taking an offset position in a related security, such as an option or a short sale.

Hedge funds are privately owned investment funds, which are not regulated as mutual funds whose owners are public corporations. This fund usually used by wealthy investors and institutions, which allow them to use aggressive strategies, including selling short, leverage, program trading, swaps, arbitrage and derivatives. Hedge funds set an extremely high minimum investment, ranging from anywhere from $250,000 to more than $1 million.

Ratio comprising the value of protected asset via a hedge with the size of the entire asset itself.

Description of investments with high rates of return.

It’s a type of fraud in which someone pretends to be someone else by assuming that person’s identity and aims at obtaining credits, resources or benefits in that person’s name.

Also known as index tracker which is a collective scheme of mainly passively managed mutual fund which aims at highlighting the performance of a specific index of a specific financial market.

IPOs, also known as offering or flotation, are first sale of common stock or shares by small companies when it seeks capital to expand, or by large privately-owned companies trying to become publicly traded.

An initial public offering or IPO takes place when a company sells common shares to investors in the public for the first time on a recognized stock exchange. An IPO gives company a faster and cheaper access to capital for growth in the form of a wide pool of stock market investors. It also helps it to bolster and diversify its equity base. Additionally, it enhances the status and financial standing of the company.

It is an illegal trading of corporation’s stock and securities by individuals having potential access to the secret information about the company.

It refers to the dollar amount of interest paid periodically on a loan, bond etc.

The Internal Rate of Return (IRR) is a rate of return widely used capital budgeting and is frequently used to determine if a given project is worthwhile. It refers to the discount rate at which the net present value of a stream of payments/incomes is equal to zero. A project or investment is considered acceptable if its Internal Rate of Return exceeds the cost of capital. Conversely a project or investment should be rejected if the cost of capital exceeds this rate. Assuming all other factors are equal among the various projects, the project with the highest IRR would probably be considered the best and undertaken first.

The formula of IRR is given by:

IRR = CFo + CF1/(1+r)^1 + CF2/(1+r)^2 +…….+CFn/(1+r)^n

Invested Capital is defined as the sum of the total cash investment that shareholders and debtholders have made in a company or business or a project.

The formula for calculation of Invested Capital is given by:

Invested capital = Operating Net Working Capital + Net PP&E + Capitalized Operating Leases + Other Operating Assets + Operating Intangibles – Other Operating Liabilities – Cumulative Adjustment for Amortization of R&D

It can be also calculated from an alternative method

Invested capital = Total Debt and Leases+ Total Equity and Equity Equivalents – Non-Operating Cash and Investments.

It is a method of inventory valuation that assumes that assets produced or acquired most recently are the ones that are sold first. During periods of high inflation rates, this method results in a lower ending inventory, a higher cost of goods sold, a lower gross profit and a lower taxable income compared to other method of inventory.

Leveraged buyout or LBO occurs when a company acquires another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, assets of the acquired company are used as collateral for the borrowed capital and interest and principal obligations are met through cash flows of the refinanced company. One advantage with LBO is that the acquiring company needs little committed capital to pursue acquisition.

The London Interbank Offered Rate or LIBOR is a a widely used benchmark for short-term interest rates. Fixed on a daily basis by the British Bankers’ Association, LIBOR is a daily reference rate based inter-bank deposit rates offered by the world’s most creditworthy banks’ in the London wholesale money market.

Margin Requirements are the collateral in the form of cash or securities which an investor must have in a margin account before making purchases of investments on credit or margin basis. These generally prevent an investor from having a level of debt which he cannot repay back.

Net debt issuance refers to the difference between the debt paid by the firm and new borrowings.

The formula is given by:

Net debt issuance = debt paid by the firm – new borrowings.

Interest, income taxes, and other such expenditure incurred in owning or renting an asset or property is referred to as net financial expense.

A company is said to be having net financial Obligation position if its financial liabilities are greater than its financial assets.

The formula is given by:

Net Financial Obligations (NFO) = Financing Liabilities – Financing Assets

Frequently used in the calculations of Economic value added and Free cash flow, NOPAT is defined as a company’s operating profit after deducting its tax liability. It gives a fair idea about operating efficiency of highly leveraged companies as it measures company’s potential cash earnings if it had no debt.

NOPAT = Operating profit x (1 – Tax Rate)

It refers to the income after deducting for operating expenses but before deducting for income taxes and interest.

The formula is given by:

Sales- (Cost of goods sold+ Selling and marketing expenses+- General and administrative expenses+ R&D+ Depreciation+ Other operating expenses).

A financial measure which is calculated by adding interest, taxes, depreciation and amortization (also known as ITDA) to the company’s operating income.


Operating profit before taxes and amortization = Operating Income + Interest + Taxes + Depreciation + Amortization.

It is a measure to calculate total operating profits for a firm with adjustments made for taxes.

NPV is widely used in capital budgeting to measure the profitability of an investment or project. It is calculated by deducting the present value of cash outflows from the present value of cash inflows. A positive NPV means a better return, and a negative NPV means a worse return, than the return from zero NPV.

Those assets which are not considered depreciating assets for tax purposes are called non-depreciating assets. Land and most intangible assets are considered as non-depreciating assets.

Liabilities such as accounts payable, accrued expenses and taxes payable that are due within one year and does not require interest payments are called non-interest-bearing current liability.

Classes of assets that are not required to conduct ordinary business, but may still generate income or provide a return on investment are called non-operating asset. These assets are listed on the balance sheet along with operating assets, and may or may not be shown separately. One such example is excess cash.

Operating asset turnover is the ratio of net sales divided by operating assets.

The formula of the ratio is given by:

Operating Asset Turnover= net sales/operating assets.

Operating cash flow (OCF), cash flow provided by operations or cash flow from operating activities is defined as the amount of cash a company generates from its operations.

Finance Professionals

Operating Cash Flow is often considered as a better measure of a business’s profits as it helps in determining the quality of a company’s earnings. Many firms use the accrual method of accounting for their business i.e sales and expense are reported in the period in which they occurred, not when cash is received or paid out. That’s why most analysts prefer operating cash flow figures over earnings/revenue numbers. Also, it is more difficult to manipulate OCF figures. If a firm reports positive Operating Cash Flow number then it indicates sound company, while a negative OCF suggests signs of cash flow problems.

Operating Cash Flow = (Earnings Before Interest & Taxes + Depreciation) – Income Taxes

An operating expense, operating expenditure, operational expense, operational expenditure or OPEX is is a day-to-day expense that is incurred while running a business. It includes salaries paid to employees, research and development costs, legal fees, accountant fees, bank charges, office supplies, electricity bills, business licenses etc.

It is a measure of overall health of business operations. It refers to the income generated from ordinary business activities and excludes expenses, such as interest and taxes.

The formula is given by:

Operating Income = Net Sales – (Cost of sales + Operating expenses).

Operating margin or operating profit margin is the ratio of operating income (operating profit in the UK) divided by revenues, expressed as a percentage.

Operating Margin= Operating income/Revenue

These are phone numbers provided by fraudster which invite the investors to verify the authenticity of the fraudster’s agency, and aims at duping the investors.

Also referred to as discounted value, present value is the current worth of a future payment or series of future payments, discounted to reflect the time value of money and other factors such as investment risk.

The formula of present value is given by:

PV = FV/ (1i)^t

It is a valuation model in which net present value of a firm’s future investments is explicitly examined. It is calculated by finding the difference between price of equity with constant growth and price of equity with no growth.


PVGO = P(Growth) – P(No growth) = [D1/(r-g)] – E/r


D1 = Dividend for next period

r = Cost of Capital or the capitalization rate of the company

E = Earning on equity

g = The growth rate of the company.

It’s a valuation ratio that compares a stock’s price/earnings (P/E) ratio to its expected EPS growth rate. It is calculated by dividing a stock’s price/earnings divided by its projected year-over-year earnings growth rate.

PEG Ratio = Price Earnings/Annual EPS Growth

A lower PEG ratio is considered better as in such a case the investor would be paying less for each unit of earnings growth. A PEG ratio of one implies that the share price is higher than the expected earnings growth of the company. Ususally, Companies having a PEG ratio between 0 and 1 means the stock is undervalued. PEG ratio is often used in conjunction with other metrics like free cash-flow, debt – equity, dividend payout etc. However, PEG ratio is not much useful for evaluating companies without high growth. Often large, well-established companies may offer dependable dividend income, but little opportunity for growth.

It refers to all those tangible assets that have a relatively long life and are held for business use and not expected to be converted to cash in the current or upcoming fiscal year, such as manufacturing equipment, real estate, and furniture. The value of fixed assets is typically depreciated over the estimated life of the asset, because they have limited useful life.

A watch on company’s stock by companies top executives to keep an eye on any unusual amount of buying, indicating towards an attempt of a takeover

Claims that, due to the efficient market theory it becomes impossible to predict future price movement of a stock, as it will always follow a random walk. In other words, it is impossible to know whether next change in the price will be up or down, or by how much it will rise or fall.

It is fund transfer system, in which transfer of securities and money from one bank to another takes place in ‘real time’ and on ‘gross’ basis. It means payments are not subject to any waiting period. These transactions are settled by the Central Bank for accounts held on a continuous gross basis, where settlements are final and irrevocable.

It is a date set by the issuing company, on which an individual holding company’s stock will be eligible to receive a declared dividend or capital gains distribution

Red Herring Prospectus is a document filed with the Securities and Exchange Commission, by a company in order to test the market’s reaction to a proposed new issue of securities.

It is price at which a bond is redeemed.

Bonds registered in the books of the company, in the name of the owner.

These are two Federal Board regulations controlling the amount of credit a broker or bank can extend to a client to buy securities. Federal Reserve Board has set margin requirements on both the regulations, which allow brokers to lend a client now more than 50 percent of the stock he wishes to purchase.

Finding loopholes in regulation and making the regulations useless in the process is called Regulatory Arbitrage. It is often done by international investors using derivatives to find ways around country’s financial regulations.

It is a process done to convert electronic holding into physical securities through a depository participant.

It is an agreement in which one party sells a security (Primarily Government Securities) to another party and agrees to buyback the security for a specified price and on a specified date. Short term REPOs are dealt by Central Banks to provide liquidity to the financial system.

It is a price at which the buyer of the security is obliged to sell back the asset to the seller in relation to a transaction under a repurchase agreement.

The residual income model uses book value and return on equity to estimate the intrinsic value of a share.

It is derived by adding up the book value at the time of valuation and the present value of the residual income i.e the amount by which profits are expected to exceed the required rate of return on equity. This approach works typically for shares which have negative earnings, cash flow or does not pay out dividends.

The formula is given by:

Residual income= Net Income- Cost of Equity (Equity rate*total equity outstanding

Different types of retirement plans which the employees can avail and include government-sponsored plans, personal plans, annuities and employer-sponsored plans.

ROA gives a fair idea about how efficiently the company is using its assets to generate profits. The assets of the company consist of both debt and equity. Higher ROA number are considered better because the company is earning more money on less investment.

The formula for return on assets is given by:

Return On Assets = Net Income/Total Assets

Return on equity reveals how much profit a company generated in comparison to the total amount of shareholder equity found on the balance sheet. It shows how well a company is using shareholder’s funds to produce earnings. Typically, investors compare ROE of one company to that of other firms in the same industry to arrive at a meaningful investment decision. Companies having high return on equity are preferred.However, the metric may not be much useful in case of companies having high debt levels.

The formula is given by:

Return on Equity = Net Income/Shareholder’s Equity

The amount that a company earns on the total investment it has made in its business before any depreciation or amortization. Total gross investment is equal to total shareholders’ equity (both common and preferred shares) plus the total gross debt that the company has accumulated before making any payments on the debt.

Return on Invested Capital (ROIC) is used to determine how efficiently a company generates earnings from capital invested in their business. It measures the amount of cash generated by each dollar of capital invested in a company’s operations. Capital invested includes all monetary capital invested: long-term debt, common and preferred shares. When a company’s return on invested capital is greater than their cost of capital (commonly measured as the weighted average cost of capital, or WACC) then they are creating value by investing in their operations. On the contrary, if WACC is greater than ROIC they are said to be destroying value by investing capital in their operations.

In reverse book building the investors aim is to sell the shares to exit the company, which is opposite to the term book building, which is aimed to obtaining the optimum price for a company’s share.

Reverse REPO is the rate at which Federal Bank borrows money from primary dealers or banks. Usually this rate is higher. The reverse REPO helps in temporary reduction in balances from the banking system. In other words, it is a purchase of securities on agreement to resell them at a higher price at a specific future date.

It is an illegal act, in which a person or company manipulates the price, favorable to the investor, than market forces really justify.

A Rights Issue / Rights Shares are ways which company uses in order to raise capital. Shares are issued to existing shareholders in a fixed ratio.

It refers to the probability that would prevail in a risk-neutral world where investors are indifferent to risk. Primarily used in the pricing of derivatives, risk-neutral measure assumes that the current value of all financial assets is equal to the expected value of the future payoff of the asset discounted at the risk-free rate.

It is a process of settling security trades on successive dates, in such a way that trades executed today will have a settlement date one business day from the trade executed yesterday.

Ruling price is the current market price of the security.

A Run is when a person successively buys and sells a security in order to create an activity in the market for that security.

It is a way of fighting unfriendly take over of the object company, where the object company buys an Airline Company, Radio Station, or a TV Station, assuming the ownership of a company in such a heavily regulated industry, makes the object company less attractive for acquisition.

Bond offered in Japanese Market by a non Japanese company adhering to Japanese regulations.

It is a term which is used, when there is a sudden attempt by one company to takeover the company, usually announced during the weekends to avoid too much publicity.

It is a classic military defense tactic used by companies as an Anti-takeover strategy. It helps the company in defending itself from taking heavy debts or selling off the assets in order to ward off a takeover.

Financial Markets trading done using information technology.

Secondary Market also known as the after market is the financial market for previously issued securities or financial instruments.

A fund which invests primarily in securities of companies engaged in a single sector. These funds are more risky and more volatile than the broad market, as they are less diversified.

It was created by the Congress, though not a Government agency, which provide funds to protect investor’s cash and securities left with the brokers, which are covered under SIPC, if the brokerage firm fails.

Securitization is the process of taking an illiquid asset, and through homogenizing and packaging financial instruments into a security.

SEC is the United States Government agency which regulates securities trading.

It is selling of a security that is not owned by the seller, but borrowed, assuming that they will buy the stock at a lower price than the price at which they sold.

It is a date by which an executed security transaction must be settled. Usually it is done after three business days, from the day the trade was executed.

It is a period between the transaction date and settlement date of a trade, during which all the transaction obligations are fulfilled.

It is a risk when one party fails to oblige to the terms of the contract with another party. It is also a form of credit risk, which arises at the settlement of a transaction.

Shareholders, also called as stockholders, are individuals or institutions which legally own one or more shares of a stock in a public or private corporation or in a mutual fund.

It is a slang used for any one number of measures taken by a company to fend off unwanted or hostile takeovers.

It is an arrangement with the Securities and Exchange Commission that allows a company wishing to sell new stocks or bonds to the public, outlining its intentions to sell securities over the next two years.

It is the buying of stocks from the seller to oblige the previous commitments.

It is the promise to sell a certain quantity of a good at a particular price in the future, in the case of Future Contracts. The other meaning of this is to sell a short stock.

It is a situation in which the price of the stock rises, and the investors who short the stock rushes to buy it, to cover their position or losses.

A company with considerable cash balance on its balance sheet, but vulnerable to a takeover by another company.

Tendency to outperform the stock market by small firms in terms of total market capitalization, which consists of both small and big firms

It operates a worldwide financial messaging network which exchanges messages between banks and other financial institutions. SWIFT also sell software and other services to Financial Institutions.

A special purpose entity (SPE) or Special Purpose Vehicle (SPV) is a subsidiary having legal status which has been created to carry out narrow, well-defined and temporary set of goals. It can be a corporation, trust, partnership, or limited liability company and may be controlled by several companies working together. Mostly they are created for the sole purpose of acquiring certain assets or derivative exposures and issuing liabilities that are thereby linked solely to those assets or exposures. SPE’s are typically designed to isolate the parent firm from accounting, tax, or regulatory risks. SPEs are also sometimes referred to as a “bankruptcy-remote entity” which implies that the assets sold to the SPV are not at risk if either the SPV or the company whose assets are being securitized becomes insolvent.

A spin out is a company formed, when its employees leaves an existing entity to form an independent startup firm.

It is the subdivision of the shares from large denomination into shares of smaller denomination.

Spoofing is a stock market manipulation in which a trader places a buy order at a better price for a large number of shares, than the current market price, and then cancels it seconds later. This triggers the stock price to jump giving an impression of high demand, allowing the manipulator to sell it at a higher price.

The delivery of the securities and the payment for the securities is done within the same day as the date of the contract or the next business day.

It is used for a speculator who, buys and sells securities rapidly for fast profits.

It is a combination of high unemployment, high inflation and low economic growth.

It is a board in which few of its directors are elected each year. This is done to avoid any unwelcome attempt of a takeover.

Any person, group or organization that has a direct or indirect stake in an organization. Because he has an interest in the actions, policies and objectives of the company.

Weighted average price of all transaction of a security is known as Standard price.

A dividend paid as additional stock of the issuing corporation rather than cash

An exchange is a place where shares of stock and common stock are bought and sold.

It is a future contract whose price varies upon the movement of the stock market index.

It is an option on a common stock of a company, giving the holder to buy or sell the stock at a specified price and on a specified date.

It is an increase in the number of outstanding shares, done usually by splitting the stock in proportion of two to one, distributing additional shares to its shareholder. The price of the stock also gets adjusted to reflect the stock slit.

A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price.

It is an options strategy in which the same position is taken in the same number of puts as calls.

It is an ability to perform financial transaction from start to finish utilizing electronic system, without intervention of any sort.

It is a specified price on an option contract, at which the option may be exercised. It is sometimes called the exercise price or basis price.

Any person, who is not a member of the stock exchange, however acts on behalf of a stock-broker as an agent for assisting investors with dealing in securities through such stock-brokers.

The capital subscribed by the shareholders for equity or preference shares, either paid up fully or partly with calls in arrears.

It is a financial transaction in which exchange of streams of payments takes place over time according to specified terms. Most common types of swap is an interest rate swap.

It is the sale of interest rate swap from one counter party to another, resulting in ending the swap.

It is an interest rate swap which is designed to end the counter party’s role in another interest rate swap. This is done by counterbalancing the swap in maturity, notional amount, and reference rate.

It is an option for interest rate swap. The buyer of this option has the right to enter into an interest rate swap agreement by a specified date in the future.

It is an Equity acquired by a company’s executive on favorable terms, to reflect the value the executives have added and will continue to add more value into the company.

It is a term used for moving money from one mutual fund to another. It can be within a same fund family or another.

It is a type of trading which is usually considered illegal. Under this type of trading, two individuals decide a price at which they trade before the market opens and execute that trade sometime during the market opens.

It is a system in Canada that allows companies to file prospectus and continuous disclosure documents.

A risk which can affect the entire market or the whole system, and not just the specific participant of the market. This risk is un-avoidable even through diversification.

It is when a broker buys or sells a security of their client, and immediately follow it with same transaction in his/her own account.

A target company is a company which is the object of a takeover attempt.

It is an offer to the shareholders by the issuing company for buyback of the stocks at a higher price than the actual market price.

It is defined as the value of a company’s expected cash flow for all years beyond the projection period in a DCF analysis. In discounted, since one cannot estimate cash flows forever, its estimation is stopped sometime in the future and then a terminal value is calculated that reflects the value of the firm at that point.

The terminal value can be calculated by several methods. In one of the methods, it is assumed that the company will cease to operate at a point in time in the future and sell the assets it has accumulated to the highest bidders. The estimate that emerges is called a liquidation value. This approach is called Exit or Terminal Multiple Approach. On the other hand, the perpetuity growth method assumes that the company will continue its historic business and generate free cash flows at a constant rate forever.

It is a market with low number of buyers and sellers. However the price fluctuations are higher relative to the volume traded.

It is an advertisement in a business newspaper by an investment bank, announcing an offering, and listing the members names and dates.

It is a type of error which can occur when using an index or a benchmarking strategy. It usually used in context to hedge or mutual funds, which did not performed as per the benchmark set.

A tracking stock or a target stock is issued by the company in addition to their common stock. A tracking stock is depended on the specific business unit or operating division, and not the whole company. They trade as separate securities and its value changes as the business unit or operating division’s performance of that stock performs, irrespective of the performance of the entire company.

It is a legally enforceable consolidation and offsetting of individual trades into net amount of securities and money due between trading partners or among members of a clearing system.

Transaction statement is a document that outlines the terms and condition of a commercial deal. Under this a depository participant gives a transaction statement periodically, with details of current balances and various transactions made through depository account.

An agent appointed by the company to carry out the function of transfer of shares.

The form needed to accompany the share certificate for an effective transfer of ownership from the seller to the buyer.

The buyer of the security is a transferee

The seller of the security is a transferor.

It is a short term security issued by the government as mean of financing their cash requirement. These bills are sold at a discount from the par amount.

A person or company responsible for attracting investors to invest in a mutual fund.

It is a legal term used for a holder of property on behalf of a beneficiary

It is a market in which the market makers have to give both, a firm bid and firm ask for each security they deal in.

It is a financial instrument which must be delivered in completion of an option or futures contract.

A company or an individual who administers the public issuance and distribution of securities from an issuing body or the corporation

It is a process by which investment banks raise capital from investors on behalf of corporations issuing the securities.

It is the minimum number of shares accepted for normal trading on the stock exchange.

A risk which is unique to a company, such as strikes, or a natural catastrophe, which does not impact the whole market is an unsystematic risk.

It is a trading of securities which are traded within a broker-dealer firm rather than taking the trade to an exchange with another broker-dealer in over-the-counter market.

VAR is the technique to estimate the probability of portfolio losses based on statistical of volatilities and historical prices. It is estimated using a prespecified probability that the actual loss will be larger.

Value Creation Analysis Model is primarily an expanded Asset Management and Cost/Benefit Analysis. It is useful in determining how each participant is adding value to the network. The concept has been primarily derived from the principles of value-added accounting and value chain analysis. The original theory contends that at every point along the value chain one should be adding value to the product or service. In value network terms, this means that when a Role or Participant receives a value input they should find ways to use that input to provide value outputs in the form of products and services. Thus, Value Creation Analysis can be done only after the completion of the value network map and after an initial Exchange Analysis.

It is a type or style of investing in stocks that trade for a less price and are expected to appreciate in terms of price.

It is a security issue, which has a straight fixed rate and no unusual feature.

Venture Capital is a financial capital provided at early stage, high potential, and growth startup companies.

It is an investment fund that manages money from investors seeking private equity stakes in a startup, small and medium-size enterprises with strong growth potential.

It is an Option trading strategy, which involves buying and selling of multiple options of the same underlying security with same expiration month but with different strike price.

It is a process under which the employee accrues non forfeitable right to apply for shares, and receive benefits from a pension fund, profit sharing plans, for a period of time, even after the employee has left the organization.

Volatility is the standard deviation of continuously compounded returns of financial securities and other financial instruments over a specified time period.

It is the quantity of all actual contracts traded over a specified period of time during a trading day.

Delisting of securities by the organization, promoters, or an acquirer, but not the exchange itself is a Voluntary Delisting.

It is a right given to the shareholder to exercise vote in the general meeting of the company.

A warrant is a security contract that entitles the holder to buy a security of a company at a fixed price, till the expiration of the contract.

As per the IRS, a wash sale is when an investor sells or trade stocks or securities at loss, and buys a substantial quantity of the same stock within 30 days before or after the sale.

The weighted average cost of capital (WACC) refers to the rate that a company is expected to pay on average to all its capital providers to finance its assets.

A company raises capital from various sources namely: common equity, preferred equity, straight debt, convertible debt, exchangeable debt, warrants,each category of capital is proportionately weighted. options, pension liabilities, executive stock options, governmental subsidies etc. While calculating WACC, each category of capital is proportionately weighted.

WACC is commonly used by companies internally to arrive at meaningful investment decisions. It is often used as a hurdle rate for capital investment. It also acts as a measure to find the optimal capital structure for the company and is a key factor in choosing the mixture of debt and equity used to finance a firm.

WACC is calculated by multiplying the cost of each source of capital for a project—which may include loans, bonds, equity, and preferred stock by its percentage of the total capital, and then adding them together.


WACC = D/(D + E) × 1/(1 – t) × i + E/(D + E) × r

where i is the interest rate,

r is the required return on equity,

D is the amount of debt capital

and E is the amount of equity capital.

A person or a company that rescues a target firm from being acquired, by buying the target firm.

It is a strategy adopted by mutual funds, companies and bank, at the end of the financial year in order to impress the investors and giving them an impression that the fund is doing well, even though in reality it may not be performing well.

It is a tendency for the winning bid in an auction, which exceeds the intrinsic value of the item, due to incomplete information, emotions or any other factors related to the item being auctioned.

It is referred to the speculators who make a kill in the stock market.

A seller of the option, usually a person, bank, or a company that issues the option. Consequently has the obligation to sell the asset or buy the asset on which the option is written.

It mean ‘without dividend’. This is when a stock is bought on or after the Ex-Dividend day, it will not pay the dividend to the purchaser which is already declared.

Bonds in Dollar Denominations issued in the U.S. by foreign corporation, banks and governments are called Yankee bonds.

Rate of return anticipated on a bond if it is held till maturity. YTM is considered a long term bond yield expressed as an annual rate.

It was an insider trading scam which was done by the young Wall Street lawyers, bankers, and arbitrageurs. Yuppie is a term used for youth, affluence, and business success

It is a type of bond which does not pays any interest to its holder. This type of bond is sold at a substantial discount and at maturity the bond holder receives the face value of the bond.

It is a method using zero coupon bonds for precisely analyzing the yield curve.