Knowledge on Finance Accounting

8/12/2019 Knowledge on Finance Accounting

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Accounting Terms

Reconciliation is the adjusting of the difference between two items (e.g., balances, amounts,statements, or accounts) so that the figures are in agreement. Often the reasons for thedifferences must be explained. One example would be reconciling a checking account (bringingthe checking ledger and bank balance statement into agreement).

Reasons for Reconciliation:1) Cheques deposited into bank but not recorded in the bank book.) Cheques issued but not presented in bank.!) "ank charges directl# debited from bank account not mentioned in bank book.$) %C&, not mentioned in bank book.') nterested credited into bank account not mentioned in bank book.) Cheques deposited not cleared.

Difference between A/P and A/R:

Accounts Payable

*his current liabilit# account will show the amount a compan# owes for items or ser+icespurchased on credit and for which there was not a promissor# note.Accounts Receivable current asset resulting from selling goods or ser+ices on credit (on account)

-hat is corporate restructuring

Corporate restructuring is necessar# when a compan# needs to impro+e its efficienc# andprofitabilit# and it requires expert corporate management. corporate restructuring strateg#in+ol+es the dismantling and rebuilding of areas within an organi/ation that need special attentionfrom the management and C%O.

*he process of corporate restructuring often occurs after bu#0outs, corporate acquisitions,takeo+ers or bankruptc#. t can in+ol+e a significant mo+ement of an organi/ations liabilities orassets.

corporate actionis an e+ent initiated b# a public compan# that affects the securities (equit# ordebt) issued b# the compan#. &ome corporate actions such as a di+idend (for equit# securities) orcoupon pa#ment (for debt securities (bonds)) ma# ha+e a direct financial impact on theshareholders or bondholders2 another example is a call (earl# redemption) of a debt securit#.Other corporate actions such as stock split ma# ha+e an indirect impact, as the increased liquidit#of shares ma# cause the price of the stock to rise. &ome corporate actions such as name change

ha+e no direct financial impact on the shareholders.

Purpose

*he primar# reasons for companies to use corporate actions are3

Return profits to shareholders3 Cash di+idends are a classic example where a public compan#declares a di+idend to be paid on each outstanding share.


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Influence the share price3 f the price of a stock is too high or too low, the liquidit# of the stocksuffers. &tocks priced too high will not be affordable to all in+estors and stocks priced too low ma#be de0listed. Corporate actions such as stock splits or re+erse stock splits increase or decreasethe number of outstanding shares to decrease or increase the stock price respecti+el#. "u#backsare another example of influencing the stock price where a corporation bu#s back shares from themarket in an attempt to reduce the number of outstanding shares thereb# increasing the price.

Corporate Restructuring3 Corporations re0structure in order to increase their profitabilit#.4ergers are an example of a corporate action where two companies that are competiti+e orcomplementar# come together to increase profitabilit#. &pin0offs are an example of a corporateaction where a compan# breaks itself up in order to focus on its core competencies. Corporateactions includes, name changes, spin0offs, cash stock mergers, forward and re+erse stock splits.Corporate ctions are the benefits gi+en to the shareholders b# their companies.

Types

Corporate actions are classified as 5oluntar#, 4andator# and 4andator# with Choice corporateactions. 6adhika.b7remunance.com

andatory Corporate Action3 mandator# corporate action is an e+ent initiated b# thecorporation b# the board of directors that affects all shareholders. 8articipation of shareholders ismandator# for these corporate actions. n example of a mandator# corporate action is cashdi+idend. ll holders are entitled to recei+e the di+idend pa#ments, and a shareholder does notneed to do an#thing to get the di+idend. Other examples of mandator# corporate actions includestock splits, mergers, pre0refunding, return of capital, bonus issue, asset 9 change, pari0passuand spinoffs. &trictl# speaking the word mandator# is not appropriate because the share holderper se doesn:t do an#thing. n all the cases cited abo+e the shareholder is just a passi+ebeneficiar# of these actions. *here is nothing the &hare holder has to do or does in a 4andator#Corporate ction.

!oluntary Corporate Action3 +oluntar# corporate action is an action where the share holderselect to participate in the action. response is required b# the corporation to process the action.

n example of a +oluntar# corporate action is a tender offer. corporation ma# request shareholders to tender their shares at a pre0determined price. *he shareholder ma# or ma# notparticipate in the tender offer. &hareholders send their responses to the corporations agents, andthe corporation will send the proceeds of the action to the shareholders who elect to participate.

&ometimes a +oluntar# corporate action ma# gi+e the option of how to get the proceeds of theaction. ;or example in case of a cash


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+ia their own ser+ices to institutional in+estors or +ia online portals in the case of indi+idualin+estors.

"toc# split

stoc# splitor stoc# divideincreases or decreases the number of shares in a public compan#.

*he price is adjusted such that the before and after market capitali/ation of the compan# remainsthe same and dilution does not occur. Options and warrants are included.

$verview

*ake, for example, a compan# with 1== shares of stock priced at >'= per share. *he marketcapitali/ation is 1== ? >'=, or >'===. *he compan# splits its stock 0for01. *here are now ==shares of stock and each shareholder holds twice as man# shares. *he price of each share isadjusted to >'. *he market capitali/ation is == ? >' @ >'===, the same as before the split.

6atios of 2-for-1, 3-for-1, and 3-for-2splits are the most common, but an# ratio is possible. &plitsof $0for0!, '0for0, and '0for0$ are used, though less frequentl#. n+estors will sometimes recei+ecash pa#ments in lieu of fractional shares.

t is often claimed that stock splits, in and of themsel+es, lead to higher stock prices2 research,howe+er, does not bear this out. -hat is true is that stock splits are usuall# initiated after a largerun up in share price. 4omentum in+esting would suggest that such a trend would continueregardless of the stock split. n an# case, stock splits do increase the liquidit# of a stock2 there aremore bu#ers and sellers for 1= shares at >1= than 1 share at >1==.

Other effects could be ps#chological. f man# in+estors belie+e that a stock split will result in anincreased share price and purchase the stock the share price will tend to increase. Otherscontend that the management of a compan#, b# initiating a stock split, is implicitl# signaling itsconfidence in the future prospects of the compan#.

n a market where there is a high minimum number of shares, or a penalt# for trading in so0calledodd lots (a non multiple of some arbitrar# number of shares), a reduced share price ma# attractmore attention from small in+estors. &mall in+estors such as these, howe+er, will ha+e negligibleimpact on the o+erall price.

On a stock exchange, a reverse stoc# splitor reverse splitis the opposite of a stock split, i.e. astock merge 0 a reduction in the number of shares and an accompan#ing increase in the shareprice.A1B*he ratio is also re+ersed3 10for0, 10for0! and so on.

*here is a stigma attached to doing this so it is not initiated without +er# good reason. 4an#institutional in+estors and mutual funds, for example, ha+e rules against purchasing a stockwhose price is below some minimum, perhaps >'. n extreme case would be when a share pricehas dropped so low that it is in danger of being delisted from its stock exchange.

t is also possible that a re+erse stock split could be used as a tactic to reduce the number ofshareholders. n a h#pothetical 10for01== re+erse split an# in+estor holding less than 1== shareswould simpl# recei+e a cash pa#ment and no shares of stock. f the resulting number ofshareholders has then dropped below some threshold, it ma# be placed into a different regulator#categor#2 such as an & corporation which is required b# law to ha+e less than 1== shareholders.

*#picall#, the stock will temporaril# add a 9 to the end of its ticker during a re+erse stock split.


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"pin%$ffs

spin%offis a new organi/ation or entit# formed b# a split from a larger one, such as a tele+isionseries based on a pre0existing one, or a new compan# formed from a uni+ersit# research group orbusiness incubator. n literature, especiall# in milieu0based popular fictional book series likem#steries, westerns, fantas# or science fiction, the term sub%seriesis generall# used instead of

spin-off, but with essentiall# the same meaning.

&pin0offs as a descripti+e term can also include a dissenting faction of a membershiporgani/ation, a sect of a cult, or a denomination of a church. n business, a spin0off is essentiall#the opposite of a merger. n computing, a spin0off from a software project is often called a fork.

spin%off productis a product deri+ing elements of design, branding or function from anexisting product, but which is itself a new distinct product.

Corporate spin%off

*he common definition of spin outis a di+ision of a compan# or organi/ation that becomes anindependent business.

&overnment spin%off

Ci+ilian goods which are the result of militar# or go+ernmental research are also known asspinoffs.

edia spin%off

4edia spin0off is the process of deri+ing new radio, +ideo game, film series, book series ortele+ision programs from existing ones.

Research spin%off

research spin0off is a new compan# based on the findings of a member or b# members of aresearch group at a uni+ersit#.

*he term is also used for concepts or products spun off a research project, for example methodsor materials pioneered during the 4anhattan 8roject (spin0off3 Commercial Nuclear Power) orduring the &pace 6ace (spin0offs3 4an#, ntegrated Circuits and hence most modern electronics,free/e0dried foods, satellites, et0cetera, and et al.).

Difference between:

Asset management

D is the management of the financial assets of a compan# in order to maximi/e return. t can bealso an account at a financial institution that ...www.financial0e+ents.ch


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D standard accountanc# process concerned with maintaining details of assets abo+e a certain+alue and their depreciation. ...ser+icedesk.unimelb.edu.au


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meaningful as comparing longterm changes in its share price because funds periodically

distribute capital gains to their fund holders, thus reducing their NA.

&lossary $n .inancial Terms

) *hat is the difference between stoc#s and shares0

Ans:J&tockK is a general term used to describe the shares of an# compan# and sharesrefers to a specific stock of a particular compan#. &o, if in+estors sa# the# own stocks, the#are generall# referring to their o+erall ownership in one or more companies. f in+estors sa#the# own shares 0 the question then becomes 0 shares in what compan#"toc#s : t#pe of securit# that signifies ownership in a corporation and represents a claim onpart of the corporation:s assets and earnings."hares : unit of ownership interest in a corporation or financial asset. -hile owning sharesin a business does not mean that the shareholder has direct control o+er the business:s da#0to0da# operations, being a shareholder does entitle the possessor to an equal distributionin an# profits, if an# are declared in the form of di+idends. *he two main t#pes of shares arecommon shares and preferred shares.

Capital ar#ets :*he capital market (securities markets) is the marketfor securities. wherecompaniesand thego+ernmentcan raise long0term funds. *he capital market includes thestock marketand the bond market.t is a place where in+estors come together to bu# and sellshares.

Primary ar#ets:*he primary mar#etis that part of the capital marketsthat deals with theissuance of new securities. Companies, go+ernments or public sector institutions can obtainfundingthrough the sale of a new stock or bond issue. *his is t#picall# done through a s#ndicateof securities dealers. *he process of selling new issues to in+estors is called underwriting. n thecase of a new stock issue, this sale is called an initial public offering(8O). 9ealers earn acommission that is built into the price of the securit# offering, though it can be found in theprospectus.

"econdary ar#et:*he secondary mar#etis thefinancial marketfor trading of securitiesthatha+e alread# been issued in an initial pri+ate or public offering.

Dividend*he periodic, usuall# quarterl#, pa#ment made b# a corporation to its shareholders, generall#expressed as di+idend per share. 9i+idends represent earnings that are not rein+ested b# thecorporation. &ome stocks pa# no di+idends and others, such as utilit# companies pa#substantial ones that represent a large portion of the total return a shareholder will get from hisin+estment. 9i+idends are a t#pe of distribution and are usuall# taxable in #ear recei+ed.

,1uity is, normall#, ownership or percentage of ownership in a compan#.

,1uity "hareis a) a share or class of shares whether or not the share carries +oting rights, b)an# warrants, options or rights entitling their holders to purchase or acquire the sharesreferred to under (a), or c. other prescribed securities.
http://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Capital_markethttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Fundinghttp://en.wikipedia.org/wiki/Underwritinghttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Prospectushttp://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Markethttp://en.wikipedia.org/wiki/Corporationhttp://en.wikipedia.org/wiki/Governmenthttp://en.wikipedia.org/wiki/Stock_markethttp://en.wikipedia.org/wiki/Bond_markethttp://en.wikipedia.org/wiki/Capital_markethttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Fundinghttp://en.wikipedia.org/wiki/Underwritinghttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Prospectushttp://en.wikipedia.org/wiki/Financial_marketshttp://en.wikipedia.org/wiki/Security_(finance)


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*hat Does Reverse "toc# "plit ean0

reduction in the number of a corporation:s shares outstanding that increases the par +alue ofits stock or its earnings per share. *he market +alue of the total number of shares (marketcapitali/ation) remains the same.

Preference "haresusuall#, non0+oting capital stock that pa#s di+idends at a specified rateand has preference o+er common stock in the pa#ment of di+idends and the liquidation ofassets.

Debenture bond issued b# a corporation which is secured b# the general credit or promise to pa# of theissuer. t is not backed b# collateral such as tangible assets.%xample3 1. certificate or +oucher acknowledging a debt.

. n unsecured bond issued b# a ci+il or go+ernmental corporation oragenc# and backed onl# b# the credit standing of the issuer.

Derivatives:;inancial instruments, such as futures and options, which deri+e their +alue from underl#ingsecurities including bonds, bills, currencies, and equities. %quit# deri+ati+es are financialderi+ati+e products whose +alue is dependent on the +alue of an underl#ing share or group ofshares.

2nderlying "ecurity*he securit# that must be deli+ered when another securit# is exercised. ;or example, if a calloption is exercised, then the underl#ing stock is deli+ered to the call owner. -arrants, rights,options, and con+ertible securities all ha+e underl#ing securities. ;or futures options, futures arethe underl#ing securit#.

.uturesn+estment contracts which specif# the quantit# and price of a commodit# to be purchased or soldat a later date. On contract date, the bu#er must take ph#sical possession or make deli+er# of thecommodit#, which can onl# be a+oided b# closing out the contract(s) before that date. ;uturescan be used for speculation or hedging.

$ption contract that gi+es the owner the right, if exercised, to bu# or sell a securit# or basket ofsecurities (index) at a specific price within a specific time limit. Lsuall#, the# are traded assecurities themsel+es, with bu#ers and sellers tr#ing to profit from price changes. *he# aregenerall# a+ailable for 1 to M months, with some longer term options (called I%8&) alsoa+ailable for selected securities. &tock option contracts are generall# for the right to bu# or sell1== shares of the underl#ing stock (1== is the multiplier). *rading in options should onl# beundertaken b# sophisticated in+estors.

Call $ption call option gi+es the owner the right, but not the obligation, to bu# the underl#ing stock at agi+en price (the strike price) b# a gi+en time (the expiration date). *he owner of the call isspeculating that the underl#ing stock will go up in +alue, hence, increasing the +alue of the option.*he purpose can be to speculate with the option (hope it goes up and sell for a profit), to in+est inthe underl#ing stock at a locked in price if the stock price goes high enough, or to generate


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income. %ach option contract equals 1== shares of stock. ;or example, an 46 ' call,would gi+e the owner the right to bu# 1== shares of at >' (strike price) per share betweennow and the third ;rida# in 4arch (expiration date).

Put $ption put option gi+es the owner the right, but not the obligation, to sell the underl#ing stock at a

gi+en price (the strike price ) b# a gi+en time (the expiration date). *he owner is speculating thatthe option will go up in +alue and the underl#ing stock will go down in +alue. *he purpose can beto either speculate with the option (hope it goes up and sell for a profit) or trade the underl#ingstock at a locked in price if the stock price goes down enough. ;or example, an 46 ' putwould gi+e the owner the right to sell 1== shares of at >' (strike price) per share betweennow and the third ;rida# in 4arch (expiration date).

+edgingn in+estment strateg# of lowering risk b# bu#ing securities that ha+e offsetting riskcharacteristics. perfect hedge eliminates risk entirel#. Gedging strategies lower return sincethere is a cost in+ol+ed in hedging. ;or example, a portfolio manager could short a futurescontract which will perfectl# offset an# decrease in the +alue of the portfolio. Options and shortselling stock can also be used for hedging. Gedge funds are in+estment pools that are free to use

an# hedging techniques the# desire and the# often make large bets in a relati+el# small numberof different holdings.

Intraday Tradingntrada# share trading refers to the bu#ing and selling (or +ise +ersa) of the same script in thesame trading session ( on the same da#).

Portfolio anagement:-here assets are combined into a portfolio that fits the in+estor:s preferences (eg, le+el ofrisk) and needs (eg, regular di+idends).*he aim of 8ortfolio 4anagement is to achie+e the maximum return from a portfolio which hasbeen delegated to be managed b# an indi+idual manager or financial institution. *he manager

has to balance the parameters which define a good in+estment ie securit#, liquidit# and return.*he goal is to obtain the highest return for the client of the managed portfolio.

3lue Chip Companies: blue chip stock is the stock of a well0established compan# ha+ing stable earnings and noextensi+e liabilities. 4ost blue chip stocks pa# regular di+idends, e+en when business is faringworse than usual. *he# are +alued b# in+estors seeking relati+e safet# and stabilit#, thoughprices per share are usuall# high.

3ond long0term debt instrument on which the issuer pa#s interest periodicall#, known asNCoupon. "onds are secured b# COII*%6I in the form of immo+able propert#. -hilegenerall#, bonds ha+e a definite 4*L6*, N8erpetual "onds are securities without an#maturit#. n the L.&., the term 9%"%F*L6%& refers to long0term debt instruments which arenot secured b# specific collateral, so as to distinguish them from bonds.

'A"DAn acron#m for Fational ssociation of &ecurit# 9ealers utomated Puotationsstem, which is a nationwide network of computers and other electronic equipment thatconnects dealers in the o+er0the0counter market across the L.&. *he s#stem pro+ides the latest"9 and &QFE 86C%& quoted for an# securit# b# different dealers. *his enables an in+estorto ha+e his or her transaction done at the best price. 9ue to F&9P, the o+er0the0countermarket in the L.&. is like a +ast but con+enient trading floor on which se+eral thousand stocks


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are traded.

'ational "toc# ,-change ('",)t is a nationwide screen0based trading network usingcomputers, satellite link and electronic media that facilitate transactions in securities b# in+estorsacross ndia. *he idea of this model exchange (traced to the 8herwani Committeerecommendations) was an answer to the deficiencies of the older stock exchanges as reflected insettlement dela#s, price rigging and a lack of transparenc#.

!olatility*he measure of the tendenc# of prices to fluctuate widel#. 8rices of small companies tend to bemore +olatile than those of large corporations. "eta is a measure of +olatilit#.

4i1uidity*he abilit# to turn an asset into cash. highl# liquid asset is eas# to sell because an acti+emarket exists that sets prices which are continuousl# adjusted for suppl# and demand. nexample is a listed stock or mutual fund. less liquid asset is real estate or a collectible

4ot group of identical LF*& (for securities) or nearl# identical units (for collectibles) of anin+estment that are traded at the same time and price. Open lots are the contents of openin+estments and can be long (bu#s) or short (short sell). Closed lots are the contents of closedin+estments and can be long (sell) or short (bu# to co+er).

Depository s#stem of computeri/ed book0entr# of securities. *his arrangement enables atransfer of shares through a mere book0entr# rather than the ph#sical mo+ement of certificates.*his is because the scrips are Ndemateriali/ed or alternati+el#, Nimmobili/ed under the s#stem.

3ear person who expects share prices in general to decline and who is likel# to indulge in&GO6* &I%&.

3ear ar#et long period of declining securit# prices. -idespread expectations of a fall incorporate profits or a slowdown in general economic acti+it# can bring about a bear market.

3ull person who expects share prices in general to mo+e up and who is likel# to take a longposition in the stock market.

Transfer agent:*he person or firm that cancels the shares in the name of the seller and

The complete lifecycle of a 25" e1uity trade3 Order Capture, its execution in the market,affirmation


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Custodian financial institution that has the legal responsibilit# for a customer:s securities. *his impliesmanagement as well as safekeeping.

3onus "hares*he issue of shares to the shareholders of a compan#, b# capitali/ing a part ofthe compan#s reser+es. *he decision to issue bonus shares, or stock 959%F9 as in the L.&.,ma# be in response to the need to signal an affirmation to the expectations of shareholders thatthe prospects of the compan# are bright2 or it ma# be with the moti+e of bringing down the shareprice in absolute terms, in order to ensure continuing in+estor interest. ;ollowing a bonus issue,though the number of total shares increases, the proportional ownership of shareholders does notchange. *he magnitude of a bonus issue is determined b# taking into account certain rules, laiddown for the purpose. ;or example, the issue can be made out of free reser+es created b#genuine profits or b# share 86%4L4 collected in cash onl#. lso, the residual reser+es, after theproposed capitali/ation, must be at least $= percent of the increased 890L8 C8*I. *heseand other guidelines must be satisfied b# a compan# that is considering a bonus issue. )&ee also46Q%* C8*IR*OF.)

"ubprime*he term used for lending to borrowers at a higher rate than the prime rate as the# ha+e a higherrisk of default. &ubprime borrowers t#picall# ha+e low credit scores due to prior bankruptc#,missed loan pa#ments, home repossession etc.

"ettlement*he process whereb# obligations arising under a deri+ati+e transaction are discharged throughpa#ment or deli+er# or both.

Difference between 6ournal 7 4edger:6ournal3 *he record ofjournal entriesappearing in order b# date. &ome refer to the journal asthe book of original entr#, since the entries are first recorded in a journal. ;rom the journal theentries will be posted to the designated accounts in the general ledger. -ith manual s#stemsthere are likel# to be a sales journal, purchases journal, cash receipts journal, cashdisbursements journal, and the general journal.4edger 3 book containing accounts. ;or example, there is the generalledger that containsthe balance sheet and income statement accounts.

3alance "heet listing of all assets and liabilities for an indi+idual or a business. *he surplus of assets o+erliabilities is the net worth, or what is owned free of debt. *he Iiabilities side of the balance sheetsshows the sources of income into the business and the assests side shows how the income hasbeen utili/ed.

Custodial accountis a financial account set up for a minor,but administered b# a responsibleadult, known as acustodian,because the minor is under the legal age of majorit#.*he custodianis often the minor:s parent. custodial account can be e+er#thing from a bank accountto a trustfund.*his t#pe of account usuall# come with a Co+erdell %&;orm a tax ad+antaged contract. tdeals with successor rights and other contract conditions depending on who issues the form.
http://www.accountingcoach.com/accounting-terms/accounting-dictionary/accounting-terms-J.html#journal%20entryhttp://en.wikipedia.org/wiki/Minor_(law)http://en.wikipedia.org/wiki/Minor_(law)http://en.wikipedia.org/wiki/Custodianhttp://en.wikipedia.org/wiki/Custodianhttp://en.wikipedia.org/wiki/Custodianhttp://en.wikipedia.org/wiki/Age_of_majorityhttp://en.wikipedia.org/wiki/Age_of_majorityhttp://en.wikipedia.org/wiki/Bank_accounthttp://en.wikipedia.org/wiki/Trust_fundhttp://en.wikipedia.org/wiki/Trust_fundhttp://en.wikipedia.org/wiki/Trust_fundhttp://en.wikipedia.org/wiki/Coverdell_ESAhttp://en.wikipedia.org/wiki/Coverdell_ESAhttp://www.accountingcoach.com/accounting-terms/accounting-dictionary/accounting-terms-J.html#journal%20entryhttp://en.wikipedia.org/wiki/Minor_(law)http://en.wikipedia.org/wiki/Custodianhttp://en.wikipedia.org/wiki/Age_of_majorityhttp://en.wikipedia.org/wiki/Bank_accounthttp://en.wikipedia.org/wiki/Trust_fundhttp://en.wikipedia.org/wiki/Trust_fundhttp://en.wikipedia.org/wiki/Coverdell_ESA


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n another form, a Custodial Accountis an account owned b# an indi+idual or institution,managed b# a named part# for purposes of rapid distribution of funds in that account. *his iscommonl# used for pett# cash or for transactions that ha+e +er# limited and clearl# definedpa#ees and transaction t#pes

compan#:s general ledger account Cash contains a record of the transactions (checks written,

receipts from customers, etc.) that in+ol+e its checking account. *he bank also creates a recordof the compan#:s checking account when it processes the compan#:s checks, deposits, ser+icecharges, and other items. &oon after each month ends the bank usuall# mails a bank statementto the compan#. *he bank statement lists the acti+it# in the bank account during the recent monthas well as the balance in the bank account.

-hen the compan# recei+es its bank statement, the compan# should +erif# that the amounts onthe bank statement are consistent or compatible with the amounts in the compan#:s Cashaccount in its general ledger and +ice +ersa. *his process of confirming the amounts is referred toas reconciling the bank statement, bank statement reconciliation, bank reconciliation, or doing abank rec. *he benefit of reconciling the bank statement is knowing that the amount of Cashreported b# the compan# (compan#:s books) is consistent with the amount of cash shown in thebank:s records.

"ecause most companies write hundreds of checks each month and make man# deposits,reconciling the amounts on the compan#:s books with the amounts on the bank statement can betime consuming. *he process is complicated because some items appear in the compan#:s Cashaccount in one month, but appear on the bank statement in a different month. ;or example,checks written near the end of ugust are deducted immediatel# on the compan#:s books, butthose checks will likel# clear the bank account in earl# &eptember. &ometimes the bankdecreases the compan#:s bank account without informing the compan# of the amount. ;orexample, a bank ser+ice charge might be deducted on the bank statement on ugust !1, but thecompan# will not learn of the amount until the compan# recei+es the bank statement in earl#&eptember. ;rom these two examples, #ou can understand wh# there will likel# be a difference inthe balance on the bank statement +s. the balance in the Cash account on the compan#:s books.t is also possible (perhaps likel#) that neither balance is the true balance. "oth balances ma#

need adjustment in order to report the true amount of cash. fter #ou adjust the balance per bankto be the true balance and after #ou adjust the balance per books to also be the same truebalance, #ou ha+e reconciled the bank statement. 4ost accountants would simpl# sa# that #ouha+e done the bank reconciliation or the bank rec.

Gow does the &G6% 46Q%*& works

&hare market is a place where companies list their shares a+ailable to common public for bu#ingS selling.these shares are now mostl# held in demat form, i.e. electronic and not ph#sical.

share 0 a share entitles #ou to own a certain T of the compan#. if the compan# has total 1==shares listed and #ou bu# 1, then #ou are 1T owner of the compan# and are entitled toparticipate in E4, +ote for general resolutions or recei+e di+idends (mone#) if the compan#declares some.

at the end of the da#, all shares in compan# are summed up 0 total bu# and total sell. this shouldtall# b# the end of da#s (*H). this means that if #ou sell 1 share toda#, #ou need to transfer 1share from #our account so that it can be gi+en to someone else who has bought 1 share. thisentire process should be complete within da#s.

complications start from here and if i write more, #ou will start getting confused. #ou can read up


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1==s of articles on stock markets on the net. #ou can post further questions if the# are more

specific.

"toc# ar#et 3asics

ar#et 3asics

*hat is a "toc# ,-change0

common platform where bu#ers and sellers come together to transact in stocks and shares. t

ma# be a ph#sical entit# where brokers trade on a ph#sical trading floor +ia an open outcr#

s#stem or a +irtual en+ironment.

*hat is electronic trading0

%lectronic trading eliminates the need for ph#sical trading floors. "rokers can trade from their

offices, using full# automated screen0based processes. *heir workstations are connected to a

&tock %xchange:s central computer +ia satellite using 5er# &mall perture *erminus (5&*s).

*he orders placed b# brokers reach the %xchange:s central computer and are matched

electronicall#.

+ow many ,-changes are there in India0

*he &tock %xchange, 4umbai ("&%) and the Fational &tock %xchange (F&%) are the countr#:s

two leading %xchanges. *here are = other regional %xchanges, connected +ia the nter0

Connected &tock %xchange (C&%). *he "&% and F&% allow nationwide trading +ia their 5&*

s#stems.

*hat is an Inde-0

n ndex is a comprehensi+e measure of market trends, intended for in+estors who are

concerned with general stock market price mo+ements. n ndex comprises stocks that ha+elarge liquidit# and market capitalisation. %ach stock is gi+en a weightage in the ndex equi+alent

to its market capitalisation. t the F&%, the capitalisation of F;* (fift# selected stocks) is taken

as a base capitalisation, with the +alue set at 1===. &imilarl#, "&% &ensiti+e ndex or &ensex

comprises != selected stocks. *he ndex +alue compares the da#:s market capitalisation +is0a0+is

base capitalisation and indicates how prices in general ha+e mo+ed o+er a period of time.


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+ow does one e-ecute an order0

&elect a broker of #our choice and enter into a broker0client agreement and fill in the client

registration form. 8lace #our order with #our broker preferabl# in writing. Eet a trade confirmation

slip on the da# the trade is executed and ask for the contract note at the end of the trade date.

*hy does one need a bro#er0

s per &%" (&ecurities and %xchange "oard of ndia.) regulations, onl# registered members can

operate in the stock market. One can trade b# executing a deal onl# through a registered broker

of a recognised &tock %xchange or through a &%"0 registered sub0broker.

*hat is a contract note0

contract note describes the rate, date, time at which the trade was transacted and the

brokerage rate. contract note issued in the prescribed format establishes a legall# enforceable

relationship between the client and the member in respect of trades stated in the contract note.

*hese are made in duplicate and the member and the client both keep a cop# each. client

should recei+e the contract note within $ hours of the executed trade. Corporate "enefits


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n case of a record date, the compan# does not close its register of securit# holders. 6ecord date

is the cut off date for determining the number of registered members who are eligible for the

corporate benefits. n case of book closure, shares cannot be sold on an %xchange bearing a

date on the transfer deed earlier than the book closure. *his does not hold good for the record

date.

*hat is a no%delivery period0

-hene+er a compan# announces a book closure or record date, the %xchange sets up a no0

deli+er# (F9) period for that securit#. 9uring this period onl# trading is permitted in the securit#.

Gowe+er, these trades are settled onl# after the no0deli+er# period is o+er. *his is done to ensure

that in+estor:s entitlement for the corporate benefit is clearl# determid.

*hat is an e-%dividend date0

*he date on or after which a securit# begins trading without the di+idend (cash or stock) included

in the contract price.

*hat is an e-%date0

*he first da# of the no0deli+er# period is the ex0date. f there is an# corporate benefits such as

rights, bonus, di+idend announced for which book closure


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&plit is book entr# wherein the face +alue of the share is altered to create a greater number of

shares outstanding without calling for fresh capital or altering the share capital account. ;or

example, if a compan# announces a two0wa# split, it means that a share of the face +alue of 6s

1= is split into two shares of face +alue of 6s ' each and a person holding one share now holds

two shares.

*hat is a 3uy 3ac#0

s the name suggests, it is a process b# which a compan# can bu# back its shares from

shareholders. compan# ma# bu# back its shares in +arious wa#s3 from existing shareholders on

a proportionate basis2 through a tender offer from open market2 through a book0building process2

from the &tock %xchange2 or from odd lot holders.

compan# cannot bu# back through negotiated deals on or off the &tock %xchange, through spot

transactions or through an# pri+ate arrangement. Clearing and &ettlement

*hat is a settlement cycle0

*he accounting period for the securities traded on the %xchange. On the F&%, the c#cle begins

on -ednesda# and ends on the following *uesda#, and on the "&% the c#cle commences on

4onda# and ends on ;rida#. t the end of this period, the obligations of each broker are

calculated and the brokers settle their respecti+e obligations as per the rules, b#e0laws and

regulations of the Clearing Corporation.

f a transaction is entered on the first da# of the settlement, the same will be settled on the eighth

working da# excluding the da# of transaction. Gowe+er, if the same is done on the last da# of the

settlement, it will be settled on the fourth working da# excluding the da# of transaction.

*hat is a rolling settlement0

*he rolling settlement ensures that each da#:s trade is settled b# keeping a fixed gap of a

specified number of working da#s between a trade and its settlement. t present, this gap is fi+e

working da#s after the trading da#. *he waiting period is uniform for all trades.

*hen does one deliver the shares and pay the money to bro#er0

s a seller, in order to ensure smooth settlement #ou should deli+er the shares to #our broker

immediatel# after getting the contract note for sale but in an# case before the pa#0in da#.


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&imliarl#, as a bu#er, one should pa# immediatel# on the receipt of the contract note for purchase

but in an# case before the pa#0in da#.

*hat is short selling0

&hort selling is a legitimate trading strateg#. t is a sale of a securit# that the seller does not own,

or an# sale that is completed b# the deli+er# of a securit# borrowed b# the seller. &hort sellers

take the risk that the# will be able to bu# the stock at a more fa+ourable price than the price at

which the# sold short.

*hat is an auction0

n auction is conducted for those securities that members fail to deli+er


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*he broker must immediatel# be notified. Compan# objection cases should be reported within 1

months from the date of issue of the memo for the original quantit# of share under objection.

*ho has to replace the shares in case of company ob8ections0

*he member who has sold the shares first on the %xchange is responsible for replacing the

shares within 1 da#s of the %xchange being informed. Compan# objection cases that are not

rectified or replaced are normall# auctioned.

+ow does transfer of physical shares ta#e place0

fter a sale, the share certificate along with a proper transfer deed dul# stamped and complete in

all respects is sent to the compan# for transfer in the name of the bu#er. Once the transfer is

registered in the share transfer register maintained b# the compan#, the process of transfer iscomplete.

,1uities

*hat is e1uity0

;unds brought into a business b# its shareholders is called equit#. t is a measure of a stake of a

person or group of persons starting a business.

*hat does investing in e1uity mean0

-hen #ou bu# a compan#:s equit#, #ou are in effect financing it, and being compensated with a

stake in the business. ou become part0owner of the compan#, entitled to di+idends and other

benefits that the compan# ma# announce, but without an# guarantee of a return on #our

in+estments.

*hat is fundamental analysis0

*he anal#sis of factual information like financial figures, balance sheet, and other information

publicl# a+ailable is known as fundamental anal#sis. *his information is used to deri+e a fair price

of the share of the compan#. *he faithful fundamentalists belie+e that the market incorporates all

facts relating to the financial performance of the compan#. "ut a s#stematic anal#sis will ensure a

more accurate +aluation of the price. ;undamental anal#sts use tools such as ratio anal#sis (8


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45


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%arning 8er &hare (%8&)3 %8& represents the portion of a compan#:s profit allocated to each

outstanding share of common stock. Fet income (reported or estimated) for a period of time is

di+ided b# the total number of shares outstanding during that period. t is one of the measures of

the profitabilit# of common shareholder:s in+estments. t is gi+en b# profit after tax (8*) di+ided

b# number of common shares outstanding.

8rice %arning 4ultiple (8


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*hat is the difference between boo# closure and record date0

n case of a record date, the compan# does not close its register of securit# holders. 6ecord date

is the cut off date for determining the number of registered members who are eligible for the

corporate benefits. n case of book closure, shares cannot be sold on an %xchange bearing adate on the transfer deed earlier than the book closure. *his does not hold good for the record

date.

*hat is a no%delivery period0

-hene+er a compan# announces a book closure or record date, the %xchange sets up a no0

deli+er# (F9) period for that securit#. 9uring this period onl# trading is permitted in the securit#.

Gowe+er, these trades are settled onl# after the no0 deli+er# period is o+er. *his is done to ensure

that in+estor:s entitlement for the corporate benefit is clearl# determined.

*hat is an e-%dividend date0

*he date on or after which a securit# begins trading without the di+idend (cash or stock) included

in the contract price.

*hat is an e-%date0

*he first da# of the no0deli+er# period is the ex0 date. f there is an# corporate benefits such as

rights, bonus, di+idend announced for which book closure


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-hile in+esting in shares the moti+e is not onl# capital gains but also proportionate share of

surplus generated from the operations once all other stakeholders ha+e been paid. "ut the

distribution of this surplus to shareholders seldom happens. nstead, this is transferred to the

reser+es and surplus account. f the reser+es and surplus amount becomes too large, the

compan# ma# transfer some amount from the reser+es account to the share capital account b# amere book entr#. *his is done b# increasing the number of shares outstanding and e+er#

shareholder is gi+en bonus shares in a ratio called the bonus ratio and such an issue is called

bonus issue. f the bonus ratio is 13, it means that for e+er# two shares held, the shareholder is

entitled to one extra share. *hus a shareholder holding two shares, post bonus holds three

shares of the compan#.

*hat is a split0

&plit is book entr# wherein the face +alue of the share is altered to create morenumber of shares

outstanding without calling for fresh capital or without altering the share capital account. ;or

example if a compan# announces a two0wa# split, it means that a share of the face +alue of

6s.1= is split into two shares of face +alue 6s.fi+e each and a person holding one share now

holds two shares.

*hat is buy%bac#0

t is a process b# which a compan# can bu#0back its shares from shareholders. compan# ma#

bu#0back its shares in +arious wa#s 3

from existing shareholders on a proportionate basis through a tender offer

from open market through book0building process

from the &tock %xchange

from odd lot holders

compan# cannot bu#0back its shares through negotiated deals, whether on or off the &tock

%xchange or through spot transactions or through an# pri+ate arrangement

*hat is a rolling settlement0

*he rolling settlement ensures that each da#:s trade is settled b# keeping a fixed gap, between a

trade and its settlement, of a specified number of working da#s. t present this is fi+e working

da#s after the trading da#. *he waiting period is uniform for all trades.

*hen does one deliver the shares/pay the money to bro#er0


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Check with a 98 as to whether the securities #ou hold can be dematerialised. *hen open an

account with a 98 and surrender the share certificates.

*hat is a Depository0

9epositor# is a securities bank, where dematerialised ph#sical securities are held in custod#,

and from where the# can be traded. *his facilitates faster, risk0free and low cost settlement.

9epositor# is akin to a bank and performs acti+ities similar in nature. t present, there are two

9epositories in ndia, Fational &ecurities 9epositor# Iimited (F&9I) and Central 9epositor#

&er+ices (C9&). F&9I was the first ndian 9epositor#. t was inaugurated in Fo+ember 1MM.

F&9I was set up with an initial capital of 6s 1$ crore, promoted b# ndustrial 9e+elopment "ank

of ndia (9"), Lnit *rust of ndia (L*), Fational &tock %xchange of ndia Itd. (F&%I) and the

&tate "ank of ndia (&").

*ho is a Depository Participant (DP)0

F&9I carries out its acti+ities through business partners 0 9epositor# 8articipants (98s), ssuing

Corporates and their 6egistrars and *ransfer gents, Clearing Corporations


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is a trader who has short sold nfos#s. Ge wants to carr# forward his position but as the

settlement has ended, he must meet his deli+er# obligation. *rader " holds shares of nfos#s. Ge

does not want to sell but at the same time, he wants to maximise returns on his portfolio, taking

ad+antage of whate+er opportunities come along.

On the I"4 session on -ednesda#, the &I8 for nfos#s is, sa#, 6s.V===. *rader " places a

sell order for 1== shares of nfos#s at 6s.V=$= (transaction price). *rader looking for an

opportunit#, grabs the shares and the transaction is executed. n effect, *rader " has lent 1==

shares of nfos#s to *rader for a fee of 6s $= per share. *rader pa#s 6s V,==,=== (6s. V,===

x 1==) as collateral and 6s $=== towards fees for the loan of securities. n the process, *rader "

gets a weekl# return of =.'=T or T annualised.

Is A43 similar to carry forward0

*his ma# sound suspiciousl# like carr# forward. "ut there are some major differences between a

carr# forward transaction and stock lending transaction.

carr# forward is a le+eraged transaction, where the in+estor has to pa# 1= to 1' per cent

margin. &tock lending is a 1== per cent margin transaction.

carr# forward positions can be rolled o+er for a maximum period of M= da#s. n the case

of stock lending, the positions ha+e to be settled within a nine0da# period.

carr# forward market is characterised b# the absence of institutions. d+ent of stock

lending will bring institutions also into the carr# forward market. *his will impro+e the carr#forward market.

*hat is hawala rate0

Hawalarate is a making0up price at which bu#ers and sellers settle their speculati+e transactions

at the end of the settlement. t is the basis for bu# and sell for the in+estor opting for carr# forward

during the next settlement. *his price is fixed b# taking the weighted a+erage of trades in the last

half0an0hour of trading on the settlement da# for securities in the carr# forward list, also known as

the group or specified group. *his price is significant because for a speculati+e bu#er or a

seller, the hawalarate is the standard rate for settling his trade and for carr#ing forward businessto the next settlement.;or example, n in+estor bu#s the stock of W compan# at 6s.1== on

4onda#. "# ;rida# ( "&% settlement da#), if 6s.M= is the weighted a+erage price in the last half0

an0hour, the bu#er would ha+e to carr# forward his trade at this price of 6s.M=. Ge then settles at

6s.M= and enters into a contract at 6s.M= plus BLEcharges for the next settlement.

Can the "toc# ,-change fi- or alter the hawala rate0


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Formall#, &tock %xchanges do not interfere with the hawalarates. Gowe+er, there are instances,

when rates ha+e been changed to ensure safet# of the markets. *his is so because in case the

market witnesses a sharp fall during a settlement, the chances of a broker default are extremel#

high. *his is when the %xchange administration steps in and raises the hawalarate to a+ert an#

possible default.

*hat is Arbitrage0

rbitrage is an act of bu#ing assets (or securities) in one market and selling in another at higher

prices. t takes ad+antage of a price differential existing in theprices of the same commodit# or

securit# in two or more different markets. "# this process, under+alued assets (or securities) are

sold in related markets, which are temporaril# out of equilibrium. t should be understood that

unlike speculation, arbitrage is risk0free as opposite positions (i.e long0short) are taken

simultaneousl#, lea+ing no unco+ered position. &ince ndian &tock %xchanges trade the same

stocks with different settlement periods, there are man# opportunities for arbitrage.

IP$s

*hat is an IP$0

n 8O is an abbre+iation for nitial 8ublic Offer. -hen a compan# goes public for the first time or

issues a fresh stock of shares, it offers it to the public directl#. *his happens in the primar#

market. *he primar# market is where a compan# makes its first contact with the public at large.

*hat is 3oo# 3uilding0

"ook "uilding is a process used for marketing a public offer of equit# shares of a compan# and is

a common practice in most de+eloped countries. "ook "uilding is so0 called because the

collection of bids from in+estors are entered in a book. *hese bids are based on an indicati+e

price range. *he issue price is fixed after the bid closing date.

+ow is the boo# built0

compan# that is planning an initial public offer (8O) appoints a categor#0 4erchant "anker as

a bookrunner. nitiall#, the compan# issues a draft prospectus which does not mention the price,

but gi+es other details about the compan# with regards to issue si/e, past histor# and future plans

among other mandator# disclosures. fter the draft prospectus is filed with the &%", a particular

period isfixed as the bid period and the details of the issue are ad+ertised.*he book runnerbuilds

an order book, that is, collates the bids from +arious in+estors, which shows the demand for the

shares of the compan# at +arious prices. ;or instance, a bidder ma# quote that he wants '=,===


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shares at 6s.'== while another ma# bid for ',=== shares at 6s.==. 8rospecti+e in+estors can

re+ise their bids at an#time during the bid period, that is, the quantit# of shares or the bid price or

an# of the bid options. Lsuall#, the bid must be for a minimum of '== equit# shares and in

multiples of 1== equit# shares thereafter. *he book runner appoints a s#ndicate member, a

registered intermediar# who garners subscription and underwrites the issue.

$n what basis is the final price decided0

On closure of the book, the quantum of shares ordered and the respecti+e prices offered are

known. *he price disco+er# is a function of demand at +arious prices, and in+ol+es negotiations

between those in+ol+ed in the issue. *he book runner and the compan# conclude the pricing and

decide the allocation to each s#ndicate member.

*hen is the payment for the shares made0

*he bidder has to pa# the maximum bid price at the time of bidding based on the highest bidding

option of the bidder. *he bidder has the option to make different bids like quoting a lower price for

higher number of shares or a higher price for lower number of shares. *he s#ndicate member

ma# wai+e the pa#ment of bid price at the time of bidding. n such cases, the issue price ma# be

paid later to the s#ndicate member within four da#s of confirmation of allocation. -here a bidder

has been allocated lesser number of shares than he or she had bid for, the excess amount paid

on bidding, if an# will be refunded to such bidder.

Is the process followed in India different from abroad0

Lnlike international markets, ndia has a large number of retail in+estors who acti+el# participate

in 8Os. nternationall#, the most acti+e in+estors are the 4utual ;unds and Other nstitutional

n+estors. &o the entire issue is book built. "ut in ndia, ' per cent of the issue has to be offered

to the general public. Gere there are two options to the compan#. ccording to the first option, '

per cent of the issue has to be sold at a fixed price and X' per cent is through "ook "uilding. *he

other option is to split the ' per cent on offer to the public (small in+estors) into a fixed price

portion of 1= per cent and a reser+ation in the book built portion amounting to 1' per cent of the

issue si/e. *he rest of the book built portion is open to an# in+estor.

*hat is the advantage of the 3oo# 3uilding process versus the normal IP$ mar#eting

process0

*he "ook "uilding process allows for price and demand disco+er#. lso, the costs of the public

issue is reduced and so is the the time taken to complete the entire process.


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Knowledge on Finance Accounting

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