8/10/2019 Finance Guidebook Updated
1/60
The Finance Club
FINANCE GUIDEBOOK
8/10/2019 Finance Guidebook Updated
2/60
2
ContentsAccounting ............................................................................................................................................ 3
Financial Markets ................................................................................................................................ 18
Banking ................................................................................................................................................ 31
Economics ........................................................................................................................................... 33
Recent Developments ......................................................................................................................... 45
Historical Events .................................................................................................................................. 49
Careers in Finance ............................................................................................................................... 57
8/10/2019 Finance Guidebook Updated
3/60
3
Accountancy
What is Accounting?
Accounting is the guide-post for management. It points out the problems faced or likely to be faced by
the firm. A firm should know the financial implications of its operations. The financial score of the firm is
kept by the accounting system. Accounting is the medium through which business organizations
communicate their financial performance and financial position to the outside world. Accounting is the
process of identifying, measuring and communicating economic information to permit informed
judgements and decisions by users of the information. Accounting is defined as the systematic and
comprehensive recording of financial transactions pertaining to a business. Accounting also refers to the
process of summarizing, analyzing and reporting these transactions.
Who are the users of accounting information?
The accounting information is used by both internal and external stakeholders. The most predominant
group of external stakeholders includes the suppliers of capital which includes shareholders, lending
banks and financial institutions, bond holders and other lenders, etc. These stakeholders have financial
interest in the business and therefore are interested in knowing about the financial performance and
health of the organization. These groups have a direct stake in the financial health of the organization.
They use the accounting information to access the risk return profile of the company. The information
contained in the financial statements helps them to judge the return they expect from their investment
as well as the risk they are exposed to by investing and lending to the organization.
Tax authorities are also interested in the accounting information. As business units are liable to pay tax
on their taxable income, accounting information is used to ascertain the same.
What is meant by Accounting Cycle?
The accounting cycle involves:-
1. IDENTIFYING THE BUSINESS TRANSACTIONS: All business transactions carried out by the firm are
identified. Business activities are separated from the non-business activities.
2. CLASSIFYING THE BUSINESS TRANSACTION: The business activities are then classified according to
their nature and recording in the financial statements.
3. RECORDING THE BUSINESS TRANSACTION: The identified business transactions are recorded for
maintaining proper records of firms activities. Journals, ledgers and Trial Balance are used for
recording transactions.
8/10/2019 Finance Guidebook Updated
4/60
4
4. SUMMARIZING THE BUSINESS TRANSACTIONS: The business transactions are summarized on
periodical basis to interpret the firms profitability and performance. Profit and Loss account,
Balance Sheet, and Cash Flow statements are use for summarizing.
5. INTERPRETING THE BUSINESS TRANSACTIONS:The financial performance of the firm is interpreted to
arrive at the profitability position of the firm. Trend Analysis, Common Size, Ratio Analysis areused for the interpretation amongst others available.
What is the role of various agencies and government agencies?
The accounting practices are greatly influenced by the regulatory requirements prescribed. As the
financial statements are used by the external users, suitable provisions should be made in applicable acts
to ensure comparability of information.
COMPANIES ACT,1956: It governs the creation, continuation and winding up of companies and also the
relationships between the shareholders, the company, the public, and the government. The act also has
provisions regarding the books of accounts to be kept by companies, format of financial statements andauthentication of financial statements. Companies Bill 2012 has been passed by both the houses and is
awaiting Presidents assent. Once approved by the President, it will be called The Companies Act 2013.
MINISTRY OF CORPORATE AFFAIRS:It is primarily responsible for the administration of the companies act,
1956. In addition it also supervises three professional accounting bodies namely the Institute of Chartered
Accountant of India (ICAI), the Institute of Cost and Works Accountants of India (ICWAI) and the Institute
of Company Secretaries of India (ICSI).
RESERVE BANK OF INDIA:The Reserve bank of India is the central bank of India and was set up in 1935 to
regulate the business of banking in India. RBI also supervises the banking companies and issues circulars
relating to disclosures in the notes of accounts to the financial statements.
BANKING REGULATIONS ACT,1949: It states that every banking company incorporated in India is required
to prepare a Balance Sheet and a Profit and Loss account for each accounting period and these financial
statements of banking companies must be prepared in the format prescribed in the Third Schedule of
banking Regulations Act 1949.
INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY: IRDA was established in 1999 to protect the
interests of holders of insurance policies, to regulate, to promote and ensure orderly growth of the
insurance industry in India. The financial statements of insurance companies must be prepared in the
format prescribed by IRDA regulations.
SECURITIES AND EXCHANGE BOARD OF INDIA:SEBI was established by an act of parliament in the year 1992
to protect the interests of investors in securities and to promote the development of, and to regulate,
the securities market. The act gives SEBI powers to specify the requirements of listing of securities.
INCOME TAX ACT,1961:Financial accounting and tax accounting are two distinct branches of accounting.
The taxable income is computed as per the provisions of Income Tax Act, 1961 whereas reported profits
8/10/2019 Finance Guidebook Updated
5/60
5
for financial accounting is determined based upon the applicable accounting standards and requirements
of the Companies Act, 1956.
CONFEDERATION OF ASIAN AND PACIFIC ACCOUNTANTS:The Confederation of Asian and Pacific Accountants
(CAPA) represent national professional accounting organisations in the Asia-Pacific region.
INTERNATIONAL FEDERATION OF ACCOUNTANTS:International Federation of Accountants (IFAC) is the global
organization for the accountancy profession.
What are the different types of accounts?
For the usage in Accounting, Accounts are classified into:
1. REAL ACCOUNTS:Real Accounts are accounts relating to assets owned by the enterprise. For Ex-
cash, machinery, etc.
2. PERSONAL ACCOUNTS:Personal Accounts are accounts relating to the persons, both natural and
legal, with whom the enterprise has business transactions. They represent the amount
receivables and payable by the enterprise. For Ex- Capital Account, Loan from Banks, etc.
3. NOMINAL ACCOUNTS: Nominal Accounts are accounts relating to income and expenses. For Ex-
sales, rent earned and paid, etc.
What do you mean by journal entry?
Journal entry is the beginning of the accounting cycle. Journal entries are the logging of business
transactions and their monetary value into the t-accounts of the accounting journal as either debits or
credits. Journal entries are usually backed up with a piece of paper; a receipt, a bill, an invoice, or some
other direct record of the transaction. Easy to record and to maintain traceability for each transaction
What is a Ledger?
Ledger is a book of accounts in which data from transactions recorded in journals are posted and thereby
classified and summarized. It is typically used by businesses that employ the double-entry bookkeeping
method - where each financial transaction is posted twice, as both a debit and a credit, and where each
account has two columns.
What is a Trial Balance?
Trial Balance is the aggregate of all debits and credit balances at the end of an accounting period. It shows
if the general ledger is in balance (total debits equal total credits) before making closing entries and serves
as a worksheet for making closing entries. It provides the basis for making draft financial statements.
8/10/2019 Finance Guidebook Updated
6/60
6
What do you mean by financial statement and explain types of financial statements and their
functions?
Financial statements can be referred to as representation of the financial status of a company in a
systematically documented form. These written reports help to quantify the financial strength,
performance and liquidity of a company.
There are three different types of financial statements. The different types of financial statements indicate
the different activities occurring in a particular business house.
Balance Sheet
Income statement
Cash flow statement
What is a Balance Sheet?
Balance Sheet presents the financial position of an entity at a given date. It is comprised of the following
three elements:
ASSETS:Something a business owns or controls (e.g. cash, inventory, plant and machinery,
etc)
LIABILITIES:Something a business owes to someone (e.g. creditors, bank loans, etc)
EQUITY (CAPITAL):What the business owes to its owners. This represents the amount of capital
that remains in the business after its assets are used to pay off its outstanding liabilities. Equity
therefore represents the difference between the assets and liabilities.
What is meant by Income Statement?
Also known as the P&L statement or the Profit And Loss Statement, this statement ascertains the profit
and loss of any business. Income Statement is composed of the following two elements:
Income: What the business has earned over a period (e.g. sales revenue, dividend income,
etc)
Expense: The cost incurred by the business over a period (e.g. salaries and wages,
depreciation, rental charges, etc)
Net profit or loss is arrived by deducting expenses from income.
What is a Cash Flow Statement?
Cash Flow Statement, presents the movement in cash and bank balances over a period. The movement in
cash flows is classified into the following segments:
Operating Activities: Represents the cash flow from primary activities of a business.
Investing Activities: Represents cash flow from the purchase and sale of assets other than
inventories (e.g. purchase of a factory plant)
8/10/2019 Finance Guidebook Updated
7/60
7
Financing Activities: Represents cash flow generated or spent on raising and repaying share
capital and debt together with the payments of interest and dividends.
Which are the twelve generally accepted accounting principles? Explain.
Separate Entity ConceptThe business entity concept provides that the accounting for a business or organization be kept separate
from the personal affairs of its owner, or from any other business or organization. The balance sheet of
the business must reflect the financial position of the business alone. Also, when transactions of the
business are recorded, any personal expenditures of the owner are charged to the owner and are not
allowed to affect the operating results of the business.
The Going Concern Concept
The going concern concept assumes that a business will continue to operate, unless it is known that such
is not the case. This concept has strong implication on the valuation of assets of the business. For example,
a supply of envelopes with the company's name printed on them would be valued at their cost. This would
not be the case if the company were going out of business. In that case, the envelopes would be difficult
to sell because the company's name is on them. When a company is going out of business, the values of
the assets usually suffer because they have to be sold under unfavourable circumstances. The values of
such assets often cannot be determined until they are actually sold.
The Principle of Conservatism
The principle of conservatism provides that accounting for a business should be fair and reasonable. It is
better to understate the financial position of the business rather than overstate. Probable gains should
be ignored but account for probable losses should be made.
The Objectivity PrincipleThe objectivity principle states that accounting will be recorded on the basis of objective evidence.
Objective evidence means that different people looking at the evidence will arrive at the same values for
the transaction. Simply put, this means that accounting entries will be based on fact and not on personal
opinion or feelings.
The source document for a transaction is almost always the best objective evidence available. The source
document shows the amount agreed to by the buyer and the seller, who are usually independent and
unrelated to each other.
Accounting Period Concept
This concept provides that accounting to take place over specific time periods known as fiscal periods. It
is usually of 12 months. These fiscal periods are of equal length, and are used when measuring the
financial progress of a business.
The Accrual Basis of accounting concept
Cash basis- transactions are recorded on receipt and payment of cash.
8/10/2019 Finance Guidebook Updated
8/60
8
Accrual basis- revenue is recorded when earned while expenses are recorded when incurred irrespective
of when received or paid.
Example - Think of the building of a large project such as a dam. It takes a construction company a number
of years to complete such a project. The company does not wait until the project is entirely completed
before it sends its bill. Periodically, it bills for the amount of work completed and receives payments asthe work progresses. Revenue is taken into the accounts on this periodic basis.
The Matching Principle
The matching principle states that each expense item related to revenue earned must be recorded in the
same accounting period as the revenue it helped to earn. If this is not done, the financial statements will
not measure the results of operations fairly.
The Cost Concept
The cost principle states that the accounting for purchases must be at their cost price. This is the figure
that appears on the source document for the transaction in almost all cases. The value recorded in the
accounts for an asset is not changed until later if the market value of the asset changes. It would take an
entirely new transaction based on new objective evidence to change the original value of an asset.
The Consistency Principle
The consistency principle requires accountants to apply the same methods and procedures from period
to period. When they change a method from one period to another they must explain the change clearly
on the financial statements. The consistency principle prevents people from changing methods for the
sole purpose of manipulating figures on the financial statements.
The Materiality Principle
The materiality principle states that all information that affects the full understanding of a company's
financial statements must be include with the financial statements provide but unnecessary details should
be avoided.
The Dual Concept
Every transaction affects at least two accounts in such a way that the below equation would always be
balanced.
Assets= Capital + Liabilities
Money Measurement Concept
It states that all the events and transactions should be converted and expressed in money terms are
subject matter of accounting. If business units earn revenue in different currencies then the financial
statements are prepared using a uniform currency called reporting currency.
8/10/2019 Finance Guidebook Updated
9/60
9
What do you mean by accounting standards? Name all the accounting standards.
Accounting standards translate general accounting principle to specific accounting principles to specific
accounting rules and are mandatory to be followed. While 32 Accounting Standards have been issued by
ICAI, the following 29 are mandatory:
AS 1 Disclosure of Accounting Policies
AS 2 Valuation of Inventories
AS 3 Cash Flow Statements
AS 4 Contingencies and Events Occurring after the Balance Sheet Date
AS 5 Net Profit or Loss for the period, Prior Period Items and Changes in Accounting Policies
AS 6 Depreciation Accounting
AS 7 Construction Contracts (revised 2002)
AS 9 Revenue Recognition
AS 10 Accounting for Fixed Assets
AS 11 The Effects of Changes in Foreign Exchange Rates (revised 2003),
AS 12 Accounting for Government Grants
AS 13 Accounting for Investments
AS 14 Accounting for Amalgamations
AS 15 Employee Benefits (revised 2005)
AS 16 Borrowing Costs
AS 17 Segment Reporting
AS 18 Related Party Disclosures
AS 19 Leases
AS 20 Earnings per Share
AS 21 Consolidated Financial Statements
AS 22 Accounting for Taxes on Income.
AS 23 Accounting for Investments in Associates in Consolidated Financial Statements
AS 24 Discontinuing Operations
AS 25 Interim Financial Reporting
AS 26 Intangible Assets
AS 27 Financial Reporting of Interests in Joint Ventures
AS 28 Impairment of Assets
AS 29 Provisions, Contingent Liabilities and Contingent Assets
What is IFRS?
International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the
International Accounting Standards Board (IASB), which is an independent accounting standard-setting
body consisting of 14 members from nine countries and is based in London. IFRS are becoming the global
standard for the preparation of public company financial statements.
8/10/2019 Finance Guidebook Updated
10/60
10
What is meant by convergence with IFRS?
Convergence means that the Indian Accounting Standards (AS) and the International Financial Reporting
Standards (IFRS) would, over time, continue working together to develop high quality, compatible
accounting standards. As per the notification of the Ministry of Corporate Affairs, convergence of Indian
Accounting Standards (AS) with International Financial Reporting Standards (IFRS) will take place in
phases. The first phase commenced on 1st April 2011 and is expected to be over by 2014.
What is an asset in financial accounting?
Any item of economic value owned by an individual or corporation, especially that which could be
converted to cash. E.g.:land, buildings, furniture, patent, etc.
What are the different types of assets?
Assets can be classified into 2 types:
1. TANGIBLE ASSETS: Assets that have a physical substance such as currencies, buildings, real estate,
vehicles, inventories, equipment, and precious metals are called tangible assets. They can be
further classified into current assets and fixed assets.
2. INTANGIBLE ASSETS: They lack of physical substance and usually are very hard to evaluate which
includes patents, copyrights, franchises, goodwill, trademarks, trade names, etc.
What are current assets and different types of it?
Current assets are cash and other assets which can be converted to cash or consumed either in a year or
in the operating cycle (whichever is longer), without disturbing the normal operations of a business. There
are 5 major items which can be included into current assets:
1. CASH AND CASH EQUIVALENTS: This includes currency and other assets such as deposit accounts,
money orders, cheque, bank drafts which can be converted to cash immediately.
2. SHORT-TERM INVESTMENTS:They include securities bought and held for sale in the near future to
generate income on short-term price differences (trading securities).
3. ACCOUNT RECEIVABLES:They represent money owed by entities to the firm on the sale of products
or services on credit. They are shown in the balance sheet as an asset. To record a journal entry
for a sale on account, one must debit a receivable and credit a revenue account. When the
customer pays off their accounts, one debits cash and credits the receivable in the journal entry.
The ending balance on the trial balance sheet for accounts receivable is usually a debit.
4. INVENTORY:It is commonly used to describe the goods and materials that a business holds for theultimate purpose of resale (or repair).The inventory of a manufacturer should report the cost of
its raw materials, work-in-process, and finished goods. The cost of inventory should include all
costs necessary to acquire the items and to get them ready for sale.
5. PRE-PAID EXPENSES:They arise as a result of business making payments for goods and services to
be received in the near future. While prepaid expenses are initially recorded as assets, their value
8/10/2019 Finance Guidebook Updated
11/60
11
is expensed over time as the benefit is received onto the income statement, because unlike
conventional expenses, the business will receive something of value in the near future.
What are fixed assets?
Fixed assets are tangible assets held by an entity for the production or supply of goods and services, for
rentals to others, or for administrative purposes. These assets are expected to be used for more than one
accounting period. They are generally not considered to be a liquid form of assets unlike current assets.
They include buildings, land, furniture and fixtures, machines and vehicles.
E.g.:If a company is in the business of selling cars, it must not account for cars held for resale as fixed
assets but instead as inventory assets. However, any vehicles other than those held for the purpose of
resale may be classified as fixed assets such as delivery trucks and employee cars.
What is a liability?
A liability is commonly defined as an obligation of an entity arising from past transactions or events. Theyare reported on a balance sheet and are usually divided into two categories:
1. CURRENT LIABILITIES:These liabilities are reasonably expected to be liquidated within a year. They
usually include payables such as wages, accounts, taxes, and accounts payable, unearned revenue
when adjusting entries, portions of long-term bonds to be paid this year, short-term obligations
(e.g. from purchase of equipment).
2. LONG-TERM LIABILITIES: These liabilities are reasonably expected not to be liquidated within a year.
They usually include issued long-term bonds, notes payables, long-term leases, pension
obligations, and long-term product warranties. The balance sheet is based upon the following
equation:
ASSETS =LIABILITIES +OWNER'S EQUITY
What is Owner's equity?
Owner's equity is an individual or company's net worth. This is calculated by taking the value of all assets
and subtracting the value of all liabilities. Owner's equity is used in determining an individual's or
company's creditworthiness, and can be used in determining the value of a business when its owner or
shareholders want to sell. It also includes the value of intangible assets and liabilities. It is sometimes
referred to as the book value of the company.
What is Shareholders Fund?
It represents the actual amount put in the business by the owners and the amount raised by issuance of
shares and earnings retained. Shareholders fund is generally divided into two parts- share capital and
reserves and surplus.
SHARE CAPITAL:It represents the amount raised by issuance of shares at the face value.
8/10/2019 Finance Guidebook Updated
12/60
12
RESERVE AND SURPLUS:It represents the part of profit that has been retained by the company after
paying out the dividends. It is also called as retained earnings.
E.g.: you have started a business by investing Rs. 100,000. After an year, the business have earned a profit
of Rs 50,000 out of which you decided to keep Rs. 10,000 to yourself and the remaining amount to be
reused in future of the business. In this case, Rs. 40,000 will be the retained earnings while Rs. 100,000will be the owners share in the business. After few years, you have decided to raise investments in your
business by issuing 10,000 shares at a face value of Rs 10. The amount of Rs. 100,000 raised will be the
share capital.
What are dividends?
It represents a part of the profit that is distributed to the shareholders. The final dividend is proposed by
the directors of the company. The dividends released attract a tax called as dividend distribution tax or
corporate distribution tax and is deducted from the profit made by the company.
Continuing with the above example, your business have earned a profit of Rs. 100,000 and you being the
Director of your business have decided to give out 10% dividend to your shareholders. The dividend
released has attracted the dividend distribution tax of 10% on the amount of dividend issued. As a result
an amount of Rs. 10,000 will be issued for the dividends and Rs 1,000 will be the dividend distribution tax
and the profit will be apportioned accordingly.
What is the distinction between debtor and creditor?
A DEBTORis a person or enterprise that owes money to another party. (The party to whom the money is
owed is often a supplier or bank that will be referred to as the creditor.)
CREDITORSare the entities which give some type of credit to a borrower or debtor. A creditor could acompany, person, organization, government, a bank, a corporation or a credit card issuer. They look at
financial information before giving out money (for a loan) to businesses.
E.g.: If Company X borrowed money from its bank, Company X is the debtor and the bank is the creditor.
If Supplier A sold merchandise to Retailer B, then Supplier A is the creditor and Retailer B is the debtor.
What are the different types of credits?
SECURED LOAN OR CREDIT:Loan will be given only if there is some kind of asset or property offered by
the borrower. This approach helps to reduce the risk to the entity or individual which is providing the
credit or loan, because there is always the choice of laying claim to the pledged asset during the time
that the borrower fails to pay the loan amount according to the loan agreement or contract.
UNSECURED LOAN OR CREDIT:Some creditors prefer to not entail the pledging of some kind of asset in
exchange for giving a credit or loan to the borrower. In this situation, the creditor has a lot of details
in order to indicate there is an adequate amount of confidence which the debtor would repay the full
amount of the debt in an appropriate manner.
8/10/2019 Finance Guidebook Updated
13/60
13
What are trade payables?
Liabilities owed to suppliers for purchases or services rendered. They are also referred as accounts payable
or as sundry creditors. For example, when any goods are purchased on credit from the vendor then that
amount is included under the head trade payables.
What is depreciation?
The process of appropriating the cost of a fixed asset over its useful life is called depreciation. The term
depreciation is associated with tangible assets such as plant machinery, furniture, building and vehicles.
E.g.:If a company buys a piece of equipment for $1 million and expects it to have a useful life of 10 years,
it will be depreciated over 10 years. Every accounting year, the company will expense $100,000 (assuming
straight-line depreciation), which will be matched with the money that the equipment helps to make each
year.
What are the various methods of computing depreciation?
1. STRAIGHT LINE METHOD:This method depreciates cost evenly throughout the useful life of the fixed
asset.
Depreciation per annum = (Cost - Residual Value) / Useful Life
2. DECLINING BALANCE METHOD: This method charges depreciation at a higher rate in the earlier years
of an asset. The amount of depreciation reduces as the life of the asset progresses.
Depreciation per annum = (Net Book Value - Residual Value) x Rate%
Where, Net Book Value is the asset's net value at the start of an accounting period. It is calculated
by deducting the accumulated (total) depreciation from the cost of the fixed asset. Residual Valueis the estimated scrap value at the end of the useful life of the asset. As the residual value is
expected to be recovered at the end of an asset's useful life, there is no need to charge the portion
of cost, equaling the residual value. Rate of depreciation is defined according to the estimated
pattern of an asset's use over its life term.
3. SUM-OF-THE-YEARS'-DIGITS METHOD: This is one of the accelerated depreciation techniques which
are based on the assumption that assets are generally more productive when they are new and
their productivity decreases as they become old.
SYD Depreciation = (Depreciable Base Remaining Useful Life)/Sum of the Years' Digits
Where, depreciable base is the difference between cost and salvage value of the asset.
8/10/2019 Finance Guidebook Updated
14/60
14
What is amortization?
It is defined as the deduction of capital expenses over a specific period of time (usually over the asset's
life). More specifically, this method measures the consumption of the value of intangible assets, such as
a patent or a copyright.
E.g.:Suppose XYZ Biotech spent $30 million dollars on a piece of medical equipment and that the patent
on the equipment lasts 15 years, this would mean that $2 million would be recorded each year as an
amortization expense.
What is Inventory?
It includes the raw materials, work-in-progress goods and finished goods that are ready or will be ready for sale
and are considered as assets to any business. The composition of inventories will depend upon the nature of
business of the organization. A manufacturing company will have all the above components, a trading company
will have only finished goods and a service company may not have any inventory at all. Inventory is always
valued at lower of cost or net realizable value. First-in-First-Out (FIFO), Last-in-Last-Out (LIFO), specific
identification method and average cost method are the methods used for evaluating the inventory. As per AS2 the cost of inventories should be assigned by using either FIFO or weighted average method.
What is a ratio? What are the different kinds of financial ratios?
Ratios express one item in relation to other and draw inference of this expression. Ratios are very
important as they help to analyze the financial statements of a company or a firm.
Ratios are of following types:
1. Profitability Ratios
2. Growth Ratios.3. Dividend policy ratios
4. Short-term liquidity ratio
5. Capital structure ratio
6. Asset utilization ratio
7. Return ratio
8. Market Ratio
9. Price to book value ratio
What is profitability ratio? What are the different kinds of profitability ratios?
A class of financial metrics that are used to assess a business's ability to generate earnings as compared
to its expenses and other relevant costs incurred during a specific period of time.
Following are the different profitability ratios:
Gross Profit Ratio = Sales Cost of Goods SoldSales
8/10/2019 Finance Guidebook Updated
15/60
15
Cash Operating Margin = EBITDASales
Operating Margin = EBITSales
Net Profit Ratio = PATSales
Operating Expenses Ratio = Operating ExpensesSales
Earnings per Share = PAT Dividend on Preference Shares if anyNo. of Equity Shares
What is growth ratio? What are the different kinds of growth ratios?
Growth ratio indicates the growth of the company based on its historical performance.
Following are the different growth ratios:
COMPOUND ANNUAL GROWTH RATIO (CAGR)indicates average annual growth achieved by an enterprise
during a given period of time.
= 1 + Where
A = current value
P = base value
g = CAGR
n = difference between current year and base year.
YEAR ON YEAR GROWTH RATIO (Y-O-Y)gives the long term average growth of key financial variables.
Year on Year growth = Current Year Sales Previous Year SalesPrevious Year Sales
What is dividend policy ratio? What are the different kinds of dividend policy ratios?
Dividend policy ratios measure how much a company pays out in dividends relative to its earnings and
market value of its shares. These ratios provide insights into the dividend policy of a company.
Dividend Rate = Total DividendNo.of Shares
Dividend Payout Ratio = Dividends + Dividend Distribution TaxPAT
8/10/2019 Finance Guidebook Updated
16/60
16
Dividend Yield = Dividend per ShareCurrent Market Price
What is Short-term Liquidity ratio? What are the different kinds of Short-term Liquidity
ratios?
Short-term liquidity ratios indicate the adequacy of the companys current assets to meet its current
obligations.
Current Ratio= Current AssetsCurrent Liabilities
Quick Ratio = Current Assets InventoriesCurrent Liabilities
What is Capital Structure ratio? What are the different kinds of Capital Structure ratios?
Capital Structure ratios indicate the proportion of borrowed funds and share holders fund in total capital
employed.
Debt Equity Ratio = Long term DebtsShareholders Fund
Fixed Assets to Long term Debt = Fixed AssetsLong term Debts
Interest Coverage Ratio = EBITInterest
Debt Service Coverage Ratio = EBIT + Depreciation + Other Non Cash ExpensesInterest+ Loan Installment1Tax Rate
What is Asset Utilization ratio? What are the different kinds of Asset Utilization ratios?
The asset utilization ratio measures management's ability to make the best use of its assets to generate
revenue. This is particularly meaningful in a manufacturing, where fewer capital assets are used to
produce products.
Total Assets Turnover Ratio = Sales
Total Assets
Fixed Assets Turnover Ratio = SalesFixed Assets
Current Assets Turnover Ratio = SalesCurrent Assets
Inventory Turnover Ratio = Cost of Goods SoldAverage Inventories
8/10/2019 Finance Guidebook Updated
17/60
17
Average Holding Period = 365Inventory Turnover Ratio
Debtors Turnover Ratio = SalesAverage Debtors
Days of Sales Outstanding = 365Debtors Turnover Ratio
Average Payment Period= 365CreditorsPurchases
Length of Cash Conversion Cycle = Average Holding Period + Days of Sales Outstanding + Average Payment Period
What is Return ratio? What are the different kinds of Return ratios?
Return ratios indicate the returns earned by a company with respect to its assets, equity, capital employed
etc.
Return of Assets ROA = EBIT1Tax RateTotal Assets
Return on Capital Employed ROCE = EBIT1Tax RateCapital Employed
Return on Equity ROE = PATShareholdersFunds
DuPont AnalysisReturn on Equity ROE = PATSales
SalesTotal Assets
Total AssetsShareholdersFunds
What is Price-to-Book Value ratio? What are the different kinds of Price-to-Book Value ratios?
Price to Book Value Ratio = Current Market PriceBook Value per Share
Price Earnings (PE)Ratio =Current Market Price
Earnings per Share
Price Earnings to Growth Ratio = Price Earnings RatioGrowth Rate
8/10/2019 Finance Guidebook Updated
18/60
18
Financial Markets
What is a Share?
Total equity capital of a company is divided into equal units of small denominations, each called a share.Each share forms a unit of ownership of a company and is offered for sale so as to raise capital for the
company. For example, in a company the total equity capital of Rs 2,00,00,000 is divided into 20,00,000
units of Rs 10 each. Each such unit of Rs 10 is called a Share. Thus, the company then is 12 said to have
20,00,000 equity shares of Rs 10 each. The holders of such shares are members of the company and have
voting rights.
Shares can be broadly divided into two categories - equity and preference shares.
EQUITY SHARESgive their holders the power to share the earnings/profits in the company as well as a
vote in the AGMs of the company. Such a shareholder has to share the profits and also bear the losses
incurred by the company. PREFERENCE SHARESearn their holders only dividends, which are fixed, giving no voting rights.
What is a Debt Instrument?
Debt instrument represents a contract whereby one party lends money to another on pre-determined
terms with regards to rate and periodicity of interest, repayment of principal amount by the borrower to
the lender.
In the Indian securities markets, the term bond is used for debt instruments issued by the Central and
State governments and public sector organizations and the term debenture is used for instruments
issued by private corporate sector.
What is a Derivative?
A derivative is a product whose value is derived from the value of one or more underlying variables or
assets in a contractual manner. The underlying asset can be equity, Forex, commodity or any other asset.
For example, wheat farmers may wish to sell their harvest at a future date to eliminate the risk of a change
in prices by that date. Such a transaction is an example of a derivative. The price of this derivative is driven
by the spot price of wheat which is the "underlying".
Some commonly used FINANCIAL DERIVATIVESare:
FORWARDS:A forward contract is a customized contract between two entities, where settlement takes
place at a specific date in the future at todays predetermined price.
E.g.:On 1st June, X enters into an agreement to buy 50 bales of cotton for 1stDecember at Rs.1000
per bale from Y, a cotton dealer. It is a case of a forward contract where X has to pay Rs.50000 on 1st
December to Y and Y has to supply 50 bales of cotton.
FUTURES:A futures contract is an agreement between two parties to buy or sell the underlying asset
at a future date at today's future price. Futures contracts differ from forward contracts in the sense
8/10/2019 Finance Guidebook Updated
19/60
19
that they are standardized and exchange traded. To facilitate liquidity in the futures contracts, the
exchange specifies certain standard quantity and quality of the underlying instrument that can be
delivered, and a standard time for such a settlement.
OPTIONS: An Option is a contract which gives the right, but not an obligation, to buy or sell the
underlying at a stated date and at a stated price. While a buyer of an option pays the premium and
buys the right to exercise his option, the writer of an option is the one who receives the option
premium and therefore obliged to sell/buy the asset if the buyer exercises it on him.
Options are of two types - CALLand PUToptions:
CALLSgive the buyer the right but not the obligation to buy a given quantity of the underlying
asset, at a given price on or before a given future dates.
Putsgive the buyer the right, but not the obligation to sell a given quantity of underlying asset
at a given price on or before a given future date.
Presently, at NSE, futures and options are traded on the Nifty, CNX IT, BANK Nifty and 116 single
stocks.
WARRANTS: Options generally have lives of up to one year. The majority of options traded on
exchanges have maximum maturity of nine months. Longer dated options are called Warrants and
are generally traded over-the-counter.
Define Commodity Derivatives market.
Commodity derivatives market trade contracts for which the underlying asset is commodity. It can be an
agricultural commodity like wheat, soybeans, rapeseed, cotton, etc. or precious metals like gold, silver,
etc.
What is the difference between Commodity and Financial Derivatives
The basic concept of a derivative contract remains the same whether the underlying happens to be a
commodity or a financial asset. However there are some features which are very peculiar to commodity
derivative markets. In the case of financial derivatives, most of these contracts are cash settled. Even in
the case of physical settlement, financial assets are not bulky and do not need special facility for storage.
Due to the bulky nature of the underlying assets, physical settlement in commodity derivatives creates
the need for warehousing. Similarly, the concept of varying quality of asset does not really exist as far as
financial underlying is concerned. However in the case of commodities, the quality of the asset underlying
a contract can vary at times.
What is a Mutual Fund?
A Mutual Fund is a corporate body registered with SEBI that pools money from individuals/corporate
investors and invests the same in a variety of different financial instruments or securities such as equity
shares, Government securities, Bonds, debentures etc. Mutual funds can thus be considered as financial
intermediaries in the investment business that collect funds from the public and invest on behalf of the
investors. Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which
8/10/2019 Finance Guidebook Updated
20/60
20
the mutual fund has invested the money leads to an appreciation in the value of the units held by
investors.
The investment objectives outlined by a Mutual Fund in its prospectus are binding on the Mutual Fund
scheme. The investment objectives specify the class of securities a Mutual Fund can invest in. The schemes
offered by mutual funds vary from fund to fund. Some are pure equity schemes; others are a mix of equityand bonds. Investors are also given the option of getting dividends, which are declared periodically by the
mutual fund, or to participate only in the capital appreciation of the scheme.
What is an Exchange Traded Fund?
An ETF represents a basket of stocks that reflect an index such as the Nifty. An ETF trades just like any
other company on a stock exchange. Unlike a mutual fund that has its net-asset value (NAV) calculated at
the end of each trading day, an ETF's price changes throughout the day, fluctuating with supply and
demand. By owning an ETF, you get the diversification of an index fund plus the flexibility of a stock.
Because, ETFs trade like stocks, you can short sell them, buy them on margin and purchase as little as one
share. Another advantage is that the expense ratios of most ETFs are lower than that of the average
mutual fund. When buying and selling ETFs, you pay your broker the same commission that you'd pay on
any regular trade.
What is an Index?
An Index shows how a specified portfolio of share prices is moving in order to give an indication of market
trends. It is a basket of securities and the average price movement of the basket of securities indicates
the index movement, whether upwards or downwards.
NIFTY INDEX
S&P CNX Nifty (Nifty), is a scientifically developed, 50 stock index, reflecting accurately the market
movement of the Indian markets. It comprises of some of the largest and most liquid stocks traded
on the NSE. It is maintained by India Index Services & Products Ltd. (IISL), which is a joint venture
between NSE and CRISIL. The index has been co-branded by Standard & Poors (S&P). Nifty is the
barometer of the Indian markets.
SENSEX INDEX
S&P BSE SENSEX (S&P Bombay Stock Exchange Sensitive Index), also-called the BSE 30 or simply
the SENSEX, is a free-float market capitalization-weighted stock market index of 30 well-established
and financially sound companies listed on BSE Ltd.
What is a Depository?
A depository is like a bank wherein the deposits are securities (viz. shares, debentures, bonds, government
securities, units etc.) in electronic form.
There are two depositories in India which provide dematerialization of securities. The National Securities
Depository Limited (NSDL) and Central Depository Services (India) Limited (CDSL).
8/10/2019 Finance Guidebook Updated
21/60
21
The benefits of participation in a depository are:
Immediate transfer of securities
No stamp duty on transfer of securities
Elimination of risks associated with physical certificates such as bad delivery, fake securities, etc.
Reduction in paperwork involved in transfer of securities
Reduction in transaction cost
What is Dematerialization?
Dematerialization is the process by which physical certificates of an investor are converted to an
equivalent number of securities in electronic form and credited to the investors account with his
Depository Participant (DP).
Define Securities.
Securities includes instruments such as shares, bonds, stocks or other marketable securities of similar
nature in or of any incorporate company or body corporate, government securities, derivatives ofsecurities, units of collective investment scheme, interest and rights in securities, security receipt or any
other instruments so declared by the Central Government.
What is the function of Securities Market?
Securities Markets is a place where buyers and sellers of securities can enter into transactions to purchase
and sell shares, bonds, debentures etc. Further, it performs an important role of enabling corporate and
entrepreneurs to raise resources for their companies and business ventures through public issues.
Transfer of resources from those having idle resources (investors) to others who have a need for them
(corporate) is most efficiently achieved through the securities market. Stated formally, securities markets
provide channels for reallocation of savings to investments and entrepreneurship.
Savings are linked to investments by a variety of intermediaries, through a range of financial products,
called Securities.
Which are the securities one can invest in?
Shares
Government Securities
Derivative products
Units of Mutual Funds
Who regulates the Securities Market?
The responsibility for regulating the securities market is shared by Department of Economic Affairs (DEA),
Department of Company Affairs (DCA), Reserve Bank of India (RBI) and Securities and Exchange Board of
India (SEBI).
8/10/2019 Finance Guidebook Updated
22/60
8/10/2019 Finance Guidebook Updated
23/60
23
Why do companies need to issue shares to the public?
Most companies are usually started privately by their promoter(s). However, the promoters capital and
the borrowings from banks and financial institutions may not be sufficient for setting up or running the
business over a long term. So companies invite the public to contribute towards the equity and issue
shares to individual investors. The way to invite share capital from the public is through a Public Issue.
Simply stated, a public issue is an offer to the public to subscribe to the share capital of a company. Once
this is done, the company allots shares to the applicants as per the prescribed rules and regulations laid
down by SEBI.
What are the different kinds of issues?
Primarily, issues can be classified as a Public, Rights or Preferential issues (also known as private
placements). While public and rights issues involve a detailed procedure, private placements or
preferential issues are relatively simpler. The classification of issues is illustrated below:
INITIAL PUBLIC OFFERING (IPO)
IPO is when an unlisted company makes either a fresh issue of securities or an offer for sale of itsexisting securities or both for the first time to the public. This paves way for listing and trading of
the issuers securities.
AFOLLOW ON PUBLIC OFFERING (FPO)
FPO is when an already listed company makes either a fresh issue of securities to the public or an
offer for sale to the public, through an offer document.
RIGHTS ISSUE
It is issued when a listed company which proposes to issue fresh securities to its existing
shareholders as on a record date. The rights are normally offered in a particular ratio to the
number of securities held prior to the issue. This route is best suited for companies who would
like to raise capital without diluting stake of its existing shareholders.
PREFERENTIAL ISSUE
Refers to the issue of shares or convertible securities by listed companies to a select group of
persons. This is a faster way for a company to raise equity capital.
What is meant by Market Capitalization?
The market value of a quoted company, which is calculated by multiplying its current share price (market
price) by the number of shares in an issue, is called as market capitalization. E.g. Company A has 120
million shares in issue. The current market price is Rs. 100. The market capitalization of company A is Rs.
12000 million.
How are companies classified on the basis of Market Capitalization?
BSEs classifies companies according to their Market Capitalization by using the 80-15-5 method. Heres
how this method works:
1. Arrange all the companies in descending order of their Market Capitalization.
8/10/2019 Finance Guidebook Updated
24/60
8/10/2019 Finance Guidebook Updated
25/60
25
going up. Bull markets cannot last forever though, and sometimes they can lead to dangerous situations
if stocks become overvalued. If a person is optimistic and believes that stocks will go up, he or she is called
a "bull" and is said to have a "bullish outlook".
Define Bear Market.
A bear market is when the economy is bad, recession is looming and stock prices are falling. Bear markets
make it tough for investors to pick profitable stocks. One solution to this is to make money when stocks
are falling using a technique called short selling. Another strategy is to wait on the side-lines until you feel
that the bear market is nearing its end, only starting to buy in anticipation of a bull market. If a person is
pessimistic, believing that stocks are going to drop, he or she is called a "bear" and said to have a "bearish
outlook".
Define Short Selling.
Selling short is the sale of a stock that you don't own. More specifically, a short sale is the sale of a security
that isn't owned by the seller, but that is promised to be delivered. Short sellers assume that they will beable to buy the stock at a lower amount than the price at which they sold short. Selling short is the
opposite of going long. That is, short sellers make money if the stock goes down in price.
This is an advanced trading strategy with many unique risks and pitfalls. Novice investors are advised to
avoid short sales.
What is a Stock Exchange?
The stock exchanges in India, under the overall supervision of the regulatory authority, the Securities and
Exchange Board of India (SEBI), provide a trading platform, where buyers and sellers can meet to transact
in securities. These days, the trading platforms provided by exchanges are electronic and there is no need
for buyers and sellers to meet at a physical location to trade.
Who is a Broker?
A broker is an individual or party (brokerage firm) that arranges transactions between a buyer and
a seller for a commission when the deal is executed. A stockbroker is a regulated professional individual,
usually associated with a brokerage firm or broker dealer, who buys and sells stocks and other
securities for both retail and institutional clients, through a stock exchange or over the counter, in return
for a fee or commission. Stockbrokers are known by numerous professional designations, depending on
the license they hold, the type of securities they sell, or the services they provide.
What is a Portfolio?
A Portfolio is a combination of different investment assets mixed and matched for the purpose of
achieving an investor's goal(s). Items that are considered a part of your portfolio can include any asset
you own-from shares, debentures, bonds, mutual fund units to items such as gold, art and even real estate
8/10/2019 Finance Guidebook Updated
26/60
26
etc. However, for most investors a portfolio has come to signify an investment in financial instruments
like shares, debentures, fixed deposits, mutual fund units.
A good investment portfolio is a mix of a wide range of asset class. Different securities perform differently
at any point in time, so with a mix of asset types, your entire portfolio does not suffer the impact of a
decline of any one security. When your stocks go down, you may still have the stability of the bonds inyour portfolio.
What is meant by Dividends declared by a Company?
Returns received by investors in equities come in two forms
a. Growth in the value (market price) of the share
b. Dividends
Dividend is distribution of part of a company's earnings to shareholders, usually twice a year in the form
of a final dividend and an interim dividend. Dividend is therefore a source of income for the shareholder.
Normally, the dividend is expressed on a 'per share' basis, for instanceRs. 3 per share. This makes it easy
to see how much of the company's profits are being paid out, and how much are being retained by the
company to plough back into the business. So a company that has earnings per share in the year of Rs. 6
and pays out Rs. 3 per share as a dividend is passing half of its profits on to shareholders and retaining the
other half. Directors of a company have discretion as to how much of a dividend to declare or whether
they should pay any dividend at all.
What is a Stock Split?
A stock split is a corporate action which splits the existing shares of a particular face value into smaller
denominations so that the number of shares increase, however, the market capitalization or the value of
shares held by the investors post-split remains the same as that before the split.
E.g.:If a company has issued 1,00,00,000 shares with a face value of Rs.10 and the current market price
being Rs. 100, a 2-for-1 stock split would reduce the face value of the shares to 5 and increase the number
of the companys outstanding shares to 2,00,00,000, (1,00,00,000*(10/5)). Consequently, the share price
would also halve to Rs. 50 so that the market capitalization or the value shares held by an investor remains
unchanged. It is the same thing as exchanging a Rs. 100 note for two Rs. 50 notes; the value remains the
same.
Why do companies announce Stock Split?
Though there are no theoretical reasons in financial literature to indicate the need for a stock split,
generally, there are mainly two important reasons. As the price of a security gets higher and higher, some
investors may feel the price is too high for them to buy, or small investors may feel it is unaffordable.
Splitting the stock brings the share price down to a more "attractive" level. In our earlier example to buy
1 share of company ABC you need Rs. 40 pre-split, but after the stock split the same number of shares can
be bought for Rs.10, making it attractive for more investors to buy the share. This leads us to the second
8/10/2019 Finance Guidebook Updated
27/60
27
reason. Splitting a stock may lead to increase in the stock's liquidity, since more investors are able to afford
the share and the total outstanding shares of the company have also increased in the market.
What is meant by Buy Back of Shares?
A buyback can be seen as a method for company to invest in itself by buying shares from other investors
in the market. Buybacks reduce the number of shares outstanding in the market. Buy back is done by the
company with the purpose to improve the liquidity in its shares and enhance the shareholders wealth.
Under the SEBI (Buy Back of Securities) Regulation, 1998, a company is permitted to buy back its share
from:
a. Existing shareholders on a proportionate basis through the offer document.
b. Open market through stock exchanges using book building process.
c. Shareholders holding odd lot shares.
What is meant by Investment?
The money you earn is partly spent and the rest saved for meeting future expenses. Instead of keepingthe savings idle you may like to use savings in order to get return on it in the future. This is called
Investment.
What are various Short-term financial options available for investment?
Broadly speaking, savings bank account, money market/liquid funds and fixed deposits with banks may
be considered as short-term financial investment options:
SAVINGS BANK ACCOUNT is often the first banking product people use, which offers low interest
(4%-5% p.a.), making them only marginally better than fixed deposits.
MONEY
MARKET OR
LIQUID
FUNDS
are a specialized form of mutual funds that invest in extremelyshort-term fixed income instruments and thereby provide easy liquidity. Unlike most mutual
funds, money market funds are primarily oriented towards protecting your capital and then, aim
to maximize returns. Money market funds usually yield better returns than savings accounts, but
lower than bank fixed deposits.
FIXED DEPOSITS WITH BANKSare also referred to as term deposits and minimum investment period
for bank FDs is 30 days. Fixed Deposits with banks are for investors with low risk appetite, and
may be considered for 6-12 months investment period as normally interest on less than 6 months
bank FDs is likely to be lower than money market fund returns.
What are various Long-term financial options available for investment?
POST OFFICE MONTHLY INCOME SCHEME is a low risk saving instrument, which can be availed
through any post office. It provides an interest rate of around 8% per annum, which is paid
monthly. Minimum amount, which can be invested, is Rs. 1,000/- and additional investment in
multiples of 1,000/-.
PUBLIC PROVIDENT FUNDSare long term savings instrument with a maturity of 15 years and interest
payable at 8% per annum compounded annually. A PPF account can be opened through a
8/10/2019 Finance Guidebook Updated
28/60
28
nationalized bank at any time during the year and is open all through the year for depositing
money. Tax benefits can be availed for the amount invested and interest accrued is tax-free.
COMPANY FIXED DEPOSITS are short-term (six months) to medium-term (three to five years)
borrowings by companies at a fixed rate of interest which is payable monthly, quarterly, semi-
annually or annually. They can also be cumulative fixed deposits where the entire principal along
with the interest is paid at the end of the loan period. The rate of interest varies between 6-9%
per annum for company FDs. The interest received is after deduction of taxes.
BONDS are fixed income (debt) instrument issued for a period of more than one year with the
purpose of raising capital. The central or state government, corporations and similar institutions
sell bonds. A bond is generally a promise to repay the principal along with a fixed rate of interest
on a specified date, called the Maturity Date.
MUTUAL FUNDSare funds operated by an investment company which raises money from the public
and invests in a group of assets (shares, debentures etc.), in accordance with a stated set of
objectives. It is a substitute for those who are unable to invest directly in equities or debt because
of resource, time or knowledge constraints. Benefits include professional money management,
buying in small amounts and diversification. Mutual fund units are issued and redeemed by the
FUND MANAGEMENT COMPANYbased on the fund's NET ASSET VALUE (NAV), which is determined
at the end of each trading session. NAV is calculated as the value of all the shares held by the
fund, minus expenses, divided by the number of units issued. Mutual Funds are usually long term
investment vehicle though there some categories of mutual funds, such as money market mutual
funds which are short term instruments.
What is meant by Trading?
Trading means performing a transaction that involves the buying and selling of a security. It involves
multiple parties participating in the voluntary negotiation and then the exchange of one's goods andservices for desired goods and services that someone else possesses.
What are the various factors considered while investing in a company?
Invest in companies which have:
BUSINESS CONTINUITY
First, look at continuity of business. Take the instance of a company in the electronics sector. The
Indian government-owned ECTV closed down operations when it failed to take advantage of other
business opportunities. It was once the largest seller of television sets in the country. Another
example in this industry was Videocon VCR, which was set up as a stand-alone manufacturer ofVCRs. The company failed to be alert to technological advancements, which sounded the death
knell for the outdated VCR and obviously for the company too!
ADEQUATE CAPACITY
Second, look at capacity. How big is beautiful? Size brings in economies of scale all rightcost is
spread over a larger output, bringing down the overall cost. But bigger isn't necessarily better in
this case. Companies can grow out of control. Arvind Mills built 10% of the global denim capacity,
8/10/2019 Finance Guidebook Updated
29/60
29
creating an oversupply situation. When these capacities went on stream, prices of denim dropped
and the infrastructure costs just killed the company. Arvind Mills couldn't go close to achieving
full capacity in its manufacturing, which it needed to do to be viable.
SURVIVAL ABILITY
Competition kills and this is one major cause of failure. Hindustan Unilever has over the years
taken the competition to its rivals and expanded its portfolio. When growth from its bread and
butter business of detergents and soap was plateauing, the company found new outlets to grow.
In the last three decades, this survival skill transformed the company into an FMCG conglomerate
with powerful cash flows. The survival factors here are more to do with the ability of the
management to see future trends in their business.
APPROPRIATE INFRASTRUCTURE
The infrastructure should complement the market where it sells its product or where it procures
its raw material. You can't have a cement plant in Karnataka and try to service the Delhi market.
It would be far more expensive just to transport goods that far, thus spiraling costs.
NEW CAPACITY CREATIONS:
Most capacities in any business come in at the peak of the business cycle. This generally leads to
a drop in selling prices as new capacities mean more supply. And a demand drop would hurt the
players in that field.
COST MANAGEMENT
The company should have a suitable cost structure for the business. Lower costs enable the
company to survive in a down phase well. In an upward business cycle, good cost management
implies higher profitability.
PRODUCTS WITH STAMINA
Look out for opportunistic businesses. There have been small niche players who have tried to
identify and milk insubstantial opportunities. For instance, a small company, India Food
Fermentations, tried to market the concept of dosas as fast food through a vending machine, Dosa
King. This company went bankrupt.
What are the different types of Investors in the market?
AGGRESSIVE:They adopt a method of portfolio management and asset allocation that attempts to
achieve maximum return. An aggressive investment strategy attempts to grow an investment at
an above-average rate compared to its industry or the overall market, but usually take on
additional risk. They place a higher percentage of their assets in equities rather than in safer debt
securities.
MODERATELY AGGRESSIVE: These investors seek longer term investment gains through a mix ofequity investments. While many of the investments are the same, the overall portfolio contains
some more conservative investments, creating a portfolio that builds wealth with less annual
swings in the portfolio's performance. An investor with a time frame of between 6-10+ years is
most appropriate for this type of portfolio and the average level of return that an investor can
expect to receive is between 10-11% annually. This annual investment return represents the stock
market's long term average growth over the past several decades.
8/10/2019 Finance Guidebook Updated
30/60
30
MODERATELY CONSERVATIVE:They are much less willing to accept variations in their portfolio's
balance. Individuals that are going to need their money within 3-6 years are most suitable for this
investment strategy, or those looking for a regular income stream. A moderately conservative
portfolio is often more weighted to individual bonds or bond mutual funds, and can expect to
earn between 6-8% in annual growth. Moderately Conservative investors also typically receive
income from dividends on a quarterly or annual basis from their investments.
CONSERVATIVE:Typically those investors with either a short term goal (less than 3 years), or those
who are in retirement seeking a regular income stream. These portfolios tilt away from equity
investments into more preservation investments, like individual bonds, bond funds, municipal
bonds and annuities. These assets are not intended to provide great growth within the portfolio,
but are designed to provide income and preserve the principal balance over the investor's
estimated lifespan.
What is the difference between a Shareholder and Stakeholder?
Shareholders are stakeholders in a corporation, but stakeholders are not always shareholders. Ashareholder owns part of a company through stock ownership, while a stakeholder is interested in the
performance of a company for reasons other than just stock appreciation.
Stakeholders could be:
employees who, without the company, would not have jobs
bondholders who would like a solid performance from the company and, therefore, a reduced
risk of default
customers who may rely on the company to provide a particular good or service
suppliers who may rely on the company to provide a consistent revenue stream
Banking
8/10/2019 Finance Guidebook Updated
31/60
31
What is a Bank and what are its functions?
The term bankis used generically to refer to any financial institution that is licensed to accept deposits
that are repayable on demand, and lends money.
A bank makes money via Net Interest Income
Net Interest Income (NII) = Interest Earned on Loans Interest Paid on Deposits
What are the different services offered by a bank to a corporate?
LOANS:Banks provide short and long-term funds to businesses.
CASH DEPOSITS:Corporate deposit surplus funds in a bank.
FOREIGN EXCHANGE TRANSACTIONS:Banks act as authorized dealers to facilitate foreign exchange
transactions.
ADVISORY SERVICES: Banks provide financial advisory services such as valuations, issue
management, mergers & acquisitions, etc. to corporate.
TRADE SERVICES:Banks play the role of the trusted intermediary between parties involved in tradeand facilitate trade and commerce.
What are the different Types of Bank Accounts?
SAVINGS ACCOUNTS
These accounts are meant for individuals. It pays interest. The interest is calculated on the daily
balance in the account. The interest is credited to the accounts on a monthly or quarterly basis.
There is some restriction on the number of times a customer may withdraw or deposit funds.
CURRENT ACCOUNTS
They are held mainly by businesses. These are accounts primarily meant for transacting, and
hence have no restrictions on the number of transactions. Banks do not pay any interest on
current accounts.
TERM/TIME/FIXED DEPOSITS
These are deposits with a fixed maturity, hence also called Fixed Deposits (FDs). The customer
cannot add to, or withdraw from, this deposit till maturityi.e. transactions are not allowed on
an FD. FDs earn higher interest than savings deposits, and banks are free to fix the interest rates.
RECURRING DEPOSITS
These are a fixed deposit variant. The only difference being that, the customer has the flexibility
to deposit the amount in installments. No withdrawals are allowed. One can however, avail a loanagainst the deposit.
PUBLIC PROVIDENT FUND ACCOUNTS
These are accounts meant for retirement savings. In India, they are fully tax exemptyou pay no
tax on the principal or interest earned.
8/10/2019 Finance Guidebook Updated
32/60
32
What are the different categories of banks?
SCHEDULED BANKS:Banks which have deposits>INR 200 crores are Scheduled Banks E.g.: SBI, ICICI
NON-SCHEDULED BANKS: Banks which have deposits50%)ownership. E.g.: SBI, Bank of India
PRIVATE BANKS:Banks which are owned by private Indian entities such as corporate or individuals.
E.g.: ICICI, Axis Bank
FOREIGN BANKS: Banks owned by Multinational/non-Indian entities. E.g.: HSBC, Deutsche bank,
JPMC
URBAN CO-OPERATIVE BANK: These banks are formed by a group of members and their main focus
is to mobilize savings from low income and middle income groups to ensure credit availability to
its members.
What are NBFCs?
Non-Banking Finance Companies (NBFCs) are financial institutions that provide services, similar to banks,
but they do not hold a banking license. The main difference is that NBFCs cannot accept deposits
repayable on demand. All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the
Bank had given a specific authorization are allowed to accept/hold public deposits. Motilal Oswal, Tata
Capital, Reliance Capital are some of the NBFCs in India.
Some of their services include:
1) Providing loans and credit facilities
2) Leasing and Hire purchase
3) Lending
4) Investment services (Asset Management, underwriting)
Economics
8/10/2019 Finance Guidebook Updated
33/60
33
What is GDP?
GDP is the total value of products & Services produced within the territorial boundary of a country. It is
calculated using the formula provided below:
GDP = Private Consumption + Investment + Government Spending + Net exports
Where,
Net Exports = ExportsImports
Private Consumption here refers to the household consumption expenditure which will fall
under one of the three categoriesdurable goods, non-durable goods and services.
Investment here refers to business investment in buying new equipment like purchase of
software, buying of machinery, etc. and does not include exchange of assets. This should not be
confused with financial investment in purchase of financial products.
Government Spending is the expenditure of government on final goods and services. It is
inclusive of salaries of public servants and purchase of military equipment but excludes socialsecurity and unemployment benefits.
APPLICATION:To see the strength of a countrys local economy. GDP is considered to be an indicator of
standard of living of a country. Countries with higher GDP are considered to have better standard of
living.
What is GNP?
Total value of Goods and Services produced by all nationals of a country (whether within or outside the
country).
GNP = GDP + NR (Net income inflow from assets abroad or Net Income Receipts) - NP (Net paymentoutflow to foreign assets)
Net income receipt is arrived at by summing the income from overseas investment and subtracting from
the sum the income earned by foreign nationals and companies domestically. Let us consider an example
for further clarification. Suppose the GDP and GNP of India are to be calculated, now if an Indian company
has a plant in China then the profit made by that plant will not be included in GDP but will be included in
GNP. Similarly if a Chinese firm has a plant in India then the plants income will be accounted for in GDP
but will be subtracted from GNP value. To summarize the basis of production allocation is geographical
location and ownership for GDP and GNP respectively.
APPLICATION:To see how the nationals of a country are doing economically.
What is PPP?
Purchasing power parity is based on the assumption that in absence of duties, transaction costs and other
curbs, identical goods should have the same price in different countries when expressed in same currency.
In other words, how much money would be needed to purchase same amount of goods and services in
8/10/2019 Finance Guidebook Updated
34/60
34
two different markets. This allows for calculating PPP exchange rates that can be used to convert gross
national income of countries in terms of a single currency, usually the US dollar, to facilitate meaningful
comparisons after adjusting for prices.
For example, suppose that Japan has a higher GDP per capita, ($18) than the US ($16). That means that
Japanese on average make $2 more than normal Americans. However, they are not necessarily richer.Suppose that one gallon of orange juice costs $6 in Japan and only $2 in the US. The Japanese can only
buy 3 gallons while the Americans can buy 8 gallons. Therefore, in terms of orange juice, the Americans
are richer
Now apply this to daily life. The orange juice represents the previously mentioned "basket of goods" which
represents the cost of living in a country. Therefore, even if a country has a higher GDP per capita
(individual income), that country's people may still live poorer if the cost of living is more expensive
What is Inflation?
Inflation means that the general level of prices is going up i.e. more money is needed to get the sameamount of a good or service, or the same amount of money will get a lower amount of a good or service.
Let us take an example suppose one week earlier you went to have breakfast in a nearby restaurant and
you have taken a 50 rupee note with you. If the price a piece of sandwich was Rs. 10 price then with you
could buy 5 sandwich pieces. Now over the week the prices of bread and vegetables have gone up on
account of inflation and as a result the restaurant has increased the price of a piece of sandwich to Rs.12.5.
Now you can only buy 4 sandwich pieces with the same 50 rupee note today. Now you may be thinking
as to how one can measure inflation. The answer to your question is inflation rate, the measure of rise in
price level of goods and services. It indicates the rate of rise in price level of goods and services.
What are the causes of inflation?
When the total money in an economy (the money supply) increases too rapidly, the quality of the
money (the currency value) often decreases.
Demand-Pull inflation
The Demand-Pull inflation theory can be said simply as "too much money chasing too few goods." In
other words, if the will of buying goods is growing faster than amount of goods that have been made,
then prices will go up. This most likely happens in economies that are growing fast.
Cost-Push inflation
The Cost-Push inflation theory says that when the cost of making goods (which are paid by the company)
go up, they have to make prices higher to still make profit out of selling that very product. The higher costs
of making goods can include things like workers' wages, taxes to be paid to the government or bigger
costs of getting raw materials from other countries.
8/10/2019 Finance Guidebook Updated
35/60
35
What is Deflation?
A general decline in prices, often caused by a reduction in the supply of money or credit is called deflation.
Deflation can be caused also by a decrease in government, personal or investment spending. The opposite
of inflation, deflation has the side effect of increased unemployment since there is a lower level of demand
in the economy, which can lead to an economic depression. Central banks attempt to stop severe
deflation, along with severe inflation, in an attempt to keep the excessive drop in prices to a minimum.
The decline in prices of assets is often known as Asset Deflation.
What is Stagflation?
When inflation is accompanied by an increase in unemployment rate then the situation is called
stagflation. The term stagflation is combination of two terms stagnation and inflation.
Therefore it is a situation in which there is almost no growth in production (total amount
of goods and services produced), there is high inflation, and unemployment is higher than normal. This
situation usually begins with things beginning to cost more while fewer of the things are being made.
Because fewer things are being made, fewer people are needed to make them. This causes unemployment
to increase.
What is Hyperinflation?
In economics, hyperinflation is inflation that is "out of control," when prices increase very fast
as money loses its value. One example of hyperinflation is in Germany in the 1920s. In 1922, the largest
banknote was 50,000 Mark. These banknotes were so worthless that people would burn them in fires to
keep them warm. The notes would burn longer than the amount of wood you could buy with them. In
Zimbabwe, the inflation rate was 231,150,888.87 % in July 2008.
What are the effects of inflation?
The effect of inflation is not distributed evenly in the economy, and as a consequence there are hidden
costs to some and benefits to others from this decrease in the purchasing power of money. For example,
with inflation, those segments in society which own physical assets, such as property, stock etc., benefit
from the price/value of their holdings going up, while those who seek to acquire them will need to pay
more for them. However in general high or unpredictable inflation rates are regarded as harmful to an
overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or
plan long-term. Uncertainty about the future purchasing power of money discourages investment and
saving.And inflation can impose hidden tax increases, as inflated earnings push taxpayers into higher
income tax rates unless the tax brackets are indexed to inflation. Where fixedexchange ratesare imposed,
higher inflation in one economy than another will cause the first economy's exports to become more
expensive and affect thebalance of trade.
But yes, moderate inflation is good for developing economies like ours.
http://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Exchange_ratehttp://en.wikipedia.org/wiki/Balance_of_tradehttp://en.wikipedia.org/wiki/Balance_of_tradehttp://en.wikipedia.org/wiki/Balance_of_tradehttp://en.wikipedia.org/wiki/Exchange_rate8/10/2019 Finance Guidebook Updated
36/60
36
Some of the effects are explained below:
Inflation cycle
High inflation can prompt employees to demand rapid wage increases, rising wages in turn can help fuel
inflation. In the case of collective bargaining, wage growth will be set as a function of inflationary
expectations, which will be higher when inflation is high. This can cause awage spiral.In a sense, inflationbegets further inflationary expectations, which beget further inflation.
Hoarding
People buy durable and/or non-perishable commodities and other goods as stores of wealth, to avoid the
losses expected from the declining purchasing power of money, creating shortages of the hoarded goods.
Social Unrest and Revolts
Inflation can lead to massive demonstrations and revolutions. For example, inflation and in particular food
inflation is considered as one of the main reasons that caused the 20102011 Tunisian revolution and
the 2011 Egyptian revolution,
Allocative Efficiency
But when prices are constantly changing due to inflation, price changes due to genuine relativeprice
signals are difficult to distinguish from price changes due to general inflation, so agents are slow to
respond to them. The result is a loss ofallocative efficiency.
Cost involved in changing
With high inflation, firms must change their prices often in order to keep up with economy-wide changes.
But often changing prices is itself a costly activity whether explicitly, as with the need to print new menus,
or implicitly, as with the extra time and effort neededto change prices constantly.
What are WPI, CPI and PPI?
Inflation in an economy can be measured based on 3 indexes.
WPI Wholesale price index
Wholesale Price Index (WPI) is a price index which represents the wholesale prices of a basket of goods
over time. In simple words, WPI is an indicator of price changes in the wholesale market. WPI measures
the changes in the prices charged by manufacturers and wholesalers. WPI measure the changes in
commodity prices at a selected stages before goods reaches to the retail level.
For example in India about 435 items were used for calculating the WPI in base year 1993-94 while theadvanced base year 2004-05 and which has now been changed to 2010-2011; uses 676 items
1. Primary Articles: consist of food grains, fruits and vegetables, milk, eggs, meats and fishes,
condiments and spices, fibers, oil seeds and minerals. Their weight age is 22.02 %.
2. Fuel, Power, and Light & Lubricants: consist of coal and petroleum related products, lubricants,
electricity etc. Their weight age is 14.23%.
http://en.wikipedia.org/wiki/Price/wage_spiralhttp://en.wikipedia.org/wiki/Price_signalhttp://en.wikipedia.org/wiki/Price_signalhttp://en.wikipedia.org/wiki/Economic_efficiencyhttp://en.wikipedia.org/wiki/Economic_efficiencyhttp://en.wikipedia.org/wiki/Price_signalhttp://en.wikipedia.org/wiki/Price_signalhttp://en.wikipedia.org/wiki/Price/wage_spiral8/10/2019 Finance Guidebook Updated
37/60
37
3. Manufactured Products: consist of dairy products, atta, biscuits, edible oils, liquors, cloth,
toothpaste, batteries, automobiles etc. Their weight age is 63.75%.
Shortcomings
Not globally comparable as countries either have a producer price index or a consumer price
index, that is used by central bank. Only has goods, and excludes services (contributes 56% to Indias GDP), a huge part of the
economy, which directly affect prices of all other things
These rates do not reflect the prices consumers pay for goods
CPI Consumer price index
Consumer Price Index (CPI) is a price index which represents the average price of a basket of goods over
time. In simple words, CPI is based on changes in prices at the retail level. CPI measures the average prices
of goods and services that we, the consumers, have paid for. Education, apparel, foods and beverages,
communication, transportation, recreation, housing, and medical care are the 8 groups for which the CPI
is set
India currently has four indices that measure changes in prices of goods and services paid by the final
consumer
1. CPI Industrial Workers;
2. CPI Urban Non-Manual Employees;
3. CPI Agricultural laborers;
4. CPI Rural labor.
Shortcomings
The all-India CPI, which has been divided between urban and rural areas, gives the most accuratepicture of prices but has very limited history as it was started in January last year
PPI focuses on prices of goods and services that are received by the producer. This is different
from the retail prices, which include shipping costs, taxes and other levies
Why 3 different indexes?
1. WPI Does not include service industry which contributes 56% to the GDP
2. CPI Helps to measure the price of goods and services at a retail level/last stage
3. PPI It completes the loop by also measuring the prices of goods and services at the first stage
Who proposed PPI in India?
Former Reserve Bank governor D Subbarao has said India needs a new gauge of inflation the producer
price index. According to Subbarao, the most widely watched measure of inflation in India, the wholesale
price index (WPI), does not include services, which forms a big part of economic activity (contributes 56%
to Indias GD