Investment-IQ

                 Path for Success

Capital Markets

Capital Market: Capital Market is the market it deals with the long term investment funds. It consists of two markets. 1. Primary Market 2.Secondary Market.

Primary Market: Those companies which are issuing new shares in this market. It is also called new issue market.
Secondary Market: Secondary Market is the market where shares buying and selling. In India secondary market is called stock exchange.
Hedging: Hedging means minimize the risk.

Arbitrage: It means purchase and sale of securities in different markets in order to profit from price discrepancies. In other words arbitrage is a way of reducing risk of loss caused by price fluctuations of securities held in a portfolio.
Derivative: Derivative is product whose value is derived from the value of one or more basic variables of underlying asset.
Forwards: A forward contract is customized contracts between two entities were settlement takes place on a specific date in the future at today’s pre agreed price.
Futures: A future contract is an agreement between two parties to buy or sell an asset at a certain time in the future at a certain price. Future contracts are standardized exchange traded contracts.
Options: An option gives the holder of the option the right to do some thing. The option holder option may exercise or not.
Call Option: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price.
Put Option: A put option gives the holder the right but not obligation to sell an asset by a certain date for a certain price.
Option Price: Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium.
Expiration Date: The date which is specified in the option contract is called expiration date.
European Option: It is the option at exercised only on expiration date it self.
Basis: Basis means future price minus spot price.
Cost of carry: The relation between future prices and spot prices can be summarized in terms of what is known as cost of carr


Put Option:


An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time. This is the opposite of a call option, which gives the holder the right to buy shares.


A put becomes more valuable as the price of the underlying stock depreciates relative to the strike price. For example, if you have one Mar 07 Taser 10 put, you have the right to sell 100 shares of Taser at $10 until March 2007 (usually the third Friday of the month). If shares of Taser fall to $5 and you exercise the option, you can purchase 100 shares of Taser for $5 in the market and sell the shares to the option's writer for $10 each, which means you make $500 (100 x $10-$5) on the put option.


Call Option:


An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period.


It may help you to remember that a call option gives you the right to "call in" (buy) an asset. You profit on a call when the underlying asset increases in price.


Forward contract: Its an agreement between two parties to buy or sell an asset at a pre-agreed future point in time.


Futures contract : It’s a standardized contract traded on a futures exchange, to buy or sell a certain underlying instrument at a certain date in the future, at a specified price. The future date is called the delivery date or final settlement date


Options: are financial instruments that convey the right, but not the obligation, to engage in a future transaction on some underlying security.


The primary Market : It is that part of the capital markets that deals with the issuance of new securities.


The secondary market: is the financial market for trading of securities that have already been issued in an initial private or public offering.


Stock split increases the number of shares in a public company. The price of adjusted such that the before and after market capitalization of the company remains the same and dilution does not occur. Options and warrants are included. Also known as a Stock Divide.


Initial Public Offering (IPO): Its is the first sale of stock by a private company to the public. IPO’s are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded


The BSE Sensex or Bombay Stock Exchange Sensitive Index is a value-weighted index composed of 30 stocks with the base April 1979 = 100. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange


Rights issue:


Issuing rights to a company's existing shareholders to buy a proportional number of additional securities at a given price (usually at a discount) within a fixed period.
Rights are often transferable, allowing the holder to sell them on the open market.


Rights:
A security giving stockholders entitlement to purchase new shares issued by the corporation at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned. Rights are issued only for a short period of time, after which they expire.


This also known as "subscription rights" or "share purchase rights".


Employee Stock Option:


The payment of stock in lieu of cash for services provided .This is a common method used by corporations to compensate executives. The theory is that executives will work harder since they want their own stock to rise in value and, therefore, have the best interests of shareholders in mind.


Insider Trading:
Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by corporate insiders such as officers, directors, or holders of more than ten percent of the firm's shares. Insider trading may be perfectly legal, but the term is frequently used to refer to a practice, illegal in many jurisdictions, in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise misappropriated.^[1]
All insider trades must be reported in the United States. Many investors follow the summaries of insider trades, published by the United States Securities and Exchange Commission (SEC), in the hope that mimicking these trades will be profitable. Legal "insider trading" may not be based on material non-public information. Illegal insider trading in the US requires the participation (perhaps indirectly) of a corporate insider or other person who is violating his fiduciary duty or misappropriating private information, and trading on it or secretly relaying it.  Insider trading is believed to raise the cost of capital for securities issuers, thus decreasing overall economic growth.^[2]
Venture Capital:


Financing for new businesses. In other words, money provided by investors to startup firms and small businesses with perceived, long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.


Venture capital can also include managerial and technical expertise. Most venture capital comes from a group of wealthy investors, investment banks and other financial institutions that pool such investments or partnerships. This form of raising capital is popular among new companies, or ventures, with limited operating history, who cannot raise funds through a debt issue. The downside for entrepreneurs is that venture capitalists usually get a say in company decisions, in addition to a portion of the equity.


Seed Capital: The initial equity capital used to start a new venture or business. This initial amount is usually quite small because the venture is still in the idea or conceptual stage. Also, there's a high risk that the venture will fail.


Bridge Financing:   A method of financing, used by companies before their IPO, to obtain necessary cash for the maintenance of operations. These funds are usually supplied by the investment bank underwriting the new issue. As payment, the company acquiring the bridge financing will give a number of shares at a discount of the issue price to the underwriters that equally offsets the loan. This financing is, in essence, a forwarded payment for the future sales of the new issue.


Stock Split:   A type of corporate action where a company's existing shares are divided into multiple shares. Although the amount of shares outstanding increases by a specific multiple, the total dollar value of the shares remains the same compared to pre-split amounts, because no real value has been added as a result of the split.

In the U.K., a stock split is referred to as a "scrip issue", "bonus issue", "capitalization issue" or "free issue".


For example, in a 2-for-1 split, each stockholder receives an additional share for each share he or she holds.

One reason as to why stock splits are performed is that a company's share price has grown so high that to many investors the shares are too expensive to buy in round lots.

For example, if a XYZ Corp's shares were worth $1,000 each, investors would need to purchase $100,000 in order to own 100 shares. Whereas, if each share was worth $10 each, investors only need to pay $1,000 to own 100 shares.


Reverse Takeover – RTO:


A type of merger used by private companies to become publicly traded without resorting to an initial public offering. Initially, the private company buys enough shares to control a publicly traded company. At this point, the private company's shareholder uses their shares in the private company to exchange for shares in the public company. At this point, the private company has effectively become a publicly traded one.A reverse takeover can also refer to situation where a smaller company acquires a larger company.


With this type of merger, the private company does not need to pay the expensive fees associated with arranging an initial public offering. The problem, however, is the company does not acquired any additional funds through the merger and it must have enough funds to complete the transaction on its own.


Deep-Discounted bonds:


1. A bond that sells at a significant discount from par value.
2. A bond that is selling at a discount from par value and has a coupon rate significantly less than the prevailing rates of fixed-income securities with a similar risk profile.
3. Typically, a deep-discount bond will have a market price of 20% or more below its face value. These bonds are perceived to be riskier than similar bonds and are thus priced accordingly.
4. These low-coupon bonds are typically long term and issued with call provisions. Investors are attracted to these discounted bonds because of their high return or minimal chance of being called before maturity.


Merger:
                The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock.
Basically, when two companies become one. This decision is usually mutual between both firms.


Factoring:


               Factoring is a financial service designed to help firms to arrange their receivable better. Under a typical factoring arrangement a factor collects the accounts on due dates, effects payments to the firm on these dates and also assumes the credit risks associated with the collection of the accounts.
Sometimes the factor provides an advance against the values of receivable taken over by it. In such cases factoring serves as a source of short-term finance for the firm.
Capital budgeting :  The process of determining whether or not projects such as building a new plant or investing in a long-term venture are worthwhile. Also known as "investment appraisal". Popular methods of capital budgeting include net present value (NPV), internal rate of return (IRR), discounted cash flow (DCF) and payback period.
Bankruptcy:  The state of a person or firm unable to repay debts. If the bankrupt entity is a firm, the ownership of the firm's assets is transferred from the stockholders to the bondholders. Shareholders are the last people to get paid if a company goes bankrupt. Secure creditors always get first grabs at the proceeds from liquidation.
Diversification:   A risk-management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique contends that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio.

Diversification strives to smooth out unsystematic risk events in a portfolio so that the positive performance of some investments will neutralize the negative performance of others. Therefore, the benefits of diversification will hold only if the securities in the portfolio are not perfectly correlated.
Market Capitalization:
A measure of a company's total value. It is estimated by determining the cost of buying an entire business in its current state. Often referred to as "market cap", it is the total dollar value of all outstanding shares. It is calculated by multiplying the number of shares outstanding by the current market price of one share.
Derivatives:  In finance, a security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks  bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage


Portfolio management :Involves deciding what assets to include in the portfolio, given the goals of the portfolio owner and changing economic conditions. Selection involves deciding what assets to purchase, how many to purchase, when to purchase them, and what assets to divest. These decisions always involve some sort of performance measurement, most typically expected return on the portfolio, and the risk associated with this return (i.e. the standard deviation of the return). Typically the expected return from portfolios comprised of different asset bundles are compared.