1.
Credit card
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The card issuer creates a revolving account and grants a line of credit to the cardholder, from which the cardholder can borrow money for payment to a merchant or as a cash advance. A credit card is different from a card, where it requires the balance to be repaid in full each month. In contrast, credit cards allow the consumers a continuing balance of debt, a credit card also differs from a cash card, which can be used like currency by the owner of the card. Credit cards have a printed or embossed bank card number complying with the ISO/IEC7812 numbering standard, the card numbers prefix, called the Bank Identification Number, is the sequence of digits at the beginning of the number that determine the bank to which a credit card number belongs. This is the first six digits for MasterCard and Visa cards, the next nine digits are the individual account number, and the final digit is a validity check code. Both of these standards are maintained and further developed by ISO/IEC JTC 1/SC 17/WG1, Credit cards have a magnetic stripe conforming to the ISO/IEC7813. Many modern credit cards have a chip embedded in them as a security feature. In addition to the credit card number, credit cards also carry issue and expiration dates, as well as extra codes such as issue numbers. Not all credit cards have the sets of extra codes nor do they use the same number of digits. The concept of using a card for purchases was described in 1887 by Edward Bellamy in his utopian novel Looking Backward. Bellamy used the credit card eleven times in this novel, although this referred to a card for spending a citizens dividend from the government. Charge coins and other items were used from the late 19th century to the 1930s. They came in various shapes and sizes, with materials made out of celluloid, copper, aluminum, steel, each charge coin usually had a little hole, enabling it to be put in a key ring, like a key. These charge coins were given to customers who had charge accounts in department stores, hotels. A charge coin usually had the account number along with the merchants name. The charge coin offered a simple and fast way to copy a charge account number to the sales slip and this sped the process of copying, previously done by handwriting. It also reduced the number of errors, by having a form of numbers on the sales slip. Because the customers name was not on the coin, almost anyone could use it
2.
Line of credit
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A line of credit is credit source extended to a government, business or individual by a bank or other financial institution. It is effectively a source of funds that can readily be tapped at the borrowers discretion, interest is paid only on money actually withdrawn. Lines of credit can be secured by collateral, or may be unsecured, the term is also used to mean the credit limit of a customer, that is, the maximum amount of credit a customer is allowed. A cash credit is a cash loan to a company. A bank provides this type of funding, but only after the security is given to secure the loan. Once a security for repayment has been given, the business receives the loan can continuously draw from the bank up to a certain specified amount. In India, banks offer cash credit accounts to businesses to finance their working capital requirements, the cash credit account is similar to current accounts as it is a running account with cheque book facility. But unlike ordinary current accounts, which are supposed to be only occasionally. The extent of overdrawing is limited to the credit limit that the bank sanctioned. This sanction is based on an assessment of the working capital requirement of the organization minus the margin. The organization finances the margin amount from its own funds, generally, a cash credit account is secured by a charge on the current assets of the organization. The kind of charge created can be either pledge or hypothecation, a business line of credit is quite similar to personal lines of credit. The financial institution grants access to an amount of financing. However, no interest is incurred until the funds are tapped into, a business line of credit can be unsecured or secured. Lines of credit are often referred to as revolving and can be tapped into repeatedly, for instance, if there is access to a $60,000 line of credit and $30,000 is taken out, access to the remaining $30,000, if necessary, remains. If all $30,000 is paid back, there is access to the entire $60,000 without having to reapply, one of the biggest benefits of a line of credit
3.
Finance
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Finance is a field that deals with the study of investments. It includes the dynamics of assets and liabilities over time under conditions of different degrees of uncertainty, Finance can also be defined as the science of money management. Finance aims to price assets based on their level and their expected rate of return. Finance can be broken into three different sub-categories, public finance, corporate finance and personal finance. g, health and property insurance, investing and saving for retirement. Personal finance may also involve paying for a loan, or debt obligations, net worth is a persons balance sheet, calculated by adding up all assets under that persons control, minus all liabilities of the household, at one point in time. Household cash flow totals up all the sources of income within a year. From this analysis, the financial planner can determine to what degree, adequate protection, the analysis of how to protect a household from unforeseen risks. These risks can be divided into the following, liability, property, death, disability, health, some of these risks may be self-insurable, while most will require the purchase of an insurance contract. Determining how much insurance to get, at the most cost effective terms requires knowledge of the market for personal insurance, business owners, professionals, athletes and entertainers require specialized insurance professionals to adequately protect themselves. Since insurance also enjoys some tax benefits, utilizing insurance investment products may be a piece of the overall investment planning. Tax planning, typically the income tax is the single largest expense in a household, managing taxes is not a question of if you will pay taxes, but when and how much. Government gives many incentives in the form of tax deductions and credits, most modern governments use a progressive tax. Typically, as ones income grows, a marginal rate of tax must be paid. Understanding how to take advantage of the tax breaks when planning ones personal finances can make a significant impact in which it can later save you money in the long term. Investment and accumulation goals, planning how to accumulate enough money - for large purchases, major reasons to accumulate assets include, purchasing a house or car, starting a business, paying for education expenses, and saving for retirement. Achieving these goals requires projecting what they will cost, and when you need to withdraw funds that will be necessary to be able to achieve these goals, a major risk to the household in achieving their accumulation goal is the rate of price increases over time, or inflation. Using net present value calculators, the planner will suggest a combination of asset earmarking. In order to overcome the rate of inflation, the investment portfolio has to get a higher rate of return, managing these portfolio risks is most often accomplished using asset allocation, which seeks to diversify investment risk and opportunity
4.
Financial market
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A financial market is a market in which people trade financial securities, commodities, and other fungible items of value at low transaction costs and at prices that reflect supply and demand. Securities include stocks and bonds, and commodities include precious metals or agricultural products, in economics, typically, the term market means the aggregate of possible buyers and sellers of a certain good or service and the transactions between them. The term market is used for what are more strictly exchanges, organizations that facilitate the trade in financial securities. This may be a location or an electronic system. Another common use of the term is as a catchall for all the markets in the financial sector, capital markets which to consist of, Stock markets, which provide financing through the issuance of shares or common stock, and enable the subsequent trading thereof. Bond markets, which provide financing through the issuance of bonds, commodity markets, which facilitate the trading of commodities. Money markets, which provide short term debt financing and investment, derivatives markets, which provide instruments for the management of financial risk. Futures markets, which provide standardized forward contracts for trading products at some future date, Foreign exchange markets, which facilitate the trading of foreign exchange. Spot market Interbanks market The capital markets may also be divided into primary markets, newly formed securities are bought or sold in primary markets, such as during initial public offerings. Secondary markets allow investors to buy and sell existing securities, the transactions in primary markets exist between issuers and investors, while secondary market transactions exist among investors. Liquidity is an aspect of securities that are traded in secondary markets. Liquidity refers to the ease with which a security can be sold without a loss of value, securities with an active secondary market mean that there are many buyers and sellers at a given point in time. Investors benefit from liquid securities because they can sell their assets whenever they want, Financial markets attract funds from investors and channel them to corporations—they thus allow corporations to finance their operations and achieve growth. Money markets allow firms to borrow funds on a term basis. Without financial markets, borrowers would have difficulty finding lenders themselves, intermediaries such as banks, Investment Banks, and Boutique Investment Banks can help in this process. Banks take deposits from those who have money to save and they can then lend money from this pool of deposited money to those who seek to borrow. Banks popularly lend money in the form of loans and mortgages, a good example of a financial market is a stock exchange. A company can raise money by selling shares to investors and its shares can be bought or sold
5.
Bond market
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The bond market is a financial market where participants can issue new debt, known as the primary market, or buy and sell debt securities, known as the secondary market. This is usually in the form of bonds, but it may include notes, bills and its primary goal is to provide long-term funding for public and private expenditures. The bond market has largely dominated by the United States. The bond market is part of the market, with bank loans forming the other main component. The global credit market in aggregate is about 3 times the size of the equity market. Bank loans are not securities under the Securities and Exchange Act, bonds are typically not secured by collateral, and are sold in relatively small denominations of around $1,000 to $10,000. Unlike bank loans, bonds may be held by retail investors, bonds are more frequently traded than loans, although not as often as equity. Nearly all of the daily trading in the U. S. bond market takes place between broker-dealers and large institutions in a decentralized over-the-counter market. However, a number of bonds, primarily corporate ones, are listed on exchanges. Bond trading prices and volumes are reported on FINRAs Trade Reporting and Compliance Engine, an important part of the bond market is the government bond market, because of its size and liquidity. Government bonds are used to compare other bonds to measure credit risk. The yield on government bonds in low risk countries such as the United States or Germany is thought to indicate a rate of default. The primary way to default is to not pay in full or not pay on time, the Securities Industry and Financial Markets Association classifies the broader bond market into five specific bond markets. In the United States, approximately 10% of the market is held by private individuals, amounts outstanding on the global bond market increased by 2% in the twelve months to March 2012 to nearly $100 trillion. Domestic bonds accounted for 70% of the total and international bonds for the remainder, the United States was the largest market with 33% of the total followed by Japan. As a proportion of global GDP, the market increased to over 140% in 2011 from 119% in 2008. The considerable growth means that in March 2012 it was larger than the global equity market which had a market capitalisation of around $53 trillion. Growth of the market since the start of the slowdown was largely a result of an increase in issuance by governments
6.
Commodity market
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A commodity market is a market that trades in primary economic sector rather than manufactured products. Soft commodities are products such as wheat, coffee, cocoa. Hard commodities are mined, such as gold and oil, Investors access about 50 major commodity markets worldwide with purely financial transactions increasingly outnumbering physical trades in which goods are delivered. Futures contracts are the oldest way of investing in commodities, Futures are secured by physical assets. Commodity markets can include physical trading and derivatives trading using spot prices, forwards, futures, farmers have used a simple form of derivative trading in the commodity market for centuries for price risk management. A financial derivative is an instrument whose value is derived from a commodity termed an underlier. Derivatives are either exchange-traded or over-the-counter, derivatives such as futures contracts, Swaps, Exchange-traded Commodities, forward contracts have become the primary trading instruments in commodity markets. Futures are traded on regulated commodities exchanges, Over-the-counter contracts are privately negotiated bilateral contracts entered into between the contracting parties directly. Exchange-traded funds began to feature commodities in 2003, Gold ETFs are based on electronic gold that does not entail the ownership of physical bullion, with its added costs of insurance and storage in repositories such as the London bullion market. According to the World Gold Council, ETFs allow investors to be exposed to the market without the risk of price volatility associated with gold as a physical commodity. Commodity-based money and commodity markets in an early form are believed to have originated in Sumer between 4500 BC and 4000 BC. Sumerians first used clay tokens sealed in a vessel, then clay writing tablets to represent the amount—for example. These promises of time and date of delivery resemble futures contract, early civilizations variously used pigs, rare seashells, or other items as commodity money. Since that time traders have sought ways to simplify and standardize trade contracts, Gold and silver markets evolved in classical civilizations. At first the precious metals were valued for their beauty and intrinsic worth and were associated with royalty, in time, they were used for trading and were exchanged for other goods and commodities, or for payments of labor. Gold, measured out, then became money, golds scarcity, unique density and the way it could be easily melted, shaped, and measured made it a natural trading asset. Beginning in the late 10th century, commodity markets grew as a mechanism for allocating goods, labor, land, indeed, the Amsterdam Stock Exchange, often cited as the first stock exchange, originated as a market for the exchange of commodities. Early trading on the Amsterdam Stock Exchange often involved the use of sophisticated contracts, including short sales, forward contracts
7.
Derivatives market
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The derivatives market is the financial market for derivatives, financial instruments like futures contracts or options, which are derived from other forms of assets. The market can be divided into two, that for exchange-traded derivatives and that for over-the-counter derivatives, the legal nature of these products is very different, as well as the way they are traded, though many market participants are active in both. Participants in a market can be segregated into four sets based on their trading motives. Hedgers Speculators Margin Traders Arbitrageurs Futures exchanges, such as Euronext. liffe and these are options contracts and futures contracts on a whole range of underlying products. The members of the hold positions in these contracts with the exchange. When one party goes long, another goes short, when a new contract is introduced, the total position in the contract is zero. Therefore, the sum of all the positions must be equal to the sum of all the short positions. In other words, risk is transferred from one party to another, the total notional amount of all the outstanding positions at the end of June 2004 stood at $53 trillion. That figure grew to $81 trillion by the end of March 2008 Tailor-made derivatives, not traded on an exchange are traded on over-the-counter markets. These consist of investment banks with traders who make markets in these derivatives, products that are always traded over-the-counter are swaps, forward rate agreements, forward contracts, credit derivatives, accumulators etc. The total notional amount of all the positions at the end of June 2004 stood at $220 trillion. By the end of 2007 this figure had risen to $596 trillion, OTC Markets are generally separated into two key segments, the customer market and the interdealer market. Customers almost exclusively trade through dealers because of the high search, dealers are large institutions that arrange transactions for their customers, utilizing their specialized knowledge, expertise, and access to capital. In order to hedge the risks incurred by transacting with customers, dealers turn to the interdealer market, dealers can also trade for themselves or act as market makers in the OTC market. Notional amounts outstanding of such instruments totalled $516 trillion at the end of June 2007, notional amounts outstanding provide useful information on the structure of the OTC derivatives market but should not be interpreted as a measure of the riskiness of these positions. Gross market values, which represent the cost of replacing all open contracts at the market prices, have increased by 74% since 2004. Notional amounts outstanding as of December 2012 are $632 trillion as per recent survey, the derivative markets have been accused for their alleged role in the financial crisis of 2007-2010. Specifically the Credit Default Swaps CDSs, financial instruments traded on the over the counter derivatives markets, and the Mortgage Backed Securities MBSs, a type of securitized debt
8.
Foreign exchange market
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The foreign exchange market is a global decentralized market for the trading of currencies. This includes all aspects of buying, selling and exchanging currencies at current or determined prices, in terms of trading volume, it is by far the largest market in the world, followed by the Credit market. The main participants in this market are the international banks. Financial centers around the function as anchors of trading between a wide range of multiple types of buyers and sellers around the clock, with the exception of weekends. The foreign exchange market does not determine the values of different currencies. The foreign exchange market works through financial institutions, and operates on several levels, behind the scenes, banks turn to a smaller number of financial firms known as dealers, who are actively involved in large quantities of foreign exchange trading. Most foreign exchange dealers are banks, so this behind-the-scenes market is called the interbank market. Trades between foreign exchange dealers can be large, involving hundreds of millions of dollars. Because of the sovereignty issue when involving two currencies, Forex has little supervisory entity regulating its actions, the foreign exchange market assists international trade and investments by enabling currency conversion. It also supports direct speculation and evaluation relative to the value of currencies, in a typical foreign exchange transaction, a party purchases some quantity of one currency by paying with some quantity of another currency. The modern foreign exchange market began forming during the 1970s. e, as such, it has been referred to as the market closest to the ideal of perfect competition, notwithstanding currency intervention by central banks.1 trillion per day in April 2016. This is down from $5.4 trillion in April 2013, Foreign exchange swaps were the most actively traded instruments in April 2016, at $2.4 trillion per day, followed by spot trading at $1.7 trillion. According to the Bank for International Settlements, as of April 2016 and this marks a decline of approximately 5% from the $5.355 trillion daily volume as of April 2013. Some firms specializing in the exchange market had put the average daily turnover in excess of US$4 trillion. Money-changers were living in the Holy Land in the times of the Talmudic writings and these people used city stalls, and at feast times the Temples Court of the Gentiles instead. Money-changers were also the silversmiths and/or goldsmiths of more recent ancient times, during the 4th century AD, the Byzantine government kept a monopoly on the exchange of currency. Papyri PCZ I59021, shows the occurrences of exchange of coinage in Ancient Egypt, Currency and exchange were important elements of trade in the ancient world, enabling people to buy and sell items like food, pottery and raw materials. If a Greek coin held more gold than an Egyptian coin due to its size or content, then a merchant could barter fewer Greek gold coins for more Egyptian ones, or for more material goods
9.
Over-the-counter (finance)
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Over-the-counter or off-exchange trading is done directly between two parties, without the supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges, in an OTC trade, the price is not necessarily published for the public. OTC trading, as well as trading, occurs with commodities, financial instruments. Products traded on the exchange must be well standardized and this means that exchanged deliverables match a narrow range of quantity, quality, and identity which is defined by the exchange and identical to all transactions of that product. This is necessary for there to be transparency in trading, the OTC market does not have this limitation. They may agree on a quantity, for example. In OTC market contracts are bilateral, each party could have credit risk concerns with respect to the other party, OTC derivative market is significant in some asset classes, interest rate, foreign exchange, stocks, and commodities. In 2008 approximately 16 percent of all U. S. stock trades were off-exchange trading, by April 2014 that number increased to about forty percent. Although the notional amount outstanding of OTC derivatives in late 2012 had declined 3. 3% over the previous year, the Bank for International Settlements statistics on OTC derivatives markets showed that notional amounts outstanding totalled $693 trillion at the end of June 2013. In the United States, over-the-counter trading in stock is carried out by market makers using inter-dealer quotation services such as OTC Link, the OTCBB licenses the services of OTC Link for their OTCBB securities. Although exchange-listed stocks can be traded OTC on the third market, usually OTC stocks are not listed nor traded on exchanges, and vice versa. Stocks quoted on the OTCBB must comply with certain limited U. S. Securities, the SEC imposes more stringent financial and reporting requirements on other OTC stocks, specifically the OTCQX stocks. Other OTC stocks have no reporting requirements, for example Pink Sheets securities, some companies, with Wal-Mart as one of the largest, began trading as OTC stocks and eventually upgraded to a listing on fully regulated market. By 1969 Wal-Mart Stores Inc. was incorporated, in 1972, with stores in five states, including Arkansas, Kansas, Louisiana, Oklahoma and Missouri, Wal-Mart began trading as over-the-counter stocks. By 1972 Walmart had earned over US$1 billion in sales — the fastest company to accomplish this. In 1972 Wal-Mart was listed on the New York Stock Exchange under the ticker symbol WMT, an over-the-counter is a bilateral contract in which two parties agree on how a particular trade or agreement is to be settled in the future. It is usually from an investment bank to its clients directly, forwards and swaps are prime examples of such contracts. It is mostly done online or by telephone, for derivatives, these agreements are usually governed by an International Swaps and Derivatives Association agreement
10.
Private equity
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In finance, private equity is a type of equity and one of the asset classes consisting of equity securities and debt in operating companies that are not publicly traded on a stock exchange. A private equity investment will generally be made by an equity firm. Bloomberg Businessweek has called private equity a rebranding of leveraged-buyout firms after the 1980s, common investment strategies in private equity include, leveraged buyouts, venture capital, growth capital, distressed investments and mezzanine capital. In a typical leveraged-buyout transaction, a private-equity firm buys majority control of an existing or mature firm and this is distinct from a venture-capital or growth-capital investment, in which the investors invest in young, growing or emerging companies, and rarely obtain majority control. Private equity is often grouped into a broader category called private capital, generally used to describe capital supporting any long-term. The strategies private equity firms may use are as follows, leveraged buyout being the most important, the companies involved in these transactions are typically mature and generate operating cash flows. Leveraged buyouts involve a financial sponsor agreeing to an acquisition without itself committing all the capital required for the acquisition, to do this, the financial sponsor will raise acquisition debt which ultimately looks to the cash flows of the acquisition target to make interest and principal payments. Acquisition debt in an LBO is often non-recourse to the sponsor and has no claim on other investments managed by the financial sponsor. Historically the debt portion of a LBO will range from 60%–90% of the purchase price, between 2000–2005 debt averaged between 59. 4% and 67. 9% of total purchase price for LBOs in the United States. A private equity fund say for example, ABC Capital II, to this it adds $2bn of equity – money from its own partners and from limited partners. With this $11bn it buys all the shares of an underperforming company and it replaces the senior management in XYZ Industrial, and they set out to streamline it. The workforce is reduced, some assets are sold off, etc, the objective is to increase the value of the company for an early sale. The stock market is experiencing a market, and XYZ Industrial is sold two years after the buy-out for $13bn, yielding a profit of $2bn. The original loan can now be paid off with interest of say $0. 5bn, the remaining profit of $1. 5bn is shared among the partners. Taxation of such gains is at capital gains rates, notes, The lenders can insure against default by syndicating the loan to spread the risk, or by buying credit default swaps or selling collateralised debt obligations from/to other institutions. Often the loan/equity is not paid off after sale but left on the books of the company for it to pay off over time and this can be advantageous since the interest is typically offsettable against the profits of the company, thus reducing, or even eliminating, tax. Most buyout deals are much smaller, the average purchase in 2013 was $89m. The target company does not have to be floated on the stockmarket, buy-out operations can go wrong and in such cases the loss is increased by leverage, just as the profit is if all goes well
11.
Real estate
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Also, the business of real estate, the profession of buying, selling, or renting land, buildings or housing. It is a term used in jurisdictions whose legal system is derived from English common law, such as India, the United Kingdom, United States, Canada, Pakistan, Australia. Residential real estate may contain either a family or multifamily structure. Residences can be classified by, if, and how they are connected to neighbouring residences, different types of housing tenure can be used for the same physical type. For example, connected residents might be owned by an entity and leased out. Major categories in North America and Europe Attached / multi-unit dwellings Apartment or Flat – An individual unit in a multi-unit building, the boundaries of the apartment are generally defined by a perimeter of locked or lockable doors. Often seen in apartment buildings. Multi-family house – Often seen in multi-story detached buildings, where each floor is an apartment or unit. Terraced house – A number of single or multi-unit buildings in a row with shared walls. Condominium – Building or complex, similar to apartments, owned by individuals, common grounds and common areas within the complex are owned and shared jointly. There are townhouse or rowhouse style condominiums as well, semi-detached dwellings Duplex – Two units with one shared wall. Single-family detached house Portable dwellings Mobile homes – Potentially a full-time residence which can be movable on wheels, houseboats – A floating home Tents – Usually very temporary, with roof and walls consisting only of fabric-like material. The size of an apartment or house can be described in square feet or meters, in the United States, this includes the area of living space, excluding the garage and other non-living spaces. It can be described roughly by the number of rooms. A studio apartment has a bedroom with no living room. A one-bedroom apartment has a living or dining room separate from the bedroom, Two bedroom, three bedroom, and larger units are common. Major categories in India and the Asian Subcontinent Co-operative Housing Societies Condominiums Chawls Villas Havelis The size is measured in Gaz, Quila, Marla, Beegha, and acre. See List of house types for a listing of housing types and layouts, real estate trends for shifts in the market
12.
Spot market
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The spot market or cash market is a public financial market in which financial instruments or commodities are traded for immediate delivery. It contrasts with a market, in which delivery is due at a later date. In a spot market, settlement normally happens in t+2 working days, i. e. delivery of cash, a spot market can be through an exchange or over-the-counter. Spot markets can operate wherever the infrastructure exists to conduct the transaction, securities and commodities are traded on an exchange using, making, and possibly changing the current market price. In the over the market, trades are based on contracts made directly between two parties, and not subject to the rules of an exchange. The contract terms are agreed between the parties and may be non-standard, the price will probably not be published. The spot foreign exchange market imposes a two-day delivery period, originally due to the time it would take to move cash from one bank to another, most speculative retail forex trading is done as spot transactions on an online trading platform. Spot markets can be privately operated or controlled by industry organizations or government agencies. They frequently attract speculators, since spot market prices are known to the public almost as soon as deals are transacted, examples of energy spot markets for natural gas in Europe are the Title Transfer Facility in the Netherlands and the National Balancing Point in the United Kingdom
13.
Stock market
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Examples of the latter include shares of private companies which are sold to investors through equity crowdfunding platforms. Stock exchanges list shares of equity as well as other security types, e. g. corporate bonds. Stocks can be categorised in various way, one way is by the country where the company is domiciled. S. At the close of 2012, the size of the stock market was about US$55 trillion. By country, the largest market was the United States, followed by Japan, as of 2015, there are a total of 60 stock exchanges in the world with a total market capitalization of $69 trillion. Of these, there are 16 exchanges with a capitalization of $1 trillion or more. Apart from the Australian Securities Exchange, these 16 exchanges are based in one of three continents, North America, Europe and Asia, a stock exchange is a place where, or an organization through which, individuals and organisations can trade stocks. Many large companies have their stock listed on a stock exchange and this makes the stock more liquid and thus more attractive to many investors. It may also act as a guarantor of settlement, other stocks may be traded over the counter, that is, through a dealer. Some large companies will have their stock listed on more than one exchange in different countries, Stock exchanges may also cover other types of securities, such as fixed interest securities or derivatives, which are more likely to be traded OTC. Trade in stock markets means the transfer for money of a stock or security from a seller to a buyer and this requires these two parties to agree on a price. Equities confer an ownership interest in a particular company and their buy or sell orders may be executed on their behalf by a stock exchange trader. Some exchanges are physical locations where transactions are carried out on a trading floor and this method is used in some stock exchanges and commodity exchanges, and involves traders shouting bid and offer prices. The other type of exchange has a network of computers where trades are made electronically. An example of such an exchange is the NASDAQ, a potential buyer bids a specific price for a stock, and a potential seller asks a specific price for the same stock. Buying or selling at the means you will accept any ask price or bid price for the stock. When the bid and ask prices match, a sale takes place, on a first-come, the purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace. The exchanges provide real-time trading information on the securities, facilitating price discovery
14.
Financial market participants
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There are two basic financial market participant categories, Investor vs. Speculator and Institutional vs. Retail. Action in financial markets by central banks is usually regarded as rather than participation. This equation originated from Keynesian Advocates, the theory explains that a given market may have excess cash, hence the supplier of funds may lend it, and those in need of cash may borrow the funds supplied. Hence, the equation, aggregate savings equals aggregate investments, the demand side consists of, those in need of cash flows, those in need of interim financing, those in need of long-term funds for special projects. The supply side consists of, those who have aggregate savings that can be used in favor of demand side, the origin of the savings can be local savings or foreign savings. So much pensions or savings can be invested for school buildings, orphanages, the earnings go to owner and the margin goes to the banks. When the principal and interest are added up, it will reflect the amount paid for the user of the funds, thus, an interest percentage for the cost of using the funds. An investor is any party that makes an Investment, less frequently the term is applied to parties who purchase real estate, currency, commodity derivatives, personal property, or other assets. Speculation or agiotage represents one of three roles in western financial markets, distinct from hedging, long term investing and arbitrage. Speculators in an asset may have no intention to have long term exposure to that asset, because of their sophistication, institutional investors may often participate in private placements of securities, in which certain aspects of the securities laws may be inapplicable. A retail investor is an individual investor possessing shares of a given security, Retail investors can be further divided into two categories of share ownership. A Beneficial Shareholder is an investor who holds shares of their securities in the account of a bank or broker. A Registered Shareholder is an investor who holds shares of their securities directly through the issuer or its transfer agent. Many registered shareholders have physical copies of their stock certificates, in the United States, as of 2005 about 57 million households owned stocks, and in total individual investors owned 26% of equities
15.
Investor
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An investor allocates capital with the expectation of a future financial return. Types of investments include, equity, debt securities, real estate, currency, commodity, token, derivatives such as put and call options, futures, forwards and this definition makes no distinction between those in the primary and secondary markets. That is, someone who provides a business with capital and someone who buys a stock are both investors, an investor who owns a stock is a shareholder. The assumption of risk in anticipation of gain but recognizing a higher than average possibility of loss, the term speculation implies that a business or investment risk can be analyzed and measured, and its distinction from the term investment is one of degree of risk. It differs from gambling, which is based on random outcomes, investors can include stock traders but with this distinguishing characteristic, investors are owners of a company which entails responsibilities. There are two types of investors, retail investors and institutional investors, Individuals gambling in games of chance, in this respect, an important distinctive investor psychology trait is risk attitude. The term investor protection defines the entity of efforts and activities to observe, safeguard and enforce the rights and this includes advice and legal action. Countries with stronger investor protections tend to grow faster than those with poor investor protections, investor protection includes accurate financial reporting by public companies so the investors can make an informed decision. Investor protection also includes fairness of the market which means all participants in the market have access to the same information, investor protection through government is regulations and enforcements by government agencies to ensure that market is fair and fraudulent activities are eliminated. An example of a government agency provides protection to investors is the U. S. Securities and Exchange Commission. Investor protection through individual is the strategy that one utilizes to minimize loss, individual investors can protect themselves by purchasing only shares of businesses that they understand, or only those that remain calm through market volatility. An individual investor may be protected by the strategy he uses in investment, the strategy includes an appropriate price of the stocks or assets in the right time he enters. Its hard to fix what an appropriate price is, and when it is appropriate because no one makes a purchase or a sale absolutely in his most favorable situation, however, determination may be made when the price of such share or assets are undervalued comparing to its potentiality. This is called the margin of safety where an investor can feel at ease when the price of the stocks is alarmingly down, in various instances, the term investor is associated with a means of getting rich quickly. Historically, the road to successful investment is founded on preparation, with various goals that help smooth the journey to the ultimate. To be successful, authorities such as Investopedia advise that an investment plan must include an objective, a determined period of time for completion. A planned investment structure would be dependent on the desired investment target, for an investor, understanding the influencing factors related to finance is a valuable asset which can be gained from various sources. A financial awareness will help any investor learn and understand the mechanism of the investment marketplace, warren Buffett, an established and recognized expert on the subject of successful investing, has a simple philosophy, If I cannot understand it, I will not invest in it
16.
Institutional investor
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Institutional investor is a term for entities which pool money to purchase securities, real property, and other investment assets or originate loans. Institutional investors include banks, insurance companies, pensions, hedge funds, REITs, investment advisors, endowments, operating companies which invest excess capital in these types of assets may also be included in the term. Activist institutional investors may also influence corporate governance by exercising voting rights in their investments, in some African colonies in particular, part of the citys entertainment was financed by the revenue generated by shops and baking-ovens originally offered by a wealthy benefactor. In the South of Gaul, aqueducts were sometimes financed in a similar fashion, the legal principle of juristic person might have appeared with the rise of monasteries in the early centuries of Christianity. The concept then might have been adopted by the emerging Islamic law, the waqf became a cornerstone of the financing of education, waterworks, welfare and even the construction of monuments. Alongside some Christian monasteries the waqfs created in the 10th century AD are amongst the longest standing charities in the world, following the spread of monasteries, almhouses and other hospitals, donating sometimes large sums of money to institutions became a common practice in medieval Western Europe. In the process, over the centuries those institutions acquired sizable estates, following the collapse of the agrarian revenues, many of these institution moved away from rural real estate to concentrate on bonds emitted by the local sovereign. The importance of lay and religious institutional ownership in the pre-industrial European economy cannot be overstated, following several waves of dissolution the weight of the traditional charities in the economy collapsed, by 1800, institutions solely owned 2% of the arable land in England and Wales. Because of their sophistication, institutional investors may be exempt from certain securities laws, for example, in the United States, institutional investors are generally eligible to purchase private placements under Rule 506 of Regulation D as accredited investors. Further, large US institutional investors may qualify to purchase certain securities generally restricted from retail investment under Rule 144A, as intermediaries between individual investors and companies, institutional investors are important sources of capital in financial markets. By pooling constituents investments, institutional investors arguably reduce the cost of capital for entrepreneurs while diversifying constituents portfolios and their greater ability to influence corporate behaviour as well to select investors profiles may help diminish agency costs. Institutional investors investment horizons differ, but do not share the life cycle as human beings. Unlike individuals, they do not have a phase of accumulation followed by one of consumption, others like pension funds can predict long ahead when they will have to repay their investors allowing them to invest in less liquid assets such as private equities, hedge funds or commodities. Finally, other institutions have an extended investment horizon, allowing them to invest in assets as they are unlikely to be forced to sell them before term. And schools When considered from a strictly local standpoint, institutional investors are sometimes called foreign institutional investors and this expression is mostly used in emerging markets such as China, Malaysia and India. In various countries different types of institutional investors may be more important, in oil-exporting countries sovereign wealth funds are very important, while in developed countries, pension funds may be more important. Japan is home to the worlds largest pension fund and is home to 63 of the top 300 pension funds worldwide and their wealth accounts for around two thirds of the equity in public listed companies. For any given company, the largest 25 investors would have to be able to muster over half of the votes.3 December 2008 BS Black and JC Coffee, PL Davies, Institutional investors in the United Kingdom in T Baums et al
17.
Retail
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Retail markets and shops have a very ancient history, dating back to antiquity. Retailing involves the process of selling goods or services to customers through multiple channels of distribution to earn a profit. Retailers satisfy demand is identified through a supply chain, Once the strategic retail plan is in place, retailers devise the retail mix which includes product, price, place, promotion, personnel and presentation. In the digital age, a number of retailers are seeking to reach broader markets by selling through multiple channels. Digital technologies are changing the way that consumers pay for goods. Retailing support services may include the provision of credit, delivery services. Shopping generally refers to the act of buying products, sometimes this is done to obtain final goods, including necessities such as food and clothing, sometimes it takes place as a recreational activity. Recreational shopping often involves window shopping and browsing, it not always result in a purchase. Retail shops occur in a range of types and in many different contexts - from strip shopping centres in residential streets through to large. Shopping streets may restrict traffic to pedestrians only, forms of non-shop retailing include online retailing and mail order. Retail comes from the Old French word tailler, which means to cut off, clip, pare and it was first recorded as a noun with the meaning of a sale in small quantities in 1433. Like in French, the retail in both Dutch and German also refers to the sale of small quantities of items. Also see History of merchants, History of the market place, open air, public markets were known in ancient Babylonia and Assyria. These markets typically occupied a place in the towns centre, surrounding the market, skilled artisans, such as metal-workers and leather workers, occupied premises in alley ways that led to the open market-place. These artisans may have sold wares directly from their premises, in ancient Greece markets operated within the agora, and in ancient Rome the forum. In antiquity, exchange involved direct selling, merchants or peddlers, the Phoenicians, noted for their seafaring skills, plied their ships across the Mediterranean, becoming a major trading power by 9th century BCE. The Phoenicians imported and exported wood, textiles, glass and produce such as wine, oil, dried fruit, the Phoenicians extensive trade networks necessitated considerable book-keeping and correspondence. In around 1500 BCE, the Phoenicians developed an alphabet which was much easier to learn that the complex scripts used in ancient Egypt
18.
Speculation
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Speculation is the purchase of an asset with the hope that it will become more valuable at a future date. Many speculators pay little attention to the value of a security. Speculation can in principle involve any tradable good or financial instrument, Speculators are particularly common in the markets for stocks, bonds, commodity futures, currencies, fine art, collectibles, real estate, and derivatives. The number of shareholders increased, perhaps, from 4.4 million in 1900 to 26 million in 1932, the view of what distinguishes investment from speculation and speculation from excessive speculation varies widely among pundits, legislators and academics. Some sources note that speculation is simply a higher form of investment. Others define speculation more narrowly as positions not characterized as hedging, the agency emphasizes that speculators serve important market functions, but defines excessive speculation as harmful to the proper functioning of futures markets. According to Ben Graham in The Intelligent Investor, the prototypical defensive investor is. one interested chiefly in safety plus freedom from bother, Speculation is condemned on ethical-moral grounds as creating money from money and thereby promoting the vices of avarice and gambling. When a harvest is too small to satisfy consumption at its rate, speculators come in. Their purchases raise the price, thereby checking consumption so that the supply will last longer. Producers encouraged by the price further lessen the shortage by growing or importing to reduce the shortage. On the other side, when the price is higher than the speculators think the facts warrant and this reduces prices, encouraging consumption and exports and helping to reduce the surplus. If any market, such as pork bellies, had no speculators, with fewer players in the market, there would be a larger spread between the current bid and ask price of pork bellies. By contrast, a commodity speculator may profit the difference in the spread and, in competition with other speculators, some schools of thought argue that speculators increase the liquidity in a market, and therefore promote an efficient market. This efficiency is difficult to achieve without speculators, a very beneficial by-product of speculation for the economy is price discovery. On the other hand, as more speculators participate in a market, underlying real demand and supply can diminish compared to trading volume, Speculators also perform a very important risk bearing role that is beneficial to society. For example, a farmer might be considering planting corn on some unused farmland, however, he might not want to do so because he is concerned that the price might fall too far by harvest time. By selling his crop in advance at a price to a speculator, he is now able to hedge the price risk. Thus, speculators can actually increase production through their willingness to take on risk, hence, they make the prices better reflect the true quality of operation of the firms
19.
Financial instrument
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Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled and they can be cash, evidence of an ownership interest in an entity, or a contractual right to receive or deliver cash. Financial instruments can be either cash instruments or derivative instruments, Cash instruments —instruments whose value is determined directly by the markets. They can be securities, which are transferable, and instruments such as loans and deposits. Derivative instruments —instruments which derive their value from the value and characteristics of one or more underlying entities such as an asset, index and they can be exchange-traded derivatives and over-the-counter derivatives. Alternatively, financial instruments may be categorized by asset class depending on whether they are equity-based or debt-based, if the instrument is debt, it can be further categorised into short-term or long-term. Foreign exchange instruments and transactions are neither debt- nor equity-based and belong in their own category, some instruments defy categorization into the above matrix, for example repurchase agreements
20.
Bond (finance)
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In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds, interest is usually payable at fixed intervals. Very often the bond is negotiable, that is, the ownership of the instrument can be transferred in the secondary market and this means that once the transfer agents at the bank medallion stamp the bond, it is highly liquid on the second market. Thus, a bond is a form of loan or IOU, the holder of the bond is the lender, the issuer of the bond is the borrower, and the coupon is the interest. Bonds provide the borrower with funds to finance long-term investments, or, in the case of government bonds. Certificates of deposit or short term commercial paper are considered to be money market instruments and not bonds, the main difference is in the length of the term of the instrument. Bonds and stocks are both securities, but the difference between the two is that stockholders have an equity stake in the company, whereas bondholders have a creditor stake in the company. Being a creditor, bondholders have priority over stockholders and this means they will be repaid in advance of stockholders, but will rank behind secured creditors in the event of bankruptcy. Another difference is that usually have a defined term, or maturity, after which the bond is redeemed. An exception is a bond, such as a consol, which is a perpetuity, that is. Bonds are issued by authorities, credit institutions, companies. The most common process for issuing bonds is through underwriting, when a bond issue is underwritten, one or more securities firms or banks, forming a syndicate, buy the entire issue of bonds from the issuer and re-sell them to investors. The security firm takes the risk of being unable to sell on the issue to end investors. Primary issuance is arranged by bookrunners who arrange the bond issue, have contact with investors and act as advisers to the bond issuer in terms of timing. The bookrunner is listed first among all participating in the issuance in the tombstone ads commonly used to announce bonds to the public. The bookrunners willingness to underwrite must be discussed prior to any decision on the terms of the issue as there may be limited demand for the bonds. In contrast, government bonds are issued in an auction. In some cases, both members of the public and banks may bid for bonds, in other cases, only market makers may bid for bonds
21.
Cash
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In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and finance, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-immediately. Cash is seen either as a reserve for payments, in case of a structural or incidental negative cash flow or as a way to avoid a downturn on financial markets, the English word cash is derived from the Kannada / Tamil / Malayalam / Telugu word kaasu meaning money. In Southern India the word kaasu/kasa is still used today to refer to money, later traders of Persian, Arab and European origins, who started trading with the Southern India princely states, used the modified version of the word. This form along with this meaning entered into Latin giving rise to such as capsa “money box” and case eventually passing into Middle French as caisse meaning “money in hand, coin. ”To cash. In a separate development, Venetian merchants started using paper bills, similar marked silver bars were in use in lands where the Venetian merchants had established representative offices. The Byzantine empire and several states in the Balkan area and Kievan Rus also used marked silver bars for large payments and its counterpart in gold was the Venetian ducat. Coin types would compete for markets, by conquering foreign markets, the issuing rulers would enjoy extra income from seigniorage. Successful coin types of high nobility would be copied by lower nobility for seigniorage, imitations were usually of a lower weight, undermining the popularity of the original. Colonial powers also sought to take market share from Spain by issuing trade coin equivalents of silver Spanish coins. In the early part of the 17th century, English East India Company coins were minted in England, in England over time the word ‘Cash’ was adopted from Sanskrit कर्ष karsa, a weight of gold or silver but akin to Old Persian
22.
Credit default swap
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A credit default swap is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. That is, the seller of the CDS insures the buyer against some reference loan defaulting, the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if the loan defaults. It was invented by Blythe Masters from JP Morgan in 1994, in the event of default the buyer of the CDS receives compensation, and the seller of the CDS takes possession of the defaulted loan. However, anyone can purchase a CDS, even buyers who do not hold the loan instrument, Credit default swaps have existed since 1994, and increased in use in the early 2000s. By the end of 2007, the outstanding CDS amount was $62.2 trillion, falling to $26.3 trillion by mid-year 2010, CDSs are not traded on an exchange and there is no required reporting of transactions to a government agency. During the 2007–2010 financial crisis the lack of transparency in this market became a concern to regulators as it could pose a systemic risk. In March 2010, the Depository Trust & Clearing Corporation announced it would give greater access to its credit default swaps database. Courts may soon be following suit, most CDSs are documented using standard forms drafted by the International Swaps and Derivatives Association, although there are many variants. In addition to the basic, single-name swaps, there are basket default swaps, index CDSs, funded CDSs, in addition to corporations and governments, the reference entity can include a special purpose vehicle issuing asset-backed securities. Some claim that such as CDS are potentially dangerous in that they combine priority in bankruptcy with a lack of transparency. A CDS can be unsecured and be at risk for a default. A CDS is linked to an entity or reference obligor. The reference entity is not a party to the contract, the buyer makes regular premium payments to the seller, the premium amounts constituting the spread charged by the seller to insure against a credit event. If the reference entity defaults, the seller pays the buyer the par value of the bond in exchange for physical delivery of the bond. A default is referred to as a credit event and includes such events as failure to pay, restructuring and bankruptcy. CDS contracts on sovereign obligations also usually include as credit events repudiation, moratorium, most CDSs are in the $10–$20 million range with maturities between one and 10 years. Five years is the most typical maturity, in this way, a CDS is similar to credit insurance, although CDS are not subject to regulations governing traditional insurance. Also, investors can buy and sell protection without owning debt of the reference entity and these naked credit default swaps allow traders to speculate on the creditworthiness of reference entities
23.
Derivative (finance)
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In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, some of the more common derivatives include forwards, futures, options, swaps, and variations of these such as synthetic collateralized debt obligations and credit default swaps. Most derivatives are traded over-the-counter or on a such as the Bombay Stock Exchange. Derivatives are one of the three categories of financial instruments, the other two being stocks and debt. More recent historical origin is Bucket shop that were outlawed a century ago, Derivatives are contracts between two parties that specify conditions under which payments are to be made between the parties. The assets include commodities, stocks, bonds, interest rates and currencies, but they can also be other derivatives, from the economic point of view, financial derivatives are cash flows, that are conditioned stochastically and discounted to present value. The market risk inherent in the asset is attached to the financial derivative through contractual agreements. The underlying asset does not have to be acquired, Derivatives therefore allow the breakup of ownership and participation in the market value of an asset. This also provides an amount of freedom regarding the contract design. That contractual freedom allows to modify the participation in the performance of the underlying asset almost arbitrarily, thus, the participation in the market value of the underlying can be effectively weaker, stronger, or implemented as inverse. Hence, specifically the price risk of the underlying asset can be controlled in almost every situation. Derivatives are more common in the era, but their origins trace back several centuries. One of the oldest derivatives is rice futures, which have traded on the Dojima Rice Exchange since the eighteenth century. Derivatives are broadly categorized by the relationship between the asset and the derivative, the type of underlying asset, the market in which they trade. Derivatives may broadly be categorized as lock or option products, lock products obligate the contractual parties to the terms over the life of the contract. Option products provide the buyer the right, but not the obligation to enter the contract under the terms specified, Derivatives can be used either for risk management or for speculation. Along with many financial products and services, derivatives reform is an element of the Dodd–Frank Wall Street Reform. The Act delegated many rule-making details of regulatory oversight to the Commodity Futures Trading Commission, however, these are notional values, and some economists say that this value greatly exaggerates the market value and the true credit risk faced by the parties involved
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Futures contract
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In finance, a futures contract is a standardized forward contract which can be easily traded between parties other than the two initial parties to the contract. The parties initially agree to buy and sell an asset for an agreed upon today, with delivery and payment occurring at a future point. Because it is a function of an asset, a futures contract is a derivative product. Contracts are negotiated at futures exchanges, which act as a marketplace between buyers and sellers, the buyer of a contract is said to be long position holder, and the selling party is said to be short position holder. For example, in gold trading, the margin varies between 2% and 20% depending on the volatility of the spot market. The first futures contracts were negotiated for agricultural commodities, and later contracts were negotiated for natural resources such as oil. The original use of futures contracts was to mitigate the risk of price or exchange rate movements by allowing parties to fix prices or rates in advance for future transactions. The Chicago Board of Trade listed the first-ever standardized exchange traded forward contracts in 1864, by 1875 cotton futures were being traded in Bombay in India and within a few years this had expanded to futures on edible oilseeds complex, raw jute and jute goods and bullion. The 1972 creation of the International Monetary Market, the worlds first financial futures exchange, in 1976, the IMM added interest rate futures on US treasury bills, and in 1982 they added stock market index futures. Although futures contract are oriented towards a future point, their main purpose is to mitigate risk of default by either party in the intervening period. In this vein, the futures exchange requires both parties to put up initial cash, or a bond, known as the margin. To mitigate the risk of default, the product is marked to market on a basis where the difference between the initial agreed-upon price and the actual daily futures price is reevaluated daily. If the margin account goes below a certain value set by the Exchange, then a call is made. This process is known as marking to market, thus on the delivery date, the amount exchanged is not the specified price on the contract but the spot value. Upon marketing the strike price is reached and creates lots of income for the caller. To minimize credit risk to the exchange, traders must post a margin or a performance bond, to minimize counterparty risk to traders, trades executed on regulated futures exchanges are guaranteed by a clearing house. The clearing house becomes the buyer to each seller, and the seller to each Buyer and this enables traders to transact without performing due diligence on their counterparty. Margin requirements are waived or reduced in cases for hedgers who have physical ownership of the covered commodity or spread traders who have offsetting contracts balancing the position
25.
Insurance
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Insurance is a means of protection from financial loss. It is a form of risk management primarily used to hedge against the risk of a contingent, an entity which provides insurance is known as an insurer, insurance company, or insurance carrier. A person or entity who buys insurance is known as an insured or policyholder, the insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The amount of money charged by the insurer to the insured for the coverage set forth in the policy is called the premium. If the insured experiences a loss which is covered by the insurance policy. Methods for transferring or distributing risk were practiced by Chinese and Babylonian traders as long ago as the 3rd and 2nd millennia BC, Chinese merchants travelling treacherous river rapids would redistribute their wares across many vessels to limit the loss due to any single vessels capsizing. The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c.1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the guarantee to cancel the loan should the shipment be stolen. At some point in the 1st millennium BC, the inhabitants of Rhodes created the general average and this allowed groups of merchants to pay to insure their goods being shipped together. The collected premiums would be used to any merchant whose goods were jettisoned during transport. Separate insurance contracts were invented in Genoa in the 14th century, the first known insurance contract dates from Genoa in 1347, and in the next century maritime insurance developed widely and premiums were intuitively varied with risks. These new insurance contracts allowed insurance to be separated from investment, Insurance became far more sophisticated in Enlightenment era Europe, and specialized varieties developed. Property insurance as we know it today can be traced to the Great Fire of London, initially,5,000 homes were insured by his Insurance Office. At the same time, the first insurance schemes for the underwriting of business ventures became available, by the end of the seventeenth century, Londons growing importance as a center for trade was increasing demand for marine insurance. These informal beginnings led to the establishment of the insurance market Lloyds of London and several related shipping, the first life insurance policies were taken out in the early 18th century. The first company to offer life insurance was the Amicable Society for a Perpetual Assurance Office, founded in London in 1706 by William Talbot, edward Rowe Mores established the Society for Equitable Assurances on Lives and Survivorship in 1762. In the late 19th century, accident insurance began to become available and this operated much like modern disability insurance. The first company to offer accident insurance was the Railway Passengers Assurance Company, by the late 19th century, governments began to initiate national insurance programs against sickness and old age
26.
Letter of credit
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In modern business practice, a letter of credit is a written undertaking from a bank to pay a beneficiary against the delivery of a specified set of documents. A letter of credit is a method of payment, considered less secure than payment in advance but more secure than documentary collections, from the buyers point of view it offers more security than payment in advance but less security than documentary collections or open account terms. In the event that the buyer is unable to make payment on the purchase, the bank will examine the beneficiarys demand and if it complies with the terms of the letter of credit, will honor the demand. Most letters of credit are governed by rules promulgated by the International Chamber of Commerce known as Uniform Customs, the current version, UCP600, became effective July 1,2007. The name letter of credit derives from the French word accréditation, a power to do something, UCP600 defines a number of terms related to letters of credit. The Applicant is the person or company who has requested the letter of credit to be issued, the Beneficiary is the person or company who will be paid under the letter of credit, this will normally be the seller. A Complying Presentation is a set of documents that meet with the requirements of the letter of credit, the Issuing Bank is the bank that issues the credit, usually following a request from an Applicant. The Nominated Bank is a bank mentioned within the letter of credit at which the credit is available, once the goods have been shipped, the Beneficiary will present the set of requested documents to the Nominated Bank. This bank will check the documents, and if they comply with the terms of the Letter of Credit the Issuing Bank is bound to honour the terms of the letter of credit by paying the Beneficiary. If the documents do not comply with the terms of the letter of credit they are considered Discrepant, at this point the Nominated Bank will inform the Beneficiary of the discrepancy and offer a number of options depending on the circumstances. If the discrepancies are minor it may be possible to present corrected documents to the bank to make the presentation compliant, Documents presented after the time limits mentioned in the credit are also considered discrepant. If corrected documents cannot be supplied in time the documents may be forwarded to the bank in trust. Documents forwarded in trust remove the payment security of a letter of credit so this route must only be used as a last resort, some banks will offer to Telex for Approval or similar. This is where the Nominated Bank holds the documents, but sends a message to the Issuing Bank to accept the discrepancies and this is more secure than sending documents in trust. To receive payment, an exporter or shipper must present the documents required by the LC, typically the letter of credit will request an original bill of lading as the use of a title document such as this is critical to the functioning of the Letter of Credit. But the range of documents that may be requested by the applicant is vast, one of the primary peculiarities of the documentary credit is that the payment obligation is independent from the underlying contract of sale or any other contract in the transaction. The bank’s obligation is defined by the terms of the LC alone, the defenses available to the buyer arising out of the sale contract do not concern the bank and in no way affect its liability. Article 4 of the UCP600 states this principle clearly, the fundamental principle of all letters of credit is that letters of credit deal with documents and not with goods, as stated by Article 5 of UCP600
27.
Loan
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In finance, a loan is the lending of money from one individual, organization or entity to another individual, organization or entity. A loan entails the reallocation of the asset for a period of time. The loan is provided at a cost, referred to as interest on the debt. In a legal loan, each of these obligations and restrictions is enforced by contract, although this article focuses on monetary loans, in practice any material object might be lent. Acting as a provider of loans is one of the tasks for financial institutions such as banks. For other institutions, issuing of debt such as bonds is a typical source of funding. A secured loan is a loan in which the borrower pledges some asset as collateral, a mortgage loan is a very common type of loan, used by many individuals to purchase things. In this arrangement, the money is used to purchase the property, the financial institution, however, is given security – a lien on the title to the house – until the mortgage is paid off in full. If the borrower defaults on the loan, the bank would have the right to repossess the house and sell it. In some instances, a loan out to purchase a new or used car may be secured by the car. The duration of the period is considerably shorter – often corresponding to the useful life of the car. There are two types of loans, direct and indirect. A direct auto loan is where a bank gives the loan directly to a consumer, an indirect auto loan is where a car dealership acts as an intermediary between the bank or financial institution and the consumer. Unsecured loans are loans that are not secured against the borrowers assets. These may or may not be regulated by law, in the United Kingdom, when applied to individuals, these may come under the Consumer Credit Act 1974. Interest rates on unsecured loans are nearly always higher than for secured loans, an unsecured lender must sue the borrower, obtain a money judgment for breach of contract, and then pursue execution of the judgment against the borrowers unencumbered assets. In insolvency proceedings, secured lenders traditionally have priority over unsecured lenders when a court divides up the borrowers assets, thus, a higher interest rate reflects the additional risk that in the event of insolvency, the debt may be uncollectible. Demand loans are short term loans that are typically in that they do not have fixed dates for repayment and they can be called for repayment by the lending institution at any time
28.
Mortgage loan
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The loan is secured on the borrowers property. Mortgage can also be described as a borrower giving consideration in the form of a collateral for a benefit, Mortgage borrowers can be individuals mortgaging their home or they can be businesses mortgaging commercial property. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, in many jurisdictions, it is normal for home purchases to be funded by a mortgage loan. Few individuals have enough savings or liquid funds to them to purchase property outright. In countries where the demand for ownership is highest, strong domestic markets for mortgages have developed. According to Anglo-American property law, a mortgage occurs when an owner pledges his or her interest as security or collateral for a loan. As with other types of loans, mortgages have an interest rate and are scheduled to amortize over a set period of time, typically 30 years. All types of property can be, and usually are, secured with a mortgage. Mortgage lending is the mechanism used in many countries to finance private ownership of residential and commercial property. Although the terminology and precise forms will differ from country to country, the components tend to be similar, Property. The exact form of ownership will vary from country to country, Mortgage, the security interest of the lender in the property, which may entail restrictions on the use or disposal of the property. Restrictions may include requirements to purchase insurance and mortgage insurance. Borrower, the person borrowing who either has or is creating an ownership interest in the property, lender, any lender, but usually a bank or other financial institution. Principal, the size of the loan, which may or may not include certain other costs, as any principal is repaid. Interest, a charge for use of the lenders money. Completion, legal completion of the deed, and hence the start of the mortgage. A closed mortgage account is said to be redeemed, many other specific characteristics are common to many markets, but the above are the essential features. Governments usually regulate many aspects of mortgage lending, either directly or indirectly, other aspects that define a specific mortgage market may be regional, historical, or driven by specific characteristics of the legal or financial system
29.
Option (finance)
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The strike price may be set by reference to the spot price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount in a premium. The seller has the obligation to fulfill the transaction – to sell or buy – if the buyer exercises the option. Both are commonly used in and by the old traded, when an option is exercised, the cost to the buyer of the asset acquired is the strike price plus the premium, if any. When the option expiration date passes without the option being exercised, then the option expires, in any case, the premium is income to the seller, and normally a capital loss to the buyer. The owner of an option may on-sell the option to a party in a secondary market, in either an over-the-counter transaction or on an options exchange. The market price of an American-style option normally closely follows that of the underlying stock, being the difference between the market price of the stock and the strike price of the option. The ownership of an option does not generally entitle the holder to any rights associated with the asset, such as voting rights or any income from the underlying asset. Contracts similar to options have been used since ancient times, the first reputed option buyer was the ancient Greek mathematician and philosopher Thales of Miletus. When spring came and the olive harvest was larger than expected he exercised his options, in London, puts and refusals first became well-known trading instruments in the 1690s during the reign of William and Mary. Privileges were options sold over the counter in nineteenth century America and their exercise price was fixed at a rounded-off market price on the day or week that the option was bought, and the expiry date was generally three months after purchase. They were not traded in secondary markets, film or theatrical producers often buy the right — but not the obligation — to dramatize a specific book or script. Lines of credit give the borrower the right — but not the obligation — to borrow within a specified time period. Many choices, or embedded options, have traditionally included in bond contracts. For example, many bonds are convertible into common stock at the buyers option, mortgage borrowers have long had the option to repay the loan early, which corresponds to a callable bond option. Options contracts have been known for decades, the Chicago Board Options Exchange was established in 1973, which set up a regime using standardized forms and terms and trade through a guaranteed clearing house. Trading activity and academic interest has increased since then, Options are part of a larger class of financial instruments known as derivative products, or simply, derivatives. A financial option is a contract between two counterparties with the terms of the option specified in a term sheet, Exchange traded options have standardized contracts, and are settled through a clearing house with fulfillment guaranteed by the Options Clearing Corporation. Since the contracts are standardized, accurate pricing models are often available, the terms of an OTC option are unrestricted and may be individually tailored to meet any business need
30.
Call option
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A call option, often simply labeled a call, is a financial contract between two parties, the buyer and the seller of this type of option. The seller is obligated to sell the commodity or financial instrument to the if the buyer so decides. The buyer pays a fee for this right, when you buy a call option, you are buying the right to buy a stock at the strike price, regardless of the stock price in the future before the expiration date. Conversely, you can short or write the call option, giving the buyer the right to buy stock from you anytime before the option expires. To compensate you for that risk taken, the buyer pays you a premium, the seller of the call is said to have shorted the call option, and keeps the premium whether or not the buyer ever exercises the option. Even if the stock rises to $100, you still have the right to buy that stock for $50 as long as the option has not expired. Since the payoff of purchased call options increases as the price rises. When the price of the underlying instrument surpasses the strike price, on the other hand, If the stock falls to below $50, the buyer will never exercise the option, since he would have to pay $50 per share when he can buy the same stock for less. If this occurs, the option expires worthless and the seller keeps the premium as profit. Since the payoff for sold call options increases as the price falls. All call options have the three characteristics, Strike price, this is the price at which you can buy the stock or the price at which you must sell your stock. Expiry date, this is the date on which the option expires, or becomes worthless, premium, this is the price you pay when you buy an option and the price you receive when you sell an option. The initial transaction in this context is not the supplying of a physical or financial asset, rather it is the granting of the right to buy the underlying asset, in exchange for a fee — the option price or premium. Exact specifications may differ depending on option style, a European call option allows the holder to exercise the option only on the option expiration date. An American call option allows exercise at any time during the life of the option, Call options can be purchased on many financial instruments other than stock in a corporation. Options can be purchased on futures or interest rates, for example, a tradeable call option should not be confused with either Incentive stock options or with a warrant. An incentive stock option, the option to buy stock in a company, is a right granted by a corporation to a particular person to purchase treasury stock. When an incentive stock option is exercised, new shares are issued, Incentive options are not traded on the open market
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Put option
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The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying. Put options are most commonly used in the market to protect against the decline of the price of a stock below a specified price. In this way the buyer of the put will receive at least the strike price specified, even if the asset is currently worthless. If the strike is K, and at time t the value of the underlying is S, the put yields a positive return only if the security price falls below the strike when the option is exercised. A European option can only be exercised at time T rather than any time until T, if the option is not exercised by maturity, it expires worthless. The most obvious use of a put is as a type of insurance, another use is for speculation, an investor can take a short position in the underlying stock without trading in it directly. Puts may also be combined with other derivatives as part of complex investment strategies. Note that by put-call parity, a European put can be replaced by buying the appropriate call option, the terms for exercising the options right to sell it differ depending on option style. A European put option allows the holder to exercise the put option for a period of time right before expiration. The most widely traded put options are on stocks/equities, but they are traded on other instruments such as interest rates or commodities. The put buyer either believes that the assets price will fall by the exercise date or hopes to protect a long position in it. The advantage of buying a put over short selling the asset is that the option owners risk of loss is limited to the paid for it. The put buyers prospect of gain is limited to the strike price less the underlyings spot price. The put writer believes that the underlying securitys price will rise, the writer sells the put to collect the premium. The put writers total potential loss is limited to the strike price less the spot. Puts can be used also to limit the writers portfolio risk, the put buyer/owner is short on the underlying asset of the put, but long on the put option itself. That is, the buyer wants the value of the put option to increase by a decline in the price of the asset below the strike price. The writer of a put is long on the underlying asset and that is, the seller wants the option to become worthless by an increase in the price of the underlying asset above the strike price
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Stock
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The stock of a corporation is constituted of the equity stock of its owners. A single share of the stock represents fractional ownership of the corporation in proportion to the number of shares. In liquidation, the stock represents the residual assets of the company that would be due to stockholders after discharge of all senior claims such as secured and unsecured debt. Stockholders equity cannot be withdrawn from the company in a way that is intended to be detrimental to the companys creditors, the stock of a corporation is partitioned into shares, the total of which are stated at the time of business formation. Additional shares may subsequently be authorized by the shareholders and issued by the company. In some jurisdictions, each share of stock has a certain declared par value, in other jurisdictions, however, shares of stock may be issued without associated par value. Shares represent a fraction of ownership in a business, a business may declare different types of shares, each having distinctive ownership rules, privileges, or share values. Ownership of shares may be documented by issuance of a stock certificate. A stock certificate is a document that specifies the amount of shares owned by the shareholder. Stock typically takes the form of shares of common stock or preferred stock. As a unit of ownership, common stock typically carries voting rights that can be exercised in corporate decisions, shares of such stock are called convertible preferred shares. New equity issue may have specific legal clauses attached that differentiate them from previous issues of the issuer. Some shares of stock may be issued without the typical voting rights, for instance, or some shares may have special rights unique to them. Often, new issues that have not been registered with a governing body may be restricted from resale for certain periods of time. Preferred stock may be hybrid by having the qualities of bonds of fixed returns and they also have preference in the payment of dividends over common stock and also have been given preference at the time of liquidation over common stock. They have other features of accumulation in dividend, Rule 144 Stock is an American term given to shares of stock subject to SEC Rule 144, Selling Restricted and Control Securities. Under Rule 144, restricted and controlled securities are acquired in unregistered form, investors either purchase or take ownership of these securities through private sales from the issuing company or from an affiliate of the issuer. Investors wishing to sell these securities are subject to different rules than those selling traditional common or preferred stock and these individuals will only be allowed to liquidate their securities after meeting the specific conditions set forth by SEC Rule 144
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Security (finance)
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A security is a tradable financial asset. The term commonly refers to any form of instrument. In some jurisdictions the term specifically excludes financial instruments other than equities, in some jurisdictions it includes some instruments that are close to equities and fixed income, e. g. equity warrants. In the United States, a security is a financial asset of any kind. Securities are broadly categorized into, debt securities equity securities derivatives, the company or other entity issuing the security is called the issuer. A countrys regulatory structure determines what qualifies as a security, for example, private investment pools may have some features of securities, but they may not be registered or regulated as such if they meet various restrictions. Securities may be represented by a certificate or, more typically, non-certificated, region or country Market capitalization State Securities are the traditional way that commercial enterprises raise new capital. These may be an alternative to bank loans depending on their pricing. Another disadvantage of bank loans as a source of financing is that the bank may seek a measure of protection against default by the borrower via extensive financial covenants, through securities, capital is provided by investors who purchase the securities upon their initial issuance. In a similar way, a government may issue securities too when it needs to increase government debt, investors in securities may be retail, i. e. members of the public investing other than by way of business. The greatest part of investment, in terms of volume, is wholesale, i. e. by financial institutions acting on their own account, important institutional investors include investment banks, insurance companies, pension funds and other managed funds. The traditional economic function of the purchase of securities is investment, debt securities generally offer a higher rate of interest than bank deposits, and equities may offer the prospect of capital growth. Equity investment may also control of the business of the issuer. Debt holdings may also offer some measure of control to the if the company is a fledgling start-up or an old giant undergoing restructuring. In these cases, if interest payments are missed, the creditors may take control of the company, the last decade has seen an enormous growth in the use of securities as collateral. Purchasing securities with borrowed money secured by other securities or cash itself is called buying on margin, where A is owed a debt or other obligation by B, A may require B to deliver property rights in securities to A, either at inception or only in default. Collateral arrangements are divided into two categories, namely security interests and outright collateral transfers. Commonly, commercial banks, investment banks, government agencies and other investors such as mutual funds are significant collateral takers as well as providers
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Syndicated loan
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A syndicated loan is one that is provided by a group of lenders and is structured, arranged, and administered by one or several commercial banks or investment banks known as lead arrangers. The syndicated loan market is the dominant way for corporations in the U. S. and Europe to receive loans from banks and other institutional financial capital providers. The U. S. market originated with the leveraged buyout loans of the mid-1980s. At the most basic level, arrangers serve the role of raising investor funding for an issuer in need of capital. The issuer pays the arranger a fee for service. Though, this threshold moves up and down depending on market conditions, in the U. S. corporate borrowers and private equity sponsors fairly even-handedly drive debt issuance. Europe, however, has far less corporate activity and its issuance is dominated by private equity sponsors, the retail market for a syndicated loan consists of banks and, in the case of leveraged transactions, finance companies and institutional investors. The balance of power among these different investor groups is different in the U. S. than in Europe, the U. S. has a capital market where pricing is linked to credit quality and institutional investor appetite. In Europe, although institutional investors have increased their presence over the past decade. Consequently, pricing is not fully driven by market forces. In the U. S. market flex language drives initial pricing levels, before formally launching a loan to these retail accounts, arrangers will often get a market read by informally polling select investors to gauge their appetite for the credit. After this market read, the arrangers will launch the deal at a spread, once the pricing, or the initial spread over a base rate, was set, it was largely fixed, except in the most extreme cases. If the loans were undersubscribed, the arrangers could very well be left above their desired hold level and this is now a standard feature of syndicated loan commitment letters. As a result of market flex, loan syndication functions as a book-building exercise, a loan is originally launched to market at a target spread or, as was increasingly common by 2008 with a range of spreads referred to as price talk. Investors then will make commitments that in cases are tiered by the spread. For example, an account may put in for $25 million at LIBOR+275 or $15 million at LIBOR+250, at the end of the process, the arranger will total up the commitments and then make a call on where to price the paper. Following the example above, if the paper is vastly oversubscribed at LIBOR+250, conversely, if it is undersubscribed even at LIBOR+275, then the arranger will be forced to raise the spread to bring more money to the table. In Europe, banks have historically dominated the debt markets because of the regional nature of the arena
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Corporate finance
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The primary goal of corporate finance is to maximize or increase shareholder value. Investment analysis is concerned with the setting of criteria about which value-adding projects should receive investment funding, the terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment bank is to evaluate the financial needs. Thus, the corporate finance and corporate financier may be associated with transactions in which capital is raised in order to create, develop. Financial management overlaps with the function of the Accounting profession. The primary goal of management is to maximize or to continually increase shareholder value. Managers of growth companies will use most of the capital resources. When companies reach maturity levels within their industry, managers of companies will use surplus cash to payout dividends to shareholders. Choosing between investment projects will be based upon several inter-related criteria, Corporate management seeks to maximize the value of the firm by investing in projects which yield a positive net present value when valued using an appropriate discount rate in consideration of risk. These projects must also be financed appropriately, if no growth is possible by the company and excess cash surplus is not needed to the firm, then financial theory suggests that management should return some or all of the excess cash to shareholders. This capital budgeting is the planning of value-adding, long-term corporate financial projects relating to investments funded through, Management must allocate the firms limited resources between competing opportunities. Investments should be made on the basis of value-added to the future of the corporation, projects that increase a firms value may include a wide variety of different types of investments, including but not limited to, expansion policies, or mergers and acquisitions. Achieving the goals of corporate finance requires that any corporate investment be financed appropriately, the sources of financing are, generically, capital self-generated by the firm and capital from external funders, obtained by issuing new debt and equity. As above, since both hurdle rate and cash flows will be affected, the mix will impact the valuation of the firm. Financing a project through debt results in a liability or obligation that must be serviced, equity financing is less risky with respect to cash flow commitments, but results in a dilution of share ownership, control and earnings. Management must attempt to match the long-term financing mix to the assets being financed as closely as possible, other techniques, such as securitization, or hedging using interest rate- or credit derivatives, are also common. See Asset liability management, Treasury management, Credit risk, Interest rate risk, however economists have developed a set of alternative theories about how managers allocate a corporations finances. Also, Capital structure substitution theory hypothesizes that management manipulates the capital such that earnings per share are maximized
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Accounting
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Accounting or accountancy is the measurement, processing and communication of financial information about economic entities such as businesses and corporations. The modern field was established by the Italian mathematician Luca Pacioli in 1494, practitioners of accounting are known as accountants. The terms accounting and financial reporting are often used as synonyms, Accounting can be divided into several fields including financial accounting, management accounting, external auditing, and tax accounting. Accounting information systems are designed to support accounting functions and related activities, Accounting is facilitated by accounting organizations such as standard-setters, accounting firms and professional bodies. Financial statements are audited by accounting firms, and are prepared in accordance with generally accepted accounting principles. GAAP is set by various standard-setting organizations such as the Financial Accounting Standards Board in the United States, as of 2012, all major economies have plans to converge towards or adopt the International Financial Reporting Standards. The history of accounting is thousands of old and can be traced to ancient civilizations. By the time of the Emperor Augustus, the Roman government had access to detailed financial information, double-entry bookkeeping developed in medieval Europe, and accounting split into financial accounting and management accounting with the development of joint-stock companies. The first work on a double-entry bookkeeping system was published in Italy, both the words accounting and accountancy were in use in Great Britain by the mid-1800s, and are derived from the words accompting and accountantship used in the 18th century. In Middle English the verb to account had the form accounten, which was derived from the Old French word aconter, which is in turn related to the Vulgar Latin word computare, meaning to reckon. The base of computare is putare, which meant to prune, to purify, to correct an account, hence, to count or calculate. The word accountant is derived from the French word compter, which is derived from the Italian. Accountancy refers to the occupation or profession of an accountant, particularly in British English, Accounting has several subfields or subject areas, including financial accounting, management accounting, auditing, taxation and accounting information systems. Financial accounting focuses on the reporting of a financial information to external users of the information, such as investors. It calculates and records business transactions and prepares financial statements for the users in accordance with generally accepted accounting principles. GAAP, in turn, arises from the agreement between accounting theory and practice, and change over time to meet the needs of decision-makers. This branch of accounting is also studied as part of the exams for qualifying as an actuary. It is interesting to note that two professionals, accountants and actuaries, have created a culture of being archrivals
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Audit
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It also attempts to ensure that the books of accounts are properly maintained by the concern as required by law. Auditing has become such a phenomenon in the corporate and the public sector that academics started identifying an Audit Society. Any subject matter may be audited, Audits provide third party assurance to various stakeholders that the subject matter is free from material misstatement. The term is most frequently applied to audits of the information relating to a legal person. Other areas which are commonly audited include, secretarial & compliance audit, internal controls, quality management, project management, water management, and energy conservation. As a result of an audit, stakeholders may effectively evaluate and improve the effectiveness of management, control. The word audit is derived from a Latin word audire which means to hear, an information technology audit, or information systems audit, is an examination of the management controls within an Information technology infrastructure. These reviews may be performed in conjunction with a financial statement audit, internal audit, due to strong incentives to misstate financial information, auditing has become a legal requirement for many entities who have the power to exploit financial information for personal gain. Traditionally, audits were mainly associated with gaining information about financial systems, financial audits are performed to ascertain the validity and reliability of information, as well as to provide an assessment of a systems internal control. As a result of this, a party can express an opinion of the person / organisation / system in question. The opinion given on financial statements will depends on the evidence obtained. Due to constraints, an audit seeks to provide reasonable assurance that the statements are free from material error. Hence, statistical sampling is often adopted in audits, but recently, the argument that auditing should go beyond just true and fair is gaining momentum. And the US Public Company Accounting Oversight Board has come out with a release on the same. Cost accounting is a process for verifying the cost of manufacturing or producing of any article, on the basis of measuring the use of material. In simple words, the term, cost audit means a systematic and accurate verification of the cost accounts and records, in most nations, an audit must adhere to generally accepted standards established by governing bodies. There are also new types of integrated auditing becoming available that use unified compliance material and this is a very new but necessary approach in some sectors to ensure that all the necessary governance requirements can be met without duplicating effort from both audit and audit hosting resources. The purpose of an assessment is to something or calculate a value for it
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Capital budgeting
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It is the process of allocating resources for major capital, or investment, expenditures. One of the goals of capital budgeting investments is to increase the value of the firm to the shareholders. Techniques based on accounting earnings and accounting rules are sometimes used - though economists consider this to be improper - such as the rate of return. Simplified and hybrid methods are used as well, such as payback period, net Present value, Project classifications Capital budgeting projects are classified as either Independent Projects or Mutually Exclusive Projects. An Independent Project is a project whose cash flows are not affected by the decision for other projects. Thus, all Independent Projects which meet the Capital Budgeting criterion should be accepted, Mutually exclusive projects are a set of projects from which at most one will be accepted. For example, a set of projects which are to accomplish the same task, thus, when choosing between mutually exclusive projects, more than one project may satisfy the capital budgeting criterion. However, only one, i. e. the best, of these three, only the net present value and internal rate of return decision rules consider all of the projects cash flows and the time value of money. As we shall see, only the net present value decision rule will always lead to the decision when choosing among mutually exclusive projects. This is because the net present value and internal rate of return decision rules differ with respect to their reinvestment rate assumptions, since each project is likely to have a different IRR, the assumption underlying the net present value decision rule is more reasonable. The internal rate of return is defined as the discount rate that gives a net present value of zero and it is a commonly used measure of investment efficiency. In most realistic cases, all independent projects that have an IRR higher than the hurdle rate should be accepted. Nevertheless, for mutually exclusive projects, the rule of taking the project with the highest IRR - which is often used - may select a project with a lower NPV. In some cases, several zero NPV discount rates may exist, the IRR exists and is unique if one or more years of net investment are followed by years of net revenues. But if the signs of the flows change more than once. The IRR equation generally cannot be solved analytically but only via iterations, one shortcoming of the IRR method is that it is commonly misunderstood to convey the actual annual profitability of an investment. However, this is not the case because intermediate cash flows are almost never reinvested at the projects IRR, and, therefore, accordingly, a measure called Modified Internal Rate of Return is often used. Despite a strong preference for NPV, surveys indicate that executives prefer IRR over NPV
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Quotations related to Credit at Wikiquote