1.
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
Finance
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London Stock Exchange, global center of finance.
Finance
Finance
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Wall Street, the center of American finance.
2.
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
Financial market
3.
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
Bond market
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Financial markets
Bond market
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Bond market prices.
4.
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
Commodity market
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Financial markets
Commodity market
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Chicago Board of Trade Futures market
5.
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
Derivatives market
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Financial markets
6.
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
Foreign exchange market
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Financial markets
Foreign exchange market
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Main foreign exchange market turnover, 1988–2007, measured in billions of USD.
Foreign exchange market
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Fig.1 Chart showing MSCI World Index of Equities fell while the US dollar Index rose.
7.
Money market
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Trading in money markets is done over the counter and is wholesale. The instruments bear differing maturities, currencies, credit risks, and structure, Money markets, which provide liquidity for the global financial system, and capital markets make up the financial market. The money market consists of institutions and dealers in money or credit who wish to either borrow or lend. Participants borrow and lend for short periods, typically up to thirteen months, Money market trades in short-term financial instruments commonly called paper. This contrasts with the market for longer-term funding, which is supplied by bonds. The core of the market consists of interbank lending—banks borrowing and lending to each other using commercial paper, repurchase agreements. These instruments are often benchmarked to the London Interbank Offered Rate for the appropriate term, finance companies typically fund themselves by issuing large amounts of asset-backed commercial paper, which is secured by the pledge of eligible assets into an ABCP conduit. Examples of eligible assets include auto loans, credit card receivables, residential/commercial mortgage loans, mortgage-backed securities, some large corporations with strong credit ratings, such as General Electric, issue commercial paper on their own credit. Other large corporations arrange for banks to issue commercial paper on their behalf, in the United States, federal, state and local governments all issue paper to meet funding needs. The money market plays crucial role in financing domestic and international trade, commercial finance is made available to the traders through bills of exchange, which are discounted by the bill market. The acceptance houses and discount markets help in financing foreign trade, industries generally need long-term loans, which are provided in the capital market. However, the market depends upon the nature of and the conditions in the money market. The short-term interest rates of the market influence the long-term interest rates of the capital market. Thus, money market indirectly helps the industries through its link with, the Money Market enables the commercial banks to use their excess reserves in profitable investment. The main objective of the banks is to earn income from its reserves as well as maintain liquidity to meet the uncertain cash demand of the depositors. In the money market, the reserves of the commercial banks are invested in near-money assets. Thus, commercial banks earn profits without sacrificing liquidity, developed money markets help the commercial banks to become self-sufficient. In the situation of emergency, when the banks have scarcity of funds, they need not approach the central bank
Money market
8.
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
Over-the-counter (finance)
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Financial markets
9.
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
Private equity
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Financial market participants
Private equity
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Basic investment types
Private equity
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Capital structure
10.
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
Real estate
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'Single-family detached house'
11.
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
Spot market
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Financial markets
12.
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
Stock market
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Financial markets
Stock market
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The
New York Stock Exchange
Stock market
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The
London Stock Exchange
Stock market
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The offices of
Bursa Malaysia, Malaysia's national stock exchange (known before demutualization as Kuala Lumpur Stock Exchange)
13.
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
Financial market participants
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Financial market participants
Financial market participants
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Financial markets
14.
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
Investor
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Financial market participants
15.
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
Retail
–
Macy's Herald Square,
New York City.
Retail
–
Fruit shop in
Naggar,
Himachal Pradesh,
India
Retail
–
San Juan de Dios Market in
Guadalajara, Jalisco
Retail
–
Inside a supermarket in
Russia
16.
Speculation
–
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
Speculation
–
Financial market participants
Speculation
–
Speculation usually involves more risks than investment.
17.
Financial instrument
–
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
Financial instrument
18.
Cash
–
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
Cash
–
A wad of
United States currency
Cash
–
Traditional holed Chinese coinage is also known as
Cash.
19.
Line of credit
–
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
Line of credit
20.
Derivative (finance)
–
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
Derivative (finance)
–
Derivatives traders at the
Chicago Board of Trade
Derivative (finance)
–
Country leaders at the
2009 G-20 Pittsburgh summit
21.
Loan
–
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
Loan
22.
Option (finance)
–
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
Option (finance)
–
Financial markets
Option (finance)
–
Payoffs from a covered call.
23.
Call option
–
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
Call option
–
Profits from buying a call.
24.
Put option
–
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
Put option
–
Payoff from buying a put.
25.
Security (finance)
–
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
Security (finance)
–
Securities
Security (finance)
–
Financial markets
Security (finance)
–
Capital structure
26.
Stock
–
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
Stock
–
Financial markets
Stock
–
One of the earliest stock by
VOC
Stock
–
Stock certificate for ten shares of the
Baltimore and Ohio Railroad Company
Stock
–
A stockbroker using multiple screens to stay up to date on trading.
27.
Corporate finance
–
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
Corporate finance
–
Corporate finance
Corporate finance
–
Capital structure
28.
Accounting
–
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
Accounting
–
Accounting
Accounting
–
Portrait of Luca Pacioli, painted by
Jacopo de' Barbari, 1495, (
Museo di Capodimonte).
29.
Audit
–
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
Audit
–
Some typical stages in the audit process
Audit
–
Ethics and principles
30.
Capital budgeting
–
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
Capital budgeting
–
Corporate finance
31.
Credit rating agency
–
A credit rating agency is a company that assigns credit ratings, which rate a debtors ability to pay back debt by making timely interest payments and the likelihood of default. An agency may rate the creditworthiness of issuers of debt obligations, of debt instruments, and in cases, of the servicers of the underlying debt. The issuers of the obligations or securities may be companies, special purpose entities, state or local governments, non-profit organizations, a credit rating facilitates the trading of securities on a secondary market. It affects the interest rate that a security pays out, with higher ratings leading to lower interest rates, individual consumers are rated for creditworthiness not by credit rating agencies but by credit bureaus, which issue credit scores. The value of credit ratings for securities has been widely questioned, hundreds of billions of securities that were given the agencies highest ratings were downgraded to junk during the financial crisis of 2007–08. Rating downgrades during the European sovereign debt crisis of 2010–12 were blamed by EU officials for accelerating the crisis, Credit rating is a highly concentrated industry, with the Big Three credit rating agencies controlling approximately 95% of the ratings business. Moodys Investors Service and Standard & Poors together control 80% of the global market, when the United States began to expand to the west and other parts of the country, so did the distance of businesses to their customers. Business owners hesitation to extend credit to new customers led to the birth of the reporting industry. Mercantile credit agencies—the precursors of todays rating agencies—were established in the wake of the crisis of 1837. These agencies rated the ability of merchants to pay their debts, the first such agency was established in 1841 by Lewis Tappan in New York City. It was subsequently acquired by Robert Dun, who published its first ratings guide in 1859, another early agency, John Bradstreet, formed in 1849 and published a ratings guide in 1857. Credit rating agencies originated in the United States in the early 1900s, the bond markets in the Netherlands and Britain had been established longer but tended to be small, and revolved around sovereign governments that were trusted to honor their debts. Following the 1907 financial crisis, demand rose for such independent market information, in 1909, financial analyst John Moody issued a publication focused solely on railroad bonds. His ratings became the first to be published widely in an accessible format, in 1913, the ratings publication by Moodys underwent two significant changes, it expanded its focus to include industrial firms and utilities, and it began to use a letter-rating system. For the first time, public securities were rated using a system borrowed from the credit rating agencies. In the next few years, antecedents of the Big Three credit rating agencies were established, Poors Publishing Company began issuing ratings in 1916, Standard Statistics Company in 1922, and the Fitch Publishing Company in 1924. In the United States, the industry grew and consolidated rapidly following the passage of the Glass-Steagall act of 1933. In 1936, regulation was introduced to prohibit banks from investing in bonds determined by recognized rating manuals to be speculative investment securities
Credit rating agency
–
Corporate finance
32.
Financial risk management
–
Financial risk management is the practice of economic value in a firm by using financial instruments to manage exposure to risk, Operational risk, credit risk and market risk. Other types include Foreign exchange risk, Shape risk, Volatility risk, Liquidity risk, Inflation risk, Business risk, Legal risk, Reputational risk, similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to address them. Financial risk management can be qualitative and quantitative, as a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk. In the banking sector worldwide, the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing operational, credit, Finance theory prescribes that a firm should take on a project when it increases shareholder value. Finance theory also shows that firm managers cannot create value for shareholders, also called its investors, when applied to financial risk management, this implies that firm managers should not hedge risks that investors can hedge for themselves at the same cost. In practice, financial markets are not likely to be perfect markets, market risks that result in unique risks for the firm are commonly the best candidates for financial risk management. The concepts of risk management change dramatically in the international realm. Multinational Corporations are faced with many different obstacles in overcoming these challenges, FRM is an international professional certification offered by GARP. GARP is the only recognized membership association for professional risk managers, GARP is a not-for-profit organization and aims at creating a cultural environment of risk awareness and management at every organizational level. The corporate headquarter of GARP is located in Jersey City, New Jersey with an office in London. The FRM curriculum is updated annually, Risk and Financial Management, Mathematical and Computational Methods. Corporate Financial Risk Management, Governance and Disclosure post IFRS7, Icfai Journal of Financial Risk Management, ISSN 0972-916X, enterprise Risk Management, From Incentives to Controls. McNeil, Alexander J. Frey, Rüdiger, Embrechts, Paul, Quantitative Risk Management. Concepts, Techniques and Tools, Princeton Series in Finance, Princeton, NJ, Princeton University Press, ISBN 0-691-12255-5, MR2175089, Zbl 1089.91037 van Deventer, Donald R. Kenji Imai, Mark Mesler. Advanced Financial Risk Management, Tools and Techniques for Integrated Credit Risk and Interest Rate Risk Management
Financial risk management
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Corporate finance
33.
Financial statement
–
Financial statements is a formal record of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a manner and in a form easy to understand. A profit and loss statement provides information on the operation of the enterprise and these include sales and the various expenses incurred during the stated period. A Statement of changes in equity, also known as equity statement or statement of retained earnings, a cash flow statement reports on a companys cash flow activities, particularly its operating, investing and financing activities. For large corporations, these statements may be complex and may include a set of footnotes to the financial statements and management discussion. The notes typically describe each item on the sheet, income statement. Notes to financial statements are considered a part of the financial statements. Financial statements should be understandable, relevant, reliable and comparable, reported assets, liabilities, equity, income and expenses are directly related to an organizations financial position. Financial statements may be used by users for different purposes, Owners and managers require financial statements to make important business decisions that affect its continued operations, Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures. These statements are used as part of managements annual report to the stockholders. Prospective investors make use of statements to assess the viability of investing in a business. Financial analyses are used by investors and are prepared by professionals. Financial institutions use them to decide whether to grant a company with fresh working capital or extend debt securities to finance expansion, the rules for the recording, measurement and presentation of government financial statements may be different from those required for business and even for non-profit organizations. They may use either of two accounting methods, accrual accounting, or cost accounting, or a combination of the two, a complete set of chart of accounts is also used that is substantially different from the chart of a profit-oriented business. Personal financial statements may be required from persons applying for a loan or financial aid. Typically, a financial statement consists of a single form for reporting personally held assets and liabilities, or personal sources of income and expenses. The form to be filled out is determined by the organization supplying the loan or aid, although laws differ from country to country, an audit of the financial statements of a public company is usually required for investment, financing, and tax purposes. These are usually performed by independent accountants or auditing firms, results of the audit are summarized in an audit report that either provide an unqualified opinion on the financial statements or qualifications as to its fairness and accuracy
Financial statement
–
Accounting
Financial statement
–
Historical financial statement
34.
Leveraged buyout
–
The use of debt, which has a lower cost of capital than equity, serves to reduce the overall cost of financing the acquisition. This reduced cost of financing allows greater gains to accrue to the equity, and, as a result, the term LBO is usually employed when a financial sponsor acquires a company. However, many transactions are partially funded by bank debt. LBOs mostly occur in private companies, but can also be employed with public companies, as financial sponsors increase their returns by employing a very high leverage, they have an incentive to employ as much debt as possible to finance an acquisition. In situations of normal companies with normal business risks, debt of 40–60% of the price are usual figures. The possible debt ratios vary significantly among the regions and the target industries, depending on the size and purchase price of the acquisition, the debt is provided in different tranches. Depending on the size of the acquisition, debt as well as equity can be provided by more than one party. Another form of debt that is used in LBOs are seller notes in which the seller effectively uses parts of the proceeds of the sale to grant a loan to the purchaser, such seller notes are often employed in management buyouts or in situations with very restrictive bank financing environments. Note that in close to all cases of LBOs, the only available for the debt are the assets. The financial sponsor can treat their investment as common equity or preferred equity among other types of securities, preferred equity can pay a dividend and has payment preferences to common equity. Junior debt often additionally has warrants and its interest is often all or partly of PIK nature, so mature companies with long-term customer contracts and/or relatively predictable cost structures are commonly acquired in LBOs. Relatively low fixed costs - Fixed costs create substantial risk for Private Equity firms because companies still have to pay them if their revenues decline. The first leveraged buyout may have been the purchase by McLean Industries, Inc. of Pan-Atlantic Steamship Company in January 1955, under the terms of that transaction, McLean borrowed $42 million and raised an additional $7 million through an issue of preferred stock. When the deal closed, $20 million of Waterman cash and assets were used to retire $20 million of the loan debt, in fact, it is Posner who is often credited with coining the term leveraged buyout or LBO. The leveraged buyout boom of the 1980s was conceived in the 1960s by a number of financiers, most notably Jerome Kohlberg, Jr. Working for Bear Stearns at the time, Kohlberg and Kravis, along with Kravis cousin George Roberts, began a series of what they described as bootstrap investments. Many of the target companies lacked a viable or attractive exit for their founders, as they were too small to be taken public, thus a sale to a buyer might prove attractive. Their acquisition of Orkin Exterminating Company in 1964 is among the first significant leveraged buyout transactions, by 1976, tensions had built up between Bear Stearns and Kohlberg, Kravis and Roberts leading to their departure and the formation of Kohlberg Kravis Roberts in that year
Leveraged buyout
–
Basic investment types
Leveraged buyout
–
Diagram of the basic structure of a generic leveraged buyout transaction
Leveraged buyout
–
Capital structure
35.
Mergers and acquisitions
–
Mergers and acquisitions are transactions in which the ownership of companies, other business organizations or their operating units are transferred or combined. As an aspect of management, M&A can allow enterprises to grow, shrink. An acquisition or takeover is the purchase of one business or company by company or other business entity. Specific acquisition targets can be identified through a myriad of avenues including market research, trade expos, or sent up from internal business units, such purchase may be of 100%, or nearly 100%, of the assets or ownership equity of the acquired entity. Consolidation occurs when two companies combine to form a new enterprise altogether, and neither of the previous companies remains independently, Acquisitions are divided into private and public acquisitions, depending on whether the acquiree or merging company is or is not listed on a public stock market. Some public companies rely on acquisitions as an important value creation strategy, an additional dimension or categorization consists of whether an acquisition is friendly or hostile. Achieving acquisition success has proven to be difficult, while various studies have shown that 50% of acquisitions were unsuccessful. Serial acquirers appear to be successful with M&A than companies who only make an acquisition occasionally. It is normal for M&A deal communications to take place in a so-called confidentiality bubble wherein the flow of information is restricted pursuant to confidentiality agreements. Hostile acquisitions can, and often do, ultimately become friendly and this usually requires an improvement in the terms of the offer and/or through negotiation. Acquisition usually refers to a purchase of a firm by a larger one. Sometimes, however, a firm will acquire management control of a larger and/or longer-established company. This is known as a reverse takeover, another type of acquisition is the reverse merger, a form of transaction that enables a private company to be publicly listed in a relatively short time frame. A reverse merger occurs when a privately held company buys a publicly listed company, usually one with no business. The overall net effect of M&A transactions appears to be positive, almost all studies report positive returns for the investors in the combined buyer and this implies that M&A creates economic value, presumably by transferring assets to management teams that operate them more efficiently. The buyer buys the assets of the target company, the cash the target receives from the sell-off is paid back to its shareholders by dividend or through liquidation. This type of leaves the target company as an empty shell. A buyer often structures the transaction as a purchase to cherry-pick the assets that it wants and leave out the assets
Mergers and acquisitions
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Corporate finance
Mergers and acquisitions
–
Accounting
Mergers and acquisitions
–
Capital structure
36.
Structured finance
–
Structured finance is a sector of finance that was created to help transfer risk using complex legal and corporate entities. Common examples of instruments created through securitization include collateralized debt obligations, Securitization is the method utilized by participants of structured finance to create the pools of assets that are used in the creation of the end product financial instruments. It is an important concept, because it is the used to create different investment classes for the securities. Tranching allows the flow from the underlying asset to be diverted to various investor groups. This is accomplished through the use of support, such as prioritization of payments to the different tranches. Credit enhancement is key in creating a security that has a higher rating than the underlying asset pool, Credit enhancement can be created, for example, by issuing subordinate bonds. The subordinate bonds are allocated any losses from the collateral before losses are allocated to the senior bonds, as a result, it is possible for defaults to occur in repayment of the underlying assets without affecting payments to holders of the senior bonds. Also, many deals, typically those involving riskier collateral, such as subprime and Alt-A mortgages, excess interest can be used to offset collateral losses before losses are allocated to bondholders, thus providing another credit enhancement. A further credit enhancement involves the use of such as swap transactions. The decision whether to use a monoline insurer or not often depends upon the cost of such cover vis-a-vis the improvement in pricing for the loan or bond issue by virtue of such credit enhancement. Ratings play an important role in structured finance for instruments that are meant to be sold to investors, many mutual funds, governments, and private investors only buy instruments that have been rated by a known credit rating agency, like Moodys, Fitch or Standard & Poors. New rules in the U. S. and Europe have tightened the requirements for ratings agencies, there are several main types of structured finance instruments. Asset-backed securities are bonds or notes based on pools of assets or collateralized by the flows from a specific pool of underlying assets. Mortgage-backed securities are asset-backed securities, the flows from which are backed by the principal. Residential mortgage-backed securities deal with residential homes, usually single family, commercial mortgage-backed securities are for commercial real estate, such as malls or office complexes. Collateralized mortgage obligations are securitizations of mortgage-backed securities, typically involving multiple classes with differing levels of seniority, collateralized debt obligations consolidate a group of fixed-income assets, such as high-yield debt or asset-backed securities, into a pool, which is then divided into various tranches. Many CDOs are collateralized by various types of mortgage-backed securities and other mortgage-related assets, collateralized loan obligations are collateralized debt obligations backed primarily by leveraged bank loans. Commercial real estate collateralized debt obligations are collateralized debt obligations backed primarily by commercial real estate loans, Credit derivatives are contracts to transfer the risk of the total return on a credit asset falling below an agreed level, without transfer of the underlying asset
Structured finance
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Corporate finance
37.
Venture capital
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Venture capital firms or funds invest in these early-stage companies in exchange for equity–an ownership stake–in the companies they invest in. Venture capitalists take on the risk of financing risky start-ups in the hopes some of the firms they support will become successful. The start-ups are usually based on a technology or business model and they are usually from the high technology industries, such as information technology. The typical venture capital investment occurs after a seed funding round. The first round of venture capital to fund growth is called the Series A round. This institution helps identify promising new firms and provide them with finance, technical expertise, mentoring, marketing know-how, and business models. Once integrated into the network, these firms are more likely to succeed. However, venture capitalists decisions are often biased, exhibiting for instance overconfidence and illusion of control, a venture may be defined as a project prospective converted into a process with an adequate assumed risk and investment. With few exceptions, private equity in the first half of the 20th century was the domain of wealthy individuals, the Wallenbergs, Vanderbilts, Whitneys, Rockefellers, and Warburgs were notable investors in private companies in the first half of the century. In 1938, Laurance S. Rockefeller helped finance the creation of both Eastern Air Lines and Douglas Aircraft, and the Rockefeller family had vast holdings in a variety of companies. Eric M. Warburg founded E. M. Warburg & Co. in 1938, which would ultimately become Warburg Pincus, with investments in both leveraged buyouts and venture capital. The Wallenberg family started Investor AB in 1916 in Sweden and were early investors in several Swedish companies such as ABB, Atlas Copco, Ericsson, before World War II, money orders remained primarily the domain of wealthy individuals and families. Georges Doriot, the father of capitalism, founded INSEAD in 1957. Along with Ralph Flanders and Karl Compton, Doriot founded ARDC in 1946 to encourage investment in businesses run by soldiers returning from World War II. ARDC became the first institutional private-equity investment firm to raise capital from other than wealthy families. ARDC is credited with the first trick when its 1957 investment of $70,000 in Digital Equipment Corporation would be valued at over $355 million after the initial public offering in 1968. Former employees of ARDC went on to several prominent venture-capital firms including Greylock Partners and Morgan, Holland Ventures. ARDC continued investing until 1971, when Doriot retired, in 1972 Doriot merged ARDC with Textron after having invested in over 150 companies
Venture capital
–
A highway exit for
Sand Hill Road in
Menlo Park, California, where many Bay Area venture capital firms are based
Venture capital
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Technology in Israel
Venture capital
–
Basic investment types
38.
Personal finance
–
The earliest known research in personal finance was done in 1920 by Hazel Kyrk. Her dissertation at University of Chicago laid the foundation of consumer economics, margaret Reid, a professor of Home Economics at the same university, is recognized as one of the pioneers in the study of consumer behavior and Household behavior. In 1947, Herbert A. Simon, a Nobel laureate, suggested that a decision maker did not always make the best financial decision because of limited educational resources and personal inclinations. Therefore, personal education is needed to help an individual or a family make rational financial decisions throughout their life. Before 1990, mainstream economists and business faculty paid little attention to personal finance and these institutions have published several works in journals such as The Journal of Financial Counseling and Planning and the Journal of Personal Finance. Research into personal finance is based on theories such as social exchange theory. Attendances of the two societies mainly come from faculty and graduates from business and home economics colleges, AFCPE has since offered several certifications for professionals in this field such as Accredited Financial Counselor and Certified Housing Counselors. Meanwhile, AFS cooperates with Certified Financial Planner, the educational programmes are frequently known as financial literacy. However, there was no standardised curriculum for personal finance education until after the 2008 financial crisis, the United States President’s Advisory Council on Financial Capability was set up in 2008 in order to encourage financial literacy among the American people. It also stressed the importance of developing a standard in the field of financial education, the key component of personal finance is financial planning, which is a dynamic process that requires regular monitoring and reevaluation. In general, it involves five steps, Assessment, A persons financial situation is assessed by compiling simplified versions of financial statements including balance sheets, a personal balance sheet lists the values of personal assets, along with personal liabilities. A personal income statement lists personal income and expenses, goal setting, Having multiple goals is common, including a mix of short- and long-term goals. For example, a goal would be to retire at age 65 with a personal net worth of $1,000,000. Setting financial goals helps to direct financial planning, goal setting is done with an objective to meet specific financial requirements. Plan creation, The financial plan details how to accomplish the goals and it could include, for example, reducing unnecessary expenses, increasing the employment income, or investing in the stock market. Execution, Execution of a financial plan often requires discipline and perseverance, many people obtain assistance from professionals such as accountants, financial planners, investment advisers, and lawyers. Monitoring and reassessment, As time passes, the plan is monitored for possible adjustments or reassessments. Net worth is a balance sheet, calculated by adding up all assets under that persons control, minus all liabilities of the household
Personal finance
–
Personal finance
Personal finance
–
An example of personal budget planning software
39.
Credit (finance)
–
In other words, credit is a method of making reciprocity formal, legally enforceable, and extensible to a large group of unrelated people. The resources provided may be financial, or they may consist of goods or services, Credit encompasses any form of deferred payment. Credit is extended by a creditor, also known as a lender, to a debtor, Credit does not necessarily require money. The credit concept can be applied in barter economies as well, based on the exchange of goods. However, in societies, credit is usually denominated by a unit of account. Bank issued credit makes up the largest proportion of credit in existence, the traditional view of banks as intermediaries between savers and borrower is incorrect. Modern banking is about credit creation, Credit is made up of two parts, the credit and its corresponding debt, which requires repayment with interest. The majority of the money in the UK economy is created as credit, when the debt is fully repaid, the credit and debt are cancelled, and the money disappears from the economy. Meanwhile, the debtor receives a cash balance, but also an equivalent negative liability to be repaid to the bank over the duration. Most of the credit created goes into the purchase of land and property, creating inflation in those markets, when a bank creates credit, it effectively owes the money to itself. If a bank issues too much bad credit, the bank will become insolvent, if it fails to do this it risks bankruptcy. In this instance, the bank uses sale of the collateral to reduce its liabilities, examples of secured credit include consumer mortgages used to buy houses, boats etc. and PCP credit agreements for automobile purchases. Movements of financial capital are normally dependent on credit or equity transfers. The global credit market is three times the size of global equity, Credit is in turn dependent on the reputation or creditworthiness of the entity which takes responsibility for the funds. Credit is also traded in financial markets, the purest form is the credit default swap market, which is essentially a traded market in credit insurance. There are many types of credit, including but not limited to bank credit, commerce, consumer credit, investment credit, international credit, public credit, in commercial trade, the term trade credit refers to the approval of delayed payment for purchased goods. Credit is sometimes not granted to a buyer who has financial instability or difficulty, companies frequently offer trade credit to their customers as part of the terms of a purchase agreement. Organizations that offer credit to their customers frequently employ a credit manager, Consumer debt can be defined as money, goods or services provided to an individual in the absence of immediate payment
Credit (finance)
40.
Consumer debt
–
In economics, consumer debt is outstanding consumer debt, as opposed to that of businesses or governments. In macroeconomic terms, it is debt which is used to fund consumption rather than investment and it includes debts incurred on purchase of goods that are consumable and/or do not appreciate. Both domestic and international economists have supported a recent upsurge in South Korean consumer debt, on the other hand, credit card debt is almost unknown just across the sea in Japan and China, because of long-standing cultural taboos against personal debt. Theoretical underpinnings aside, personal debt is on the rise, particularly in the United States, however, according to the US Federal Reserve, the US household debt service ratio is at the lowest level since its peak in the Fall of 2007. The most common forms of debt are credit card debt, payday loans, and other consumer finance. The amount of debt outstanding versus the consumers disposable income is expressed as the consumer leverage ratio, on a monthly basis, this debt ratio is advised to be no more than 20 percent of an individuals take-home pay. Rates generally range from 0.25 percent above base-rate, to well into double figures, consumer debt is also associated with Predatory lending, although there is much debate as to what exactly constitutes predatory lending. Long-term consumer debt is often considered fiscally suboptimal, while some consumer items may be useful investments that justify debt, most consumer goods are not. On the other hand, personal finance advisers like Robert Kiyosaki encourage a liberal attitude towards taking on debt if it can be leveraged into a small business or real estate. In many countries, the ease with which individuals can accumulate consumer debt beyond their means to repay has precipitated an industry in debt consolidation
Consumer debt
41.
Employment contract
–
An employment contract or contract of employment is a kind of contract used in labour law to attribute rights and responsibilities between parties to a bargain. The contract is between an employee and an employer and it has arisen out of the old master-servant law, used before the 20th century. But generally, the contract of employment denotes a relationship of economic dependence, a contract of employment usually defined to mean the same as a contract of service. The purpose of the line is to attribute rights to some kinds of people who work for others. This could be the right to a wage, holiday pay, sick leave, fair dismissal, a written statement of the contract, the right to organise in a union. In Roman law the equivalent dichotomy was that between locatio conductio operarum and locatio conductio operis, the terminology is complicated by the use of many other sorts of contracts involving one person doing work for another. Instead of being considered an employee, the individual could be considered a worker or as having an employment relationship or a professional or a dependent entrepreneur, different countries will take more or less sophisticated, or complicated approaches to the question. Main articles, Labour economics and Contemporary slavery Anarcho-syndicalists and other socialists who criticise wage slavery, to treat abilities in this manner is also implicitly to accept that the exchange between employer and worker is like any other exchange of material property. The answer to the question of how property in the person can be contracted out is no such procedure is possible. Labour power, capacities or services, cannot be separated from the person of the worker like pieces of property, united States,209 U. S. ” Mark Freedland, The Personal Employment Contract Oxford University Press, ISBN 0-19-924926-1
Employment contract
–
Syndicalism
42.
Financial planner
–
A financial planner or personal financial planner is a professional who prepares financial plans for people. Financial planning should cover all areas of the financial needs. In Australia, a company providing financial services must obtain a licence from ASIC, some persons who offer financial advisory services, e. g. licensed life insurance agents, are exempted from licensing as a practising requirement. In Singapore, financial sector are highly regulated by The Monetary Authority of Singapore. MAS is the regulator and supervisor of financial institutions in Singapore, rules are set by MAS for financial institutions and are implemented through legislation, regulations, directions and notices. Http, //www. mas. gov. sg Currently, majority of the financial planners are commission-based, in 2015, Balanced scorecard framework is implemented to better align the interests of the FA industry and consumers. Failure to achieve good grades for these non-sales KPI will directly affect their commission, the Financial Markets Authority provides Authorisation to individuals who provide Personalised Financial Advice, Investment Planning Services and/or Discretionary Investment Management Services. Individuals who receive Authorisation are referred to as an Authorised Financial Adviser, in order to receive Authorisation individuals must complete the National Certificate in Financial Services
Financial planner
–
Personal finance
43.
Retirement
–
Retirement is the point where a person stops employment completely. A person may also semi-retire by reducing work hours, an increasing number of individuals are choosing to put off this point of total retirement, by selecting to exist in the emerging state of Pre-tirement. In most countries, the idea of retirement is of recent origin, being introduced during the late 19th, previously, low life expectancy and the absence of pension arrangements meant that most workers continued to work until death. Germany was the first country to introduce retirement, in 1889, nowadays, most developed countries have systems to provide pensions on retirement in old age, which may be sponsored by employers and/or the state. In many poorer countries, support for the old is still provided through the family. Today, retirement with a pension is considered a right of the worker in many societies, in many western countries this right is mentioned in national constitutions. Retirement, or the practice of leaving ones job or ceasing to work after reaching an age, has been around since around the 18th century. Prior to the 18th century, the life expectancy of people was between 26 and 40 years. Due to this, only a percentage of the population were reaching an age where physical impairments began to be obstacles to working. Retirement as a government policy began to be adopted by countries during the late 19th century, a person may retire at whatever age they please. However, a countrys tax laws and/or state old-age pension rules usually mean that in a country a certain age is thought of as the standard retirement age. The standard retirement age varies from country to country but it is generally between 50 and 70, in some countries this age is different for males and females, although this has recently been challenged in some countries, and in some countries the ages are being brought into line. The table below shows the variation in eligibility ages for public benefits in the United States and many European countries. Notes, Parentheses indicate eligibility age for women when different, 1–2, OECD Pensions at a Glance, Cols. 3–6, Tabulations from HRS, ELSA and SHARE, square brackets indicate early retirement for some public employees. * In France, the retirement age has been extended to 62 and 67 respectively, for those turning 65 in 2008, full benefits will be payable beginning at age 66. Public servants are not covered by Social Security but have their own pension programs. Military members of the US Armed Forces may elect to retire after 20 years of active duty and their retirement pay is calculated on total number of years on active duty, their final pay grade and the retirement system in place when they entered service
Retirement
–
For other uses, see
Retirement (disambiguation).
Retirement
44.
Student loan
–
A student loan is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. It may differ from other types of loans in that the interest rate may be substantially lower and it also differs in many countries in the strict laws regulating renegotiating and bankruptcy. This article highlights the differences of the student loan system in major countries. Tertiary student places in Australia are usually funded through the HECS-HELP scheme and this funding is in the form of loans that are not normal debts. They are repaid over time via a supplementary tax, using a scale based on taxable income. As a consequence, loan repayments are made when the former student has income to support the repayments. Discounts are available for early repayment, the scheme is available to citizens and permanent humanitarian visa holders. Means-tested scholarships for living expenses are also available, special assistance is available to indigenous students. Koreas student loans are managed by the Korea Student Aid Foundation which was established in May 2009, strong academic performance is part of the eligibility criteria. Loans are not subject to credit approval, Loan applicants must be enrolled for undergraduate study in a postsecondary institution in Korea. Students do not qualify for this program if they are in a graduate school. Loan must be used for tuition, qualifying school fees, and other specific education-related costs, Loan payments may not exceed the student’s financial need, there is no other upper limit on the amount borrowed. In the case of applying loan towards both tuition/school fees and in-study living expenses, the limit is KRW600,000. Under the income contingent repayment system, a borrower does not have to pay the principal amount or interest until he or she has income above a certain minimum threshold level for repayment. Once the borrower’s annual income is greater than the repayment minimum threshold level, reduced-interest loans that come from and are guaranteed by the government. Qualifying borrowers, on conditions, may be eligible for interest relief offered by the government. For undergraduate and graduate students of any grade level*, from households of any income level, Loan applicants must be enrolled for undergraduate study in a postsecondary institution in Korea. Students do not qualify for this program if they are in a continuing education program through an academic credit bank system or a school outside of Korea
Student loan
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Occupy Boston activist Nelson Terry at the
Occupy Wall Street event in
New York protesting student loan debt, September 19, 2011
45.
Public finance
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Public finance is the study of the role of the government in the economy. The purview of public finance is considered to be threefold, governmental effects on efficient allocation of resources, distribution of income, the proper role of government provides a starting point for the analysis of public finance. In theory, under circumstances, private markets will allocate goods. If private markets were able to provide efficient outcomes and if the distribution of income were socially acceptable, in many cases, however, conditions for private market efficiency are violated. For example, if people can enjoy the same good at the same time. National defense is one example of consumption, or of a public good. Market failure occurs when private markets do not allocate goods or services efficiently, the existence of market failure provides an efficiency-based rationale for collective or governmental provision of goods and services. Externalities, public goods, informational advantages, strong economies of scale, Public provision via a government or a voluntary association, however, is subject to other inefficiencies, termed government failure. Under broad assumptions, government decisions about the efficient scope and level of activities can be separated from decisions about the design of taxation systems. In practice, government budgeting or public budgeting is substantially more complicated, Government can pay for spending by borrowing, although borrowing is a method of distributing tax burdens through time rather than a replacement for taxes. A deficit is the difference between government spending and revenues, the accumulation of deficits over time is the total public debt. Deficit finance allows governments to smooth tax burdens over time, deficits can also narrow the options of successor governments. Public finance is closely connected to issues of distribution and social equity. Governments can reallocate income through transfer payments or by designing tax systems that treat high-income and low-income households differently, the public choice approach to public finance seeks to explain how self-interested voters, politicians, and bureaucrats actually operate, rather than how they should operate. Collection of sufficient resources from the economy in an appropriate manner along with allocating, resource generation, resource allocation and expenditure management are the essential components of a public financial management system. Public Finance Management basically deals with all aspects of resource mobilization, just as managing finances is a critical function of management in any organization, similarly public finance management is an essential part of the governance process. Public finance management includes resource mobilization, prioritization of programmes, the process, efficient management of resources. Rising aspirations of people are placing more demands on financial resources, at the same time, the emphasis of the citizenry is on value for money, thus making public finance management increasingly vital
Public finance
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Public finance
Public finance
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Figure 1: General Government (IMF Government Finance Statistics Manual 2001 (Washington, 2001) pp.13
46.
Government spending
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Government spending or expenditure includes all government consumption, investment, and transfer payments. Government acquisition of goods and services intended to create future benefits and these two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of gross domestic product. Government spending can be financed by government borrowing, seigniorage, or taxes, changes in government spending is a major component of fiscal policy used to stabilize the macroeconomic business cycle. For fiscal policy, increases in government spending are expansionary, while decreases are contractionary, john Maynard Keynes was one of the first economists to advocate government deficit spending as part of the fiscal policy response to an economic contraction. According to Keynesian economics, increased government spending raises aggregate demand and increases consumption, acquisition of goods and services is made through production by the government or through purchases of goods and services from market producers. In economic theory or in macroeconomics, investment is the amount purchased per unit of time of goods which are not consumed but are to be used for future production, examples include railroad or factory construction. Infrastructure spending is considered government investment because it will save money in the long run. These payments are considered to be exhaustive because they do not directly absorb resources or create output, in other words, the transfer is made without any exchange of goods or services. Examples of certain transfer payments include welfare, social security, in 2010 the average national government spent $2,376 per citizen, while the average for the worlds 20 largest economies was $16,110 per citizen. Norway and Sweden topped the list with per citizen spending of $40,908, the federal government of the USA spent an average of $11,041 per citizen, ahead of only South Korea, Brazil, Russia, China, and India in the twenty largest world economies. Government spending in the United States of America occurs at levels of government, including primarily federal, state. The Organisation for Economic Co-operation and Development reports that federal, state. This is tracked in National Income and Product Accounts, as of September 2001 the U. S. Congressional Budget Office reported that government spending for 2004 was projected to be $2.293 trillion. There are two types of government spending – discretionary and mandatory, discretionary spending, which accounts for roughly one-third of all Federal spending, includes money for things like the Army, FBI, the Coast Guard, and highway projects. Congress explicitly determines how much to spend on these programs on a basis in annual appropriations bills. Mandatory spending accounts for two-thirds of all federal spending, spending levels in these areas are mostly determined by the number of people who request and qualify for the program benefits as determined by the agencies. In some cases, mandatory spending is influenced by earmarks in multi-year spending bills like highway bills, all government agencies face congressional oversight and most programs are updated and amended by congressional legislation, as well as internal agency rules and regulations
Government spending
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Public finance
Government spending
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Chart showing how the
United States Congress has spent the federal tax revenue, 2010-2014.
47.
Redistribution of income and wealth
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The term typically refers to redistribution on an economy-wide basis rather than between selected individuals, and it always refers to redistributions from those who have more to those who have less. Itemized deductions, often called tax loopholes, tend to perpetuate predistribution preferences in lieu of implementing a tax system. Many alternate taxation proposals have been floated without the political will to alter the status quo, the proposed Buffett Rule is a hybrid taxation model, a compromise of opposing systems, intended to minimize the favoritism of the special interest tax design. The effects of a system are actively debated on ethical. The subject includes analysis of its rationales, objectives, means, a 2003 survey among 264 members of the American Economic Association found that 71. 2% of them support redistribution, while 20. 4% oppose it, and 7. 2% had mixed feelings. In ancient times, redistribution operated as a palace economy and these economies were centrally based around the administration, so the dictator or pharaoh had both the ability and the right to say who was taxed and who got special treatment. Another early form of wealth redistribution occurred in Plymouth Colony under the leadership of William Bradford, Bradford records in his diary that this common course bred confusion, discontent, distrust, and the colonists looked upon it as a form of slavery. Different types of economic systems feature varying degrees of interventionism aimed at redistributing income, free-market capitalist economies tend to feature high degrees of income redistribution. However, Japans government engages in much less redistribution because its initial distribution is much more equal than Western economies. Today, income redistribution occurs in some form in most democratic countries through economic policies. Redistributive policies attempt to take wealth, income, and other resources from the “haves” and give them to the “have-nots. ”For example, the U. S. government’s progressive-rate income tax policy is redistributive because much tax revenue goes to programs such as welfare, Social Security. In a progressive tax system, a high income earner will pay a higher tax rate than a low income earner. Another taxation-based method of redistributing income is the income tax. Two other common types of governmental redistribution of income are subsidies and these transfer payment programs are funded through general taxation, but benefit the poor, who pay fewer or no taxes. Another common type of governmental redistribution of income are direct benefit programs and these programs are also funded by the United States tax payers. Direct benefit programs involve either cash transfers or the purchase of services for an individual. By far the largest direct benefit programs are Social Security and Medicare, unlike subsidies and voucher programs, Social Security recipients receive a direct payment not a voucher that is limited as to what it can buy. The difference between the Gini index for the income distribution before taxation and the Gini index after taxation is an indicator for the effects of such taxation
Redistribution of income and wealth
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Number of high-net-worth individuals in the world in 2011
Redistribution of income and wealth
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German
progressive tax rates for different incomes. Progressive tax taxes the rich at a higher rate, in order to redistribute wealth.
48.
Government revenue
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Government revenue is money received by a government. It is an important tool of the policy of the government and is the opposite factor of government spending
Government revenue
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Public finance
49.
Tax
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A tax is a financial charge or other levy imposed upon a taxpayer by a state or the functional equivalent of a state to fund various public expenditures. A failure to pay, or evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent, the legal definition and the economic definition of taxes differ in that economists do not regard many transfers to governments as taxes. For example, some transfers to the sector are comparable to prices. Examples include tuition at public universities and fees for utilities provided by local governments, governments also obtain resources by creating money and coins, through voluntary gifts, by imposing penalties, by borrowing, and by confiscating wealth. In modern taxation systems, governments levy taxes in money, but in-kind and corvée taxation are characteristic of traditional or pre-capitalist states, the method of taxation and the government expenditure of taxes raised is often highly debated in politics and economics. Tax collection is performed by a government agency such as the Canada Revenue Agency, when taxes are not fully paid, the state may impose civil penalties or criminal penalties on the non-paying entity or individual. The levying of taxes aims to raise revenue to fund governing and/or to alter prices in order to affect demand, States and their functional equivalents throughout history have used money provided by taxation to carry out many functions. A governments ability to raise taxes is called its fiscal capacity, when expenditures exceed tax revenue, a government accumulates debt. A portion of taxes may be used to service past debts, governments also use taxes to fund welfare and public services. These services can include education systems, pensions for the elderly, unemployment benefits, energy, water and waste management systems are also common public utilities. A tax effectively changes relative prices of products and they have therefore sought to identify the kind of tax system that would minimize this distortion. Governments use different kinds of taxes and vary the tax rates, historically, taxes on the poor supported the nobility, modern social-security systems aim to support the poor, the disabled, or the retired by taxes on those who are still working. A states tax system often reflects its communal values and the values of those in current political power. To create a system of taxation, a state must make choices regarding the distribution of the tax burden—who will pay taxes and how much they will pay—and how the taxes collected will be spent. In democratic nations where the public elects those in charge of establishing or administering the tax system, in countries where the public does not have a significant amount of influence over the system of taxation, that system may reflect more closely the values of those in power. All large businesses incur administrative costs in the process of delivering revenue collected from customers to the suppliers of the goods or services being purchased. Taxation is no different, the resource collected from the public through taxation is always greater than the amount which can be used by the government, the difference is called the compliance cost and includes the labour cost and other expenses incurred in complying with tax laws and rules
Tax
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Pieter Brueghel the Younger, The tax collector's office, 1640
Tax
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Egyptian
peasants seized for
non-payment of taxes. (
Pyramid Age)
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