the five c for banking

8/7/2019 The Five C for banking

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The Five Cs of Credit: Capacity, Capital, Collateral, Conditions and Character

When you apply for a loan, the lender will evaluate your request in order to determine whether ornot it is a good decision to lend you and your business money. A common evaluation frameworkis the Five Cs of Credit: capacity, capital, collateral, conditions and character.

Capacity refers to your ability to meet the loan payments. The prospective lender will want toknow exactly how you intend to repay the loan. The lender will consider the cash flow from thebusiness, the timing of repayment, and the probability of successful repayment of the loan.Lenders will also consider payment history as an indicator of future payment potential. Forexample, if you have a history of not paying back loans then it becomes more difficult to obtainadditional loans.

Capital is the money invested in the business and is an indicator of how much is at risk shouldthe business fail. Lenders will generally consider the company's debt-to-equity ratio tounderstand how much money the lender is being asked to lend (debt) in relation to how much theowners have invested (equity). A high debt-to-equity ratio also indicates that the company

already has a high level of loans and could be a higher financial risk.

Collateral is a form of security for the lender. Banks usually require collateral as a type ofinsurance in case you cannot repay the loan. If you default on the loan, then the lender takespossession of the collateral in place of the debt. The loan agreement should carefully specify allitems serving as collateral. Equipment, buildings, accounts receivable, and inventory are allpotential forms of collateral. A lender will normally want the term of the loan to match the usefullife of the asset used as collateral. For example, if equipment with a five-year expected life spanis used as collateral, then the term of the loan will generally be five years or less. In some cases,the lender may ask for a third-party guarantee where someone else signs a document promisingto repay the loan if you cannot.

Conditions refer to the intended purpose of the loan, for example working capital, additionalequipment, or new offices. The size of loan in relation to the specific use will help the lenderevaluate your loan request. Conditions also include the national, industry level, and localeconomic situation. A volatile or unstable economic situation can negatively impact theevaluation. However, positive expectations can increase the likelihood of obtaining the loan.

Character is the obligation that a borrower feels to repay the loan. Since there is not an accurateway to judge character, the lender will decide subjectively whether or not you are sufficientlytrustworthy to repay the loan. The lender will investigate your payment history, review a creditbureau report, and consider your educational background and experience in business. The quality

of your references and the background and experience of your employees will also beconsidered.


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foreign exchange reserve

Deposits of a foreign currencyheld by a central bank. Holding the currencies of othercountries

as assets allow governments to keep their currencies stable and reduce the effect ofeconomicshocks. The use offoreign exchangereserves became popular after thedecline of the goldstandard.

What Are Foreign Exchange Reserves?

By Kofi Bofah, eHow Contributor

updated: September 29, 2009

What Are Foreign Exchange Reserves?

Foreign exchange reserves are stores of international currency held by the central banks ofnations around the world. The primary purpose of the foreign exchange reserve is for theinternational settlement of debts and payments between governments.

Foreign exchange reserves have broken the link to the gold standard and are now predominatelyassociated with foreign currency and bonds, particularly U.S. dollars and Treasuries. Foreignexchange reserve policy affects exchange rates, international trade and inflation.

Official International Payments

1. Foreign exchange reserves are used to make international payments between countries.These payments are associated with military spending, government aid and loans to buildinfrastructure. Countries remain committed to building strong foreign exchange reservesin order to stay in good standing with allies and to help balance the world economy.National debt defaults devalue currency and are disastrous, commercially, becausegovernments and private entities will be reluctant to transact business with countries thatcannot honor payments.
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Gold Standard and the U.S. Dollar

2.

U.S. dollars are no longer backed by gold.

Gold and silver were once the only accepted medium for settling international paymentsbetween nations, prior to the 1944 Bretton Woods Agreements. The Bretton Woodssystem and International Monetary Fund emerged to establish commercial protocolbetween industrial nations, many of which had been devastated by two world wars. The

United States was untouched by war at home and became the world's supreme power tomake loans to Western Europe and Japan.

International exchange rates were pegged to the U.S. dollar, which was in turn backedand convertible into gold at a set rate. Both mediums would function as foreign exchangereserves to make payments. The system collapsed in 1971 when the U.S. abandonedconvertibility of gold into dollars. The U.S. dollar is still the most dominant currency forforeign exchange reserves, but it is no longer backed by gold.

Central banks have always used foreign exchange reserves to influence exchange ratesand, consequently, international trade and inflation.

Exchange Rates

3. Central banks trade domestic notes against foreign currency collectively to affectexchange rate movements. International central banks trade, sell or simply run theprinting presses to create domestic currency, which is then used to buy foreign exchange.Buying foreign currency by creating money devalues the home currency against thatparticular medium.

Conversely, foreign central banks strengthen the home currency by releasing foreigncurrency back into the marketplace out of the reserves in exchange for the domestic

currency, which is then taken out of circulation.

The United States Federal Reserve Bank of New York manages the U.S. foreignexchange reserves on behalf of the U.S. Treasury.

International Trade
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4. Exchange rates affect international trade by influencing the prices of goods relative toeach other by nationality. Exports sell for low prices overseas when the domesticcurrency has been devalued against competing foreign exchange. Meanwhile, importsbecome more expensive when the home currency is weak. Tourists and business travelersvisit nations with weaker currencies in order to exploit additional buying power.

Central banks manipulate foreign exchange reserves for competitive advantages. Exporteconomies add to foreign exchange reserves in order to devalue the home currency andsell cheap goods overseas. China leads the world in foreign exchange reserves and carriesover $2 trillion in U.S. dollars, which effectively devalues the yuan and drives China'sexport economy.

Inflation and Loss

5. Fiat currency, which identifies money that is not backed by gold, is always susceptible tolong-term devaluation, or inflation. Inflation identifies the loss of purchasing power that

occurs over time. Central banks pressure the value of domestic currency through printingand creating money in order to buy foreign exchange.

Nations that hold large amounts of foreign currency incur losses in purchasing power asthe exchange values of that currency decrease. Foreign exchange reserves earn little interms of interest. This means that interest income will not overcome the losses realizedfrom holding depreciating currency. Treasury officials decide whether foreign exchangereserves would have been of better service to the home nation as domestic investments

WHAT IS SLR? What is CRR? What is BANK RATE?,What are REPO AND REVERSE REPOs? What is

difference between CRR and SLR?

Click Here to Know the Latest CRR Rates SLR Rate, Bank Rate, Repo and Reverse Repo

Rates for Banks in India

What is Bank rate? Bank Rate is the rate at which central bank of the country (in India it isRBI) allows finance to commercial banks. Bank Rate is a tool, which central bank uses for

short-term purposes. Any upward revision in Bank Rate by central bank is an indication thatbanks should also increase deposit rates as well as Prime Lending Rate. This any revision in theBank rate indicates could mean more or less interest on your deposits and also an increase ordecrease in your EMI.

What is Bank Rate ? (For Non Bankers) :This is the rate at which central bank (RBI) lendsmoney to other banks or financial institutions. If the bank rate goes up, long-term interest rates alsotend to move up, and vice-versa. Thus, it can said that in case bank rate is hiked, in all likelihood
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banks will hikes their own lending rates to ensure and they continue to make a profit.

What is CRR? The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and hascome into force with its gazette notification. Consequent upon amendment to sub-Section 42(1),the Reserve Bank, having regard to the needs of securing the monetary stability in the country,

can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or ceilingrate. [Before the enactment of this amendment, in terms of Section 42(1) of the RBI Act, theReserve Bank could prescribe CRR for scheduled banks between 3 per cent and 20 per cent oftotal of their demand and time liabilities].

RBI uses CRR either to drain excess liquidity or to release funds needed for the economy fromtime to time. Increase in CRR means that banks have less funds available and money is suckedout of circulation. Thus we can say that this serves duel purposes i.e. it not only ensures that a portionof bank deposits is totally risk-free, but also enables RBI to control liquidity in the system, and thereby,inflation by tying the hands of the banks in lending money.

What is CRR (For Non Bankers) :CRR means Cash Reserve Ratio. Banks in India arerequired to hold a certain proportion of their deposits in the form of cash. However, actuallyBanks dont hold these as cash with themselves, but deposit such case with Reserve Bank ofIndia (RBI) / currency chests, which is considered as equivlanet to holding cash withthemselves.. This minimum ratio (that is the part of the total deposits to be held as cash) isstipulated by the RBI and is known as the CRR or Cash Reserve Ratio. Thus, When a banksdeposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to holdadditional Rs 9 with RBI and Bank will be able to use only Rs 91 for investments and lending/ credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the amount that bankswill be able to use for lending and investment. This power of RBI to reduce the lendableamount by increasing the CRR, makes it an instrument in the hands of a central bank through

which it can control the amount that banks lend. Thus, it is a tool used by RBI to controlliquidity in the banking system.

What is SLR? Every bank is required to maintain at the close of business every day, a minimumproportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold andun-encumbered approved securities. The ratio of liquid assets to demand and time liabilities isknown as Statutory Liquidity Ratio (SLR). Present SLR is 24%. (reduced w.e.f. 8/11/208, fromearlier 25%) RBI is empowered to increase this ratio up to 40%. An increase in SLR also restrictthe banks leverage position to pump more money into the economy.

What is SLR ? (For Non Bankers) : SLR stands for Statutory Liquidity Ratio. This term is

used by bankers and indicates the minimum percentage of deposits that the bank has tomaintain in form of gold, cash or other approved securities. Thus, we can say that it is ratio ofcash and some other approved to liabilities (deposits) It regulates the credit growth in India.

What are Repo rate and Reverse Repo rate?

Repo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When


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the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say thatin case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate;similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI.The RBI uses this tool when it feels there is too much money floating in the banking system. An increasein the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest.As a result, banks would prefer to keep their money with the RBI

Thus, we can conclude that Repo Rate signifies the rate at which liquidity is injectedin the banking system by RBI, whereas Reverse repo rate signifies the rate at which

the

Latest Important Banking Sector Data

Bank Rate6.00% (w.e.f.29/04/2003)

Cash Reserve Ratio (CRR)

6.00%(w.e.f.

24/04/2010)

Increased from5.00% to 5.50% wef

13/02/2010; and thenagain to 5.75% wef

27/02/2010; and nowto 6.00% wef24/04/2010

Statutory Liquidity Ratio(SLR)

25%(w.e.f.07/11/2009)

Increased from 24%which wascontinuing since.

08/11/2008


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Reverse Repo Rate

5.00%(w.e.f.

(16/09/2010)

Increased from4.50% which wascontinuing since

27/07/2010

Repo Rate under LAF

6.00%(w.e.f.

16/09/2010)

Increased from5.75% which wascontinuing since

27/07/2010

BSE Sensex

Bombay Stock ExchangeSensitive Index. A value-weighted stock market index, which tracksthe performanceof the 30 largest stocks on the Bombay Stock Exchange. The 30 stocks arechosen at randomtimes, whenever the markethas significantly changed enough to warrant thechanges, and are chosen by thevalue of theirfree floatshares. Although the index only tracks avery small percentageof the total stocks traded on the BSE, the index typically comprises about

one fifth of the market capitalization of the entirestockexchange.

Certificate Of Deposit - CD

What Does Certificate Of Deposit - CD Mean?A savings certificate entitling the bearer to receive interest. A CD bears a maturity date, aspecified fixed interest rate and can be issued in any denomination. CDs are generally issued bycommercial banks and are insured by the FDIC. The term of a CD generally ranges from onemonth to five years.
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Investopedia explains Certificate Of Deposit - CD

A certificate of deposit is a promissory note issued by a bank. It is a time deposit that restrictsholders from withdrawing funds on demand. Although it is still possible to withdraw the money,this action will often incur a penalty.

For example, let's say that you purchase a $10,000 CD with an interest rate of 5% compoundedannually and a term of one year. At year's end, the CD will have grown to $10,500 ($10,000 *1.05).

CDs of less than $100,000 are called "small CDs"; CDs for more than $100,000 are called "largeCDs" or "jumbo CDs". Almost all large CDs, as well as some small CDs, are negotiable.

A certificate of deposit, also called a CD, is a typeof savings certificate. A client deposits a certain amount of funds with a bank for a

fixed period, usually from one to five years although longer terms are possible, andin return is guaranteed a locked interest rate which is higher than that of atraditional savings account. For people who want non-risky methods of investmentwith guaranteed returns, such as the elderly, youth wanting to set money aside, orpeople with limited funds, a certificate of deposit is an excellent investmentalternative, because when the certificate of deposit is held by an Federal DepositInsurance Corporation (FDIC) insured bank and is for less than $100,000 US Dollars(USD), the client will never lose his or her money.

Fixed deposits are loanarrangements where a specific amount of funds is placed on deposit under thename of the account holder. The money placed on deposit earns a fixed rate ofinterest, according to the terms and conditions that govern the account. The actualamount of the fixed rate can be influenced by such factors at the type of currencyinvolved in the deposit, the duration set in place for the deposit, and the locationwhere the deposit is made.

Money Market: Introduction

Printer friendly version (PDF format)Whenever a bear market comes along, investors realize (yet again!) that the stock market is arisky place for their savings. It's a fact we tend to forget while enjoying the returns of a bullmarket! Unfortunately, this is part of the risk-return tradeoff. To get higher returns, you have totake on a higher level of risk. For many investors, a volatile market is too much to stomach -the money market offers an alternative to these higher-risk investments.
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The money market is better known as a place for large institutions and government to managetheir short-term cash needs. However, individual investors have access to the market through avariety of different securities. In this tutorial, we'll cover various types of money market

securities and how they can work in your portfolio.

Money Market: What Is It?

Printer friendly version (PDF format)The money market is a subsection of the fixed incomemarket. We generally think of the termfixed income as being synonymous to bonds. In reality, a bond is just one type of fixed incomesecurity. The difference between the money market and the bond market is that the moneymarket specializes in very short-term debt securities (debt thatmatures in less than one year).Money market investments are also called cash investments because of their short maturities.

Money market securities are essentially IOUs issued by governments, financial institutions andlarge corporations. These instruments are veryliquid and considered extraordinarily safe.Because they are extremely conservative, money market securities offer significantly lowerreturns than most other securities.

One of the main differences between the money market and the stock market is that most moneymarket securities trade in very high denominations. This limits access for the individual investor.

Furthermore, the money market is a dealer market, which means that firms buy and sellsecurities in their own accounts, at their own risk. Compare this to the stock market where abroker receives commission to acts as an agent, while the investor takes the risk of holding thestock. Another characteristic of a dealer market is the lack of a central trading floor orexchange.Deals are transacted over the phone or through electronic systems.

The easiest way for us to gain access to the money market is with amoney market mutual funds,or sometimes through a money market bank account. These accounts and funds pool together the
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the TreasuryDirectwebsite.)

The biggest reasons that T-Bills are so popular is that they are one of the few money marketinstruments that are affordable to the individual investors. T-bills are usually issued indenominations of $1,000, $5,000, $10,000, $25,000, $50,000, $100,000 and $1 million. Other

positives are that T-bills (and all Treasuries) are considered to be the safest investments in theworld because the U.S. government backs them. In fact, they are considered risk-free.Furthermore, they are exempt from state and local taxes. (For more on this, see Why docommercial bills have higher yields than T-bills?)

The only downside to T-bills is that you won't get a great return because Treasuries areexceptionally safe. Corporate bonds,certificates of deposit and money market funds will oftengive higher rates of interest. What's more, you might not get back all of your investment if youcash out before the maturity date.

Money Market: Certificate Of Deposit (CD)

Printer friendly version (PDF format)A certificate of deposit(CD) is a time depositwith a bank. CDs are generally issued bycommercial banks but they can be bought through brokerages. They bear a specific maturity date(from three months to five years), a specified interest rate, and can be issued in anydenomination, much like bonds. Like all time deposits, the funds may not be withdrawn ondemand like those in a checking account.

CDs offer a slightly higher yield than T-Bills because of the slightly higherdefault risk for abank but, overall, the likelihood that a large bank will go broke is pretty slim. Of course, theamount of interest you earn depends on a number of other factors such as the current interest rateenvironment, how much money you invest, the length of time and the particular bank youchoose. While nearly every bank offers CDs, the rates are rarely competitive, so it's important toshop around.
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A fundamental concept to understand when buying a CD is the difference betweenannualpercentage yield (APY) and annual percentage rate(APR). APY is the total amount of interestyou earn in one year, taking compound interest into account. APR is simply the stated interestyou earn in one year, without taking compounding into account. (To learn more, read APR vs.APY: How The Distinction Affects You.)

The difference results from when interest is paid. The more frequently interest is calculated, thegreater the yield will be. When an investment pays interest annually, its rate and yield are thesame. But when interest is paid more frequently, the yield gets higher. For example, say youpurchase a one-year, $1,000 CD that pays 5% semi-annually. After six months, you'll receive aninterest payment of $25 ($1,000 x 5 % x .5 years). Here's where the magic of compoundingstarts. The $25 payment starts earning interest of its own, which over the next six monthsamounts to $ 0.625 ($25 x 5% x .5 years). As a result, the rate on the CD is 5%, but its yield is5.06. It may not sound like a lot, but compounding adds up over time.

The main advantage of CDs is their relative safety and the ability to know your return ahead of

time. You'll generally earn more than in a savings account, and you won't be at the mercy of thestock market. Plus, in the U.S. the Federal Deposit Insurance Corporationguarantees yourinvestment up to $100,000.

Despite the benefits, there are two main disadvantages to CDs. First of all, the returns are paltrycompared to many other investments. Furthermore, your money is tied up for the length of theCD and you won't be able to get it out without paying a harsh penalty.

Money Market: Commercial Paper

Printer friendly version (PDF format)

For many corporations, borrowing short-term money from banks is often a laborious andannoying task. The desire to avoid banks as much as possible has led to the widespreadpopularity ofcommercial paper. (See Why do companies issue bonds instead of borrowingfrom the bank? )
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Commercial paper is an unsecured, short-term loan issued by a corporation, typically forfinancing accounts receivable and inventories. It is usually issued at a discount, reflecting currentmarket interest rates. Maturities on commercial paper are usually no longer than nine months,

with maturities of between one and two months being the average.

For the most part, commercial paper is a very safe investment because the financial situation of acompany can easily be predicted over a few months. Furthermore, typically only companies withhighcredit ratings and credit worthiness issue commercial paper. Over the past 40 years, therehave only been a handful of cases where corporations have defaulted on their commercial paperrepayment.

Commercial paper is usually issued in denominations of $100,000 or more. Therefore, smallerinvestors can only invest in commercial paper indirectly through money market funds.

Money Market: Banker's Acceptance

Printer friendly version (PDF format)A bankers' acceptance (BA) is a short-term credit investment created by a non-financial firm andguaranteed by a bank to make payment. Acceptances are traded at discounts fromface value inthe secondary market.
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For corporations, a BA acts as a negotiable time draft for financing imports, exports or othertransactions in goods. This is especially useful when the creditworthiness of a foreign tradepartner is unknown.

Acceptances sell at a discount from the face value:

Face Value of Banker's Acceptance $1,000,000

Minus 2% Per Annum Commission for One Year -$20,000

Amount Received by Exporter in One Year $980,000

One advantage of a banker's acceptance is that it does not need to be held until maturity, and canbe sold off in the secondary markets where investors and institutions constantly trade BAs.

Money Market: Eurodollars

Printer friendly version (PDF format)Contrary to the name, eurodollars have very little to do with the euroor European countries.Eurodollars are U.S.-dollar denominated deposits at banks outside of the United States. Thismarket evolved in Europe (specifically London), hence the name, but eurodollars can be heldanywhere outside the United States.
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The eurodollar market is relatively free of regulation; therefore, banks can operate onnarrowermargins than their counterparts in the United States. As a result, the eurodollar markethas expanded largely as a way of circumventing regulatory costs.

The average eurodollar deposit is very large (in the millions) and has a maturity of less than sixmonths. A variation on the eurodollar time deposit is the eurodollar certificate of deposit. Aeurodollar CD is basically the same as a domestic CD, except that it's the liability of a non-U.S.bank. Because eurodollar CDs are typically less liquid, they tend to offer higher yields.

The eurodollar market is obviously out of reach for all but the largest institutions. The only wayfor individuals to invest in this market is indirectly through a money market fund

Money Market: Repos

Printer friendly version (PDF format)Repo is short for repurchase agreement. Those who deal ingovernment securitiesuse repos as aform of overnight borrowing. A dealer or other holder of government securities (usually T-bills)sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreedprice. They are usually very short-term, from overnight to 30 days or more. This short-termmaturity and government backing means repos provide lenders with extremely low risk.
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Repos are popular because they can virtually eliminate credit problems. Unfortunately, a numberof significant losses over the years from fraudulent dealers suggest that lenders in this markethave not always checked theircollateralization closely enough.

There are also variations on standard repos:

Reverse Repo - The reverse repo is the complete opposite of a repo. In this case, a dealerbuys government securities from an investor and then sells them back at a later date for ahigher price

Term Repo - exactly the same as a repo except the term of the loan is greater than 30days.

Real Time Gross Settlement From Wikipedia, the free encyclopedia Jump to: navigation,search Real time gross settlement systems (RTGS) are funds transfer systems where transfer of

money or securities[1] takes place from one bank to another on a "real time" and on"gross" basis. Settlement in "real time" means payment transaction is not subjected to anywaiting period. The transactions are settled as soon as they are processed. "Grosssettlement" means the transaction is settled on one to one basis without bunching ornetting with any other transaction. Once processed, payments are final and irrevocable.

Real Time Gross Settlement

The acronym 'RTGS' stands for Real Time Gross Settlement.The Reserve Bank of India (India'sCentral Bank) maintains this payment network. RTGS system is a funds transfer mechanismwhere transfer of money takes place from one bank to another on a 'real time' and on 'gross'basis. This is the fastest possible money transfer system through the banking channel. Settlementin 'real time' means payment transaction is not subjected to any waiting period. The transactionsare settled as soon as they are processed. 'Gross settlement' means the transaction is settled onone to one basis without bunching with any other transaction. Considering that money transfer
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takes place in the books of the Reserve Bank of India, the payment is taken as final andirrevocable.

Fees for RTGS vary from bank to bank. Both the remitting and receiving must have Corebanking in place to enter into RTGS transactions. Core Banking enabled banks and branches

have assigned RTGS 11-characteralphanumeric codes, which are required for transactions alongwith recipient's account number.

RTGS is a large value (minimum value of transaction should be Rs. 1,00,000) funds transfersystem whereby financial intermediaries can settle interbank transfers for their own account aswell as for their customers. The system effects final settlement of interbank funds transfers on acontinuous, transaction-by-transaction basis throughout the processing day. Customers canaccess the RTGS facility between 9 am to 4:30 pm on week days and 9 am to 12 noon onSaturday [1].

The statistics of transactions for the month of March 2004 shows that in the interbank market

transactions involving 45,000 instruments and aggregating Rs. 1,79,000 crore (1,790 billion)were settled. High valueinstruments (3,17,000) settlement aggregated Rs. 2,74,000 crore(2,740 billion). However, settlement ofMICRinstruments (145 lakhs) accounted for onlyRs. 54,000 crore (540 billion). RTGS will eliminate settlement risk in the case of interbank andhigh value transactions.

Banks could use balances maintained under the cash reserve ratio(CRR) instead of the intra-dayliquidity (IDL) to be supplied by the central bank for meeting any eventuality arising out of thereal time gross settlement (RTGS). The RBI fixed the IDL limit for banks to three times their netowned fund (NOF).

The IDL will be charged at Rs 25 per transaction entered into by the bank on the RTGS platform.The marketable securities andtreasury bills will have to be placed as collateral with a margin offive per cent. However, the apex bank will also impose severe penalties if the IDL is not paidback at the end of the day.

The RTGS service window for customer's transactions is available from 9.00 hours to 16.30hours on week days and from 9.00 hours to 12.30 noon on Saturdays for settlement at the RBIend. However, the timings that the banks follow may vary depending on the customer timings ofthe bank branches.

What Does Beta Mean?

A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to themarket as a whole. Beta is used in the capital asset pricing model (CAPM), a model thatcalculates the expected return of an asset based on its beta and expected market returns..

Also known as "beta coefficient".
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Investopedia explains Beta

Beta is calculated using regression analysis, and you can think of beta as the tendency of asecurity's returns to respond to swings in the market. A beta of 1 indicates that the security'sprice will move with the market. A beta of less than 1 means that the security will be less volatilethan the market. A beta of greater than 1 indicates that the security's price will be more volatile

than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than themarket.

Many utilities stocks have a beta of less than 1. Conversely, most high-tech Nasdaq-based stockshave a beta of greater than 1, offering the possibility of a higher rate of return, but alsoposing more risk.

What is a Floating Rate?

Interest rates and exchange rates are an everyday part of the worlds economic life.Any time that currency is borrowed, loaned, or exchanged for another type ofcurrency, these rates come into play. These rates can be fixed at a certain value, orcan be free to change with market fluctuations and other changing conditions. Arate that changes with market conditions on a periodic basis is called a floatingrate.

Re: WHAT IS MEAN BY SHARE & DEBENTURE? WHAT IS THE DIFFERENCEBETWEEN THEM?Answer# 1share:A unit of ownership interest in a corporation or

financial asset. While owning shares in a business does not

mean that the shareholder has direct control over the

business's day-to-day operations, being a shareholder does

entitle the possessor to an equal distribution in any

profits, if any are declared in the form of dividends. The

two main types of shares are common shares and preferred

shares.

Debenture:A certificate or voucher acknowledging a debt.

An unsecured bond issued by a civil or governmental

corporation or agency and backed only by the credit

standing of the issuer.

Difference:A debenture is an unsecured loan you offer to a

company. The company does not give any collateral for the

debenture, but pays a higher rate of interest to its

creditors. In case of bankruptcy or financial difficulties,the debenture holders are paid later than bondholders.

Debentures are different from stocks and bonds, although

all three are types of investment. Below are descriptions

of the different types of investment options for small

investors and entrepreneurs.

Debentures and Shares

When you buy shares, you become one of the owners of the
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company. Your fortunes rise and fall with that of the

company. If the stocks of the company soar in value, your

investment pays off high dividends, but if the shares

decrease in value, the investments are low paying. The

higher the risk you take, the higher the rewards you get.

Debentures are more secure than shares, in the sense that

you are guaranteed payments with high interest rates. The

company pays you interest on the money you lend it until

the maturity period, after which, whatever you invested in

the company is paid back to you. The interest is the profit

you make from debentures. While shares are for those who

like to take risks for the sake of high returns, debentures

are for people who want a safe and secure income.

Initial public offering

From Wikipedia, the free encyclopediaJump to: navigation,search"IPO" redirects here. For other uses, seeIPO (disambiguation).

This article has multiple issues. Please help improve itor discuss these issues on thetalk page.

Its references would be clearer with a different or consistent style ofcitation,footnotingorexternal linking. Tagged since September 2009.

Its factual accuracy isdisputed.Tagged since December 2009. It may not present aworldwide view of the subject. Tagged since August 2010.

It reads like a personal reflection oressay. Tagged since December 2009.

An initial public offering (IPO), referred simply as an "offering" or "flotation", is when acompany (called the issuer) issuescommon stockorshares to the public for the first time. Theyare often issued by smaller, younger companies seeking capital to expand, but can also be doneby large privately-owned companies looking to become publicly traded.

In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determinewhat type ofsecurity to issue (common orpreferred), best offering price and time to bring it tomarket.

An IPO can be a risky investment. For the individual investor it is tough to predict whatthe stock or shares will do on its initial day of trading and in the near future sincethere is often little historical data with which to analyze the company. Also, most
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IPOs are of companies going through a transitory growth period, and they aretherefore subject to additional uncertainty regarding their future value.

he Stock Market - A Beginner's Guide

The stock market is a creature in and of itself. At times it makes sense and at other times, no onecan explain why it acts the way it does. What is clear is that, over the long run, the stock marketwill climb and climb faster than almost any other traditional investment. With that said, there arealso moments (that sometimes last years) when the value of the stock market gets out of whackwith the underlying companies and with the economy. Ill try to explain my views below.

How the stock market works.

How stocks are valued.

Why the stock market is a good investment (in the long term).

Why the stock market gets out of whack with reality.

Recommended ways to invest in the stock market.

How the stock market works.

The stock market is driven by supply and demand. The number of shares of stock dictates thesupply and the number of shares that investors want to buy dictates the demand. It's important tounderstand the for every share that is purchased, there is someone on the other end selling thatshare (or vice versa). The stock market is really just a big, automated superstore where everyonegoes to buy and sell their stock. The main players in the stock market are the exchanges.Exchanges are where the sellers are matched with buyers to both facilitate trading and to help setthe price of the shares. The primary exchanges are the Nasdaq, the New York Stock Exchange(NYSE), all of the ECNs (electronic communication networks) and a few other regionalexchanges like the American Stock Exchange and the Pacific Stock Exchange. Years ago, all ofthe trading was done through the traditional exchanges (like the NYSE, American and PacificExchanges) but now almost all of the trading is done through the Nasdaq, which uses ECNs andthousands of other firms with access to the Nasdaq to facilitate trading.

Here's an example of one of the many ways that the stock market works:

You open an account with E*Trade. You send E*Trade a check for $1,000. E*Trade depositsthe check into a trading account that is listed under your name. You log onto E*Trade and placean order to buy 100 shares of a stock in Company A, which is currently trading at $5. E*Tradeuses it's network to tell the Nasdaq and all of it's related networks that there is demand for 100shares of Company A's stock. The Nasdaq finds someone who is willing to sell 100 shares of
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Company A and, instantaneously, they execute the trading of stock between you and the personselling the shares. The trade information is sent to a clearinghouse where the information isprocessed and the shares will now be registered to you. Basically, the clearinghouse willdesignate 100 shares of Company A to E*Trade and E*Trade will designate those 100 shares asyours. The actual stock certificates are typically held "in street name" and never really need to

exchange hands (although you could request that the stock certificates be transferred to yourname).

In a nutshell, that's how the stock market works. The stock market is really just like any othermarketplace - it facilitates the exchange of goods between interested parties and works to reducedistribution costs and set prices.

How stocks are valued.

Stocks have two types of valuations. One is a value created using some type of cash flow, salesor fundamental earnings analysis. The other value is dictated by how much an investor is willingto pay for a particular share of stock and by how much other investors are willing to sell a stockfor (in other words, by supply and demand). Both of these values change over time as investorschange the way they analyze stocks and as they become more or less confident in the future ofstocks. Let me discuss both types of valuations.

First, the fundamental valuation. This is the valuation that people use to justify stock prices.The most common example of this type of valuation methodology is P/E ratio, which stands forPrice to Earnings Ratio. This form of valuation is based on historic ratios and statistics and aimsto assign value to a stock based on measurable attributes. This form of valuation is typically

what drives long-term stock prices.

The other way stocks are valued is based on supply and demand. The more people that want tobuy the stock, the higher its price will be. And conversely, the more people that want to sell thestock, the lower the price will be. This form of valuation is very hard to understand or predict,and is often drives the short-term stock market trends.

Why the stock market is a good investment (in the long term).

Its all about risk and return, and because your money is at more risk in the stock market than ifyou park it in a savings or CD (by the way, the money you invest in a CD is probably reinvestedby the company offering the CD), the potential return is higher. Its true that the gyrations in thestock market can cause both large losses and large gains, but if your investment time horizon islong enough, these short-term fluctuations will result in relatively high returns. It is generallyaccepted, that the average long term return from investing in stocks is 10-12%. This is muchhigher than the average CD or savings rate of 4-6%.


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Why the stock market gets out of whack with reality.

Over the long term, the stock market is driven by underlying economic, financial and global

growth. But in the short run, the market is driven by simple greed and fear, which are dictated byhuman emotions. During periods of prosperity, the stock market often rises faster thanunderlying earnings. During tough economic times, political uncertainty, and low consumerconfidence, the stock market often performs worse than the underlying fundamentals predict.

Recommend ways to invest in the stock market.

Dont try to time the market. As tempting as it is to try, it is not possible to time thestock market. People have written millions of pages of research on this topic and NO

ONE has ever found a legitimate way to determine its trends. Use cost averaging. By buying stocks on a periodic basis (like once a paycheck, once a

month or even once a year), you will always be buying at an average price. If you try totime the market, you may be buying at a high or low valuation.

Take taxes into account. When you buy stocks, try to hold them for more than one yearso you get taxed at the long term capital gains rate, which is currently 18%. If you sellyour stock before one year, you will be taxed at your ordinary income tax rate, which isalmost always higher than 18%, sometimes twice as high.

Invest as much as possible into tax-sheltered 401K, 403B and IRAs. By investing intax deferred plans, you are able to invest money and not worry about the taximplications. With 401K and 403B plans, you get to invest your earnings before taxes, so

the investment will grow on a higher base. For example, if you received a paycheck for$2,000 gross pay and taxes were taken out, you'd be left with only $1,200 or so to invest.The investment return on $1,200 could be substantial, but if you could invest that same$2,000 in a tax deferred account, you would be investing and earning a return on $2,000instead of $1,200. Also, many employers offer matching investments that could makethat $2,000 investment equivalent to a $4,000 investment. Put as much as you can intothese tax deferred investments.

Diversify your investments. Don't just invest in stocks. It is better if you diversifyyour investments into other asset classes including real estate (a house), cash (savingsaccount or CD) and maybe even bonds. That way, if one asset class reallyunderperforms, you will have some exposure to the better performing assets.

Diversify your stocks (mutual funds). When investing in the stock market, don't loadup on just one or two stocks. Diversify your investments across many stocks. If yourportfolio is not large enough to buy 15 or more different stocks, you should considerpurchasing one or more mutual funds to ensure diversification.

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