BANKING TERMS

RBI – The Reserve Bank of India is the apex bank of the country, which was constituted under the RBI Act, 1934 to regulate the other banks, issue of bank notes and maintenance of reserves with a view to securing the monetary stability in India.

Demand Deposit – A Demand deposit is the one which can be withdrawn at any time, without any notice or penalty; e.g. money deposited in a checking account or savings account in a bank.

Time Deposit – Time deposit is a money deposit at a banking institution that cannot be withdrawn for a certain "term" or period of time. When the term is over it can be withdrawn or it can be held for another term.

Fixed Deposits – FDs are the deposits that are repayable on fixed maturity date along with the principal and agreed interest rate for the period. Banks pay higher interest rates on FDs than the savings bank account.

Recurring Deposits – These are also called cumulative deposits and in recurring deposit accounts, a certain amounts of savings are required to be compulsorily deposited at specific intervals for a specified period.

Savings Account – Savings account is an account generally maintained by retail customers that deposit money (i.e. their savings) and can withdraw them whenever they need. Funds in these accounts are subjected to low rates of interest.

Current Accounts – These accounts are maintained by the corporate clients that may be operated any number of times in a day. There is a maintenance charge for the current accounts for which the holders enjoy facilities of easy handling, overdraft facility etc.

FCNR Accounts – Foreign Currency Non-Resident accounts are the ones that are maintained by the NRIs in foreign currencies like USD, DM, and GBP etc. The account is a term deposit with interest rates linked to the international rates of interest of the respective currencies.

NRE Accounts – Non-Resident External accounts are the ones in which NRIs remit money in any permitted foreign currency and the remittance is converted to Indian rupees for credit to NRE accounts. The accounts can be in the form of current, saving, FDs, recurring deposits. The interest rates and other terms of these accounts are as per the RBI directives.

Cheque Book - A small, bound booklet of cheques. A cheque is a piece of paper produced by your bank with your account number, sort-code and cheque number printed on it. The account number distinguishes your account from other accounts; the sort-code is your bank's special code which distinguishes it from any other bank.

Cheque Clearing - This is the process of getting the money from the cheque-writer's account into the cheque receiver's account.

Clearing Bank - This is a bank that can clear funds between banks. For general purposes, this is any institution which we know of as a bank or as a provider of banking services.

Bounced Cheque - when the bank has not enough funds in the relevant account or the account

holder requests that the cheque is bounced (under exceptional circumstances) then the bank will return the cheque to the account holder.

Credit Rating - This is the rating which an individual (or company) gets from the credit industry. This is obtained by the individual's credit history, the details of which are available from specialist organisations like CRISIL in India.

Credit-Worthiness - This is the judgement of an organization which is assessing whether or not to take a particular individual on as a customer. An individual might be considered credit-worthy by one organisation but not by another. Much depends on whether an organization is involved with high risk customers or not.

Interest - The amount paid or charged on money over time. If you borrow money interest will be charged on the loan. If you invest money, interest will be paid (where appropriate to the investment).

Overdraft - This is when a person has a minus figure in their account. It can be authorized (agreed to in advance or retrospect) or unauthorized (where the bank has not agreed to the overdraft either because the account holder represents too great a risk to lend to in this way or because the account holder has not asked for an overdraft facility).

Payee - The person who receives a payment. This often applies to cheques. If you receive a cheque you are the payee and the person or company who wrote the cheque is the payer.

Payer - The person who makes a payment. This often applies to cheques. If you write a cheque you are the payer and the recipient of the cheque is the payee.

Security for Loans - Where large loans are required the lending institution often needs to have a guarantee that the loan will be paid back. This takes the form of a large item of capital outlay (typically a house) which is owned or partly owned and the amount owned is at least equivalent to the loan required.

Internet Banking - Online banking (or Internet banking) allows customers to conduct financial transactions on a secure website operated by the bank.

Credit Card - A credit card is one of the systems of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services.

Debit Card – Debit card allows for direct withdrawal of funds from customers bank accounts. The spending limit is determined by the available balance in the account.

Loan - A loan is a type of debt.  In a loan, the borrower initially receives or borrows an amount of money, called the principal, from the lender, and is obligated to pay back or repay an equal amount of money to the lender at a later time. There are different kinds of loan such as the house loan, auto loan etc.

Bank Rate - This is the rate at which central bank (RBI) lends money to other banks or financial institutions.   If the bank rate goes up, long-term interest rates also tend to move up, and vice-versa.

CRR - Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks.

SLR - SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities.  Thus, we can say that it is ratio of cash and some other approved to liabilities (deposits). It regulates the credit growth in India.

ATM - An automated teller machine (ATM) is a computerised telecommunications device that provides the clients with access to financial transactions in a public space without the need for a cashier, human clerk or bank teller. On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic smart card with a chip, that contains a unique card number and some security information such as an expiration date or CVV. Authentication is provided by the customer entering a personal identification number (PIN)

REPO RATE: - Under repo transaction the borrower places with the lender certain acceptable securities against funds received and agree to reverse this transaction on a predetermined future date at agreed interest cost. Repo rate is also called (repurchase agreement or repurchase option).

REVERSE REPO RATE:  is the interest rate earned by the bank for lending money tothe RBI in exchange of govt. securities or "lender buys securities with agreement to sell them back at a predetermined rate".

CASH RESERVE RATIO:  specifies the percentage of their total deposits the commercial bank must keep with central bank or RBI. Higher the CRR lower will be the capacity of bank to create credit.

SLR:  known as Statutorily Liquidity Ratio. Each bank is required statutorily maintain a prescribed minimum proportion of its demand and time liabilities in the form of designated liquid asset.

OR

"Every bank has to maintain a percentage of its demand and time liabilities by way of cash, gold etc".

BANK RATE:  is the rate of interest which is charged by RBI on its advances to commercial banks. When reserve bank desires to restrict expansion of credit it raises the bank rate there by making the credit costlier to commercial bank.

OVERDRAFT: It is the loan facility on customer current account at a bank permitting him to overdraw up to a certain agreed limit for a agreed period ,interest is payable only on the amount of loan taken up.

PRIME LENDING RATE: It is the rate at which commercial banks give loan to its prime customers.

Fiscal cliff

Fiscal cliff is a newly coined term in USA, referring to the effect of a number of laws which, if unchanged, could result in tax increases, spending cuts, and a corresponding reduction in the budget deficit beginning in 2013. These laws include tax increases due to the expiration of the so-called Bush tax cuts and across-the-board spending cuts under the Budget Control Act of 2011. The year-over-year changes for fiscal years 2012–13 include a 19.63% increase in tax revenue and 0.25% reduction in spending. The US Congressional Budget Office estimates that allowing certain laws on the books during 2012 to expire or take effect in 2013 (the baseline scenario) would cut the 2013 deficit approximately in half and significantly reduce the trajectory of future deficits and debt increases for the next decade and beyond. However, the 2013 deficit reduction would adversely impact the economy in the short-run. On the other hand, if Congress acts to extend current policies (the alternative scenario), deficits and debt will rise rapidly over the next decade and beyond, slowing the economy over the long run and dramatically increasing interest costs. Many experts have argued that the U.S. should avoid the fiscal cliff while taking steps to bring the long-term deficit and debt trajectory under control. For example, economist Paul Krugman recommended that the US focus on employment in the short-run, rather than the deficit. Federal Reserve Chair Ben Bernanke emphasized the importance of balancing long-term deficit reduction with actions that would not slow the economy in the short-run. Charles Konigsburg, who directed the bi-partisan Domenici-Rivlin deficit reduction panel, advocated avoiding the fiscal cliff while taking steps to reduce the budget deficit over time. He recommended the adoption of ideas from deficit panels such as Domenici-Rivlin and Bowles-Simpson that accomplish these two goals.

Banking Glossary

ATM
An automated teller machine (ATM) is a machine in which a customer can use his card along with PIN to get cash, information and other services.
Bank Guarantee
Bank guarantee is a promise by a bank on behalf of its customer to a third party to pay an amount specified in the guarantee deed in case the customer fails to perform the obligation as stipulated in the deed.
Banking Ombudsman
Banking Ombudsman is an independent dispute resolution authority set up by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services.
Bills
Bills are financial negotiable instruments such as Bills of Exchange or Promissory Notes. Bill of Exchange is issued by a seller to his buyer directing him to make payment for the goods supplied/ services rendered. Bill in the form of a promissory note is issued by a buyer to his seller undertaking to make payment for the goods received/ services rendered.
Bill Purchase / Discounting
Bill purchase / discounting are modes of extending credit to the seller of goods who has raised demand / usance bill of exchange. Demand bills are purchased and usance bills are discounted.
Card
Card is a general term for any plastic card, which a customer may use to pay for goods and services or to withdraw cash. In this Code, it includes ATM/ Smart/Debit/Credit cards.
Cash Credit/Overdraft
Cash credit/overdraft is a form of credit facility in which a borrower is sanctioned a pre- arranged limit with the freedom to borrow as much money as he requires. In case of flow of credit to the account, he can withdraw afresh subject to the limit sanctioned. As such, the limit works as a revolving line of credit. Bank charges interest on the outstanding balances.
Cash losses
Cash losses mean net losses minus depreciation.
Cheque Collection Policy
Cheque Collection Policy refers to the policy followed by a bank in respect of various local and outstation cheques and instruments deposited with the bank for credit to an account.
Compensation Policy
Compensation Policy refers to the policy followed by a bank for compensating its customers for the financial losses incurred by them (the customers) due to the acts of omission or commission on the part of the bank.
Credit facilities/ Bank Loan
Credit facilities from the bank may be in the form of a term loan or in the form of overdraft or cash credit that is extended by a bank to its customer for a specified period and he is charged interest on the outstanding balances.
Credit Information Companies (CICs)
Credit Information Companies are companies formed and registered under the Companies Act, 1956 and which have been granted a Certificate of Registration by the Reserve Bank. These companies are empowered to collect data on credit from credit institutions who are its members and disseminate
the same after analysis, to its members and specified users.
Current Account
A form of demand deposit wherefrom withdrawals are allowed any number of times depending upon the balance in the account or up to a particular agreed amount.
Customer
An MSE or its authorised representative who has an account with a bank or who avails of other products/ services from a bank.
Deceased account
A Deceased account is a deposit account in which case either the single account holder has deceased or in case of joint accounts one or more of joint account holders has/have deceased.
Demat accounts
A Demat account refers to dematerialised account and is an account in which the stocks of investors are held in electronic form.
Deposit Accounts
• “Savings deposits” means a form of demand deposit which is subject to restrictions as to the number of withdrawals as also the amounts of withdrawals permitted by the bank during any specified period.
• “Term deposit” means a deposit received by the bank for a fixed period withdrawable only after the expiry of the fixed period and includes deposits such as Recurring/Short Deposits/Fixed Deposits/ Monthly Income Certificate/Quarterly Income Certificate etc.
• “Notice Deposit” means term deposit for specific period but withdrawable on giving at least one complete banking day’s notice.
Electronic Clearing Service
The Electronic Clearing Service (ECS) is an online transmission system which permits the electronic transmission of payment information by the banks/branches to the Automated Clearing House (ACH) via a communication network.
Electronic Funds Transfer
Electronic Funds Transfer (EFT) is a scheme introduced by RBI to help banks to offer their customers facility of transfer of funds from account to account from one bank branch to another in places where EFT service is available.
Equity
Equity means a part of capital of a corporate entity that is represented by the shares of the company whether in physical or dematerialised form.
Factoring
Factoring is a financial option for the management of receivables. It is the conversion of credit sales into cash.
Government bond
Government bond means a security, created and issued by the Central or State Government for raising a public loan.
Guarantee
A promise given by a person.
Improper conduct of account 
Issuing of cheque on the account without sufficient balance in the account; frequent returns of inward / outward cheques in the account; account has been overdrawn, or the account holder has exceeded its agreed credit limit; non compliance of KYC procedure; fraud/malfeasance or fraudulent intention exhibited by the customer; suspicious transactions/ engagement in money laundering activity under the scope of PMLA Act, 2002 etc. are instances of improper conduct of account.
Letter of Credit
A letter of credit is a document issued by a bank, which usually provides an irrevocable undertaking for payment to a beneficiary against submission of documents as stated in the Letter of Credit.
Mail
Mail is a letter in a physical or electronic form.
Merchant Services
Merchant services generally refer to merchant accounts allowed to trading and service establishments for acceptance of payments through credit/ debit cards. The cards may be accepted over the counter through card terminals i.e. Point of Sale (POS) machines or over phone or through internet.
Micro and Small Enterprises
Micro and Small Enterprises are those enterprises engaged in manufacturing or rendering services.
A micro enterprise is defined as:
An enterprise engaged in the manufacture or production of goods pertaining to any industry where the investment in plant and machinery does not exceed Rs. 25 lakh
or
An enterprise engaged in rendering services where investment in equipment does not exceed Rs. 10 lakh.
A small enterprise is defined as :
An enterprise engaged in manufacture or production of goods pertaining to any industry where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore
or
An enterprise engaged in rendering services where investment in equipment is more than Rs. 10 lakh but does not exceed Rs. 2 crore.
National Electronic Funds Transfer
National Electronic Funds Transfer (NEFT) system is a nation-wide funds transfer system to facilitate transfer of funds from one bank branch to any other bank branch in the country.
Net worth
Net worth means sum of Capital and free reserves minus accumulated losses.
Nomination Facility
The nomination facility enables the bank to: make payment to the nominee of a deceased depositor, of the amount standing to the credit of the depositor, return to the nominee, the articles left by a deceased person in the bank’s safe custody, release to the nominee of the hirer, the contents of a safety locker, in the event of death of the hirer.
Non-Fund based facility
Non-fund based facilities are such facilities extended by banks which do not involve outgo of funds from the bank when the customer avails the facilities but may at a later date crystallise into financial liability if the customer fails to honour the commitment made by availing these facilities. Non-fund based facilities are generally extended in the form of Bank Guarantees, Acceptances and Letters of Credit.
Non Performing Asset
A Non Performing Asset (NPA) is a loan or an advance where
i) interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan.
ii) the account remains ‘out of order’ in respect of an Overdraft/Cash Credit (OD/CC).
iii) the bill remains overdue for a period of more than 90 days in the case of bills purchased or discounted.
Originator
An organisation which collects payments from a customer’s account in line with customer’s instructions.
Other Security Information
A selection of personal facts and information (in an order which the customer knows), which may be used for identification when using accounts.
Out-of-date (stale) cheque
A cheque, which has not been paid because the date written on the cheque is a date exceeding three months from the time of its presentation.
‘Out of Order’ status
An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’.
Overdue
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.
PAN
The Permanent Account Number (PAN) is an all India unique Number having ten alphanumeric characters allotted by the Income Tax Department, Government of India. It is issued in the form of a laminated card. It is permanent and will not change with change of address of the assessee or change of Assessing Officer.
Password
A word or a set of numbers or an alphanumeric combination for an access code, which the customer has chosen, to allow him to use a phone or Internet banking service. It is also used for identification.
Payment and Settlement System
Payment and Settlement System means financial system creating the means for transferring money between suppliers and user of funds usually by exchanging debits or credits among financial institutions.
PIN
A confidential number, use of which along with a card allows customers to pay for articles/services, withdraw cash and use other electronic services offered by the bank.
Real Time Gross Settlement
The acronym ‘RTGS’ stands for Real Time Gross Settlement. RTGS system offers the fastest means of transfer of funds through banking channel. Settlement of transactions under RTGS takes place on one-to-one basis, which is termed as ‘Gross’ settlement and in ‘real time’ i.e. without any waiting period.
Reasonable
Governed by or being in accordance with reason and sound thinking; being within the bounds of common sense; not excessive or extreme.
Repossession
Repossession is the process by which a creditor with a loan secured on house or goods (e.g. car) takes possession of the security, if the debtor does not repay as per the terms of the loan agreement.
Rehabilitation Package
Rehabilitation package is the package drawn for the rehabilitation of a sick unit. The package has to be drawn in accordance with the RBI stipulations and it usually consists of
i) Working Capital with relaxation in the rate of interest in terms of regulatory guidelines
ii) Funded Interest Term Loan
iii) Working Capital Term Loan
iv) Term Loan
v) Contingency Loan Assistance
Smart Cards
A smart card is a plastic card about the size of a credit card, with an embedded microchip which can process data. It provides a secure way of identification, authentication and storage of data. It can be used for telephone calling, electronic cash payments, and other applications.
Security
Represents assets used as support for a loan or other liability. In the event of the borrower defaulting on the loan, the lender bank can claim these assets in lieu of the sum owed.
Primary security is the asset created out of the credit facility extended to the borrower and / or which is directly associated with the business / project of the borrower for which the credit facility has been extended.
Collateral security is any other security offered for the said credit facility. For example, hypothecation of jewellery, mortgage of house etc. Services
i) In respect of small and micro service enterprises, services refer to small road and water transport operators, small business, professional and self-employed persons, and all other service enterprises.
ii) Services rendered by the banks include various facilities like remittance (issue of DDs, MTs, TTs etc), receipt and payment of cash, exchange of notes and foreign exchange etc. provided by the banks to the customers.
Sick Unit
Sick unit refers to a unit whose account has remained substandard for more than six months or there has been erosion in net worth due to accumulated cash losses to the extent of 50% of the net worth during the previous accounting year and the unit has been in commercial production for at least
two years.
Substandard
A substandard asset would be one, which has remained NPA for a period less than or equal to 12 months.
Tariff Schedule
The schedule containing charges levied by a bank on the products and services offered by it to its customers.
Unpaid Cheque
This is a cheque, which is returned ‘unpaid’ (bounced) by the drawee bank.

Banking Terms

AIDB- All India Development Bank


ATM- Automated Teller Machine is a machine uses a computer that verifi es your account information and PIN (Personal Identification Number) and will dispense or deposit funds per your request)Annuity- Fixed amount of cash to be received every year for a specified period of time

Asset/Liability Risk- A risk that current obligations/ liabilities cannot be met with current assets.
Assets- Things that one owns which have value in financial terms.

Banking Cash Transaction Tax (BCTT) - BCTT is a small tax on cash withdrawal from bank exceeding a particular amount in a single day

Bank Credit – Bank Credit includes Term Loans, Cash Credit, Overdrafts, Bills purchased & discounted, Bank Guarantees, Letters of Guarantee, Letters of credit.

Bank Debits - Sum of the value of all cheques and other instruments charged against the deposited funds of a bank’s customer.

Bank Rate - Interest rate paid by major banks if they borrow from RBI, the Central Bank of the country.

Bank Statement - A periodic record of a customer’s account that is issued at regular intervals, showing all transactions recorded for the period in question

Basis Point- Basis Point is one-hundredth of one percentage point (i.e. 0.01%), normally used for indicating spreads or cost of finance.

Balance of Payment (BoP) – BoP is a statement showing the country’s trade and financial transactions (all economic transactions), in terms of net outstanding receivable or payable from other countries, with the rest of the world for a period of time

BR Act - Banking Regulation Act

Cash reserve Ratio (CRR) - CRR is the amount of funds that the banks have to keep with the RBI. If the central bank decides to increase the CRR, the available amount with the banks comes down

CAD- current account deficit

Capital Adequacy Ratio (CAR) – CRR is a ratio of total capital divided by risk-weighted assets and risk-weighted off-balance sheet items.

Cash Credit (CC) - An arrangement whereby the bank gives a short-term loan against the self-liquidating security

Certificate of Deposit (CD) - CD is a negotiable instrument issued by a bank evidencing time deposit

Cheque - A written order on a bank instrument for payment of a certain amount of money.

C-D ratio- Credit- Deposit Ratio

Corporate Banking - Banking services for large firms

CRAR - Capital to Risk-Weighted Assets Ratio

Credit Crunch - Fall in supply of credit even though there is sufficient demand for it

Cross default - Two loan agreements connected by a clause that allows one lender to recall the loan if the borrower defaults with another, and vice versa.

Deposit: A check or cash that is put into your bank account.

Endorse: To sign the back of your check before cashing or depositing it, as proof that you are the person the check was written out to.

Equitable mortgage - Mortgage under which one still owns the property which is security for the mortgage. The owner can occupy or live in the property

Exchange Rate - The rate at which one currency may be exchanged for another

FRNs - Floating Rate Notes

Fixed assets - Assets such as land, buildings, machinery or property used in operating a business that will not be consumed or converted into cash during the current accounting period

Fixed Rate - A predetermined rate of interest applied to the principal of a loan or credit agreement

IFSC Code - Indian Financial System Code or IFSC code is an eleven character code assigned by RBI to identify every bank branches uniquely, that are participating in NEFT system in India

Liquidation – Liquidation is divestment of all the assets of a firm so that the firm ceases to exist

Liquidity- The extent to which or the ease with which an asset may quickly be converted into cash with the least administrative and other costs

Letter of Credit (LC) - A formal document issued by a bank on behalf of a customer, stating the conditions under which the bank will honour the commitments of the customer

Line of Credit - pre-approved credit facility (usually for one year) enabling a bank customer to borrow up to the specified maximum amount at any time during the relevant period of time.

MICR- Magnetic Ink Character Recognition or MICR is the bottom line on all checks. It is printed using a special font.

Monthly Statement: statement received by customers at the end of the month about the account’s activity (what went in and what came out) from the previous month.

NEFT- national electronic funds transfer

Non Performing Assets (NPA) - When due payments in credit facilities remain overdue above a specified period, then such credit facilities are classified as NPA.

NBFCs- Non-banking Finance Companies

NHB- National Housing Bank

Overdraw: To write a check for more money than what is present in the account. Usually there is a fee (known as NSF/non-sufficient funds)

Principal- Principal is the amount of debt that must be repaid. Also means a person who deals in securities on his own account and not as a broker

Prime Lending Rate (PLR) - The rate of interest charged on loans by banks to their most creditworthy customers

PSB - Public Sector Bank

Repo rate- the rate at which the RBI lends money to banks

Reverse repo rate- Reverse Repo rate is the rate at which the RBI borrows money from commercial banks

SCBs - Scheduled Commercial Banks

Statutory Liquidity Ratio- SLR is Statutory Liquidity Ratio. It’s the percentage of Demand and Time Maturities that banks need to have in any or combination of the following forms:
i) Cash
ii) Gold valued at a price not exceeding the current market price,
iii) Unencumbered approved securities (G Secs or Gilts come under this) valued at a price as specified by the RBI from time to time

Standby Letter of Credit - A guarantee issued by a bank, on behalf of a buyer that protects the seller against non-payment for goods shipped to the buyer

Securitization - Securitization is a process of transformation of a bank loan into tradable securities
Selective Credit Control (SCC) - Control of credit flow to borrowers dealing in some essential commodities to discourage hoarding and black-marketing

Tier 1 Capital - Refers to core capital consisting of Capital, Statutory Reserves, Revenue and other reserves, Capital Reserves (excluding Revaluation Reserves) and unallocated surplus/ profit but excluding accumulated losses, investments in subsidiaries and other intangible assets

Tier 2 Capital - Comprises Property Revaluation Reserves, Undisclosed Reserves, Hybrid Capital, Subordinated Term Debt and General Provisions. This is Supplementary Capital.
Withdrawal: To take money out of your bank account. To make a withdrawal is the opposite of making a deposit

Important Banking terminologies

• Accrued interest: Interest due from issue date or from the last coupon payment date to the settlement date. Accrued interest on bonds must be added to their purchase price.

• Arbitrage: Buying a financial instrument in one market in order to sell the same instrument at a higher price in another market.

• Ask Price: The lowest price at which a dealer is willing to sell a given security.

• Asset-Backed Securities (ABS): A type of security that is backed by a pool of bank loans, leases, and other assets. Most ABS are backed by auto loans and credit cards – these issues are very similar to mortgage-backed securities.

• At-the-money: The exercise price of a derivative that is closest to the market price of the underlying instrument.

• Basis Point: One hundredth of 1%. A measure normally used in the statement of interest rate e.g., a change from 5.75% to 5.81% is a change of 6 basis points.

• Bear Markets: Unfavorable markets associated with falling prices and investor pessimism.

• Bid-ask Spread: The difference between a dealer’s bid and ask price.

• Bid Price: The highest price offered by a dealer to purchase a given security.

• Blue Chips: Blue chips are unsurpassed in quality and have a long and stable record of earnings and dividends. They are issued by large and well-established firms that have impeccable financial credentials.

• Bond: Publicly traded long-term debt securities, issued by corporations and governments, whereby the issuer agrees to pay a fixed amount of interest over a specified period of time and to repay a fixed amount of principal at maturity.

• Book Value: The amount of stockholders’ equity in a firm equals the amount of the firm’s assets minus the firm’s liabilities and preferred stock

• Broker: Individuals licensed by stock exchanges to enable investors to buy and sell securities.

• Brokerage Fee: The commission charged by a broker.

• Bull Markets: Favorable markets associated with rising prices and investor optimism.

• Call Option: The right to buy the underlying securities at a specified exercise price on or before a specified expiration date.

• Callable Bonds: Bonds that give the issuer the right to redeem the bonds before their stated maturity.

• Capital Gain: The amount by which the proceeds from the sale of a capital asset exceed its original purchase price.

• Capital Markets: The market in which long-term securities such as stocks and bonds are bought and sold.

• Certificate of Deposits (CDs): Savings instrument in which funds must remain on deposit for a specified period, and premature withdrawals incur interest penalties.

• Closed-end (Mutual) Fund: A fund with a fixed number of shares issued, and all trading is done between investors in the open market. The share prices are determined by market prices instead of their net asset value.

• Collateral: A specific asset pledged against possible default on a bond. Mortgage bonds are backed by claims on property. Collateral trusts bonds are backed by claims on other securities. Equipment obligation bonds are backed by claims on equipment.

• Commercial Paper: Short-term and unsecured promissory notes issued by corporations with very high credit standings.

• Common Stock: Equity investment representing ownership in a corporation; each share represents a fractional ownership interest in the firm.

• Compound Interest: Interest paid not only on the initial deposit but also on any interest accumulated from one period to the next.

• Contract Note: A note which must accompany every security transaction which contains information such as the dealer’s name (whether he is acting as principal or agent) and the date of contract.

• Controlling Shareholder: Any person who is, or group of persons who together are, entitled to exercise or control the exercise of a certain amount of shares in a company at a level (which differs by jurisdiction) that triggers a mandatory general offer, or more of the voting power at general meetings of the issuer, or who is or are in a position to control the composition of a majority of the board of directors of the issuer.

• Convertible Bond: A bond with an option, allowing the bondholder to exchange the bond for a specified number of shares of common stock in the firm. A conversion price is the specified value of the shares for which the bond may be exchanged. The conversion premium is the excess of the bond’s value over the conversion price.

• Corporate Bond: Long-term debt issued by private corporations.

• Coupon: The feature on a bond that defines the amount of annual interest income.

• Coupon Frequency: The number of coupon payments per year.

• Coupon Rate: The annual rate of interest on the bond’s face value that a bond’s issuer promises to pay the bondholder. It is the bond’s interest payment per dollar of par value.

• Covered Warrants: Derivative call warrants on shares which have been separately deposited by the issuer so that they are available for delivery upon exercise.

• Credit Rating: An assessment of the likelihood of an individual or business being able to meet its financial obligations. Credit ratings are provided by credit agencies or rating agencies to verify the financial strength of the issuer for investors.

• Currency Board: A monetary system in which the monetary base is fully backed by foreign reserves. Any changes in the size of the monetary base has to be fully matched by corresponding changes in the foreign reserves.

• Current Yield: A return measure that indicates the amount of current income a bond provides relative to its market price. It is shown as: Coupon Rate divided by Price multiplied by 100%.

• Custody of Securities: Registration of securities in the name of the person to whom a bank is accountable, or in the name of the bank’s nominee; plus deposition of securities in a designated account with the bank’s bankers or with any other institution providing custodial services.

• Default Risk: The possibility that a bond issuer will default ie, fail to repay principal and interest in a timely manner.

• Derivative Call (Put) Warrants: Warrants issued by a third party which grant the holder the right to buy (sell) the shares of a listed company at a specified price.

• Derivative Instrument: Financial instrument whose value depends on the value of another asset.

• Discount Bond: A bond selling below par, as interest in-lieu to the bondholders.

• Diversification: The inclusion of a number of different investment vehicles in a portfolio in order to increase returns or be exposed to less risk.

• Duration: A measure of bond price volatility, it captures both price and reinvestment risks to indicate how a bond will react to different interest rate environments.

• Earnings: The total profits of a company after taxation and interest.

• Earnings per Share (EPS): The amount of annual earnings available to common stockholders as stated on a per share basis.

• Earnings Yield: The ratio of earnings to price (E/P). The reciprocal is price earnings ratio (P/E).

• Equity: Ownership of the company in the form of shares of common stock.

• Equity Call Warrants: Warrants issued by a company which give the holder the right to acquire new shares in that company at a specified price and for a specified period of time.

• Ex-dividend (XD): A security which no longer carries the right to the most recently declared dividend or the period of time between the announcement of the dividend and the payment (usually two days before the record date). For transactions during the ex-dividend period, the seller will receive the dividend, not the buyer. Ex-dividend status is usually indicated in newspapers with an (x) next to the stock’s or unit trust’s name.

• Face Value/ Nominal Value: The value of a financial instrument as stated on the instrument. Interest is calculated on face/nominal value.

• Fixed-income Securities: Investment vehicles that offer a fixed periodic return.

• Fixed Rate Bonds: Bonds bearing fixed interest payments until maturity date.

• Floating Rate Bonds: Bonds bearing interest payments that are tied to current interest rates.

• Fundamental Analysis: Research to predict stock value that focuses on such determinants as earnings and dividends prospects, expectations for future interest rates and risk evaluation of the firm.

• Future Value: The amount to which a current deposit will grow over a period of time when it is placed in an account paying compound interest.

• Future Value of an Annuity: The amount to which a stream of equal cash flows that occur in equal intervals will grow over a period of time when it is placed in an account paying compound interest.

• Futures Contract: A commitment to deliver a certain amount of some specified item at some specified date in the future.

• Hedge: A combination of two or more securities into a single investment position for the purpose of reducing or eliminating risk.

• Income: The amount of money an individual receives in a particular time period.

• Index Fund: A mutual fund that holds shares in proportion to their representation in a market index, such as the S&P 500.

• Initial Public Offering (IPO): An event where a company sells its shares to the public for the first time. The company can be referred to as an IPO for a period of time after the event.

• Inside Information: Non-public knowledge about a company possessed by its officers, major owners, or other individuals with privileged access to information.

• Insider Trading: The illegal use of non-public information about a company to make profitable securities transactions

• Intrinsic Value: The difference of the exercise price over the market price of the underlying asset.

• Investment: A vehicle for funds expected to increase its value and/or generate positive returns.

• Investment Adviser: A person who carries on a business which provides investment advice with respect to securities and is registered with the relevant regulator as an investment adviser.

• IPO price: The price of share set before being traded on the stock exchange. Once the company has gone Initial Public Offering, the stock price is determined by supply and demand.

• Junk Bond: High-risk securities that have received low ratings (i.e. Standard & Poor’s BBB rating or below; or Moody’s BBB rating or below) and as such, produce high yields, so long as they do not go into default.

• Leverage Ratio: Financial ratios that measure the amount of debt being used to support operations and the ability of the firm to service its debt.

• Libor: The London Interbank Offered Rate (or LIBOR) is a daily reference rate based on the interest rates at which banks offer to lend unsecured funds to other banks in the London wholesale money market (or interbank market). The LIBOR rate is published daily by the British Banker’s Association and will be slightly higher than the London Interbank Bid Rate (LIBID), the rate at which banks are prepared to accept deposits.

• Limit Order: An order to buy (sell) securities which specifies the highest (lowest) price at which the order is to be transacted.

• Limited Company: The passive investors in a partnership, who supply most of the capital and have liability limited to the amount of their capital contributions.

• Liquidity: The ability to convert an investment into cash quickly and with little or no loss in value.

• Listing: Quotation of the Initial Public Offering company’s shares on the stock exchange for public trading.

• Listing Date: The date on which Initial Public Offering stocks are first traded on the stock exchange by the public

• Margin Call: A notice to a client that it must provide money to satisfy a minimum margin requirement set by an Exchange or by a bank / broking firm.

• Market Capitalization: The product of the number of the company’s outstanding ordinary shares and the market price of each share.

• Market Maker: A dealer who maintains an inventory in one or more stocks and undertakes to make continuous two-sided quotes.

• Market Order: An order to buy or an order to sell securities which is to be executed at the prevailing market price.

• Money Market: Market in which short-term securities are bought and sold.

• Mutual Fund: A company that invests in and professionally manages a diversified portfolio of securities and sells shares of the portfolio to investors.

• Net Asset Value: The underlying value of a share of stock in a particular mutual fund; also used with preferred stock.

• Offer for Sale: An offer to the public by, or on behalf of, the holders of securities already in issue.

• Offer for Subscription: The offer of new securities to the public by the issuer or by someone on behalf of the issuer.

• Open-end (Mutual) Fund: There is no limit to the number of shares the fund can issue. The fund issues new shares of stock and fills the purchase order with those new shares. Investors buy their shares from, and sell them back to, the mutual fund itself. The share prices are determined by their net asset value.

• Open Offer: An offer to current holders of securities to subscribe for securities whether or not in proportion to their existing holdings.

• Option: A security that gives the holder the right to buy or sell a certain amount of an underlying financial asset at a specified price for a specified period of time.

• Oversubscribed: When an Initial Public Offering has more applications than actual shares available. Investors will often apply for more shares than required in anticipation of only receiving a fraction of the requested number. Investors and underwriters will often look to see if an IPO is oversubscribed as an indication of the public’s perception of the business potential of the IPO company.

• Par Bond: A bond selling at par (i.e. at its face value).

• Par Value: The face value of a security.

• Perpetual Bonds: Bonds which have no maturity date.

• Placing: Obtaining subscriptions for, or the sale of, primary market, where the new securities of issuing companies are initially sold.

• Portfolio: A collection of investment vehicles assembled to meet one or more investment goals.

• Preference Shares: A corporate security that pays a fixed dividend each period. It is senior to ordinary shares but junior to bonds in its claims on corporate income and assets in case of bankruptcy.

• Premium (Warrants): The difference of the market price of a warrant over its intrinsic value.

• Premium Bond: Bond selling above par.

• Present Value: The amount to which a future deposit will discount back to present when it is depreciated in an account paying compound interest.

• Present Value of an Annuity: The amount to which a stream of equal cash flows that occur in equal intervals will discount back to present when it is depreciated in an account paying compound interest.

• Price/Earnings Ratio (P/E): The measure to determine how the market is pricing the company’s common stock. The price/earnings (P/E) ratio relates the company’s earnings per share (EPS) to the market price of its stock.

• Privatization: The sale of government-owned equity in nationalized industry or other commercial enterprises to private investors.

• Prospectus: A detailed report published by the Initial Public Offering company, which includes all terms and conditions, application procedures, IPO prices etc, for the IPO

• Put Option: The right to sell the underlying securities at a specified exercise price on of before a specified expiration date.

• Rate of Return: A percentage showing the amount of investment gain or loss against the initial investment.

• Real Interest Rate: The net interest rate over the inflation rate. The growth rate of purchasing power derived from an investment.

• Redemption Value: The value of a bond when redeemed.

• Reinvestment Value: The rate at which an investor assumes interest payments made on a bond which can be reinvested over the life of that security.

• Relative Strength Index (RSI): A stock’s price that changes over a period of time relative to that of a market index such as the Standard & Poor’s 500, usually measured on a scale from 1 to 100, 1 being the worst and 100 being the best.

• Repurchase Agreement: An arrangement in which a security is sold and later bought back at an agreed price and time.

• Resistance Level: A price at which sellers consistently outnumber buyers, preventing further price rises.

• Return: Amount of investment gain or loss.

• Rights Issue: An offer by way of rights to current holders of securities that allows them to subscribe for securities in proportion to their existing holdings.

• Risk-Averse, Risk-Neutral, Risk-Taking:
  Risk-averse describes an investor who requires greater return in exchange for greater risk.
  Risk-neutral describes an investor who does not require greater return in exchange for greater risk.
  Risk-taking describes an investor who will accept a lower return in exchange for greater risk.

• Senior Bond: A bond that has priority over other bonds in claiming assets and dividends.

• Short Hedge: A transaction that protects the value of an asset held by taking a short position in a futures contract.

• Settlement: Conclusion of a securities transaction when a customer pays a broker/dealer for securities purchased or delivered, securities sold, and receives from the broker the proceeds of a sale.

• Short Position: Investors sell securities in the hope that they will decrease in value and can be bought at a later date for profit.

• Short Selling: The sale of borrowed securities, their eventual repurchase by the short seller at a lower price and their return to the lender.

• Speculation: The process of buying investment vehicles in which the future value and level of expected earnings are highly uncertain.

• Stock Splits: Wholesale changes in the number of shares. For example, a two for one split doubles the number of shares but does not change the share capital.

• Subordinated Bond: An issue that ranks after secured debt, debenture, and other bonds, and after some general creditors in its claim on assets and earnings. Owners of this kind of bond stand last in line among creditors, but before equity holders, when an issuer fails financially.

• Substantial Shareholder: A person acquires an interest in relevant share capital equal to, or exceeding, 10% of the share capital.

• Support Level: A price at which buyers consistently outnumber sellers, preventing further price falls.

• Technical Analysis: A method of evaluating securities by relying on the assumption that market data, such as charts of price, volume, and open interest, can help predict future (usually short-term) market trends. Contrasted with fundamental analysis which involves the study of financial accounts and other information about the company. (It is an attempt to predict movements in security prices from their trading volume history.)

• Time Horizon: The duration of time an investment is intended for.

• Trading Rules: Stipulation of parameters for opening and intra-day quotations, permissible spreads according to the prices of securities available for trading and board lot sizes for each security.

• Trust Deed: A formal document that creates a trust. It states the purpose and terms of the name of the trustees and beneficiaries.

• Underlying Security: The security subject to being purchased or sold upon exercise of the option contract.

• Valuation: Process by which an investor determines the worth of a security using risk and return concept.

• Warrant: An option for a longer period of time giving the buyer the right to buy a number of shares of common stock in company at a specified price for a specified period of time.

• Window Dressing: Financial adjustments made solely for the purpose of accounting presentation, normally at the time of auditing of company accounts.

• Yield (Internal rate of Return): The compound annual rate of return earned by an investment

• Yield to Maturity: The rate of return yield by a bond held to maturity when both compound interest payments and the investor’s capital gain or loss on the security are taken into account.

Zero Coupon Bond: A bond with no coupon that is sold at a deep discount from par value.