Basic Terms in Finance

Friends, we are all familiar with the word 'investment' but it is just like a drop of water in the ocean. It is advisable to understand the frequently used words in the financial/ investments world. Hereby, I simple want to share few of the drops of water with you all the lovely readers.

ADR (American depository receipts) – Depository receipt issued by a company in the USA

Amortization – Process of writing off of intangible assets

Annual Report – The report containing profit and loss statement, balance sheet and cash flow statement, issued annually by a company to its share holders

Arbitrage – Purchase and sale of securities in different markets in order to earn profit from price discrepancies. It reduces risk of loss in your investment portfolio

Authorized Share Capital – Maximum amount of the share capital which a company can raise for the time being

Bad debts – Amount lost from debtors to whom the goods were sold on credit

Balanced Funds – Funds invested both in debt and equity markets

Bank Reconciliation Statement (BRS) – Statement reconciling the balance as shown by the bank pass book and the balance as shown by the Cash Book in order to know the difference & pass necessary correcting, adjusting entries in the books

Bankruptcy – A situation under which a firm is unable to meets its obligations and hence, its assets are surrendered to court for administration

Book Keeping – Recording of financial data relating to the business operations in a significant and orderly manner

Budgeting – Process of preparing budgets

Capital Budgeting – The process of decision making with regard to investment in fixed assets or long term projects

Capital Employed – Total long term funds employed in the business

Certificate of Deposits (CDs) – Similar to a FD receipt, issued by banks where interest rate is not fixed. It is based on the prevailing market conditions

Close Ended Funds – Funds open for sale to investors for a specific period, after which further sales are closed

Commercial Paper – A short term promissory note issued by a company, negotiable by endorsement and delivery, issued at a discount on face value as may be determined by the issuing company

Contingency – A condition (or) situation the ultimate outcome of which gain or loss will be known as determined only as the occurrence or non occurrence of one or more uncertain future events

Debentures – A certificate issued by a company under its seal acknowledging a debt due by it to its holder

Debt Funds – Funds pre-dominantly invest in debt securities

Deficiency – the excess of liabilities over assets of an enterprise at a given date

Deficit – When expenses are more than incomes

Depreciation – Continuous decrease in the value of asset due to wear and tear, technology changes, laps of time and accident

Equity Share Capital – The total sum of equity shares

Equity Shares – Shares carrying no preference rights

Euro Issues – The issues listed on a European stock Exchange for which subscription can come from any part of the world except India

Factoring – An arrangement under which a firm (called borrower) receives advances against its receivables, from a financial institutions (called factor)

Fictitious Assets – Assets not represented by tangible possession or property

Financial Break-even Point (Financial BEP) – Level at which a firm’s pre-interest and tax profit (EBIT) is just sufficient to cover interest and preference dividend

Funds Flow Statement (FFS) – A statement explains procurement and utilization of the funds

Gilt funds – Funds invests only in securities that are issued by the GOVT having no risk

Global depository receipts (GDR) – A negotiable receipt dominated in US dollars that represents a non-US company publicly traded in local currency equity shares

Goodwill – The present value of firm’s anticipated excess earnings

Hedging – Minimizing the risk

Intangible Assets – Assets having no physical appearance

Joint Venture – An association of 2 or more persons who are combined for the execution of a specific transaction and divide the profit or loss thereof an agreed ratio

Journal – Journal means chronological record of transactions.

Lease – A contract between two parties in which the owner of the asset gives the right to use the asset to the user over an agreed period of the time for a consideration

Ledger – A set of accounts

Leverage – It is a force applied at a particular point to get the desired result.

Liquid Funds – Debt funds invests only in instruments with maturities less than one year

Marketable Securities – A short term instruments

Master Budget – A summary of budget schedules in capsule form made for the purpose of presenting in one report

Maximum Permissible Bank Finance (MPBF) – Maximum amount that banks can lend a borrower towards his working capital requirements

Minority Interest – Equity of the minority shareholders in a subsidiary company

Mutual fund – A pool of money collected from investors which is invested based on specific objectives

Net Asset Value (NAV) – The value of one unit of investment

Net Present Value (NPV) – the net present value of an investment proposal is defined as the sum of the present values of all future cash inflows less the sum of the present values of all cash out flows associated with the proposal

Open Ended Fund – Funds can be bought and sold directly from the fund at NAV related prices at any time

Overdraft (OD) – A credit facility in which a fixed limit is granted within which the borrower allowed to overdraw from his account

Partnership – Relationship between 2 or more persons who have agreed to share the profits of business carried on by all or any of them acting for all

Pay-back period (PBP) – Time period required for complete recovery of the initial investment in the project

Petty Cash Book – Maintained by business to record petty cash expenses of the business, such as postage, stationery, etc.

Preference Shares – Shares carrying preference rights

Price-earnings ratio (PE Ratio) – The ratio between the share price and the post tax earnings of company

Primary market – Where new shares have been issued directly through companies to investors

Profitability Index (PI) – Where different investment proposal each involving different initial investments and cash inflows are to be compared

Promissory Note – An instrument in writing containing an unconditional undertaking signed by the maker, to pay certain sum of money only to or to the order of a certain person or to the barer of the instrument

Public Deposits (PD) – Very important source of short term and medium term finance which the company can accept from members of the public and shareholders

Secondary Market – Where shares are exchanged (buy and sell). In India, stock exchange is our secondary market

Surplus – When incomes are more than expenses

Swaps – Private agreements between two parties to exchange cash flows in the future according to a pre–agreed formula

Time Value of Money – The worth (value) of a rupee received today is different from the worth of a rupee to be received in future

Trade Credit – Credit granted by suppliers of goods during trade

Venture capital – It refers to the financing of high risk ventures promoted by new qualified entrepreneurs who require funds to give shape to their ideas

Working capital – The funds available for conducting day to day operations of an enterprise

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