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A temporary document that represents a portion of a share of stock, often issued after a stock split or
spin-off.

 

A certificate that can be exchanged for a fractional share of stock. Scrip is distributed as the result of
a spinoff, a stock dividend, or a stock split in which the stockholder would be entitled to a fractional share
of stock. For example, the owner of a single share would receive scrip for one-half a share in the event the
issuer declared a three-for-two stock split.

 

A certificate giving the person or company listed a portion of ownership in a stock, mutual fund, or
some other investment vehicle. A share is the smallest unit of ownership. They may be bought or sold on
or off an exchange.

 

A certificate giving the person or company listed a portion of ownership in a stock, mutual fund, or
some other investment vehicle. A share is the smallest unit of ownership. They may be bought or sold on
or off an exchange.

  A share is a unit of ownership in a corporation or mutual fund, or an interest in a general or

limited partnership. Though the word is sometimes used interchangeably with the word stock, you
actually own shares of stock



Ownership of a corporation indicated by shares, which represent a piece of the corporation's assets and
earnings



A portion of ownership in a corporation. The holder of a stock is entitled to the company's earnings and is
responsible for its risk for the portion of the company that each stock represents. There are two main
classes of stock: common stock and preferred stock. Common stock holders have the right to vote on
major company decisions, such as whether or not to merge with another corporation, and receive
dividends determined by management. Preferred stock holders do not usually have voting rights, but
receive a minimum dividend. Stock may be bought or sold, usually, though not always, in the context of a
securities exchange. It is important to note that a single share of a stock usually represents only a tiny
amount of ownership, and, therefore, most stocks are traded in batches of 100.




Occurs when a firm issues new shares of stock and in turn lowers the current market price of its stock to a
level that is proportionate to pre-split prices. For example, if IBM trades at $100 before a two-for-one
split, after the split it will trade at $50, and holders of the stock will have twice as many shares as they had
before the split.

Stock Split

The act of a publicly-traded company increasing the number of outstanding shares while maintaining the
same market capitalization. In other words, a company engages in a stock split in order to decrease its
share price by increasing the number of shares available. Current holders of the stock are given more
shares so that they maintain the same percentage of ownership in the company. For example, a company
with a share price of $400 may double the number of shares so that the share price drops to $200.
Companies conduct stock splits for a number of reasons; one possible reason is to keep its shares
affordable for investors.

Stock Split

The act of a publicly-traded company increasing the number of outstanding shares while maintaining the
same market capitalization. In other words, a company engages in a stock split in order to decrease its
share price by increasing the number of shares available. Current holders of the stock are given more
shares so that they maintain the same percentage of ownership in the company. For example, a company
with a share price of $400 may double the number of shares so that the share price drops to $200.
Companies conduct stock splits for a number of reasons; one possible reason is to keep its shares
affordable for investors.

Spin-Off

A situation in which a company offers stock in one of its wholly-owned subsidiaries or dependent
divisions such that subsidiary or division becomes an independent company. The parent company may or
may not maintain a portion of ownership in the newly spun-off company. A company may conduct a
spin-off for any number of reasons. For example, it may wish to divest itself of one industry so it can
expand into another. It may also simply wish to profit from the sale of the subsidiary. A spin off should
not be confused with a split off.
Blue Chip

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A nationally recognized, well-established and financially sound company. Blue chips generally sell high-
quality, widely accepted products and services. Blue chip companies are known to weather downturns and
operate profitably in the face of adverse economic conditions, which helps to contribute to their long
record of stable and reliable growth.

4

The name "blue chip" came about because in the game of poker the blue chips have the highest value.

Blue chip stocks are seen as a less volatile investment than owning shares in companies without blue chip
status because blue chips have an institutional status in the economy. Investors may buy blue chip
companies to provide steady growth in their portfolios. The stock price of a blue chip usually closely
follows the S&P 500.

Blue-Chip Stock

4

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Stock of a well-established and financially sound company that has demonstrated its ability to pay
dividends in both good and bad times.

4


These stocks are usually less risky than other stocks. The stock price of a blue chip usually closely
follows the S&P 500

Liquidity
[

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1. The degree to which an asset or security can be bought or sold in the market without affecting the
asset's price. Liquidity is characterized by a high level of trading activity. Assets that can by easily bought
or sold, are known as liquid assets.

2. The ability to convert an asset to cash quickly. Also known as "marketability".

There is no specific liquidity formula, however liquidity is often calculated by using liquidity ratios.

[


1. It is safer to invest in liquid assets than illiquid ones because it is easier for an investor to get his/her
money out of the investment.

2. Examples of assets that are easily converted into cash include blue chip and money market securities

r

It is an acronym for basis point and is used to indicate changes in rate of interest and other financial
instruments. 1 basis point is equal to 0.01%. So when we say that repo rate has been increased by 25 bps,
it means that the rate has been increased by 0.25%.





People often get confused between these two terms. Though they appear similar there is a basic difference
between them.

Repo rate or repurchase rate is the rate at which banks borrow money from the central bank (read RBI for
India) for short period by selling their securities (financial assets) to the central bank with an agreement to
repurchase it at a future date at predetermined price. It is similar to borrowing money from a money-
lender by selling him something, and later buying it back at a pre-fixed price.

Bank rate is the rate at which banks borrow money from the central bank without any sale of securities. It
is generally for a longer period of time. This is similar to borrowing money from someone and paying
interest on that amount.

Both these rates are determined by the central bank of the country based on the demand and supply of
money in the economy.

 



Reverse repo rate is the rate of interest at which the central bank borrows funds from other banks for a
short duration. The banks deposit their short term excess funds with the central bank and earn interest on
it.
Reverse Repo Rate is used by the central bank to absorb liquidity from the economy. When it feels that
there is too much money floating in the market, it increases the reverse repo rate, meaning that the central
bank will pay a higher rate of interest to the banks for depositing money with it.

 
 
!

Banks are required to maintain a percentage of their deposits as cash, meaning that if you deposit Rs.
100/- in your bank, then bank can¶t use the entire Rs. 100/- for lending or investment purpose. They have
to maintain a portion of the deposit as cash and can use only the remaining amount for
lending/investment. This minimum percentage which is determined by the central bank is known as Cash
Reserve Ratio.

So if CRR is 6% then it means for every Rs. 100/- deposited in bank, it has to maintain a minimum of Rs.
6/- as cash. However banks do not keep this cash with them, but are required to deposit it with the central
bank, so that it can help them with cash at the time of need.

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!

Apart from keeping a portion of deposits with the RBI as cash, banks are also required to maintain a
minimum percentage of deposits with them at the end of every business day, in the form of gold, cash,
government bonds or other approved securities. This minimum percentage is called Statutory Liquidity
Ratio.

Example

If you deposit Rs. 100/- in bank, CRR being 6% and SLR being 8%, then bank can use 100-6-8= Rs. 84/-
for giving loan or for investment purpose.

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Having understood the meaning of these banking terms, let us now see how we are affected by
increase/decrease of these rates.

The central bank uses these rates to control inflation.

All About Inflation

Inflation and Types of Inflation

Banks earn profit by borrowing at a lower rate of interest from the central bank, and lending the same
amount at a higher rate to the customers. If the repo rate or the bank rate is increased, bank has to pay
more interest to the central bank. So in order to make profit, banks in turn increase their interest rate at
which they take deposit from the customer and lend money to the customer. So the demand for loan
decreases, and people start putting more and more money in bank accounts to earn higher rate of interest.
This helps in controlling inflation.

An increase in Reverse repo rate causes the banks to transfer more funds to the central bank, because
banks earn attractive interest rates and also their money is in safe hands. This results in the money being
drawn out of the banking system, thus banks are left with lesser funds.
Thus, by lowering repo rate, central bank injects liquidity in the banking system and by increasing reverse
repo rate it absorbs liquidity from the banking system.

Increase in SLR and CRR rate means that banks will have less power to give loans (see our example
above), which again controls amount of money floating in the market; thereby controlling inflation. It also
makes banks safer to keep money because banks will have a higher liquidity to meet the demand of
customers. As we learnt from the recession, giving loans expose banks to great risks. So if banks have
lesser funds to give as loan, they become relatively safer.

#

Thus we conclude that the central bank of a country uses these rates to fight inflation and to keep a check
on economy.

I'm sure you'll also want to know the meaning of numbers written on debit and credit cards and also the
meaning of numbers written at the bottom of a cheque - two of the most read articles on Knowledge Hub.

If you have something to add, or have some questions, feel free to use the comment form below.

LATEST IMPORTANT BANKING SECTOR

6.00% (w.e.f.
Bank Rate 29/04/2003)

Increased from 5.00% to

5.50% wef 13/02/2010;
6.00% (w.e.f.
Cash Reserve Ratio (CRR) and then again to 5.75%
24/04/2010)
wef 27/02/2010; and now
to 6.00% wef 24/04/2010

Decreased from 25%

24%(w.e.f.
Statutory Liquidity Ratio (SLR) which was continuing
18/12/2010)
since 07/11/2009

Increased from 5.50%

5.75% (w.e.f.
Reverse Repo Rate which was continuing
17/03//2011)
since 25/01/2011
 Increased from 6.50%
6.75% (w.e.f.
Repo Rate under LAF which was continuing since
17/03/2011)
25/01/2011

Mutual Funds: What Are They?

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A mutual fund is nothing more than a collection of stocks and/or bonds. You can think of a mutual fund
as a company that brings together a group of people and invests their money in stocks, bonds, and other
securities. Each investor owns shares, which represent a portion of the holdings of the fund.

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1) Income is earned from dividends on stocks and interest on bonds. A fund pays out nearly all of
the income it receives over the year to fund owners in the form of a distribution.
2) If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass
on these gains to investors in a distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in
price. You can then sell your mutual fund shares for a profit.

Funds will also usually give you a choice either to receive a check for distributions or to reinvest the
earnings and get more shares.

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‡ Professional Management - The primary advantage of funds is the professional management of your
money. Investors purchase funds because they do not have the time or the expertise to manage their own
portfolios. A mutual fund is a relatively inexpensive way for a small investor to get a full-time manager to
make and monitor investments. (For more reading see Active Management: Is It Working For You?)

‡ Diversification - By owning shares in a mutual fund instead of owning individual stocks or bonds, your
risk is spread out. The idea behind diversification is to invest in a large number of assets so that a loss in
any particular investment is minimized by gains in others. In other words, the more stocks and bonds you
own, the less any one of them can hurt you (think about Enron). Large mutual funds typically own
hundreds of different stocks in many different industries. It wouldn't be possible for an investor to build
this kind of a portfolio with a small amount of money.

‡ Economies of Scale - Because a mutual fund buys and sells large amounts of securities at a time, its
transaction costs are lower than what an individual would pay for securities transactions.

‡ Liquidity - Just like an individual stock, a mutual fund allows you to request that your shares be
converted into cash at any time.

‡ Simplicity - Buying a mutual fund is easy! Pretty well any bank has its own line of mutual funds, and
the minimum investment is small. Most companies also have automatic purchase plans whereby as little
as $100 can be invested on a monthly basis.

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‡ Professional Management - Many investors debate whether or not the rofessionals are any better than
you or I at picking stocks. Management is by no means infallible, and, even if the fund loses money, the
manager still gets paid.

‡ Costs - Creating, distributing, and running a mutual fund is an expensive proposition. Everything from
the manager¶s salary to the investors¶ statements cost money. Those expenses are passed on to the
investors. Since fees vary widely from fund to fund, failing to pay attention to the fees can have negative
long-term consequences. Remember, every dollar spend on fees is a dollar that has no opportunity to
grow over time. (Learn how to escape these costs in Sto Paying High Mutual Fund Fees.)

‡ Dilution - It's possible to have too much diversification. Because funds have small holdings in so many
different companies, high returns from a few investments often don't make much difference on the overall
return. Dilution is also the result of a successful fund getting too big. When money pours into funds that
have had strong success, the manager often has trouble finding a good investment for all the new money.

‡ Taxes - When a fund manager sells a security, a capital-gains tax is triggered. Investors who are
concerned about the impact of taxes need to keep those concerns in mind when investing in mutual
funds. Taxes can be mitigated by investing in tax-sensitive funds or by holding non-tax sensitive mutual
fund in a tax-deferred account, such as a 401(k) or IRA. (Learn about one type of tax-deferred fund in
Money Market Mutual Funds: A Better Savings Account.)
c###+(( $(#

Printer friendly version (PDF format)

No matter what type of investor you are, there is bound to be a mutual fund that fits your style. According
to the last count there are more than 10,000 mutual funds in North America! That means there are more
mutual funds than stocks. (For more reading see Which Mutual Fund Style Index Is For You?)

It's important to understand that each mutual fund has different risks and rewards. In general, the higher
the potential return, the higher the risk of loss. Although some funds are less risky than others, all funds
have some level of risk - it's never possible to diversify away all risk. This is a fact for all investments.

Each fund has a predetermined investment objective that tailors the fund's assets, regions of investments
and investment strategies. At the fundamental level, there are three varieties of mutual funds:
1) Equity funds (stocks)
2) Fixed-income funds (bonds)
3) Money market funds

All mutual funds are variations of these three asset classes. For example, while equity funds that invest in
fast-growing companies are known as growth funds, equity funds that invest only in companies of the
same sector or region are known as specialty funds.

Let's go over the many different flavors of funds. We'll start with the safest and then work through to the
more risky.

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The money market consists of short-term debt instruments, mostly Treasury bills. This is a safe place to
park your money. You won't get great returns, but you won't have to worry about losing your principal. A
typical return is twice the amount you would earn in a regular checking/savings account and a little less
than the average certificate of deposit (CD).

-*#
Income funds are named appropriately: their purpose is to provide current income on a steady basis.
When referring to mutual funds, the terms "fixed-income," "bond," and "income" are synonymous. These
terms denote funds that invest primarily in government and corporate debt. While fund holdings may
appreciate in value, the primary objective of these funds is to provide a steady cashflow to investors. As
such, the audience for these funds consists of conservative investors and retirees. (Learn more inIncome
Funds 101.)

Bond funds are likely to pay higher returns than certificates of deposit and money market investments, but
bond funds aren't without risk. Because there are many different types of bonds, bond funds can vary
dramatically depending on where they invest. For example, a fund specializing in high-yield junk bonds is
much more risky than a fund that invests in government securities. Furthermore, nearly all bond funds are
subject to interest rate risk, which means that if rates go up the value of the fund goes down.

#
The objective of these funds is to provide a balanced mixture of safety, income and capital appreciation.
The strategy of balanced funds is to invest in a combination of fixed income and equities. A typical
balanced fund might have a weighting of 60% equity and 40% fixed income. The weighting might also be
restricted to a specified maximum or minimum for each asset class.

A similar type of fund is known as an asset allocation fund. Objectives are similar to those of a balanced
fund, but these kinds of funds typically do not have to hold a specified percentage of any asset class. The
portfolio manager is therefore given freedom to switch the ratio of asset classes as the economy moves
through the business cycle.

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Funds that invest in stocks represent the largest category of mutual funds. Generally, the investment
objective of this class of funds is long-term capital growth with some income. There are, however, many
different types of equity funds because there are many different types of equities. A great way to
understand the universe of equity funds is to use a style box, an example of which is below.

The idea is to classify funds based on both the size of the companies invested in and the investment style
of the manager. The term value refers to a style of investing that looks for high quality companies that are
out of favor with the market. These companies are characterized by low P/E and price-to-book ratios and
high dividend yields. The opposite of value is growth, which refers to companies that have had (and are
expected to continue to have) strong growth in earnings, sales and cash flow. A compromise between
value and growth is blend, which simply refers to companies that are neither value nor growth stocks and
are classified as being somewhere in the middle.

For example, a mutual fund that invests in large-cap companies that are in strong financial shape but have
recently seen their share prices fall would be placed in the upper left quadrant of the style box (large and
value). The opposite of this would be a fund that invests in startup technology companies with excellent
growth prospects. Such a mutual fund would reside in the bottom right quadrant (small and growth). (For
further reading, check out nderstanding The Mutual Fund Style Box.)

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An international fund (or foreign fund) invests only outside your home country. Global funds invest
anywhere around the world, including your home country.

It's tough to classify these funds as either riskier or safer than domestic investments. They do tend to be
more volatile and have unique country and/or political risks. But, on the flip side, they can, as part of a
well-balanced portfolio, actually reduce risk by increasing diversification. Although the world's
economies are becoming more inter-related, it is likely that another economy somewhere is outperforming
the economy of your home country.

$#
This classification of mutual funds is more of an all-encompassing category that consists of funds that
have proved to be popular but don't necessarily belong to the categories we've described so far. This type
of mutual fund forgoes broad diversification to concentrate on a certain segment of the economy.

Sector funds are targeted at specific sectors of the economy such as financial, technology, health, etc.
Sector funds are extremely volatile. There is a greater possibility of big gains, but you have to accept that
your sector may tank.

Regional funds make it easier to focus on a specific area of the world. This may mean focusing on a
region (say Latin America) or an individual country (for example, only Brazil). An advantage of these
funds is that they make it easier to buy stock in foreign countries, which is otherwise difficult and
expensive. Just like for sector funds, you have to accept the high risk of loss, which occurs if the region
goes into a bad recession.

Socially-responsible funds (or ethical funds) invest only in companies that meet the criteria of certain
guidelines or beliefs. Most socially responsible funds don't invest in industries such as tobacco, alcoholic
beverages, weapons or nuclear power. The idea is to get a competitive performance while still
maintaining a healthy conscience.

#
The last but certainly not the least important are index funds. This type of mutual fund replicates the
performance of a broad market index such as the S&P 500 or Dow Jones Industrial Average (DJIA). An
investor in an index fund figures that most managers can't beat the market. An index fund merely
replicates the market return and benefits investors in the form of low fees. (For more on index funds,
check out our Index Investing Tutorial.)