DBA/ S-III/ Banking

BASIC TERMINOLOGIES OF FINANCIAL ASSETS

  Investment:

  The commitment of funds to one or more assets that will be held    

  over    some future time period is called investment.

  Investments:

  The study of the investment process is called investments.

  Financial Assets:

  Pieces of paper evidencing a claim on some issuer is called financial assets

Or / A paper (or electronic) claim on some issuer is called financial assets.

Real Assets:

The physical/tangible assets such as gold, silver, diamond and real estate etc are called real assets.

Marketable Securities:

Financial assets that are easily traded in organized market is called marketable securities.

Liquidity:.....

The ease with in which an asset can be bought or sold with relatively low price change is called liquidity.

There are two conditions for the liquid assts;

1. Easily convertible into cash

2. with relatively low price change

Direct Investing:

When investors by themselves buy and sells shares it is known as a direct investing.

Direct Finance:

Direct lending gives rise to direct claims against borrowers.

      Flow of funds:(Loans of spending power for an agreed-upon period of time)

      Primary Securities:

      (stocks, bonds, notes, etc., evidencing direct claims against borrowers)

Indirect Investing:

When investors buy and sell shares through others (Financial intermediaries) it is known as a indirect investing.

Indirect Finance:

Financial intermediation of funds.

Primary Securities ;

(direct claims against ultimate borrowers in the form of loan contracts, stocks, bonds, notes, etc.)

Secondary Securities ;

(indirect claims against ultimate borrowers issued by financial intermediaries in the form of deposits, insurance policies, retirement savings accounts, etc.)

Ultimate Borrowers > <Financial intermediaries (banks, savings and loan associations, insurance companies, credit unions, mutual funds, finance companies, pension funds) ><Ultimate lenders

      Financial Intermediaries:

Financial institutions that accept money from savers and use that funds to make loans and other financial investments in their own name are called Financial Intermediaries”. They include commercial banks, savings institutions, Insurance companies, pension funds, finance companies and mutual funds.

      Services offered by Financial Institutions:

      Intermediaries help to facilitate the flow of funds in the financial marketplace.

Treasury Bill:

A short term money market instrument sold at discount by the government is called Treasury bill.

Fixed Income Securities:

Securities with specified payment dates and amounts primarily bonds is called fixed income securities.

Bonds:

Long term debts instruments representing the issuer’s contractual obligation is called bonds.

      Basic Terminologies of Investment

Corporate Bonds:

Long term debt securities of various types sold by corporation.

Common Stock:

An equity security representing the ownership interest in a company is called common stock. Or

Common stock represents the ownership interest of corporations, or the equity of the stockholders.

Preferred stock:

An equity security with an intermediate claim (between the bondholders and stockholders) on a firm’s assets and earnings.

What is Financial Market?

All institutions and procedures for bringing buyers and sellers of financial instruments together is called financial market.

Saving surplus units

Those whose savings exceeds their investments in real assets. or

Those units who have money more than their need.

Savings deficit units

Those whose investments in real assets exceed their savings. or

Those units who need money to fulfill their basic need.

1. Money Market:

The market concerned with buying and selling of short term (less than one year original maturity) government and corporate debt securities is called money market.

2. Capital Market:

The market concerned with relatively long term (greater than one year original maturity) debt and equity instruments (e.g bonds and stocks) is called capital market.

Primary and Secondary Markets

With in Capital and Money markets there exist both primary and secondary markets.

1. Primary Market:

A market where new securities are bought and sold for the 1st time (a “new issues” market) is called primary market.

2. Secondary Market:

A market where existing (used) securities are bought and sold rather than new issues are called secondary market.

Financial Brokers

Broker:

An intermediary who represents buyers and sellers in security transactions and receive a commission is called broker.

Investment Bankers:

A financial institution that underwrites (purchase at a fixed price on a fixed date) new securities for resale is called investment banker.

Underwriting:

The process by which investment bankers purchases an issue of securities from a firm and resell it to the public.

What is security?

A security is an interest or a right in property given to the creditor to convert it into cash in case the debtor fails to meet the principal and interest on loan.