Common Economic Terms
- Devaluation of a Currency: Conscious decision taken by the Central Bank of a country to lower the external value of domestic currency in international markets. It is done to push up exports.
- Depreciation of a Currency: The change in exchange rates of a currency due to market forces of demand and supply. When the demand for Dollar would be more than supply, Rupee will depreciate.
- Balance of Payment (BoP): BoP of a nation is the systematic record of all transactions that a nation carries out with rest of the world. It tells us what a country receives or pays to the outside world.
- Two agencies that help to Promote FDI in India: (i) Foreign Investment Promotion Board (FIPB) and (ii) Foreign Investment implementation Authority (FIIA).
- Foreign Direct Investment (FDI): It is a long term foreign investment made in setting up of revenue generating project in a country.
- Difference between Balance of Trade and Balance of Payment: BoT is the annual statement of a country’s trade in goods (Visible) while the BoP is a stamen of its trade in goods, services and all other financial transactions with rest of the world.
- Automatic route of FDI: This route allows foreign investment in India without prior approval of RBI. The investor is only required to inform the RBI within 30 days of investment.
- Special Drawing Rights: It is a reserve asset, known as “Paper Gold” created within the framework of the international monetary fund in an attempt to increase international liquidity. It forms a part of country’s official reserves.
- CECPA: comprehensive Economic Cooperation and Partnership Agreement. It is a step ahead of a Free Trade Area (FTA) and it envisages economic cooperation between two countries on a long term basis in a win-win scenario.
- Capital Account Convertibility: The Taropare Committee set up in 1997, defines the Capital Account Convertibility as “the freedom to convert local financial assets into foreign financial assets and vice-versa at the market determined rates of the exchange.” In other words, the Capital Account convertibility implies complete mobility of capital across countries.
- Bombay Stock Exchange (BSE): Established in 1875 as “the Native Share and Stockbroker Association” the exchange was managed by brokers. Now, the exchange plans to demutualise and convert itself into a corporate entity, with management clearly separated from ownership.
- National Stock Exchange (Nifty): Established as a corporate body in 1993, with headquarters at Mumbai. Its primary objective is of nationwide electronic trading, high levels of transparency and faster settlement cycle.
- Double Taxation: The taxation of incomes and profits, first in the country in which they arise and again when these incomes and profits are repatriated to the income earner’s home country.
- IFC: The International Finance Corporation established in 1956, promotes sustainable private sector investment in developing countries as a way to reduce poverty and improve people’s lives.
- MIGA: Multilateral Investment Guarantee Agency founded in 1988, as a member of the World Bank Group, to promote FDI into developing countries to help support economic growth, reduce poverty and improve people’s life.
- ICSID: The International Centre for Settlement of Investment Disputes. It provides facilities for the conciliation and arbitration of disputes between member countries and investors who qualify as nationals of the member countries.
- Patent: A patent is an exclusive right for a limited period of time granted by the Government to the patentee in lieu of full disclosure of the invention. A patent for 20 years from the date of filling the application.
- Special Economic Zones (SEZs): The Special Economic Zones are modifies versions of the earlier export processing zones. These are specially demarcated areas that allow units locating there to function under a set of tax and other rules very different from those in the rest of the country.
- Free Trade Agreement: A comprehensive economic arrangement wherein goods and services flow within the region without any restriction and with minimum duties.
- ITC: The International Trade Centre is the technical cooperation agency of the UNCTAD and WTO for operational, enterprise oriented aspects of trade development.
- UNCTAD: Established in 1964, The United Nations Conference on Trade and Development (UNCTAD) is meant for the integrated treatment of trade and development and related issues in the areas of investment, finance, technology, enterprise development and sustainable development.
- Bank Rate: It is that rate of interest at which the Central Bank of the country provides refinancing facilities to commercial banks. When there is inflation in the market central bank would raise the bank rate to make borrowing costlier.
- Budget Deficit: Budget deficit is the difference between the estimated public expenditure and public revenue. The Government meets this deficit by way of printing new currency or borrowing.
- Cash Reserve Ratio (CRR): It is that ratio of the total deposits of bank which it has to keep in the central bank of the country. When there is inflation it would be raised.
- Capital Adequacy Ratio: It is that ratio of the total funds of a bank in relation to its risk weight-age assets, which must maintain to ensure that its non-performing assets do not erode its capital gains.
- CENVAT: Introduced 2000, it was rechristened as Modvat under which there is a uniform rate of 16% for the reimbursement to the final manufacture.
- Floating Debt: Generally, any short-term debt, specifically, the part of the national debt that consists of short-term borrowing. Fringe benefits: Rewards for employment over and above the wager paid. e.g. goods at a discount, subsidized meals, arrangements, etc.
- Fiscal Policy: that part of government policy which is concerned with raising revenue through taxation and deciding on the level and pattern of expenditure.
- Fixed Costs: Costs which in the short run do not vary with outputs. These costs are borne even if no output is produced.
- Asset: Anything of monetary value that is owned by a person. Assets include real property, personal property, and enforceable claims against others (including bank accounts, stocks, mutual funds, and so on)
- Base year: In the construction of an index, the year from which the weights assigned to the different components of the index is drawn. It is conventional to set the value of an index in its base year equal to 100. Bear: An investor with a pessimistic market outlook; an investor who expects prices to fall and so sells now in order to buy later at a lower price. A Bear Market is one which is trending downwards or losing value.
- Bid price: The highest price an investor is willing to pay for a stock.
- Bill of exchange: A written, dated, and signed three-party instrument containing an unconditional order by a drawer that directs a drawee to pay a definite sum of money to a payee on demand or at a specified future date. Also known as a draft. It is the most commonly used financial instrument in international trade.
- Bond: A certificate of debt (usually interest-bearing or discounted) that is issued by a government or corporation in order to raise money; the bond issuer is required to pay a fixed sum annually until maturity and then a fixed sum to repay the principal. Bonds guide.
- Collateral security: Additional security a borrower supplies to obtain a loan.
- Compound interest: Interest paid on the original principal and on interest accrued from time it became due.
- Consumer Surplus is the difference between the price a consumer pays and what they were prepared to pay.
- Direct tax: A tax that you pay directly, as opposed to indirect taxes, such as tariffs and business taxes. The income tax is a direct tax, as are property taxes. See also Indirect Tax.
- Double taxation: Corporate earnings taxed at both the corporate level and again as a stockholder dividend
- Exchange rate: The price of one currency stated in terms of another currency, when exchanged.
- Revenue expenditure: This is expenditure on recurring items, including the running of services and financing capital spending that is paid for by borrowing. This is meant for normal running of governments’ maintenance expenditures, interest payments, subsidies and transfers etc. It is current expenditure which does not result in the creation of assets. Grants given to State governments or other parties are also treated as revenue expenditure even if some of the grants may be meant for creating assets.
- Subsidy: Financial assistance (often from the government) to a specific group of producers or consumers.
Trade and Banking Terms
- ARBITRATION: Referring dispute to disinterested party called arbitrator for decision, which will be binding.
- ANNUITY: Payment of a fixed amount periodically for a limited time. It is an investment on which the owner receives not only interest on his money but also return of his capital.
- BALANCE OF TRADE: The difference between the value of imports and exports. It is favourable when the value of exported goods exceeds the value of imported goods. If it is reverse balance is unfavourable.
- BALANCE SHEET: Statements of accounts, generally os a business house prepared at the end of a year, showing debits and credits under broad heads, in order to find out the profit and loss positions in the outgoing year.
- BARTER: Exchange of commodity with other commodities without the interface of any form of currency.
- BOND: Document by which a government, a company or a person agrees to pay a sum of money in a certain time.
- BUDGET: Annual estimate of expenditure and revenue of a country or a subordinate authority like a corporation.
- BILL OF EXCHANGE: Written order by a drawer to pay sum on given date ot named payee.
- BUYER’S MARKET: An economic phenomenon where there are more goods in market than demanded and so the buyers can dictate the prices of goods.
- CLEARING HOUSE: Place where officials of the banks meet daily to exchange cheques drawn on the respective banks and settle the account by the payment of balances only.
- COOPERATIVE FARMING: Joint farming wherein farmers pool their land, capital and resources and divide the produce at the end of the harvest in proportion to their land put in the pool. The farmers retain their proprietary rights.
- CEILING ON LAND AND HOLDING: Imposition of a maximum limit of the land which an individual should have. Its purpose is rational distribution of land.
- DEATH DUTY (ESTATE DUTY): A sort of tax imposed on the property inherited at death of its previous owner.
- DEVALUATION: Government’s step to reduce the value of its own currency relatively to a foreign currency. It aims to increase exports and reduce imports.
- DEFLATION: A monetary state characterised by decrease in the supply of money and bank deposits and falling profits, wages, incomes and employment accompanied by unemployment and falling prices.
- DEMONETISATION: The governmental measure of depriving metallic coins or paper currency od specified denominations of its status money. It is meant to unearth the hidden money which is unaccounted for purpose of income tax assessment.
- EXCISE DUTY: Duty levied on goods manufactured within the country.
- FOREIGN EXCHANGE: Transfer of money of one country to another.
- INFLATION: Increase in the quality of money in circulation without any corresponding increase in goods; so, it leads to rising prices spiral.
- LAISSEZ FAIRE: An individualistic theory advocating private initiative in trade and non-interference by State in commercial or business ventures.
- LOCKOUT: Closure of a factory by owners to force the workers to accept the imposed terms.
- MALTHUSIAN THEORY OF POPULATION: It states that the food supply increase in arithmetical progression while population increase by geometrical progression resulting in over-population.
- OCTROI: Tax imposed on articles coming inside a city.
- PUBLIC SECTOR: Applies to State enterprises or undertaking.
- RECESSION: An economic phenomenon characterised by excessive production, less demand, tight money market.
- SOFT CURRENCY: Currency of a country with which we have favourable balance of trade.
- STERLING AREA: Group of countries of Commonwealth (except Canada) keeping their reserves in sterling and not gold or dollars.
- TARIFFS: Measures undertaking by one country to protect industry against trade competition from outside.
Stock Market Terms
- Blue-Chip: Stock of well known companies with stable business.
- Bonds: Bond holder is the creditor of the company and normally bonds are issues with a minimum of 3 years time frame with specific interest rate.
- Bonus Shares: Bonus shares are shares given to share holder at no extra cost.
- Book Value: It is the value at which you carry the asset into the balance sheet. The book value is calculated by dividing the equity reserve of the company by the number of shares issues for the same.
- Brokerage: Brokerage is the commission charged by the broker for a transaction which can be upto 2.5% as per SEBI.
- Bull Market: Continuous phase of rising share prices.
- Buyback: Repurchase of its own company or bonds from the holders.
- Carry forward: The process of postponement of purchase from one settlement to other by paying a charge.
- Circuit: The limit imposed by exchanges to control the fluctuation of share prices.
- Closing price: Last traded price of a stock.
- Close Ended Funds: Close ended funds are funds where investors can subscribe only during the New Fund Offer (NFO) period only.
- Demat trading: Demat trading is trading of shares in electronic or dematerialized form.
- Dividend: Dividend is the amount of money that any company gives to the share holders for each share held.
- Equity / Stock / Share: Representation of ownership of a company.
- ETF: Exchange Traded Fund: A mutual fund that is traded on a stock exchange and holds a basket of securities like mutual funds. They can be traded like a stock in trading hours of the day. Price movement is like stock varying on a trading basis and not like Mutual Fund which is once every day.
- Face Value: The nominal value of share. This is the actual price of the share. Many west countries allow the face value to be consistent and of Re. 1 but in India we have Face value in range of Re. 1 to Rs 10.
- Forward Trading: The Scrip is traded today would be settled at future date which can even be settled or carried forward.
- IPO: Initial public offer which refers to the first offering of equity shares to the general public. Top 5 Indian IPO’s
- Nifty: Nifty is the Index of National Stock Exchange.
- Open Ended Funds: Investors can purchase and sell units even after the New Fund Offer (NFO) period.
- Open Interest: Open interests are open contracts which refer to the total number of contracts that have not been settled or squared off. For each buyer there must be a seller. So when either of the buyer or seller opens the contract and till he does not square off the contract, it is open and sum total of all such open contracts is called open interest.
- P/E Ratio: Price of the stock divided by the net earnings of the company.
- Resistance: Resistance is the point at which sellers (bears) take control of prices and prevent them from rising higher.
- SEBI: Securities and exchange board of India.
- Sensex: Sensitive Index is a value-weighted index composed of 30 stocks with the base April 1979 = 100. It consists of the 30 largest and most actively traded stocks, representative of various sectors, on the Bombay Stock Exchange. These companies account for around one-fifth of the market capitalization of the BSE.
- Settlement and Settlement Date: The date at which transaction between users is settled by deliver of shares.
- Share Premium: Premium paid over the face value for acquiring the share in the company.
- Support: Support is a level at which bulls (i.e., buyers) take control over the prices and prevent them from falling lower.
- Undervalued Shares: Shares which are traded lower than the book value.
- Volume: The number of shares or contracts traded in a security or an entire market during a given period of time.