What Is Finance?
- Finance is the core element of every business organisation. When we mention ‘Finance’, usually it means money, but it is merely not the money, it is a vast concept which is concerned with money and its flow. The word ‘Finance’ is a French word which means ‘Management of Money’.
- Finance is such a powerful medium that, it performs an important role to operate, co-ordinate and control the various economic activities of the business enterprise.
- Finance is also limited resource like other resources and a business entity needs to manage its finances resourcefully, effectively and efficiently..
- Finance is essential for expansion, diversification, modernization, as well as for establishment of new projects.
- The financial policy of any organization mainly determines not only its existence and survival but also the performance and success of that organization. Finance is required for investment purposes and also to meet substantial capital expenditure projects.
- Financial Management is a managerial process that is concerned with the planning, organizing, directing and controlling of financial resources.
Stock:
- A stock represents ownership in a company entitling you to a portion of its profits and assets exactly in the proportion of the amount you have invested. It is a share of ownership in a company, also known as equity.
- The capital of a company is divided into shares. Each share forms a unit of ownership and is offered for sale so as to raise capital for the company.
Share Capital and Debenture: A share is the interest of a member in a company. Section 2(84) of the Companies Act, 2013 “share” means a share in the share capital of a company and includes stock.
- It is the division of capital into smaller yet equal units. It facilitates the investors to subscribe to the capital in smaller amount.
- These units then are further referred to as ‘shares’. It is the smallest unit in the total share capital of a company. The people who invest and hold such securities are known as shareholders.
- Shares are also known as ownership securities. Shares represent the ownership capital of the company.
- Companies raise the required finance by issuing a proportion of their equity shares to the investors in the form of ownership and in return pay dividends as a return on their investments.
- A company can issue two type of shares: Equity equity shares do not enjoy preference for dividend and do not have priority for repayment of capital at the time of winding up. They are also known as ordinary shares, shares that are not preference shares are called equity shares. Preference shares are those shares which carry preferential right as to payment of dividend and repayment of capital.
IPO (Initial Public Offering):
- Companies generally go for IPOs in their later stages when they are looking for expanding and diversifying the business. The mechanism of IPOs is as such that it is refers to the offer or issue its shares to the public for the first time.
- When companies stand in a position where they are established enough to expand and diversify, have a significant, impactful reputation in the market and are consistantly and constantly improving the profitablity and at scale. Listing of the company on the stock exchange further helps it to grow its market share, valuation and goodwill if its core value propositions and fundamentals are strong enough.
- IPO is the first sale of a company’s shares to the public, allowing it to raise capital by listing on the stock exchange.
Blue Chip Stock:
Stocks of companies which are stable, reputable and well established. These stocks are considered to be less risky as compared to other stocks. Investors who want to invest in shares but at the same time want safety of their capital, generally, prefer to invest in bluechip companies. These companies are fundamentally stable, have strong core value propostions, a reputable and powerful image in the business ecosystem.
Penny Stock:
These are low priced, highly volatile, generally with small market capitalisation. Aggressive investors who like the High Risk High Returns Game are the ones who preferably invest in these securities.
Bull Market:
A market where prices are rising, characterised with a bull run, signalling investor optimism and economic growth. It is a phase when there are foreign investments taking place, investors are expecting their shares to boost up and the growth in the company valuations, mutual funds deploy funds consistently with the economy rising and growing.
Bear Market:
A market which is completely opposite of the bull market. It is characterised by the phase when prices are falling, reflecting and potential economic downturns. There are lesser foreign investments, investors are pessimistic about growth of the company, the foreign institutional investors are selling the securities, with the overall economy slowing down.
Dividend:
- A portion of a company’s profits distributed to its shareholders.
- Dividend is the appropriation out of the profits of the company. It is distributed among the shareholders of the company. The term dividend is derived from a Latin word “Dividendum” which means that which is to be divided.
- Dividend is the part of the annual net profit of the company which is appropriated among the shareholders of the company. It is the part of annual net profit which is distributed among its shareholders.
- The payment of dividend is not an expenditure of the company, as it is a payment made to its shareholders.
Dividend Payout Ratio (DPR):
It is the ratio which demostrates the percentage of a company’s profit that is distributed to the shareholders in the form of dividends.
The dividend payout ratio is the total amount of dividend paid to the shareholders against the total profits generated in the current accounting period. It measures the rate or percentage of net profits distributed to the shareholders.
A greater DPR indicates that the company is not reinvesting in the business to the fullest and distributing in the form of dividends to attract income investors.
A lesser DRP indicates that the business is retaining the money in the business and re-investing the same in the business for expansion and diversification activities. In due course of time, companies of these type tend to generate higher levels of capital gains for investors.
This helps investors to understand what type of returns the company is capable of yielding, dividend income or capital gains. Accordingly, investors who want a steady and regular income will invest in the companies with a high DPR whereas, investors who are interested in the potential profits from a significant rise in share price, further expansion and diversification and capital gains may invest in companies with a low DPR.
DPR =DIVIDEND PER SHARE/NET PROFIT
Interest:
- Interest refers to a certain amount of money paid on borrowed capital. It is the payment made for using money of another, which is the borrowed money. It is the price paid for the productive services rendered by capital.
- It is the cost of finance for borrowing and it is the revenue from lending money, for the lender. Interest is the monetary charge for borrowing the money which is expressed as an annual percentage of the principal value.
- Interest is in direct proportion to risk, higher the risk is, higher would be the rate of interest. It is determined by various factors like money supply, financial policy, the volume of borrowings, inflations.
You can calculate the amount of your interest payable using the Simplifiedfiscalaffairs’ EMI Calculator to reach the right conclusions.
Bonus Shares/ Issue:
Additional fully paid up shares issued to existing shareholders free of cost are known is known as bonus issue. Usually, financially sound companies issue bonus shares out of its accumulated distributable profits/ reserves or retained earnings. Hence, as the profits are capitalised, it is also known as ‘capitalisation of profits or reserves’.
Stock Split:
A corporate action dividing shares to increase the liquidity, and significantly reducing the price. It considerably helps investors to acquire more number of shares at a reduced price.
For example, lets say that a company’s share before the split was 1000 Rs. thereafter, the corporate action took place where they divided one share of 1000 Rs each into 5 shares of 200Rs. each.
Buyback of Shares:
When a company buys its own shares, reducing supply and increasing the value of remaining shares. A share buyback, also known as a share repurchase, is when a company buys back its own shares from the public. The company uses its cash to buy back its shares. It is another way to capitalise the profits by optimally using it to buyback its shares which helps the company to reduce the number of shareholders and have a greater autonomy and ownership over its business.
Net Asset Value (NAV):
The NAV (NET ASSET VALUE) per unit value of a Mutual Fund.
- NAV abbreviation stands for “Net Asset Value”. The performance of a specified mutual fund is denoted by its Net Asset Value (NAV). As shares have a market traded price, similarly, mutual funds are assigned a net asset value per unit. The NAV of mutual funds fluctuates daily depending on the performance of the underlying assets. It is required to be disclosed on a daily basis.
- The NAV per unit is the market value of securities of a particular mutual fund divided by the total number of units of the scheme on any specified date.
NET ASSET VALUE (NAV) = Fund Assets - Fund Liabilities / Total Number of Units Outstanding
Expense Ratio:
The fee charged by the mutual fund house for the management of funds. Expense ratio is the annual maintenance charge levied by mutual funds to finance its expenses. The expense ratio includes fees for portfolio management, administration, marketing, and distribution. The expense ratio for every scheme is mentioned on the AMC’s (Asset Management Company) website as well as the scheme’s factsheet. It is expressed as a percentage of the fund’s total assets.
NFO (New Fund Offer):
The abbreviation NFO stands for New Fund Offer, it refers to the process when a new mutual fund is launched in the stock market. NFO is a Mutual Fund’s first time offer of units, similar to an IPO for stocks.
A new fund offer (NFO) refers to the initial sale of fund shares issued by an investment company to investors. Similar to an IPO in the stock market, NFOs are intended to raise capital for the fund and attract investors.
Lock In Period:
The mandatory holding period before an investor can redeem or exit a mutual fund is referred to as the lock in period. It is the minimum duration for which investors must hold their investment, they cannot redeem or sell mutual fund units in that period.
Liquid Fund:
A mutual fund investing primarily in short term debt for liquidity, offering safety but lower returns. They invest predominantly in highly liquid money market instruments and debt securities of very short tenure and hence provide high liquidity.
The investment is majorly in short-term instruments such as Treasury Bills (T-bills), Commercial Paper (CP), Certificates Of Deposit (CD) and Collateralized Lending & Borrowing Obligations (CBLO) that have residual maturities of up to 91 days to generate optimal returns while maintaining safety and high liquidity.
The aim of the fund manager of a Liquid Fund is to invest only into liquid investments with a good credit rating with very low possibility of a default. Control over expenses in the form of low expense ratio, good overall credit quality of the portfolio and a disciplined approach to investing are some of the key ingredients of a good liquid fund.
Wealth managers suggest, liquid funds as an ideal parking ground when you have a sudden influx of cash, which could be a huge bonus, sale of real estate and so on and you are undecided about where to deploy that money. Then, this proves to be a return generating as well as a safer option in comparison to others.
Capital Gain:
Capital gains refers to the gain which is eaned by selling of the capital assets of the business. It is not a regular activity hence is differentiated/ separated from the operational incomes pertaining to the company.
Capital Loss:
The loss made from selling capital assets of the company. When the acquisition cost exceeds the selling price a capital loss in incurred.
Goodwill:
- Goodwill is an intangible asset (an asset that’s non-physical which has the potential to offer long-term value). It is the monetary valuation of the business in terms of its reputation.
- Goodwill is the value of the reputation of a firm in respect of the profits which are expected in future over and above the normal profits.
- Goodwill is an intangible asset which is attached to profits which are over and above what one can earn by starting a new business venture.
- Goodwill plays an important role in strengthening the fundamentals and overall image of the business organisation, it is an intangible asset but not a fictitious asset which means that it has some realisable value.
- Goodwill helps a business to get advantage over a new business in the market. It helps organisations create extra profit which is also known as super profit.
- Goodwill is the measurement of reputation of the business in terms of money.
- Goodwill is sometimes reported on the balance sheet with a description title which says that “excess of acquisition cost over net assets acquired”.