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Let's understand the Concept... 

What Does Secondary Market Mean? 

A market where investors purchase securities or assets from other

investors, rather than from issuing companies themselves. Thenational exchanges - such as the New York Stock Exchange and theNASDAQ are secondary markets.

Secondary markets exist for other securities as well, such as whenfunds, investment banks, or entities such as Fannie Maepurchase mortgages from issuing lenders. In any secondary markettrade, the cash proceeds go to an investor rather than to theunderlying company/entity directly.A newly issued IPO will be considered a Primary market trade whenthe shares are first purchased by investors directly from the

underwriting investment bank; after that any shares traded will be onthe secondary market, between investors themselves. In the primarymarket prices are often set beforehand, whereas in the secondarymarket only basic forces like supply and demand determine the priceof the security. 

Let's understand the Concept... What Does Debt   Mean?An amount of money borrowed by one party from another.Many corporations/individuals use debt as a method for making large

purchases that they could not afford under normal circumstances. Adebt arrangement gives the borrowing party permission to borrowmoney under the condition that it is to be paid back at a later date,usually with interest.

Bonds, loans and commercial paper are all examples of debt. Forexample, a company may look to borrow $1 million so they can buy acertain piece of equipment. In this case, the debt of $1 million willneed to be paid back (with interest owing) to the creditor at a laterdate.

 

What Does Debt Security   Mean?Any debt instrument that can be bought or sold between two partiesand has basic terms defined, such as notional amount (amountborrowed), interest rate and maturity/renewal date. Debt securitiesinclude government bonds, corporate bonds, CDs, municipal bonds,preferred stock, collateralized securities and zero-coupon securities.

  The interest rate on a debt security is largely determined by the

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perceived repayment ability of the borrower; higher risks of paymentdefault almost always lead to higher interest rates to borrow capital.Also known as "fixed-income securities."

Debt securities on the whole are safer investments than equity

securities, but riskier than cash. Debt securities get their measure of safety by having a principal amount that is returned to the lender atthe maturity date or upon the sale of the security. They are typicallyclassified and grouped by their level of default risk, the type of 

issuer and income payment cycles.

What Does Money Market   Mean?A segment of the financial market in which financial instruments withhigh liquidity and very short maturities are traded. The moneymarket is used by participants as a means for borrowing and lending inthe short term, from several days to just under a year. Money market

securities consist of negotiable certificates of deposit (CDs), bankersacceptances, U.S. Treasury bills, commercial paper, municipal notes,federal funds and repurchase agreements (repos). 

 The money market is used by a wide array of participants, from acompany raising money by selling commercial paper into the market toan investor purchasing CDs as a safe place to park money in the shortterm. The money market is typically seen as a safe place to put moneydue the highly liquid nature of the securities and short maturities, butthere are risks in the market that any investor needs to be aware of including the risk of default on securities such as commercial paper.

What Does Money Market Fund   Mean?An investment fund that holds the objective to earn interest forshareholders while maintaining a net asset value (NAV) of $1 pershare. Mutual funds, brokerage firms and banks offer these funds.Portfolios are comprised of short-term (less than one year) securitiesrepresenting high-quality, liquid debt and monetary instruments.A money market fund's purpose is to provide investors with asafe place to invest easily accessible cash-equivalent assetscharacterized as a low-risk, low-return investment. Because of theirrelatively low returns, investors, such as those participating

in employer-sponsored retirement plans, might not want to use moneymarket funds as a long-term investment option. 

Let's understand the Concept... 

What Does Dividend Mean?

A distribution of a portion of a company's earnings, decided by the board of 

directors, to a class of its shareholders. The dividend is most often quoted in

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terms of the dollar amount each hare receives (dividends per share). It can also

  be quoted in terms of a percent of the current market price, referred to as

dividend yield.

Also referred to as "Dividend Per Share (DPS)."

Mandatory distributions of income and realized capital gains made tomutual fund investors.

Mutual funds pay out interest and dividend income received from their portfolioholdings as dividends to fund shareholders. In addition, realized capital gains

from the portfolio's trading activities are generally paid out (capital gains

distribution) as a year-end dividend.

What Does Dividend Yield Mean?

A financial ratio that shows how much a company pays out in dividends each

year relative to its share price. In the absence of any capital gains, the dividend

yield is the return on investment for a stock. Dividend yield is calculated asfollows:

To better explain the concept, refer to this dividend yield example: If two

companies both pay annual dividends of $1 per share, but ABC company's stock

is trading at $20 while XYZcompany's stock is trading at $40, then ABC has a

dividend yield of 5% while XYZ is only yielding 2.5%. Thus, assuming all other

factors are equivalent, an investor looking to supplement his or her incomewould likely prefer ABC's stock over that of XYZ.

What Does Interest  Mean?- The charge for the privilege of borrowing money, typically expressedas an annual percentage rate.Interest is commonly calculated using one of two methods: simpleinterest calculation, or compound interest calculation.

What Does   Accrued Interest   Mean?1. A term used to describe an accrual accounting method wheninterest that is either payable or receivable has been recognized, butnot yet paid or received. Accrued interest occurs as a result of the

difference in timing of cash flows and the measurement of these cashflows.2. The interest that has accumulated on a bond since the last interestpayment up to, but not including, the settlement date.

For example, accrued interest receivable occurs when interest on anoutstanding receivable has been earned by the company, but has notyet been received. A loan to a customer for goods sold would result in

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interest being charged on the loan. If the loan is extended on October1 and the lending company's year ends on December 31, there will betwo months of accrued interest receivable recorded as interestrevenue in the company's financial statements for the year.Accrued interest is added to the contract price of a bond transaction.

Accrued interest is that which has been earned since the last couponpayment. Because the bond hasn't expired or the next payment is notyet due, the owner of the bond hasn't officially received the money. If he or she sells the bond, accrued interest is added to the sale price.

Let's understand the Concept... 

*WhatDoesCorporateActionMean?Any event that brings material change to a company and affectsits stakeholders. This includes shareholders, both common andpreferred, as well as bondholders. These events are generallyapproved by the company's board of directors; shareholders are

permitted to vote on some events as well.Splits, dividends, mergers, acquisitions and spin-offs are all examplesof corporate actions. For example, a company may decide to split itsshares 2:1, leaving shareholders with twice as many shares asthey had before. Bondholders are also subject to the effects of corporate actions, which might include calls or the issuance of newdebt. For example, if interest rates fall sharply, a company may call inbonds and pay off existing bondholders, then issue new debt at thecurrent lower interest rates. 

In short, A Corporate Action is any pending or completed action taken

by an issuing corporation that affects the financial and/or physicalstatus of a security.Financial Status : An action affecting the financial status of a securityis one that influences the original cost, market value, or the incomeearned on a security.Example : A corporation declares a cash dividend to be paid to itsstockholders. The financial effect on the security would be incomeearned. 

Physical status change : An action affecting the physical status of asecurity is one that changes the appearance of the actual certificate.

Example-The corporation changes its name. All registeredshareholders will be notified of the details related to the change. In thephysical environment, the corporation's new name replaces the oldname on the certificate and the corporation reissues the certificate tothe shareholders. In the book entry environment, a physical certificatemay not exist so the certificate records are updated electronically. 

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* What Does Letter of Intent - LOI Mean? - An agreement that describes in detail a corporation's intention toexecute a corporate action. The letter of intent is created by thecorporation with its management and legal council, among others,and outlines the details of the action.

 - Letters of intent are used during the merger and acquisitions processto outlines a firm's plan to buy/take over another company. Forexample, the letter of intent will disclose the specific terms of thetransaction (whether it is a cash or stock deal).

Corporate Action - Important Dates!  The following provides a brief description of the important datesassociated with Corporate Actions. It is important to note that not alldates are relative to all Corporate Actions. 

Declaration Date :   This is the date the corporation's board of 

directors declares the action. 

Ex-Dividend Date : This is a date set by the market and the companyto determine shareholder entitlement. A shareholder is entitled toreceive payment, or the privilege of participating in a corporate action,if they hold the security or have purchased the security before Ex-Date. The Entitlement Rule is as follows:If a shareholder owns a security on the morning of ex-dividend datebefore trading begins, the shareholder is entitled to receive thedividend payment or participate in the corporate action. If a

shareholder purchases the security on or after the Ex-Date of acorporate action,  the shareholder is not eligible to participate. If ashareholder sells part, or all of their holding, on or after Ex-Date, theshareholder is still entitled to participate in the corporate action. 

Record Date : A corporation's board of directors establishes this datewith agreement from the market. It is the date that the transfer agent(U.S.) or company registrar (U.K.) "closes its books" on an issue,effectively taking a snapshot of the register. This enables the transferagent/registrar to have a fixed record on which to calculate theregistered holders' entitlement and to identify to whom any documents

are to be sent. Those names listed on record date will receive the corporate actionpayment or the participating documentation for the action. It isimportant that the name of each current shareholder is officiallyregistered on the books of the transfer agent (U.S.) or registrar (U.K)prior to "the books close" in order to receive their entitlement directlyfrom the issuer. 

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For those shareholders who have purchased a security before ex-datebut traded positions have not been settled or registered on the booksby record date, they will have to claim their right to participate in thecorporate action  from the seller of the stock. 

Effective Date  :  This is the date that a Corporate Action is effective.On this date, the action should be accounted for on the shareholdersbooks. Typically, there will be a period of time that  elapses betweenthe announcement of the action and the effective date. 

Payable Date : This is the date that the shareholders receive theirentitlement, whether cash or stock.  A corporation's board of directorsestablishes this date.

 Call Date : Often referred to as the Redemption Date in the UK, this isthe date that a callable issue may be redeemed prior to maturity.

Shareholders will have to relinquish the bond to the issuer in exchangefor payment.

What Does Mortgage-Backed Security (MBS) Mean?A type of asset-backed security that is secured by a mortgage orcollection of mortgages. These securities must also be grouped in oneof the top two ratings as determined by a accredited credit ratingagency, and usually pay periodic payments that are similar to couponpayments. Furthermore, the mortgage must have originated from aregulated and authorized financial institution.Also known as a"mortgage-related security" or a "Mortgage pass through".

When you invest in a mortgage-backed security you are essentiallylending money to a home buyer or business. An MBS is a way for asmaller regional bank to lend mortgages to its customers withouthaving to worry about whether the customers have the assets to coverthe loan. Instead, the bank acts as a middleman between the homebuyer and the investment markets. This type of security is also commonly used to redirect the interest andprincipal payments from the pool of mortgages to shareholders. Thesepayments can be further broken down into different classes of securities, depending on the riskiness of different mortgages as theyare classified under the MBS. 

What Does Commercial Mortgage-Backed Securities (CMBS)Mean?A type of mortgage-backed security that is secured by the loan on acommercial property. A CMBS can provide liquidity to real estateinvestors and to commercial lenders. As with other types of MBS, theincreased use of CMBS can be attributable to the rapid rise in realestate prices over the years.

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Because they are not standardized, there are a lot of details associatedCMBS that make them difficult to value. However, when compared to aresidential mortgage-backed security (RMBS), a CMBS provides a lowerdegree of prepayment risk because commercial mortgages are mostoften set for a fixed term.

 What Does Residential Mortgage-Backed Security (RMBS)Mean?A type of security whose cash flows come from residential debt such asmortgages, home-equity loans and sub prime mortgages. This is a typeof mortgage-backed securities that focuses on residential instead of commercial debt.Holders of an RMBS receive interest and principal payments that comefrom the holders of the residential debt. The RMBS comprises a largeamount of pooled residential mortgages.

What Does Paydown Mean?A payment made towards an outstanding loan balance . Every timeyou make a mortgage payment you are "paying down" your loan.

What Does Original Face Mean?  The par value of a mortgage-backed security at the time it isissued. Unlike most other types of bonds, mortgage-backed securitiesreturn both principal and interest to the holder in periodic payments(usually monthly). Over time, the outstanding principal balance of amortgage-backed security will be reduced. The original face remainsan important and distinguishing piece of information associated with a

mortgage-backed security. By definition, a new issue mortgage-backedsecurity will have a pool factor of 1; in other words, the original facewill equal the current face. As the principal is paid down, the currentface will be less than the original face. The current face is derived by multiplying the original face by thecurrent pool factor.

What Does Current Face Mean? The current par value of a mortgage-backed security (MBS). Currentface is determined by multiplying the current pool factor by themortgage-backed security's original face value. A mortgage-backed

security's current face represents the outstanding principal balance (orits outstanding face value) of the mortgage's underlying the security.If the MBS pays interest and principal on payment dates, the currentface will decline after each payment is madeDifferent mortgage-Backed securities with the same issue date, samecoupon and same original face value can have greatly different currentfaces. Mortgage-backed securities pay down at different rates basedon the characteristics of the underlying loans and on the actual

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prepayment speed of underlying mortgages.

For example, suppose that two mortgage-backed securities (MBS 1 andMBS 2) have the same original face value, but MBS 1 experiencesfaster prepayments then MBS 2. In this case, MBS 1 will have a lower

current face value then MBS 2 as time progresses.

Let's understand the Concept... What Does Index  Mean?A statistical measure of change in an economy or a securities market.In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Eachindex has its own calculation methodology and is usually expressed interms of a change from a base value. Thus, the percentage change ismore important than the actual numeric value.

Stock and bond market indexes are used to construct index mutualfunds and exchange-traded funds (ETFs) whose portfolios mirror thecomponents of the index. The Standard & Poor's 500 is one of the world's best known indexes,and is the most commonly used benchmark for the stock market.Other prominent indexes include the DJ Wilshire 5000 (total stockmarket), the MSCI EAFE (foreign stocks in Europe, Australasia, FarEast) and the Lehman Brothers Aggregate Bond Index (total bondmarket).Because, technically, you can't actually invest in an index, index

mutual funds and exchange-traded funds (based on indexes)allow investors to invest in securities representing broad marketsegments and/or the total market.

In Market capitalization weighted index method, index is calculatedwith the help of following formula.

Current market capitalizationINDEX = ---------------------------------------------- * Base value

Base market capitalization A market index is very important for its use.

1. as a barometer for market behavior.2. as a benchmark portfolio performance.3. as an underlying in derivatives instruments like index futures, and4. in passive fund management by index funds.

Let's understand the Concept... 

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What Does Fannie Mae - Federal National Mortgage Association - FNMA

Mean?

A government-sponsored enterprise (GSE) that was created in 1938 to expand

the flow of mortgage money by creating a secondary mortgage market. Fannie

Mae is a publicly traded company which operates under a congressional charter that directs

Fannie Mae to channel its efforts into increasing the availability and affordability of homeownership for low-, moderate-, and middle-income Americans.

Fannie Mae purchases and guarantees mortgages that meet its funding criteria. Through this

process it secures mortgages to form mortgage-backed securities (MBS). The market for Fannie

Mae's MBS is extremely large and liquid. Pension funds, insurance companies and foreign

governments are among the investors in Fannie Mae's MBS. In order to promote homeownership,

Fannie Mae also holds a large portfolio of its own and other institution's MBSs, known as its

retained portfolio. To fund this portfolio, Fannie Mae issues debt known in the market place as

agency debt.

What Does Ginnie Mae - Government National Mortgage Association -

GNMA Mean?

U.S. government corporation within the U.S. Department of Housing and UrbanDevelopment (HUD). Ginnie May aims to:

- Ensure liquidity for government-insured mortgages, including those insured by

the Federal Housing Administration (FHA), the Veterans Administration (VA)and the Rural Housing Administration (RHA).

- Bring Investors' capital into the market for these types of loans, so that the

issuers have the means to issue more.

Most of the mortgages securitized as Ginnie Mae mortgage-backed securities(MBSs) are those guaranteed by FHA, which are typically mortgages for first-

time home buyers and low-income borrowers.

Ginnie Mae neither issues, sells or buys pass-through mortgage-backedsecurities, nor does it purchase mortgage loans. It simply guarantees (insures)

the timely payment of principal and interest from approved issuers (such as

mortgage bankers, savings and loans, and commercial banks) of qualifying loans,

such as those issued by the FHA and RHA.

Unlike its cousins Freddie Mac, Fannie Mae and Sallie Mae, Ginnie Mae is not a

publicly-traded company. An investors in a GNMA security will not know who

the underlying issuer of the mortgages is, but merely that the security isguaranteed by GNMA, which is backed by the full faith and credit of the U.S

government, just like U.S. Treasuries.

Let's understand the Concept... 

What Does 'Derivative' Mean? 

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A security whose price is dependent upon or derived from one or moreunderlying assets. The derivative itself is merely a contract betweentwo or more parties.

Its value is determined by fluctuations in the underlying asset. Themost common underlying assets include stocks, bonds, commodities,

currencies, interest rates and market indexes. Most derivatives arecharacterized by high leverage. 

Futures contracts, forward contracts, options and swaps are the mostcommon types of derivatives.

Derivatives are generally used to hedge risk, but can also be used forspeculative purposes.

For example, a European investor purchasing shares of an Americancompany off of an American exchange (using U.S. dollars to do so)would be exposed to exchange-rate risk while holding that stock. Tohedge this risk, the investor could purchase currency futures to lock in

a specified exchange rate for the future stock sale and currencyconversion back into Euros.

What Does Forward Contract Mean?A cash market transaction in which delivery of the commodity isdeferred until after the contract has been made. Although the deliveryis made in the future, the price is determined on the initial trade date.

Most forward contracts don't have standards and aren't traded onexchanges. A farmer would use a forward contract to "lock-in" a pricefor his grain for the upcoming fall harvest.

What Does Currency Forward Mean?A forward contract in the forex market that locks in the price at whichan entity can buy or sell a currency on a future date. Also known as"outright forward currency transaction", "forward outright" or "FXforward".

In currency forward contracts, the contract holders are obligated tobuy or sell the currency at a specified price, at a specified quantity andon a specified future date. These contracts cannot be transferred. 

What Does Futures Mean?

A financial contract obligating the buyer to purchase an asset (or theseller to sell an asset), such as a physical commodity or a financialinstrument, at a predetermined future date and price. Futurescontracts detail the quality and quantity of the underlying asset; theyare standardized to facilitate trading on a futures exchange. Somefutures contracts may call for physical delivery of the asset, whileothers are settled in cash. The futures markets are characterized bythe ability to use very high leverage relative to stock markets.

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Futures can be used either to hedge or to speculate on the pricemovement of the underlying asset. For example, a producer of corncould use futures to lock in a certain price and reduce risk (hedge). Onthe other hand, anybody could speculate on the price movement of 

corn by going long or short using futures. The primary difference between options and futures is that optionsgive the holder the right to buy or sell the underlying asset atexpiration, while the holder of a futures contract is obligated to fulfillthe terms of his/her contract.

What Does Futures Contract Mean?A contractual agreement, generally made on the trading floor of afutures exchange, to buy or sell a particular commodity or financialinstrument at a pre-determined price in the future. Futures contractsdetail the quality and quantity of the underlying asset; they are

standardized to facilitate trading on a futures exchange. Some futurescontracts may call for physical delivery of the asset, while others aresettled in cash.

Let's understand the Concept... 

What Does Mark To Market - MTM Mean?1. A measure of the fair value of accounts that can change over time,such as assets and liabilities. Mark to market aims to provide a realisticappraisal of an institution's or company's current financial situation.2. The accounting act of recording the price or value of a security,portfolio or account to reflect its current market value rather than itsbook value.3. When the net asset value (NAV) of a mutual fund is valued based onthe most current market valuation.

4.This is done most often in futures accounts to make sure that marginrequirements are being met. If the current market value causes themargin account to fall below its required level, the trader will be facedwith a margin call.5. Mutual funds are marked to market on a daily basis at the marketclose so that investors have an idea of the fund's NAV.

MTM settlement: 

All futures contracts for each member are marked -to -market (MTM) tothe daily settlement price of the relevant futures contract at the end of the day. The profits / losses are computed as the difference between: 

1.The trade price and the day's settlement price for contracts executedduring the day but not squared up. 

2. The previous day's settlement price and the current day'ssettlement price for brought forward contracts. 

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3. The buy price and the sell price for contracts executed during theday and squared up. 

What Does Maintenance Margin Mean? The minimum amount of equity that must be maintained in a marginaccount. In the context of the NYSE and NASD, after an investor has

bought securities on margin, the minimum required level of margin is25% of the total market value of the securities in the margin account.Keep in mind that this level is a minimum, and many brokerages havehigher maintenance requirements of 30-40%.Also referred to as "minimum maintenance" or "maintenancerequirement".

As governed by the Federal Reserve's Regulation T, when a traderbuys on margin, key levels must be maintained throughout the life of the trade. First off, a broker cannot extend any credit to accounts withless than $2,000 in cash (or securities). Second, the initial margin of 

50% is required for a trade to be entered. Finally, the maintenancemargin says that an equity level of at least 25% must be maintained. The investor will be hit with a margin call if the value of securities fallsbelow the maintenance margin.

What Does Option Mean?A financial derivative that represents a contract sold by one party(option writer) to another party (option holder). The contract offers thebuyer the right, but not the obligation, to buy (call) or sell (put) asecurity or other financial asset at an agreed-upon price (the strikeprice) during a certain period of time or on a specific date (exercisedate).

Options are extremely versatile securities that can be used in manydifferent ways. Traders use options to speculate, which is a relativelyrisky practice, while hedgers use options to reduce the risk of holdingan asset.

In terms of speculation, option buyers and writers have conflictingviews regarding the outlook on the performance of an underlyingsecurity.For example, because the option writer will need to provide theunderlying shares in the event that the stock's market price willexceed the strike, an option writer that sells a call option believes thatthe underlying stock's price will drop relative to the option's strikeprice during the life of the option, as that is how he or she will reapmaximum profit. This is exactly the opposite outlook of the option buyer. The buyerbelieves that the underlying stock will rise, because if this happens, thebuyer will be able to acquire the stock for a lower price and then sell itfor a profit. 

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American Option : American options are options that can beexercised at any time up to the expiration date. Most exchange-tradedoptions are American. 

European options: European options are options that can beexercised only on the expiration date itself. European options are

easier to analyze than American options. 

Let's understand the Concept... 

What Does Call Option Mean?An agreement that gives an investor the right (but not the obligation)to buy a stock, bond, commodity, or other instrument at a specifiedprice within a specific time period.

It may help you to remember that a Call option gives you the right to"call in" (buy) an asset. You profit on a call when the underlying assetincreases in price.

What Does Put Option Mean?An option contract giving the owner the right, but not the obligation, tosell a specified amount of an underlying security at a specified pricewithin a specified time. This is the opposite of a call option, which givesthe holder the right to buy shares.

A put becomes more valuable as the price of the underlying stockdepreciates relative to the strike price. For example, if you have oneMar 08 Taser 10 put, you have the right to sell 100 shares of Taser at$10 until March 2008 (usually the third Friday of the month). If sharesof Taser fall to $5 and you exercise the option, you can purchase 100shares of Taser for $5 in the market and sell the shares to the option's

writer for $10 each, which means you make $500 (100 x ($10-$5)) onthe put option. Note that the maximum amount of potential profit inthis example ignores the premium paid to obtain the put option.

What Does Warrant Mean?A derivative security that gives the holder the right to purchasesecurities (usually equity) from the issuer at a specific price within acertain time frame. Warrants are often included in a new debt issue asa "sweetener" to entice investors.

 The main difference between warrants and call options is that warrantsare issued and guaranteed by the company, whereas options are

exchange instruments and are not issued bythe company. Also, the lifetime of a warrant is often measured inyears, while the lifetime of a typical option is measured in months.

Options generally have lives of up to one year, the majority of optionstraded on options exchanges having a maximum maturity of ninemonths. Longer-dated options are called warrants and are generallytraded over-the-counter. 

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What Does Rights Mean?A security giving stockholders entitlement to purchase new sharesissued by the corporation at a predetermined price (normally less thanthe current market price) in proportion to the number of shares alreadyowned. Rights are issued only for a short period of time, after which

they expire. This also known as "subscription rights" or "share purchase rights".

Let's understand the Concept... 

What Does Swap Mean?A Swap is an agreement between two parties to exchange sets of cashflows over a period of time in the future. The two parties that agree tothe Swap agreement are known as counterparties. Swaps areconsidered derivative instruments. Similar to Options and Futures,their value is derived from the value of another financial instrument,such as securities or foreign currencies.

 Traditionally, the exchange of one security for another to change thematurity ( bonds), quality of issues (stocks or bonds), or becauseinvestment objectives have changed. Recently, swaps have grown toinclude currency swaps and interest rate swaps.

Swaps are private agreements between two parties to exchange cashflows in the future according to a prearranged formula. They can beregarded as portfolio of forward contracts.

If firms in separate countries have comparative advantages on interestrats, then a swap could benefit both firms. For example, one firm mayhave a lower fixed interest rate, while another has access to a lower

floating interest rate. These firms could swap to take advantage of thelower rates.

What Does International Swaps and Derivatives Association -ISDA Mean?An association created by the private negotiated derivatives marketthat represents participating parties. This association helps to improvethe private negotiated derivatives market by identifying and reducingrisks in the market.

Created in 1985, the ISDA has members from institutions around theworld. It was created to improve the private negotiated derivatives

market by making it easier for the institutions that deal in the marketto network.

It is the principal derivatives industry trade organization. ISDAdevelops and publishes master agreements for Swaps and other over-the-counter derivatives contracts. ISDA agreements serve as industrystandard documentation for a variety of financial instruments. 

Currency Swap : 

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A currency swap (or cross currency swap) is a foreign exchangeagreement between two parties to exchange principal and fixed rateinterest payments on a loan in one currency for principal and fixed rateinterest payments on an equal (regarding net present value) loan inanother currency. Currency swaps are motivated by comparative

advantage. Currency swaps can be negotiated for a variety of maturities of up to30 years. Unlike a back-to-back loan, a currency swap is notconsidered to be a loan by United States accounting laws and thus it isnot reflected on a company's balance sheet. A swap is considered tobe a foreign exchange transaction (short leg) plus an obligation toclose the swap (far leg) being a forward contract.

Unlike interest rate swaps, currency swaps involve the exchange of theprincipal amount. Interest payments are not netted (as they are ininterest rate swaps) because they are denominated in different

currencies. Further, many currency swaps are traded on organizedexchanges - lowering counter-party risk, as evidenced by the bid- askspread on most listings.

Currency swaps are often combined with interest rate swaps. Forexample, one company would seek to swap a cash flow for their fixedrate debt denominated in US dollars for a floating-rate debtdenominated in Euro. This is especially common in Europe wherecompanies shop for the cheapest debt regardless of its denominationand then seek to exchange it for the debt in desired currency.

For example, suppose a U.S.-based company needs to acquire Swissfrancs and a Swiss-based company needs to acquire U.S. dollars. Thesetwo companies could arrange to swap currencies by establishing aninterest rate, an agreed upon amount and a common maturity date forthe exchange. Currency swap maturities are negotiable for at least tenyears, making them a very flexible method of foreign exchange.

Currency swaps were originally done to get around exchange controls.

During the global financial crisis of 2008 currency swaps were offeredto other central banks by the Federal Reserve System including stableemerging economies such as South Korea, Singapore, Brazil, andMexico

Let's understand the Concept... What Does Interest Rate Swap Mean?An agreement between two parties (known as counterparties) whereone stream of future interest payments is exchanged for anotherbased on a specified principal amount. Interest rate swaps oftenexchange a fixed payment for a floating payment that is linked to aninterest rate (most often the LIBOR). A company will typically useinterest rate swaps to limit, or manage, its exposure to fluctuations in

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interest rates, or to obtain a marginally lower interest rate than itwould have been able to get without the swap.

Interest rate swaps are simply the exchange of one set of cash flows(based on interest rate specifications) for another. Because they tradeOTC, they are really just contracts set up between two or more parties,

and thus can be customized in any number of ways.

Let's review a basic Interest Rate Swap example:Situation: Party A and Party B agree to enter into a Swap agreementthat covers a five-year period and involves annual payments on a $1million principal amount.

· Party A agrees to pay a fixed interest rate of 12% to Party B.

· In return, Party B agrees to pay a floating rate of LIBOR + 3 % toParty A.

· Party A pays 12% of $ 1 million , or $120,000 each year to Party B.

Party B makes a payment to Party A in return, but the actual amount of the payments depends on the movement in LIBOR.Let's assume that the LIBOR is 10% at the time of the firstpayment.

· This means that Party A will pay $120,000 ( $1 million X 12 %) toParty . · Party B will owe $130,000 ($1 million X 13 %) to Party A. ·Netting the two obligations, Party B owes $10,000 ($130,000 - $120,000 ) to Party A.

Generally, only the net payment , the difference between the twoobligations, actually takes place

Foreign Exchange Market : 

 The foreign exchange market (currency, forex, or FX) is wherecurrency trading takes place. It is where banks and other officialinstitutions facilitate the buying and selling of foreign currencies. FXtransactions typically involve one party purchasing a quantity of onecurrency in exchange for paying a quantity of another. The foreignexchange market that we see today started evolving during the 1970swhen world over countries gradually switched to floating exchangerate from their erstwhile exchange rate regime, which remained fixed as per the Bretton Woods system till 1971.

Presently, the FX market is one of the largest and most liquid financialmarkets in the world, and includes trading between large banks,central banks, currency speculators, corporations, governments, andother institutions. The average daily volume in the global foreignexchange and related markets is continuously growing. Traditionaldaily turnover was reported to be over US$3.2 trillion in April 2007 by

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the Bank for International Settlements. Since then, the market hascontinued to grow. According to Euro money's annual FX Poll, volumesgrew a further 41% between 2007 and 2008 

 The purpose of FX market is to facilitate trade and investment. Theneed for a foreign exchange market arises because of the presence of 

multifarious international currencies such as US Dollar, Pound Sterling,etc., and the need for trading in such currencies

 The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currencytrading happens continuously throughout the day; as the Asian trading session ends,the European session begins, followed by the North American session and then backto the Asian session, excluding weekends.

Exchange-Traded Fund (ETF) : 

A security that tracks an index, a commodity or a basket of assets like

an index fund, but trades like a stock on an exchange. ETFs experienceprice changes throughout the day as they are bought and sold.Because it trades like a stock, an ETF does not have its net asset value(NAV) calculated every day like a mutual fund does.By owning an ETF, you get the diversification of an index fund as wellas the ability to sell short, buy on margin and purchase as little as oneshare. Another advantage is that the expense ratios for most ETFs arelower than those of the average mutual fund. When buying and sellingETFs, you have to pay the same commission to your broker that you'dpay on any regular order.

Exchange-traded funds (or ETFs) are open ended investment

companies that can be traded at any time throughout the course of theday. Typically, ETFs try to replicate a stock market index such as theS&P 500 (e.g., SPY), but recently they are now replicating investmentsin the currency markets with the ETF increasing in value when the USDollar weakens versus a specific currency, such as the Euro. Certain of these funds track the price movements of world currencies versus theUS Dollar, and increase in value directly counter to the US Dollar,allowing for speculation in the US Dollar for US and US Dollardenominated investors and speculators.

An ETF combines the valuation feature of a mutual fund or unitinvestment trust, which can be purchased or redeemed at the end of each trading day for its net asset value, with the tradability feature of aclosed-end fund, which trades throughout the trading day at pricesthat may be more or less than its net asset value. Closed-end funds arenot considered to be exchange-traded funds, even though they arefunds and are traded on an exchange. ETFs have been available in theUS since 1993 and in Europe since 1999. ETFs traditionally have been

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index funds, but in 2008 the U.S. Securities and Exchange Commission began to authorize the creation of actively-managed ETFs.

Let's understand the Concept... 

NASDAQ...

 The NASDAQ (acronym of National Association of SecuritiesDealers Automated Quotations ) is an American stock exchange. Itis the largest electronic screen-based equity securities trading marketin the United States. With approximately 3,800 companies, it has moretrading volume per hour than any other stock exchange in the world.

It was founded in 1971 by the National Association of SecuritiesDealers (NASD), who divested themselves of it in a series of sales in2000 and 2001. It is owned and operated by the NASDAQ OMX Group,the stock of which was listed on its own stock exchange in 2002, and ismonitored by the Securities and Exchange Commission (SEC). With the

completed purchase of the Nordic-based operated exchange OMX,following its agreement with Borse Dubai, NASDAQ is poised to capture67% of the controlling stake in the aforementioned exchange, therebyinching ever closer to taking over the company and creating a trans-Atlantic powerhouse. The group, now known as Nasdaq-OMX, controlsand operates the NASDAQ stock exchange in New York City -- thesecond largest exchange in the United States. It also operates eightstock exchanges in Europe and holds one-third of the Dubai StockExchange. It has a double-listing agreement with OMX, and willcompete with NYSE Euro next group in attracting new listings.

 NASDAQ has a pre-market session from 07:00am to 09:30am, a normal trading session from 09:30am to

04:00pm and a post-market session from 04:00pm to 08:00pm (all times in EST).

What Does Net Asset Value - NAV Mean? 

A mutual fund's price per share or exchange-traded fund's (ETF) per-share value. In both cases, the per-share dollar amount of the fund iscalculated by dividing the total value of all the securities in itsportfolio, less any liabilities, by the number of fund shares outstanding.

Net asset value (NAV) is a term used to describe the value of anentity's assets less the value of its liabilities. The term is mostcommonly used in relation to open-ended funds, though it may also beused as a synonym for the book value of a business.

 There is no universal method of valuing assets and liabilities for thepurposes of calculating net asset value, and the criteria used for thevaluation will depend upon the circumstances, the purposes of thevaluation and any regulations that may apply.

In terms of corporate valuations, the calculation: value of assets lessliabilities equals net asset value (NAV), or "book value", is used.

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In the context of mutual funds, NAV per share is computed once a daybased on the closing market prices of the securities in the fund'sportfolio. All mutual fund’s buy and sell orders are processed at theNAV of the trade date. However, investors must wait until the followingday to get the trade price.

Mutual funds pay out virtually all of their income and capital gains. Asa result, changes in NAV are not the best gauge of mutual fundperformance, which is best measured by annual total return. BecauseETFs and closed -end funds trade like stocks, their shares trade atmarket value, which can be a dollar value above (trading at apremium) or below (trading at a discount) NAV. 

In determining whether shares in a public company are a cheap orexpensive investment, one tool used by investors is a comparison of the company's current market capitalization (being the price at whichthe market values the company) with its NAV. The NAV will usually be

below the market price for the following reasons: The NAV describes the company's current asset and liability

position. Investors might believe that the company hassignificant growth prospects, in which case they would beprepared to pay more for the company than its NAV.

 The current value of a company's assets may be higher than thehistorical financial statements used in the NAV calculation.

Certain assets, such as goodwill (which broadly represents acompany's ability to make future profits), are not necessarilyincluded on a balance sheet and so will not appear in an NAV

calculation.Let's understand the Concept... 

What Does Merger Mean? The combining of two or more companies, generally by offering thestockholders of one company securities in the acquiring company inexchange for the surrender of their stock.

In business or economics a merger is a combination of two companies into one larger company. Such actions are commonly voluntary andinvolve stock swap or cash payment to the target. Stock swap is oftenused as it allows the shareholders of the two companies to share the

risk involved in the deal. A merger can resemble a takeover but resultin a new company name (often combining the names of the originalcompanies) and in new branding; in some cases, terming thecombination a "merger" rather than an acquisition is done purely forpolitical or marketing reasons.

Let's understand the Concept... 

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What Does Stock Split Mean?A corporate action in which a company's existing shares are dividedinto multiple shares. Although the number of shares outstandingincreases by a specific multiple, the total dollar value of the sharesremains the same compared to pre-split amounts, because no real

value has been added as a result of the split.In the U.K., a stock split is referred to as a "scrip issue", "bonus issue","capitalization issue" or "free issue".

For example, in a 2-for-1 split, each stockholder receives an additionalshare for each share he or she holds.

One reason as to why stock splits are performed is that a company'sshare price has grown so high that to many investors, the shares aretoo expensive to buy in round lots.For example, if a XYZ Corp.'s shares were worth $1,000 each, investorswould need to purchase $100,000 in order to own 100 shares. If each

share was worth $10, investors would only need to pay $1,000 to own100 shares.

What Does Reverse Stock Split Mean?A reduction in the number of a corporation's shares outstanding thatincreases the par value of its stock or its earnings per share. Themarket value of the total number of shares (market capitalization)remains the same.

For example, a 1-for-2 reverse split means you get half as manyshares, but at twice the price. It's usually a bad sign if a company isforced to reverse split - firms do it to make their stock look morevaluable when, in fact, nothing has changed. A company may also do areverse split to avoid being delisted.

What Does International Securities Identification Number - ISINMean?ISIN is A code that uniquely identifies a specific securities issue. Theorganization that allocates ISINs in any particular country is thecountry's respective National Numbering Agency (NNA). AnInternational Securities Identification Number (ISIN) uniquelyidentifies a security. Its structure is defined in ISO 6166. Securities forwhich ISINs are issued include bonds, commercial paper, equities and

warrants. The ISIN code is a 12-character alpha-numerical code thatdoes not contain information characterizing financial instruments butserves for uniform identification of a security at trading andsettlement. 

Securities with which ISINs can be used include debt securities, shares,options, derivatives and futures. The ISIN identifies the security, notthe exchange (if any) on which it trades; it is not a ticker symbol. For

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instance, Daimler AG stock trades on twenty-two different stockexchanges worldwide, and is priced in five different currencies; it hasthe same ISIN on each, though not the same ticker symbol.

What Does CUSIP Number Mean? The acronym CUSIP typically refers to both the Committee on

Uniform Security Identification Procedures and the 9-characteralphanumeric security identifiers that they distribute for all NorthAmerican securities for the purposes of facilitating clearing andsettlement of trades. The CUSIP distribution system is owned by theAmerican Bankers Association and is operated by Standard & Poor's. The CUSIP Service Bureau acts as the National Numbering Association(NNA) for North America, and the CUSIP serves as the NationalSecurities Identification Number for products issued from both theUnited States and Canada.

In the 1980s there was an attempt to expand the CUSIP system for

international securities as well. The resulting CINS (CUSIP InternationalNumbering System) has seen little use as it was introduced at aboutthe same time as the truly international ISIN system. CINS identifiersdo appear in the ISID Plus directory, however.

What Does Depository Trust Company - DTC Mean?

The Depository Trust Company (DTC) – The original depositoryclearing corporation. Established in 1973, it was created to reducecosts and provide efficiencies by immobilizing securities and making"book-entry" changes to show ownership of the securities. DTC

provides securities movements for NSCC's net settlements, andsettlement for institutional trades (which typically involve money andsecurities transfers between custodian banks and broker-dealers), aswell as money market instruments. In 2007, DTC settled transactionsworth $513 trillion, and processed 325 million book-entry deliveries. Inaddition to settlement services, DTC retains custody of 3.5 millionsecurities issues, worth about $40 trillion, including securities issued inthe US and more than 110 other countries. DTC is a member of theU.S. Federal Reserve System, and a registered clearing agency withthe Securities and Exchange Commission. 

One of the world's largest securities depositories, it holds in excess of 

US$10 trillion worth of securities in custody. The DTC acts like aclearinghouse to settle trades in corporate and municipal securities.

DTC is owned by many companies in the financial industry, with theNYSE being one of its largest shareholders 

The Depository Trust & Clearing Corporation (DTCC), basedprimarily at 55 Water Street in New York City, is the world’s largestpost-trade financial services company. It was set up to provide an

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efficient and safe way for buyers and sellers of securities to make theirexchange, and thus "clear and settle" transactions. It also providescustody of securities.

User-owned and directed, it automates, centralizes, standardizes, andstreamlines processes that are critical to the safety and soundness of 

the world’s capital markets. Through its subsidiaries, DTCC providesclearance, settlement, and information services for equities, corporateand municipal bonds, unit investment trusts, government andmortgage-backed securities, money market instruments, and over-the-counter derivatives. DTCC is also a leading processor of mutual funds and insurance transactions, linking funds and carriers with theirdistribution networks. DTCC's DTC depository provides custody andasset servicing for 3.5 million securities issues, comprised mostly of stocks and bonds, from the United States and 110 other countries andterritories, valued at $40 trillion, more than any other depository in theworld.

In 2007, DTCC settled the vast majority of securities transactions in theUnited States, more than $1.86 quadrillion in value. DTCC hasoperating facilities in New York City, and at multiple locations in andoutside the U.S.

In 2007 Chief Executive Officer Donald F. Donahue was named to theadditional office of Chairman of DTCC and its subsidiaries, and Chief Operating Officer William B. Aimetti was named President.

In 2008, The Clearing Corporation and the Depository Trust & ClearingCorporation announced CCorp members will benefit from CCorp'snetting and risk management processes, and will leverage the assetservicing capabilities of DTCC's Trade Information Warehouse for creditdefault swaps (CDS).

A Custodian Bank : 

A custodian bank, or simply custodian, is a financial institution responsible for safeguarding a firm's or individual's financial assets.

 The role of a custodian in such a case would be the following: to hold insafekeeping assets such as equities and bonds, arrange settlement of any purchases and sales of such securities, collect information on and

income from such assets (dividends in the case of equities and interestin the case of bonds), provide information on the underlying companiesand their annual general meetings, manage cash transactions, performforeign exchange transactions where required and provide regularreporting on all their activities to their clients. Custodian banks areoften referred to as global custodians if they hold assets for theirclients in multiple jurisdictions around the world, using their own localbranches or other local custodian banks in each market to hold

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accounts for their underlying clients. Assets held in such a manner aretypically owned by pension funds.

 The following companies offer custodian bank services:

Bank of New York Mellon 

BNP Paribas Securities Services Fifth Third Bank 

Goldman Sachs 

HSBC 

 JPMorgan Chase 

Northern Trust 

RBC Dexia 

Union Bank of California 

Standard Bank State Street Bank & Trust 

Wells Fargo Bank 

Deutsche Bank 

What Does International Swaps and Derivatives Association -ISDA Mean? 

An association created by the private negotiated derivatives market

that represents participating parties. This association helps to improvethe private negotiated derivatives market by identifying and reducingrisks in the market. Created in 1985, the ISDA has members frominstitutions around the world. It was created to improve the privatenegotiated derivatives market by making it easier for the institutionsthat deal in the market to network.

 The International Swaps and Derivatives Association (ISDA) is atrade organization of participants in the market for over-the-counterderivatives. It is headquartered in New York, and has created astandardized contract (the ISDA Master Agreement) to enter intoderivatives transactions. There are currently two versions of the ISDA

Master Agreement: the 1992 edition and the 2002 edition. In practicalterms the two are very similar since parties tend to amend their 1992agreements to incorporate most of the amendments included in the2002 edition by means of the Schedule (see below). References hereinto sections of the ISDA Master Agreement are references to the 1992edition unless otherwise stated. The ISDA Master Agreement is abilateral framework agreement.

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ISDA also produces a credit support annex which further permits parties to anISDA Master Agreement to mitigate their credit risk by requiring the party whichis 'out-of-the-money' to post collateral (usually cash, government securities or highly rated bonds) corresponding to the amount which would be payable by thatparty were all the outstanding Transactions under the relevant ISDA Master 

Agreement terminated. Collateral other than cash is usually discounted for risk,that is, the pledgor would have to post collateral in excess of the potentialsettlement amount . 

What Does Global Depository Receipt - GDR Mean? 

1. A bank certificate issued in more than one country for shares in aforeign company. The shares are held by a foreign branch of aninternational bank. The shares trade as domestic shares, but areoffered for sale globally through the various bank branches.

2. A financial instrument used by private markets to raise capital

denominated in either U.S. dollars or euros.A Global Depository Receipt (GDR) is a certificate issued by a depository bank, which

 purchases shares of foreign companies and deposits it on the account. GDRs representownership of an underlying number of shares.

Global Depository Receipts facilitate trade of shares, and are commonly used to invest in

companies from developing or emerging markets.

Prices of GDRs are often close to values of related shares, but they are traded & settled

independently of the underlying share.

Several international banks issue GDRs, such as JPMorgan Chase, Citigroup, Deutsche

Bank, Bank of New York. They trade on the International Order Book (IOB) of the

London Stock Exchange. Normally 1 GDR = 10 Shares,

Let's understand the Concept... 

What Does American Depositary Receipt - ADR Mean? 

A negotiable certificate issued by a U.S. bank representing a specifiednumber of shares (or one share) in a foreign stock that is traded on aU.S. exchange. ADRs are denominated in U.S. dollars, with theunderlying security held by a U.S. financial institution overseas. ADRshelp to reduce administration and duty costs that would otherwise be

levied on each transaction. This is an excellent way to buy shares in aforeign company while realizing any dividends and capital gains in U.S.dollars. However, ADRs do not eliminate the currency and economicrisks for the underlying shares in another country. For example,dividend payments in euros would be converted to U.S. dollars, net of conversion expenses and foreign taxes and in accordance with thedeposit agreement. ADRs are listed on either the NYSE, AMEX orNasdaq.

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An American Depository Receipt (or ADR) represents theownership in the shares of a foreign company trading on US financialmarkets. The stock of many non-US companies trades on USexchanges through the use of ADRs. ADRs enable US investors to buyshares in foreign companies without undertaking cross-border

transactions. ADRs carry prices in US dollars, pay dividends in USdollars, and can be traded like the shares of US-based companies. 

Each ADR is issued by a US depositary bank and can represent afraction of a share, a single share, or multiple shares of foreign stock.An owner of an ADR has the right to obtain the foreign stock itrepresents, but US investors usually find it more convenient simply toown the ADR. The price of an ADR is often close to the price of theforeign stock in its home market, adjusted for the ratio of ADRs toforeign company shares. In the case of companies incorporated in theUnited Kingdom, creation of ADRs attracts a 1.5% stamp duty reservetax (SDRT) charge by the UK government. 

Depositary banks have numerous responsibilities to an ADR holder andto the non-US company the ADR represents. The first ADR wasintroduced by JPMorgan in 1927, for the British retailer Selfridges&Co. There are currently four major commercial banks that providedepositary bank services - JPMorgan, Citibank, Deutsche Bank and theBank of New York Mellon. Individual shares of a foreign corporationrepresented by an ADR are called American Depositary Shares (ADS).

What Does Private Placement Mean?

Raising of capital via private rather than public placement. The result isthe sale of securities to a relatively small number of investors.Investors involved in private placements are usually large banks,mutual funds, insurance companies, and pension funds.Since a private placement is offered to a few, select individuals, theplacement does not have to be registered with the Securities andExchange Commission. In many cases detailed financial information isnot disclosed and a the need for a prospectus is waived. Finally sincethe placements are private rather than public, the average investor isonly made aware of the placement usually after it has occurred.

In the United States, a private placement is an offering of securitiesthat are not registered with the Securities and Exchange Commission

(SEC). Such offerings exploit an exemption offered by the SecuritiesAct of 1933 that comes with several restrictions, including a prohibitionagainst general solicitation. This exemption allows companies to avoidquarterly reporting requirements and many of the legal liabilitiesassociated with the Sarbanes-Oxley Act. The SEC passed Regulation D(Reg D) in 1982 which clarifies how companies can be sure they areexempt from registration under the Securities Act. Regulation D doesinclude a notification requirement in Rule 503.

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Private placements offer "units", where a "unit" is (again, typically)comprised of 1 common share and one-half or one warrant. Thewarrant is usually good for buying 1 common share at a specified priceand has a validity period. An example would be a unit that includesone-half a warrant, where one whole warrant is good for purchasing 1

common share at 56 cents in the 24 months following the privateplacement closing. 

Let's understand the Concept... 

What Does Hedge Fund Mean? 

An aggressively managed portfolio of investments that uses advancedinvestment strategies such as leveraged, long, short and derivativepositions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specifiedmarket benchmark).

Legally, hedge funds are most often set up as private investmentpartnerships that are open to a limited number of investors and requirea very large initial minimum investment. Investments in hedge fundsare illiquid as they often require investors keep their money in the fundfor at least one year.

For the most part, hedge funds (unlike mutual funds) are unregulatedbecause they cater to sophisticated investors. In the U.S., laws requirethat the majority of investors in the fund be accredited. That is, theymust earn a minimum amount of money annually and have a net worthof more than $1 million, along with a significant amount of investment

knowledge. You can think of hedge funds as mutual funds for the superrich. They are similar to mutual funds in that investments are pooledand professionally managed, but differ in that the fund has far moreflexibility in its investment strategies.

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is tomaximize return on investment. The name is mostly historical, as thefirst hedge funds tried to hedge against the downside risk of a bearmarket by shorting the market (mutual funds generally can't enter intoshort positions as one of their primary goals). Nowadays, hedge fundsuse dozens of different strategies, so it isn't accurate to say that hedgefunds just "hedge risk". In fact, because hedge fund managers makespeculative investments, these funds can carry more risk than theoverall market.

What Does Short-Term Investment Fund - STIF Mean?

A Short-Term Investment Fund is a type of investment fund whichinvests in money market investments of high quality and low risk. Theyare commonly used by investors to temporarily store funds while

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arranging for their transfer to another investment vehicle that willprovide higher returns. The goal of this type of fund is to protectcapital with low-risk investments while achieving a return that beats arelevant benchmark such as a Treasury bill index.

 This type of fund aims to protect capital while generating a return that

compares favorably with a particular benchmark, such as a TreasuryBill index. These types of fund have low management fees (usually wellbeneath 1% p.a.) and relatively low rates of return, commensuratewith their low-risk investment style.

What Does Short Selling Mean?

 The selling of a security that the seller does not own, or any sale that iscompleted by the delivery of a security borrowed by the seller. Shortsellers assume that they will be able to buy the stock at a loweramount than the price at which they sold short.

Selling short is the opposite of going long. That is, short sellers makemoney if the stock goes down in price.

 This is an advanced trading strategy with many unique risks andpitfalls. Novice investors are advised to avoid short sales.

In finance, short selling or "shorting" is the practice of selling afinancial instrument that the seller does not own at the time of thesale. Short selling is done with the intent of later purchasing thefinancial instrument at a lower price. Short-sellers attempt to profitfrom an expected decline in the price of a financial instrument. Shortselling or "going short" is contrasted with the more conventional

practice of "going long", which typically occurs when a financialinstrument is purchased with the expectation that its price will rise. Thus, being "long" is just a way of saying that you own a positivenumber of the securities; being "short" is just a way of saying that youown a negative number of the securities. 

For example, assume that shares in XYZ Company currently sell for$10 per share. A short seller would borrow 100 shares of XYZCompany, and then immediately sell those shares for a total of $1000.If the price of XYZ shares later falls to $8 per share, the short sellerwould then buy 100 shares back for $800, return the shares to theiroriginal owner and make a $200 profit (minus borrowing fees). Thispractice has the potential for losses as well. For example, if the sharesof XYZ that one borrowed and sold in fact went up to $25, the shortseller would have to buy back all the shares at $2500, losing $1500. 

Let's understand the Concept... 

What Does Commercial Paper Mean?

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In the global money market, commercial paper is an unsecuredpromissory note with a fixed maturity of one to 270 days. CommercialPaper is a money-market security issued (sold) by large banks andcorporations to get money to meet short term debt obligations (forexample, payroll), and is only backed by an issuing bank or

corporation's promise to pay the face amount on the maturity datespecified on the note. Since it is not backed by collateral, only firmswith excellent credit ratings from a recognized rating agency will beable to sell their commercial paper at a reasonable price. Commercialpaper is usually sold at a discount from face value, and carries shorterrepayment dates than bonds. The longer the maturity on a note, thehigher the interest rate the issuing institution must pay. Interest ratesfluctuate with market conditions, but are typically lower than banks'rates.

It is an unsecured, short-term debt instrument issued by a corporation,typically for the financing of accounts receivable, inventories and

meeting short-term liabilities. Maturities on commercial paper rarelyrange any longer than 270 days. The debt is usually issued at adiscount, reflecting prevailing market interest rates.

Commercial paper is not usually backed by any form of collateral, soonly firms with high-quality debt ratings will easily find buyers withouthaving to offer a substantial discount (higher cost) for the debt issue.

A major benefit of commercial paper is that it does not need to beregistered with the Securities and Exchange Commission (SEC) as longas it matures before nine months (270 days), making it a very cost-

effective means of financing. The proceeds from this type of financingcan only be used on current assets (inventories) and are not allowed tobe used on fixed assets, such as a new plant, without SEC involvement.

Repo Rate : 

Repo rate is the rate at which the banks can borrow money from acentral bank of the country in order to avoid scarcity of funds.For eg,whenever the banks have any shortage of funds they can borrow itfrom Reserve Bank of India (RBI). Thus Repo rate is the rate at whichour banks borrow rupees from RBI. A reduction in the repo rate willhelp banks to get money at a cheaper rate. When the repo rate

increases borrowing from RBI becomes more expensive. It is also afinancial & economic tool in the hands of government to control theavailability of money supply in the market by altering the repo ratefrom time to time. 

 The Repo Rate has been cut to 4.75% w.e.f. April 21st 2009

Bank Rate : 

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Bank rate, also referred to as the discount rate, is the rate of interestwhich a central bank charges on the loans and advances that itextends to commercial banks and other financial intermediaries.Changes in the bank rate are often used by central banks to controlthe money supply. 

Various Uses for the Term "Bank Rate" - 

 The term bank rate is most commonly used by bankers to refer to theFederal Discount Rate of interest charged to Federally CharteredSavings Banks. The term bank rate is commonly used by consumers torefer to the current rate of interest given on a savings certificate of Deposit. The term bank rate is most commonly used by consumerswho are interested in either obtaining a purchase money mortgage, ora refinance loan, when referring to the current mortgage rate. 

Types of Bank Interest Rates - 

Bank rate on a Certificate of Deposit "CD".

Bank Rate on a credit card or other loanBank Rate on an automobile or real estate loanused to have a close relation with consumers Bank Rate[current rate of interest]. With an increase in Bankers Bank Rate the Consumers BankRate also used to increase. With vast changes in Bank FinancialStructure and with less dependency on Central Bank for financingcustomers credit, the control on Bankers Bank Rate has very lessimpact on Consumers Bank Rate. 

Consumer Use of the Current Bank Rate -Consumers will check the current "Bank Rate" by comparing CD ratesin the local newspaper or by visiting website's online, in order todetermine which will pay the highest Annual Yield on their savings.Consumers will compare mortgage interest rates by visiting mortgagewebsites that show the various rates of interest of mortgagecompanies. 

Difference between Bank Rate and Repo Rate - 

While repo rate is a short-term measure, i.e. applicable to short-termloans and used for controlling the amount of money in the market,bank rate is a long-term measure and is governed by the long-termmonetary policies of the governing bank concerned.

What Does Capitalization Mean?

" A company's outstanding shares multiplied by its share price,better known as "market capitalization".

If a company has 1,000,000 shares and is currently trading at$10 a share, their market capitalization is $10,000,000. 

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What Does Market Capitalization Mean?The total dollar market value of all of a company's outstandingshares. Market capitalization is calculated by multiplying acompany's shares outstanding by the current market price of one share. The investment community uses this figure to

determining a company's size, as opposed to sales or totalasset figures. Frequently referred to as "market cap".

Company size is a basic determinant of asset allocation andrisk-return parameters for stocks and stock mutual funds. Theterm should not be confused with a company's "capitalization,"which is a financial statement term that refers to the sum of acompany's shareholders' equity plus long-term debt. The stocks of large, medium and small companies are referredto as large-cap, mid-cap, and small-cap, respectively.

Investment professionals differ on their exact definitions, butthe current approximate categories of market capitalizationare:

Large Cap: $10 billion plus and include the companies with thelargest market capitalization.Mid Cap: $2 billion to $10 billionSmall Cap: Less than $2 billion 

Let's understand the Concept... 

What Does Small Cap Mean?Refers to stocks with a relatively small market capitalization. Thedefinition of small cap can vary among brokerages, but generally it is acompany with a market capitalization of between $300 million and $2billion.One of the biggest advantages of investing in small-cap stocks is theopportunity to beat institutional investors. Because mutual funds haverestrictions that limit them from buying large portions of any oneissuer's outstanding shares, some mutual funds would not be able togive the small cap a meaningful position in the fund. To overcomethese limitations, the fund would usually have to file with the SEC,which means tipping its hand and inflating the previously attractiveprice.

What Does Mid Cap Mean?A company with a market capitalization between $2 and $10 billion,which is calculated by multiplying the number of a company's sharesoutstanding by its stock price. Mid cap is an abbreviation for the term"middle capitalization".As the name implies, a mid cap company is in the middle of the packbetween large cap and small cap companies.

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Keep in mind that classifications such as large cap, mid cap and smallcap are only approximations that change over time. Also, the exactdefinition of these terms can vary among the various participants inthe investment business. 

What Does Inflation Mean? The rate at which the general level of prices for goods and services isrising, and, subsequently, purchasing power is falling. Central banksattempt to stop severe inflation, along with severe deflation, in anattempt to keep the excessive growth of prices to a minimum.

As inflation rises, every dollar will buy a smaller percentage of a good.For example, if the inflation rate is 2%, then a $1 pack of gum will cost$1.02 in a year.

Most countries' central banks will try to sustain an inflation rate of 2-3%.

A loss of purchasing power in the internal medium of exchange whichis also the monetary unit of account in an economy. A chief measure of general price-level inflation is the general inflation rate, which is thepercentage change in a general price index (normally the ConsumerPrice Index) over time. 

Inflation can have adverse effects on an economy. For example,uncertainty about future inflation may discourage investment andsaving. High inflation may lead to shortages of goods if consumersbegin hoarding out of concern that prices will increase in the future. 

Origin of Inflation : 

Inflation originally referred to the debasement of the currency. Whengold was used as currency, gold coins could be collected by thegovernment (e.g. the king or the ruler of the region), melted down,mixed with other metals such as silver, copper or lead, and reissued atthe same nominal value. By diluting the gold with other metals, thegovernment could increase the total number of coins issued withoutalso needing to increase the amount of gold used to make them. Whenthe cost of each coin is lowered in this way, the government profitsfrom an increase in seigniorage ( It is the net revenue derived from theissuing of currency). This practice would increase the money supply

but at the same time lower the relative value of each coin. As therelative value of the coins decrease, consumers would need more coinsto exchange for the same goods and services. These goods andservices would experience a price increase as the value of each coin isreduced. 

By the nineteenth century, economists categorized three separatefactors that cause a rise or fall in the price of goods: a change in thevalue or resource costs of the good, a change in the price of money

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which then was usually a fluctuation in metallic content in thecurrency, and currency depreciation resulting from an increased supplyof currency relative to the quantity of redeemable metal backing thecurrency. Following the proliferation of private bank note currencyprinted during the American Civil War, the term "inflation" started to

appear as a direct reference to the currency depreciation that occurredas the quantity of redeemable bank notes outstripped the quantity of metal available for their redemption. The term inflation then referredto the devaluation of the currency, and not to a rise in the price of goods. 

 This relationship between the over-supply of bank notes and aresulting depreciation in their value was noted by earlier classicaleconomists such as David Hume and David Ricardo, who would go onto examine and debate to what effect a currency devaluation (latertermed monetary inflation) has on the price of goods (later termedprice inflation, and eventually just inflation). 

Let's understand the Concept... 

What Does Deflation Mean?A general decline in prices, often caused by a reduction in the supplyof money or credit. Deflation can be caused also by a decrease ingovernment, personal or investment spending. The opposite of inflation, deflation has the side effect of increased unemploymentsince there is a lower level of demand in the economy, which can leadto an economic depression. Central banks attempt to stop severedeflation, along with severe inflation, in an attempt to keep theexcessive drop in prices to a minimum. 

 The decline in prices of assets, is often known as Asset Deflation.

Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinkingemployment and incomes, and increasing defaults on loans bycompanies and individuals. To counter deflation, the Federal Reserve(the Fed) can use monetary policy to increase the money supply anddeliberately induce rising prices, causing inflation. Rising pricesprovide an essential lubricant for any sustained recovery becausebusinesses increase profits and take some of the depressive pressuresoff wages and debtors of every kind.

Deflationary periods can be both short or long, relatively speaking. Japan, for example, had a period of deflation lasting decades starting inthe early 1990's. The Japanese government lowered interest rates totry and stimulate inflation, to no avail.

What Does Special Drawing Rights - SDR Mean? 

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It an international type of monetary reserve currency, created by theInternational Monetary Fund (IMF) in 1969, which operates as asupplement to the existing reserves of member countries. Created inresponse to concerns about the limitations of gold and dollars as thesole means of settling international accounts, SDRs are designed to

augment international liquidity by supplementing the standard reservecurrencies.

 You can think of SDRs as an artificial currency used by the IMF anddefined as a "basket of national currencies". The IMF uses SDRs forinternal accounting purposes. SDRs are allocated by the IMF to itsmember countries and are backed by the full faith and credit of themember countries' governments.

SDRs are defined in terms of a basket of major currencies used ininternational trade and finance. At present, the currencies in thebasket are, by weight, the United States dollar, the Euro, the Japanese

yen, and the pound sterling. Before the introduction of the Euro in1999, the Deutsche Mark and the French franc were included in thebasket. The amounts of each currency making up one SDR are chosenin accordance with the relative importance of the currency ininternational trade and finance. The determination of the currencies inthe SDR basket and their amounts is made by the IMF Executive Boardevery five years. 

 The exact amounts of each currency in the basket, and theirapproximate relative contributions to the value of an SDR, in the pastwere and currently are.

Purpose:

SDRs are used as a unit of account by the IMF and several otherinternational organizations. A few countries peg their currenciesagainst SDRs, and it is also used to denominate some privateinternational financial instruments. For example, the Warsawconvention, which regulates liability for international carriage of persons, luggage or goods by air uses SDRs to value the maximumliability of the carrier. 

In Europe, the Euro is displacing the SDR as a basis to set values of various currencies, including Latvian lats. This is a result of the ERM IIconvergence criteria which now apply to states entering the European

Union. 

SDRs were originally created to replace Gold and Silver in largeinternational transactions. Being that under a strict (international) goldstandard, the quantity of gold worldwide is relatively fixed, and theeconomies of all participating IMF members as an aggregate aregrowing, a perceived need arose to increase the supply of the basicunit or standard proportionately. Thus SDRs, or "paper gold", are

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credits that nations with balance of trade surpluses can 'draw' uponnations with balance of trade deficits. 

So-called "paper gold" is little more than an accounting transactionwithin a ledger of accounts, which eliminates the logistical and securityproblems of shipping gold back and forth across borders to settle

national accounts. 

It has also been suggested that having holders of US dollars convertthose dollars into SDRs would allow diversification away from the dollarwithout accelerating the decline of the value of the dollar.

Let's understand the Concept... 

Nostro and Vostro accounts : 

Nostro and vostro (Middle Italian, from Latin, noster and voster;English, ours and yours) are accounting terms used to distinguish anaccount you hold for another entity from an account another entity

holds for you. The entities in question are almost always, but need notbe, banks.

It helps to recall that the term account refers to a record of transactions, whether current, past or future, and whether in money, orshares, or other countable commodities. Originally a bank account justmeant the record kept by a banker of the money they were holding onbehalf of a customer, and how that changed as the customer madedeposits and withdrawals (the money itself probably being in the formof specie, such as gold and silver coin).

Some customers will keep their own records of their transactions, for

instance, so they can check for errors by the bank. That record kept bythe customer is also an account, of the money the bank is holding forthem. When that customer is another bank, since they also keep otheraccounts (of the money they are holding for their customers) there is aneed to clearly differentiate between these two types of accounts.

 The terms nostro and vostro remove the potential ambiguity whenreferring to these two separate accounts of the same balance and setof transactions. Speaking from the bank's point-of-view:

A nostro is our account of our money, held by you.A vostro is our account of your money, held by us.

Note that all "bank accounts" as the term is normally understood,including personal or corporate chequing, loan, and savings accounts,are treated as vostros by the bank. They also regard as vostro purelyinternal funds such as treasury, trading and suspense accounts;although there is no "you" in the sense of an external customer, themoney is still "held by us".

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Interestingly, a bank customer who keeps a parallel record of theirchequing account or credit card at home in order to, say, verify theirstatements, is in theory keeping a nostro account.

 The International Monetary Fund (IMF)  The International Monetary Fund (IMF) is an international organizationthat oversees the global financial system by following themacroeconomic policies of its member countries, in particular thosewith an impact on exchange rates and the balance of payments. It isan organization formed to stabilize international exchange rates andfacilitate development. It also offers highly leveraged loans mainly topoorer countries. Its headquarters are located in Washington, D.C.,USA. 

 The International Monetary Fund was created in July of 1944,originallywith 46 members, with a goal to stabilize exchange rates and assistthe reconstruction of the world's international payment system.Countries contributed to a pool which could be borrowed from, on atemporary basis, by countries with payment imbalances. (Condon,2007) 

 The IMF describes itself as "an organization of 185 countries(Montenegro being the 185th, as of January 18, 2007), working tofoster global monetary cooperation, secure financial stability, facilitateinternational trade, promote high employment and sustainableeconomic growth, and reduce poverty". With the exception of Taiwan(expelled in 1980), North Korea, Cuba (left in 1964), Andorra, Monaco,

Liechtenstein, Tuvalu and Nauru, all UN member states participatedirectly in the IMF. Most are represented by other member states on a24-member Executive Board but all member countries belong to theIMF's Board of Governors.

Today : The IMF's influence in the global economy steadily increased as itaccumulated more members. The number of IMF member countrieshas more than quadrupled from the 44 states involved in itsestablishment, reflecting in particular the attainment of politicalindependence by many developing countries and more recently thecollapse of the Soviet bloc. The expansion of the IMF's membership,

together with the changes in the world economy, have required theIMF to adapt in a variety of ways to continue serving its purposeseffectively.In 2008, faced with a shortfall in revenue, the International MonetaryFund's executive board agreed to sell part of the IMF's gold reserves.On April 27, 2008, IMF Managing Director Dominique Strauss-Kahnwelcomed the board's decision April 7, 2008 to propose a new

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framework for the fund, designed to close a projected $400 millionbudget deficit over the next few years. The budget proposal includessharp spending cuts of $100 million until 2011 that will include up to380 staff dismissals.

At the 2009 G-20 London summit, it was decided that the IMF would

require additional financial resources to meet prospective needs of itsmember countries during the ongoing global crisis. As part of thatdecision, the G-20 leaders pledged to increase the IMF's supplementalcash tenfold to $500 billion, and to allocate to member countriesanother $250 billion via Special Drawing Rights.

Over-the-counter -

Over-the-counter (OTC) trading is to trade financial instruments suchas stocks, bonds, commodities or derivatives directly between twoparties. It is contrasted with exchange trading, which occurs via

facilities constructed for the purpose of trading (i.e., exchanges), suchas futures exchanges or stock exchanges

OTC-traded stocks:In the U.S., over-the-counter trading in stock is carried out by marketmakers that make markets in OTCBB and Pink Sheets securities usinginter-dealer quotation services such as Pink Quote (operated by PinkOTC Markets) and the OTC Bulletin Board (OTCBB). OTC stocks are notusually listed or traded on any stock exchange, though exchange listedstocks can be traded OTC on the third market. Although stocks quotedon the OTCBB must comply with SEC reporting requirements, otherOTC stocks, such as those stocks categorized as Pink Sheets securities,have no reporting requirements, while those stocks categorized asOTCQX have met alternative disclosure guidelines through Pink OTCMarkets.

OTC contracts:An over-the-counter contract is a bilateral contract in which two partiesagree on how a particular trade or agreement is to be settled in thefuture. It is usually from an investment bank to its clients directly.Forwards and swaps are prime examples of such contracts. It is mostlydone via the computer or the telephone. For derivatives, theseagreements are usually governed by an International Swaps and

Derivatives Association agreement. This segment of the OTC market is occasionally referred to as the"Fourth Market." The NYMEX has created a clearing mechanism for a slate of commonlytraded OTC energy derivatives which allows counterparties of manybilateral OTC transactions to mutually agree to transfer the trade toClearPort, the exchange's clearing house, thus eliminating credit andperformance risk of the initial OTC transaction counterparts. 

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Let's understand the Concept... 

What Does Spot Market Mean? The spot market or cash market is a commodities or securities marketin which goods are sold for cash and delivered immediately. Contractsbought and sold on these markets are immediately effective. Spot

markets can operate wherever the infrastructure exists to conduct thetransaction. The spot market for most securities exists primarily on theInternet.

A commodities or securities market in which goods are sold for cashand delivered immediately. Contracts bought and sold on thesemarkets are immediately effective. 

 The spot market is also called the "cash market" or "physicalmarket", because prices are settled in cash on the spot atcurrent market prices, as opposed to forward prices.

Examples -Spot Forex : The spot foreign exchange market has a 2 day delivery date, originallydue to the time it would take to move cash from one bank to another.Energy Spot : The spot energy market allows producers of surplus energy to instantlylocate available buyers for this energy, negotiate prices withinmilliseconds and deliver actual energy to the customer just a fewminutes later. Spot markets can be either privately operated orcontrolled by industry organizations or government agencies. Theyfrequently attract speculators, since spot market prices are known tothe public almost as soon as deals are transacted. Examples of energyspot markets for natural gas in Europe are the Title Transfer Facility(TTF) in the Netherlands and the National Balancing Point (NBP) in theUnited Kingdom.

Gold Standard :

A monetary system in which a country's government allows itscurrency unit to be freely converted into fixed amounts of gold andvice versa. The exchange rate under the gold standard monetarysystem is determined by the economic difference for an ounce of gold

between two currencies. The gold standard was mainly used from 1875to 1914 and also during the interwar years.

 The use of the gold standard would mark the first use of formalizedexchange rates in history. However, the system was flawed becausecountries needed to hold large gold reserves in order to keep up withthe volatile nature of supply and demand for currency.

Disadvantages :

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 The total amount of gold that has ever been mined has been estimatedat around 142,000 tonnes. Assuming a gold price of US$1,000 perounce, or $32,500 per kilogram, the total value of all the gold evermined would be around $4.5 trillion. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in

circulation or in deposit. Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking,would result in a significant increase in the current value of gold, whichmay limit its use in current applications. For example, instead of usingthe ratio of $1,000 per ounce, the ratio can be defined as $2,000 perounce (or $1,000 per 1/2 ounce) effectively raising the value of gold to$8 trillion. However, this is specifically a disadvantage of return to thegold standard and not the efficacy of the gold standard itself. Somegold standard advocates consider this to be both acceptable andnecessary whilst others who are not opposed to fractional reservebanking argue that only base currency and not deposits would need to

be replaced. The amount of such base currency is only about one tenthas much as the figure listed above.Most mainstream economists believe that economic recessions can belargely mitigated by increasing money supply during economicdownturns. Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hencemonetary policy could no longer be used to stabilize the economy intimes of economic recession.Monetary policy would essentially be determined by the rate of goldproduction. Fluctuations in the amount of gold that is mined couldcause inflation if there is an increase, or deflation if there is a

decrease. Some hold the view that this contributed to the severity andlength of the Great Depression.Some have contended that the gold standard may be susceptible tospeculative attacks when a government's financial position appearsweak. For example, some believe the United States was forced to raiseits interest rates in the middle of the Great Depression to defend thecredibility of its currency.If a country wanted to devalue its currency, it would produce sharperchanges, in general, than the smooth declines seen in fiat currencies,depending on the method of devaluation. 

After World War II, a modified version of the gold standard monetarysystem, the Bretton Woods monetary system, was created as itssuccessor. This successor system was initially successful, but becauseit also depended heavily on gold reserves, it was abandoned in 1971when U.S president Nixon "closed the gold window".