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Terms related to Economy and Financial Market


P/E (Price/Earnings) Ratio is a valuation ratio of a company's current share price compared to its per-share earnings. Also sometimes known as "price multiple" or "earnings multiple". 

Calculated as:

Market Value per Share
Earnings per Share (EPS)

EPS is usually from the last four quarters (trailing P/E).

PLR  Prime Lending Rateis the benchmark rate for all bank loans. Historically, the PLR has been the rate at which banks lend to the best borrower—one who is the safest or the least likely to default on the loan. Earlier, banks could not lend below the base rate, but along with more liberal financial markets came the freedom for banks to fix rates below the PLR.

Preference Shares A class of shares that usually do not offer voting rights, but do offer a superior type of dividend, paid ahead of dividends to ordinary shareholders. Preference shareholders often also have superior status in the event of a liquidation.

Profit Warning When a company issues a statement indicating that its profits will not be as high as it had expected.

Rating  Bonds are rated according to their safety from an investment standpoint - based on the ability of the company or government that has issued it to repay. Ratings range from AAA, the safest, down to D, a company that has already defaulted.

RBI Reserve Bank of India is the central bank of India. The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934
. The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: " regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

Recapitalisation To inject fresh money into a firm, thus reducing the debts of a company.  For example, when a government intervenes to recapitalise a bank, it might give cash in exchange for some form of guarantee, such as a stake in the company. Taxpayers can then benefit if the bank recovers.

Recession A period of negative economic growth or contracting economic activity. In most parts of the world a recession is technically defined as two consecutive quarters of negative economic growth - or fall in real output/GDP. In the United States (US), a larger number of factors are taken into account to define recession, by the NBER (National Bureau of Economic Research), like monthly measures of activity across the entire economy: (1) personal income less transfer payments, in real terms and (2) employment. In addition, to two indicators with coverage primarily of manufacturing and goods: (3) industrial production and (4) the volume of sales of the manufacturing and wholesale-retail sectors adjusted for price changes. The bottoming out of these indicators is taken to mark the end of the recession period [see Depression].

Repo/Reverse Repo Rate: Repo rate is the rate at which the RBI buys government securities from the market to infuse liquidity in the system. Reverse repo rate is the rate at which the RBI absorbs excess bank funds by selling government securities in the market. If liquidity is abundant in the system, then reverse repo becomes the key policy rate, but when liquidity is scarce and banks borrow from RBI, the repo rate is the policy rate. A cut in repo rate is a signal to banks to pare their lending and deposit rates but its effectiveness depends on liquidity in the system.

The lender or buyer in a Repo is entitled to receive compensation for use of funds provided to the counterparty. Effectively the seller of the security borrows money for a period of time (Repo period) at a particular rate of interest mutually agreed with the buyer of the security who has lent the funds to the seller. The rate of interest agreed upon is called the Repo rate. The Repo rate is negotiated by the counterparties independently of the coupon rate or rates of the underlying securities and is influenced by overall money market conditions.

The Repo/Reverse Repo transaction can only be done at Mumbai between parties approved by RBI and in securities as approved by RBI (Treasury Bills, Central/State Govt securities).

Uses of Repo
It helps banks to invest surplus cash.
It helps investor achieve money market returns with sovereign risk.
It helps borrower to raise funds at better rates.
An SLR surplus and CRR deficit bank can use the Repo deals as a convenient way of adjusting SLR/CRR positions simultaneously.
RBI uses Repo and Reverse repo as instruments for liquidity adjustment in the system.

Reserve Banking/ Fractional-Reserve Banking is the universal banking practice in which banks are required by law to keep only a fraction of their deposits in reserve (termed reserve requirement) as cash and other highly liquid assets with the choice of lending out the remainder, while maintaining the simultaneous obligation to redeem all deposits immediately upon demand. Under fractional-reserve banking also known as fractional deposit lending central bank money is used to create commercial bank money to augment economic activity, instead of it lying idle in the bank. With a fractional-reserve rate of 20%, from an initial deposit of say, $100 of central bank money $80 can be lent out as $20, is set aside as reserves. The recipient(s) of the $80 then spends that money. If the receiver(s) of that $80 deposits it into a bank, the bank sets aside 20% of that $80, or $16, as reserves and can lend out the remaining $64. As the process continues, more commercial bank money is created from an initial deposit. Full-Reserve Banking refers to a situation when the Reserve requirement is set at 100% by law. This is usually not the case as it is only in situations of grave crisis that all depositors can demand their money at the same time. Ususally only a fraction of net deposits maintained by any bank is withdrawn at a time.

Retained Earnings Money not paid out as dividend and held awaiting investment in the company.

Rights Issue When a public company issues new shares to raise cash. The company might do this for a number or reasons - because it is running short of cash, or because it wants to make an expensive investment. By putting more shares on the market, a company dilutes the value of its existing shares.

Scheduled Commercial Banks (SCBs)
are commercial banks, which are included in the second schedule to the Reserve Bank of India Act 1934. These banks enjoy certain privileges such as free concessional remittance facilities and financial accommodation from the RBI. They also have certain obligations like minimum cash reserve ratio (CRR) to be kept with the RBI.

Security Essentially, a contract that can be assigned a value and traded. It could be a stock, bond or mortgage debt, for example. 

Securities lending  Security lending is when one broker or dealer lends a security to another for a fee. This is the process that allows short selling.

Securitisation Turning something into a security. For example, taking the debt from a number of mortgages and combining them to make a financial product which can then be traded. Banks who buy these securities receive income when the original home-buyers make their mortgage payments.

Short (1) The selling side of an open futures contract; (2) a trader whose net position in the futures market shows an excess of open sales over open purchases.

Short Selling/Shorting A technique used by investors who think the price of an asset, such as shares, currencies or oil contracts, will fall. They borrow the asset from another investor and then sell it in the relevant market. The aim is to buy back the asset at a lower price and return it to its owner, pocketing the difference.

Spot Price The price at which a physical commodity for immediate delivery is selling at a given time and place.

Sterilisation Refers to an operation by central banks to neutralise the  impact of forex intervention when it tries to maintain the exchange rate within a desired band. Sterilisation process involves (a) decision of the monetary authority to intervene by substituting foreign currency with domestic currency in case of excess capital inflows, and (b) decision to intervene further in the bond or money market to substitute domestic currency so released out of the intervention in forex market with bonds or other eligible securities. While open market operations (OMO) involving sale of securities constitute the commonly used instrument of sterilisation, there are several other instruments available to offset the impact of capital inflows on domestic money supply.

Stock Market Indices A stock index is a measure of the performance of underlying stocks.  Changes in the index reflect changes in the value of the stocks.

Some important stock indices are:

BSE Sensex

The Bombay Stock Exchange Sensitive Index (Sensex) is a cap-weighted index. The selection of the index members has been made on the basis of liquidity, depth, and floating-stock-adjustment depth and industry representation. Sensex has a base date and value of 100 in 1978-1979. The index uses free float.

S&P CNX Nifty

The S&P CNX Nifty, a weighted average index, is the leading index for large companies on the National Stock Exchange of India. It consists of 50 companies representing 24 sectors of the economy. The base level is defined as 1000 on November 3, 1995.


The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

S&P Nifty

Standard and Poor's 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The index was developed with a base level of 10 for the 1941- 43 base period.


tracks the price performance of the portfolio of listed Indian equity shares owned by foreign institutional investors (FIIs). The Index comprises the top 15 companies by value of FII holdings subject to (a) Stock futures listed in India, (b) Restriction of company weight to 20%, industry to 30% and principal shareholder to 30%. Index weights are based on adjusted market value of holdings. The Index is adjusted for all corporate actions, including bonus, split and rights. Reviews are conducted quarterly and companies are deleted from the Index if they are not among the top 20 FII holdings. The base date is September 30, 2003 (=100).

* The Index has been developed by and is owned by Instanex Capital Consultants Pvt. Ltd., Mumbai, India.

FTSE 100 

The FTSE 100 Index is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. The equities use an investibility weighting in the index calculation. The index was developed with a base level of 1000 as of January 3, 1984

Nikkei - 225

The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. The Nikkei Stock Average was first published on May 16, 1949.


The Hang Seng Index is a free-float capitalization-weighted index of selection of companies from the Stock Exchange of Hong Kong. The components of the index are divided into four subindexes: Commerce and Industry, Finance, Utilities, andProperties. The index was developed with a base level of 100 as of July 31, 1964.


The KOSPI Index is a capitalization-weighted index of all common shares on the Korean Stock Exchanges. The Index was developed with a base value of 100 as of January 4th, 1980. Note: The preferred shares are excluded in calculating the KOSPI Index from June 14, 2002.

Shanghai Composite

The Shanghai Stock Exchange Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listedon the Shanghai Stock Exchange. The index was developed on December 19, 1990 with a base value of 100. Index trade volume on Q is scaled down by a facotr of 1000.


The Bovespa Index is a total return index weighted by traded volume and is comprised of the most liquid stocks traded on the Sao Paulo Stock Exchange. The Bovespa Index has been divided 10 times by a factor of 10 since January 1, 1985.


The Mexican Bolsa Index, or the IPC (Indice de Precios y Cotizaciones), is a capitalization-weighted index of the leading stocks traded on the Mexican Stock Exchange. The index was developed with a base level of .78 as of October 30, 1978.

Sub-prime Mortgages These carry a higher risk to the lender (and therefore tend to be at higher interest rates) because they are offered to people who have had financial problems or who have low or unpredictable incomes. 

Swap An exchange of securities between two parties. For example, if a firm in one country has a lower fixed interest rate and one in another country has a lower floating interest rate, an interest rate swap could be mutually beneficial.


Tier I Capital A calculation of the strength of a bank in terms of its capital, defined by the Basel Accords, typically comprising ordinary shares, disclosed reserves, retained earnings and some preference shares.

Underwriters When used of a rights issue, the institution pledging to purchase a certain number of shares if not bought by the public.

Unwind To unwind a deal is to reverse it - to sell something that you have previously bought, or vice versa.


Warrants A document entitling the bearer to receive shares, usually at a stated price.

Wholesale Price Index (WPI) The prices of goods, which are dealt with, wholesale, mainly bulk goods, which are mostly inputs to production rather than finished commodities. A wholesale price index, for example, includes wheat and sheet steel, where a retail price index includes bread and cars. Because they involve goods that are dealt in before the production of final goods, and are held as stocks of inputs, wholesale price indexes tend to be leading indicators, moving earlier in trade cycles than the retail or consumer price index.
In India the WPI commodity basket has three constituent commodity groups: (a) primary articles, (b) fuel, power, light and lubricants, and (c) manufactured products, with respective weights of 22.02 per cent, 14.23 per cent and 63.75 per cent. (Note: As per the decision of the Cabinet Committee of Economic Affairs (CCEA), from October 2009, the weekly release of Wholesale Price Index will cover only the Primary Articles and commodities in the broad group “Fuel, Power, Light & Lubricants”. Monthly WPI covering all commodities will be released separately.) For more on computation see this Website.

Write-down Reducing the book value of an asset to reflect a fall in its market value. For example, the write-down of a company's value after a big fall in share prices.

Yield  is the rate of return on a bond (debt security) based on a bond's interest rate. 

Yield curve  is a graphical representation of the yields on bonds with various maturities.  (also see CMYC).

YTM: Yield-to-Maturity  is the rate of return if the bond is held until maturity.  It takes into account purchase price, redemption value, coupon rate, and time to maturity.        


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