Glossary Of Financial Terms starting with O

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List of Financial Terms (Alphabet Wise)

Odd-lot A lot of shares that is different from a round (marketable) lot. A stock exchanges, transactions are done in lots mostly of 100 or 50 shares and multiples thereof. These conventional trading units are called 'Round Lots', Any lot that is different from the prescribed trading unit is deemed an odd-lot. At some stock exchanges, odd-lot trading takes place on Saturdays.

Offshore Financial Centre (OFC) A place that encourages financial activities by having a pragmatic regulatory environment with few exchange controls. Thus, it acts as a conduit for investment activities of international INSTITUTIONAL INVESTORS and other intermediaries. While an OFC can boost the flow of investments and give a fillip to related industries such as tourism, it can also be misused for money laundering and other undesirable activities.

Open-end Fund A mutual fund which continuously issues new shares or units to meet investors' demand. Simultaneously, it redeems shares for thse who want to sell. Hence, there is no limit on the number of shares that can be issued, and in fact, the number of shares outstanding keeps changing because of the continuous influx and exit of investors. Due to the constant changes in the aggregate portfolio value and the number of shares, the NET ASSET VALUE keeps changing. The purchase and sale prices for redeeming or selling shares are set at or around the net asset value. (See also MUTUAL FUND).

Open-Market Operations (OMO) The purchase or sale of securities, by the CENTRAL BANK of a country to expand or contract the reserves with the banking system. Open Market Opertions serve as an instrument of PUBLIC DEBT management and also of monetary control, besides the CASH RESERVE RATIO and STATUTORY LIQUIDITY RATIO.

Through OMO, the Reserve Bank of India (RBI) is able to absorb liquidity from, or inject the same into, the banking system. Since it is envisaged that OMO will become the dominant tool of monetary control in India, the government and RBI have initiated a series of measures to deepen and widen the market for GOVERNMENT SECURITIES. These actions, which will enhance the effectiveness of OMO, are as follows :
  • A shift to market rates of interest on Government Securities.
  • The promotion of new institutions viz., DISCOUNT AND FINANCE HOUSE OF INDIA and SECURITIES TRADING CORPORATION OF INDIA.
  • The appointment of 'PRIMARY DEALERS' to intensify the participation of intermediaries.
  • The introduction of the
  • Delivery versus Payment' system.
  • Promotion of the MARKING-TO-MARKET basis for the valuation of APPROVED SECURITIES held by banks.
  • Permitting banks to trade in Government Securities, in order to promote the retail market segment.
Operating Leverage The ability to magnify profits from increases in sales due to a firm's operating costs being largely fixed than variable. When the proportion of VRIABLE COSTS is small, any increase in sales results in a significant impact on profitability beyond the BREAK-EVEN POINT, at which revenues equal total costs. The degree of operating leverage which guages the impact on profitability of a change in volume, is measured by the ratio :
Percentage change in OPERATING INCOME
-------------------------------------------
Percentage change in units sold or in sales
To illustrate, if the operating income of a company rises to Rs.2,40,000 from Rs.1,60,000 as a result of an increase in the number of units sold from 90,000 to 1,20,000, its degree of operating leverage suggests that it will benefit by increasing volume :
Therefore, in order to increase volume, the company could adopt a competitive pricing strategy.

Opportunity Cost The value or benefit from an alternative proposal, e.g., investment decision, that is foregone in favour of another.

Option A contract that gives the holder the right to buy ('Call Option') or sell ('Put Option') a certain number of shares of a company at a specified price known as the 'Striking Price' or 'Exercise Price'. American options may be exercised during a certain time period, which extends up to what is known as the 'Expiration Date'. Exchange-traded options in the U.S. are in denominations of 100 shares. The attraction of buying options is a potentially large profit on a relatively small investment. The maximum possible loss is the price paid for the option, known as the 'Premium'. The premium is paid by the option buyer to the option writer (seller) who keeps the money, whether the option is exercised or not. The buyer is under no obligation to exercise his right and may simply let the option expire. However, by selling a call or a put, the writer obligates himself to deliver or buy shares if the option is exercised. Importantly though, the buyer or the writer may independently terminate their outstanding positions before the expiration date, by executing offsetting transactions. The value of an option comprises a time value and an INTRINSIC VALUE, the latter resulting from the price of the underlying stock. As the expiration date approaches, the time value converges to zero.

Buying a call option is an alternate to buying the underlying shares. Buying a put is an alternative to a short sales of the underlying shares. Thus, a call buyer's outlook is essentially bullish whereas a put buyer is bearish about the underlying share. The value of a call option rises with the price of the underlying share whereas, the value of a put option increases as the price of the share falls. This is illustrated in the examples (Appendix II contains an illustration of HEADING involving options) given below

Mr. Joy buys a six-month call on Yummy Ice Cream Ltd. At a striking price of Rs.60, paying a premium of Rs.6 per share. The share is currently trading at Rs.50. Incidentally, since the market price is below the striking price, this call is said to be 'out-or-the-money'. The profit or loss picture at different market prices six months hence, is shown below (brokerage and taxes excluded):

Rupees
Share Price at expiration date 455565667585
Call Value(on 100 shares)0050060015002500
Premium (on 100 shares)-600-600-600-600-600-600
Net Profit/Loss-600-600-10009001900
Expecting the share of Lite Umbrella Ltd. To fall, Mr. Peppy buys a six-month put at a striking price of Rs.30, paying a premium of Rs.4.50 per share. The share is currently trading at Rs.28, which means that the put is 'in-the-money'. How well does Mr. Peppy perform? This performance depends on the share price movement during the life of the option.

Rupees
Share Price at expiration date 15202528303540
Put Value(on 100 shares)15001000500200nilnilnil
Premium(on 100 shares)-450-450-450-450-450-450-450
Net Profit/Loss105055050-250-450-450-450


OTC Exchange of India (OTCEI) A floorless national securities exchange with a screen-based system of trading. This modern market characterized by fully computerized operations, was promoted by the Unit Trust of India, ICICI, and SBI Capital Markets Ltd. Among others, in order to overcome problems such as the lack of transparency and delays in settlements that have plagued the older exchanges. Additionally, the prohibitive cost of a PUBLIC ISSUE through the conventional route also spurred the development of this alternative forum. OTCEI's operations began in 1992 and its network consists of counters located all over the country, linked by computers and other electronic media. Companies with a small equity capital and certain permitted securities are traded on it. Each counter is the location of a member or dealer and serves as a trading floor. Members of the OTC Exchange include FINANCIAL INSTITUTIONS, subsidiaries of banks and certain MERCHANT BANKERS. They help in originating issues, i.e., sponsoring companies and also in ensuring LIQUIDITY by making a market; the latter function entails offering two-way quotes for a stipulated period from the date of LISTING. The dealers are intermediaries between buyers and sellers. They may deal in securities or act as brokers.

The Initial Counter Receipt (ICR) is the document an investor gets upon allotment in an OTCEI issue. The existence of an electronic depository eliminates and cumbersome method of physical movement of securities and so, facilitates quick transfers at the registrar's end. Thus the share certificates remain in the custody of the registrar.

Subject to certain conditions, any company with a PAID-UP CAPITAL from Rs.30 lakh to Rs.25 crore could be listed on the OTCEI. The shares may be originated by a direct public issue or through a BOUGHT-OUT DEAL. In this function, it is necessary to appoint a sponsor from among the OTCEI members. Besides listed securities, certain DEBENTURES, permitted securities and MUTUAL FUND shares are also traded on the OTCIE.

A major advantage of the system is the transparency and speed with which transactions are completed, including payment and delivery of securities. An investor is able to see the price quotes on the OTC scan when placing a buy/ sell order. The COUNTER RECEIPT is the document in OTCEI transactions that evidences the purchase of a share. The 'Sales Confirmation Slip' (SCS) confirms the sale of the shares. Payment is made to an investor against the SCS.