Glossary Of Financial Terms starting with S
List of Financial Terms (Alphabet Wise)SEBI An abbreviation for Securities and Exchange Board of India, which is a regulatory body established under the Securities and Exchange Board of India Act, 1992. Its role is to protect the interests of investors in securities, to promote the development of securities markets and to regulate the same.
- Regulating the business at stock exchanges at other markets.
- Registration of stock brokers, sub-brokers, transfer agents, registrars to issues, MERCHANT BANKERS, UNDERWIRTERS and others.
- Regulating MUTUAL FUNDS.
- Promoting investor education.
- Undertaking inspection and audit of stock exchanges and various intermediaries.
Securitization The transfer of loans (ASSETS) of a homogeneous nature, from a lending institution to investors through an intermediary, by packaging them in the form of securities which are usually termed "PASS-THROUGH SECURITIES". The cash flow by was of PRINCIPAL and interest on the underlying loans is "passed through" to the security holders. The assignment of loans is mostly without recourse to the original lender. Various assets that generate cash flows can be securitized- as e.g., housing loans and car loans. The lending institution benefits by this arrangement since it frees a large amount of funds for reinvestment, long before they become due. The assets are selected from a pool that is carefully sifted- this is known as 'Cherry Picking'. They are subsequently monitored over a period of time to confirm their financial soundness – this part is termed 'Seasoning'. Considering that there is such a careful appraisal coupled with the backing of the underlying assets, the financial instruments that are created present an attractive investment opportunity. Moreover, their investment quality can be determined from the CREDIT RATING, if available. A trust or an intermediary termed 'Special Purpose Vehicle' (SPV) is involved in the arrangement of securitization. The SPV holds the loans and issues paper against the security of the loans, say MORTGAGES. The proceeds from the issue of securities are given to the housing finance company. The periodic interest and principal are collected by the SPV and passed on after retaining service costs and insurance fees.
Security Analyst An individual who evaluates and identifies stocks and other securities for investment. The technique that is commonly employed to identify mispriced securities, involves an examination of the fundamental aspects – economic outlook, industry prospects and a company's plans, projections, strengths and weaknesses – that will have a bearing on the intrinsic worth of an ASSET. On this basis, a security analyst makes recommendations to buy, sell or hold securities. Alternatively, an analyst may use tools of TECHNICAL ANALYSIS in order to generate short-term forecasts of stock prices. Analysts in the U.S. are employed by brokerage firms and banks, among others. They tend to specialize in a particular industry or a few industries. For instance, an analyst may specialize in airline stocks while another in pharmaceuticals. (See also FUNDAMENTAL ANALYSIS and TECHNICAL ANALYSIS.)
Security Market Line A linear relationship between the expected rate of return on a security and its SYSTEMATIC RISK indicated by BETA.
Seed Capital The financial assistance towards a promoter's equity contribution. Seed Capital, alternatively called 'Equity Support', is to enable promising entrepreneurs with inadequate capital to set up their enterprises. The assistance is usually in the form of a loan at very generous terms, as e.g., a long MORATORIUM period, nominal service charge and a lengthy repayment period.
Semi-Variable Costs The costs that vary with output though not proportionately. Examples are repairs and maintenance expenses.
Sensitive Index A statistical measure of the prices of 30 selected stocks traded on the Bombay Stocks traded on the Bombay Stock Exchange. The method of compilation is similar to the one used in Standard & Poor's indices, USA. This base-weighted aggregative method assigns to the price of each component share. A weight corresponding to the number of shares outstanding. Therefore, the index on a particular day is the ratio of the aggregate market capitalization of 30 stocks on that day to the average MARKET CAPITALIZATION of the same stocks during the base period. The base year is the financial year 1978-79. In the event of an increase in the number of shares outstanding owing to a RIGHTS ISSUE, conversion, etc., proportional adjustments are made to the weights and base year average market capitalization. Although the index is more popular, it is a narrow barometer of market movements since it comprises only 30 stocks. (See also NATIONAL INDEX.)
Service Tax A levy on the value of taxable services provided to any person.
Based on the recommendations of the CHELLIAH COMMITTEE on tax reforms, a beginning was made with the Union Budget for 1994-95 to impose a 5 percent service tax on stock-brokerage, general insurance and telephone connection. Its administration is the responsibility of the Central Excise Department. The onus of collection and payment of tax is on the stockbroker, the telegraph authority or the insurer who is providing taxable services. The Union Budget 1996-97 extended the service tax to advertising, radio paging and courier services.
Shah Committee A working group constituted by the Reserve Bank of India (RBI) in May 1992, under the chairmanship of A.C. Shah to suggest reforms relating to NON-BANKING FINANCIAL COMPANIES (NBFCs). The task of the group was to carry out an in-depth study of these companies and suggest regulatory and control measures to promote their healthy growth and operations. Its report was submitted in September 1992 and subsequently, the RBI acted upon some important recommendations which are mentioned below :
- There should be uniform regulatory norms for all categories of NBFCs.
- Regulation should be made applicable to incorporated deposit-accepting entities having 'Net Owned Funds' (NOF) of at least Rs.50 lakh (NOF is the sum of PAID-UP CAPITAL and free reserves less accumulated loss, deferred revenue expenditure and INTANGIBLE ASSETS. In 1998, the RBI modified the definition to include convertible preference shares, for certain purposes).
- New NBFCs should have a minimum NOF level of Rs.50 lakh.
- Regulation should focus on ASSETS rather than LIABILITIES; this view has resulted in a prescription of norms for CAPITAL ADEQUACY, LIQUIDITY, FINANCIAL LEVERAGE, etc. For instance, the group suggested capital requirement at 8 percent of risk-weighted assets which is comparable to that for banks. Similarly, the minimum LIQUIDITY RATIO suggested was 10 percent of total deposit liabilities. Examples of liquid assets are bank deposits and investments in GOVERNMENT SECURITIES and APPROVED SECURITIES.
- Mandatory CREDIT RATING for all NBFCs by 1998.
Shetty Committee A committee appointed by the Reserve Bank of India (RBI) to review CONSORTIUM based lending. The committee which was headed by J.V. Shetty, Chairman, Canara Bank, submitted its report in 1993. As a sequel to the report, the RBI effected certain changes in the system of bank finance for WORKING CAPITAL, thereby imparting greater flexibility to the system. For example, the limit for obligatory consortium arrangement was raised to Rs.50 crore. Thus companies whose requirements are below Rs.50 crore need not have a consortium; they may deal with just one bank. Also, as an alternative to the obligatory consortium arrangement, banks may arrange LOAN SYNDICATION. This could result in a more competitive pricing and infuse greater discipline owing to a fixed repayment period.
In April 1997, it was decided that it would no longer be obligatory for banks to form a consortium, even if they credit limit of the borrower exceeded Rs.50 crore.
Speculation An approach to investing that relies more on chance and therefore, entails a greater risk. Speculation is driven by an expectation of a high rate of return over a very short holding period.
Spot Market The transactions in which securities and foreign exchange get traded for immediate delivery. Since the exchange of securities and cash is virtually immediate (to be precise, the settlement would take place within two working days), the term cash market has also been used to refer to spot dealings.
Spread The difference between the rate of interest charged to borrowers and the rate paid to lenders by a bank or FINANCIAL INSTITUTION.
Statutory Liquidity Ratio (SLR) The portion of net demand and time LIABILITIES that SCHEDULED commercial banks (excluding REGIONAL RURAL BANKS) must invest in specified financial ASSETS such as TREASURY BILLS and GOVERNMENT SECURITIES. The SLR indirectly serves as an instrument of credit control, by reducing the monetization of the DEFICIT that would have taken place if funds from the banking system were not statutorily pre-empted by the government sector.
Stock Index Future Futures contracts based on broad stock market indices. This vehicle is meant for investors and active traders who have a forecast on the stock market's direction, but are unsure or unwilling to select specific stocks. So, investors who are bullish could buy stock index futures, whereas those expecting a market downturn may sell the contract. In essence, stock index futures enable investors and speculators to take a position based on their opinion about the market without actually selecting individual stocks. The instrument may also be used to offset unrealized or probable losses on a long or short position. In general, a futures contract is an obligation to accept or effect delivery as per the transaction. However, this obligation may be discharged with an offsetting transaction by the last trading day. With stock index futures, since each contract represents a hypothetical PORTFOLIO of stocks, there is no physical delivery of securities, and the difference in market value is settled in each.
Stock Split Adjustments effected in the FACE VALUE of shares and the number of shares outstanding, such that no change occurs in the total PAID-UP CAPITAL. Stock splits are generally associated with shares having a high face value and which correspondingly trade at a higher price. By reducing the face value and increasing the number of shares (for instance, 10 shares of PAR VALUE ` 10 each in place of each share of Rs.100), a company hopes to bring down the market price to ensure continued investor interest. In a 'Reverse split', a company increases the face value and accordingly reduces the number of shares. This has been the case with some companies in the U.S. where a very low face value with a low market price had created a negative impression on investors.
Sunk Costs The costs that have already been incurred because of decisions in the past. Consequently, decisions taken today cannot vary nor reverse what has already happened.
Swap The exchange of financial LIABILITIES which may be in the same currency or in different currencies. Swaps may relate to CAPITAL MARKETS or to the foreign exchange market. They are used to manage risks relating to changes in interest rate or foreign exchange rate. An interest rate swap is undertaken to alter the stream of interest payment flows mostly from fixed to floating or vice versa, with no PRINCIPAL obligations changing hands. For instance, a company with a variable-rate liability may opt for a swap with another borrower who has raised a fixed-rate loan. Thus, the difference in the two interest payments would be exchanged. A currency swap involves conversion of principal and interest into another currency for the duration of the flows, after which the principal sums are reconverted to the original currencies.
An example of an interest rate swap is shown below. Assuming that there are two companies, A and B, with the former enjoying a superior CREDIT RATING which translates into an interest cost advantage, a mutually beneficial swap could be arranged as illustrated below.
|Company A||Company B|
|1. Cost of fixed-rate loan||10.60%||11.70%|
|2. Cost of variable-rate loan||Six-month||Six-month|
|3. Funds raised from the market||LIBOR + 0.20%||LIBOR + 0.70%|
|4. Payments Swapped||Fixed-rate loan @ 10.60%||Variable-rateloan @ LIBOR + 0.70%|
|5. Post-swap cost||A pays six-month month LIBOR||B Pays 10.70% to A.11.40% (Fixed)|
|6. Saving interest cost||Six-month LIBOR – 0.10% (Variable)0.30%||0.30%|
Sweat Equity Equity shares allotted to certain employees of company either on discount or for consideration other than cash, as a reward for providing know-how or sharing intellectual rights or some other value addition to the company.
Synergy A notion of disproportionately higher financial benefits expected by combining complementary businesses, which would exceed the performances of the entities achieved separately. For example, the MERGER some years ago of the two electrical equipment giants in Europe, namely ASEA and Brown Boveri with individual strengths in marketing and R&D respectively, was effected to reap the benefit of synergy.
Systematic Risk The portion of risk or variability that is caused by factors, which affect the returns on all securities. Major political, economic and social phenomena, for instance, would affect all stocks, which implies that systematic risk cannot be eliminated by DIVERSIFICATION. Therefore, it is also termed 'Undiversifiable RISK'. However, by diversifying internationally, an investor can reduce the level of systematic risk of a PORTFOLIO; the lack of coincidence between economic cycles of different countries helps to achieve this. Systematic risk of a financial ASSET is indicated by the BETA coefficient. It shows the sensitivity of return on a security or a portfolio to return from the market. (See BETA).