WAT-PI KIT

fINANCE
Prepared by
fINANCE AND INVESTMENT CLUB OF IIM ROHTAK
An Initiative by Public Relations Cell, IIM Rohtak
CONTENTS

Finance Basics ............................................................................................................................................... 1

Basic terms ................................................................................................................................................ 1
Economics basics........................................................................................................................................... 8
Microeconomics........................................................................................................................................ 8
Macroeconomics....................................................................................................................................... 9
Career opportunities ................................................................................................................................... 10
Corporate Finance................................................................................................................................... 10
Commercial Banking ............................................................................................................................... 10
Investment Banking ................................................................................................................................ 10
Hedge Funds ........................................................................................................................................... 10
Private Equity and Venture Capital ......................................................................................................... 11
Financial Planning ................................................................................................................................... 11
Insurance................................................................................................................................................. 11
Public Accounting.................................................................................................................................... 12
Choosing the Right Direction for You.......................................................................................................... 12
 1

FINANCE BASICS

BASIC TERMS
Accounts payable: Money owed by a company to suppliers that have extended the company a line of
credit.

Accounts receivable: Money owed to a company by customers who purchase on credit.

Alpha: Outperformance relative to a relevant market benchmark.

Alternative investments: A diverse asset class that typically includes private equity, real estate, and
commodities. It provides an alternative to traditional investments, such as debt and equity securities.

Amortization: The process of expensing the costs of intangible assets over their useful lives.

Annuity: The exchange of an initial amount for a fixed number of future payments of a certain amount.

Appreciation: A situation in which a currency is getting stronger relative to other currencies.

Arbitrage opportunity: An opportunity to make money by taking advantage of a price difference between
two markets.

Ask prices: Prices at which a dealer is willing to sell an asset or security, typically qualified by a maximum
quantity (ask size). Also called offer price.

Asset-backed securities: Financial securities created by securitization whose associated payments and
value are backed by a pool of underlying assets, such as car loans, credit card receivables, bank loans, or
airplane leases.

Assets: Items that have value and include real assets and financial assets.

Balance of payments: A record that tracks transactions between residents of one country and residents
of the rest of the world over some time, usually a year.

Balance sheet: A statement of the company’s financial position at a specified point in time; essentially, it
shows the company’s assets, liabilities or debt, and owner-supplied capital or equity.

Ban assurance: An arrangement in which a bank and an insurance company form a partnership so that
the insurance company can sell its products to the bank's client base

Basis point: A measure equal to 0.01% or 0.0001.

Beta: A generic term for market risk, systematic risk, or non-diversifiable risk.

Bid-ask spreads: The Difference between the bid price and the offer price quoted by a dealer, which
represents the compensation dealers expect for taking the risk of buying and selling securities.
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Bid prices: Prices at which a dealer is willing to buy an asset or security, typically qualified by a maximum
quantity (bid size).

Bond: A formal contract that represents a loan from an investor (bondholder) to an issuer. The contract
describes the key terms of the debt obligation, such as the interest rate and maturity.

Book values: Balance sheet values of a company’s assets, liabilities, and equity.

Bottom line: Net earnings or net profits of any company

Brokerage services: Trading services provided to clients who want to buy and sell securities; they include
not only execution services (that is, processing orders on behalf of clients) but also investment advice and
research.

Budget deficit: Status of financial health in which expenditures exceed revenue.

Business cycles: Economy-wide fluctuations in economic activity.

Call option: The right (but not the obligation) to buy an underlying security at the exercise price until the
option expires.

Capital account: A component of the balance of payments that reports capital transfers between
domestic entities and foreign entities, such as debt forgiveness or the transfer of assets by migrants
entering or leaving the country.

Capital market: The part of a financial system concerned with raising capital by dealing in shares, bonds,
and other long-term investments

Capitalism: An economic system that promotes private ownership as the means of production and
markets as the means of allocating scarce resources.

Cartel: A special case of oligopoly in which a group of producers jointly control the production and pricing
of products or services produced by the group.

Collateral: Specific assets (generally a tangible asset) that a borrower pledges to a lender to secure a loan.

Commodities: Physical products, such as precious and base metals (e.g., gold, copper), energy products
(e.g., oil), and agricultural products that are typically consumed (e.g., corn, cattle, wheat) or used in the
manufacture of goods (e.g., lumber, cotton, sugar).

Consumer price index: Constructed by determining the weight (or relative importance) of each product
and service in a typical household’s spending in a base year and then measuring the overall price of that
basket of goods from year to year.

Coupon rate: The interest rate for a bond. The bond’s coupon rate multiplied by its par value equals the
annual interest owed to the bondholders.
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Credit default swap: A contract that protects the buyer against a loss of value in debt security or index of
debt securities. The contract will specify under what conditions the other party has to make payment to
the buyer of the CDS.

Credit rating agencies: Investment research service providers that specialize in providing opinions about
the credit quality of bonds and their issuers.

CRR (Cash Reserve Ratio): Banks in India are required to hold a certain proportion of their deposits in the
form of cash. However, Banks don’t hold these as cash with themselves but deposit such cash with
Reserve Bank of India (RBI) / currency chests, which is considered as equivalent to holding cash with RBI.
This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is
known as the CRR or Cash Reserve Ratio

Current account: A component of the balance of payments that indicates how much a country consumes
and invests (outflows) with how much it receives (inflows). It includes three components, the goods, and
services account, the income account, and the current transfers account.

Current account deficit/surplus: A negative/positive current account balance.

Current assets: Short-term assets that are expected to be converted into cash used up or sold within the
current operating period (usually one year), such as cash, inventories, and accounts receivable.

Current liabilities: Short-term liabilities that must be repaid within the next year.

Default: A situation in which the bond issuer fails to make the promised payments.

Deflation: A persistent and pronounced decrease in prices across most products and services in an
economy.

Demand: The quantity of a product or service buyers is willing and able to buy at a given price.

Depreciation (currency): A situation in which a currency is getting weaker relative to other currencies.

Depreciation: The process of allocating the cost of an asset over the asset’s estimated useful life.

Derivatives: Contracts (agreements to do something in the future) that derive their value from the
performance of an underlying asset, event, or outcome.

Discount rate: The rate used to calculate the present value of some future amount.

Diversification: The practice of combining assets and types of assets with different characteristics in a
portfolio to reduce risk.

Earnings per share: The amount of income earned during a period per share of common stock; net income
divided by the number of shares outstanding.
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Economics: The study of production, distribution, and consumption or the study of choices in the presence
of scarce resources.

Equity: Assets minus liabilities; the shareholders’ (owners’) investment in the company.

Exchange-traded funds (ETFs): Pooled investment vehicles that are typically passively managed to track
an index or sector and that trade continuously as common stocks on exchanges or through dealers.

Financial institutions: Financial intermediaries, such as banks and insurance companies, whose role is to
collect money from savers and to invest it in financial assets.

Financial intermediaries: Organizations that act as middlemen between those who have money and those
who need money.

Financial markets: Places where buyers and sellers can trade securities; also called security markets.

Financial services industry: The industry that offers a range of products and services to those who have
money to invest and those who need money and helps channel funds between them.

Fiscal policy: The use of taxes and government spending to affect the level of aggregate expenditures.

Foreign direct investments (FDI): Direct investments made by foreign investors and companies.

Gross domestic product (GDP): The total value of all final products and services produced within an
economy in each period of time (output definition), or equivalently, the aggregate income earned by all
households, all companies, and the government within an economy in a given period of time (income
definition). Nominal GDP uses current market values. Real GDP adjusts for changes in price levels.

Gross national product (GNP): The market value of all the products and services produced in one year by
labor and property supplied by the citizens of a country.

Hedge: To reduce or eliminate risk caused by fluctuations in the prices of commodities, securities, or
currencies.

Hyperinflation: Price increases so large and rapid that people find it difficult to purchase products and
services.

Imports: Products and services that are produced outside a country’s borders and then brought into the
country.

Income statement: A financial statement that identifies the profit or loss of a company during a given
period, such as one year.

Inflation: The percentage increase in the general price level from one period to the next; a sustained rise
in the overall level of prices for products and services.

Initial public offering: The first issuance of common shares to the public by a formerly private corporation.
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Insider trading: Trading while in possession of material non-public information.

Intangible assets: Assets lacking physical substance, such as patents and trademarks.

Inventories: The unsold units of production on hand.

Investment banks: Financial intermediaries that assist companies and governments raise capital and can
provide other services, such as strategic advisory services, brokerage, and dealing services, and research
services. They are also known as merchant banks.

Liability: A monetary obligation of a company as a result of previous events.

Maturity date: Date when the borrower must repay the amount borrowed.

Monetary policy: Actions taken by a nation’s central bank to affect aggregate output and prices through
the money supply or credit.

Money laundering: A process in which criminals use financial services to transfer money from illegal
operations to other legal activities; the money becomes “clean” in the process.

Money market: The trade in short-term loans between banks and other financial institutions

Net asset value (NAV): The total net value of a fund (the value of all assets minus the value of all liabilities)
divided by the fund’s current total number of shares outstanding.

Net exports/Balance of trade: The difference between exports and imports of goods and services; also
called the balance of trade or trade balance.

Net income: The difference between revenue and expenses; income available to distribute to
shareholders.

Net present value: The present value of future cash flows minus the cost of the investment, or the present
value of cash inflows minus the present value of cash outflows.

Non-current assets: Assets used over some years to generate income for the company; examples include
machinery, equipment, buildings, land, and intangible assets.

Open market operations: Activities that involve the purchase and sale of government bonds by a central
bank.

Opportunity cost: The cost of any activity measured regarding the value of the best alternative that is not
chosen; the value that investors forgo by choosing a course of action. For example, the cost of not having
money to invest, spend, or hold; the cost of giving up opportunities to use the money.

Option contract: An agreement in which the buyer of the option has the right, but not the obligation, to
trade the underlying security.
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Over-the-counter (OTC) markets: Another name for quote-driven markets dating from when securities
were traded over a counter in the dealer’s office.

Portfolio: The group of assets in which savings are invested.

Primary market: Markets in which issuers, such as companies and governments, sell their securities to
investors.

Private equity: A type of alternative investment that consists of investing in private companies—that is,
companies that are not listed on a stock exchange.

Purchasing power parity: Economic theory based on the principle that a basket of goods in two different
countries should cost the same after considering the exchange rate between the two countries’
currencies.

Put option: The right (but not the obligation) to sell the underlying at the exercise price until expiration.

Real estate investment trusts (REITs): Public companies that mainly own, and in most cases operate,
income-producing real estate.

Recession: A period during which real GDP decreases (i.e., negative growth) for at least two successive
quarters, or a period of significant decline in total output, income, employment, and sales lasting more
than a few months.

Repo (Repurchase) rate: The rate at which the RBI lends short-term money to the banks against securities.
When the repo rate increases borrowing from RBI becomes more expensive, therefore, we can say that
in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate;
similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo rate: The rate at which banks park their short-term excess liquidity with the RBI. The banks
use this tool when they feel that they are stuck with excess funds and are not able to invest anywhere for
reasonable returns. An increase in the reverse repo rate means that the RBI is ready to borrow money
from the banks at a higher rate of interest. As a result, banks would prefer to keep more and more surplus
funds with RBI.

Reserve requirement: The requirement for banks to hold reserves in proportion to the size of deposits –
CRR & SLR

Secondary market: The market in which investors’ trade securities and contracts with each other but not
with the original security issuer.

Securities: Financial assets that can be traded, such as shares and bonds.

Share buyback/repurchase: A transaction in which a company uses its cash to buy back its shares from
existing shareholders. This transaction reduces the number of shares outstanding.
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SLR (Statutory Liquidity Ratio): This term is used by bankers and indicates the minimum percentage of
deposits that the bank must maintain in the form of gold, cash or other approved securities. Thus, we can
say that it is the ratio of cash and some other approved securities to liabilities (deposits)

Spot market: Foreign exchange market in which currencies are traded now and delivered immediately.

Stagflation: When a high inflation rate is combined with a high level of unemployment and a slowdown
of the economy.

Statement of cash flows: A financial statement that identifies the sources and uses of cash over some
time and explains the change in the company’s reported cash balance during the period.

Stock dividend: A transaction in which a company distributes additional shares of its common stock to
shareholders instead of cash. This transaction reduces the number of shares outstanding but does not
affect the company’s value because the stock price decreases accordingly.

Swaps: Derivatives in which two parties swap cash flows or other financial instruments over multiple
periods (months or years) for mutual benefit, usually to manage risk.

Top line: Company's gross sales or revenues.

Trade deficits/surplus: When the value of exports is lower/higher than the value of imports.
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ECONOMICS BASICS

MICROECONOMICS
Every time you buy or sell a product or try to assess the value of a product or service, you are effectively
applying microeconomics. You may directly use microeconomics in your everyday work. Even if you do
not, it is very likely to be used by others in your workplace to make business and investment decisions.

Some important points to remember about microeconomics include the following:

 Microeconomics is the study of how individuals and companies make decisions to allocate scarce
resources.
 Demand is the desire for a product or service coupled with the ability and willingness to pay a
given price for it.
 The law of demand states that the quantity demanded and price of a product are usually inversely
related.
 If consumers expect that the price of a product will increase in the future, the current quantity
demanded may increase as consumers accumulate the product to avoid paying a higher price in
the future. If consumers’ tastes and preferences change and they stop liking the product as much,
the quantity demanded at each price will decrease.
 When the price of a product decreases, it may lead to an increase in demand for the product and
its complementary products.
 Market equilibrium occurs when, at a particular price, no buyer or seller has any incentive or
desire to change the quantity demanded or supplied, all other factors remaining unchanged. The
price at which the quantity demanded equals the quantity supplied in a market is known as the
equilibrium price.
 Profit is the difference between the revenue generated from selling products and services and
the cost of producing them. Accounting profit considers only the explicit costs, whereas economic
profit considers both explicit costs and the implicit opportunity costs. Opportunity costs capture
the value foregone by choosing a particular course of action relative to the best alternative that
is not chosen.
 Fixed costs do not fluctuate with the level of output, whereas variable costs do. As production
increases, average total costs, which include both average fixed costs and average variable costs,
decrease because the fixed costs are spread over more units. Increased production allows
producers to benefit from economies of scale, the cost savings arising from a significant increase
in output without a simultaneous increase in fixed costs.
 Economies of scale are cost savings arising from a significant increase in output without a
comparable rise in fixed costs. These cost savings lead to a reduction in total costs per unit as a
result of increased production. Economies of scale can be obtained if, for example, staff, buildings,
and machinery are unchanged but output increases, which results in lower fixed costs per unit
and lower total costs per unit.
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MACROECONOMICS
Investment professionals consider macroeconomic factors when evaluating a company’s earnings
potential and the relative attractiveness of asset classes. It is no easy task, and few investment
professionals can measure and assess the combined effect of macroeconomic factors with any degree of
certainty.
Some important points to remember about macroeconomics include the following:
 Macroeconomics is the study of an economy as a whole.
 GDP per capita is equal to GDP divided by the population. It allows comparisons of GDP between
countries or within a country.
 Economic growth is the annual percentage change in real output. It is also sometimes expressed
in per capita terms.
 Economic activity and growth rates tend to fluctuate over time. These fluctuations are referred
to as business cycles. Phases of a business cycle include expansion, peak, contraction, trough, and
recovery.
 Changes in the business cycle can be driven by many factors, such as housing, the stock market,
and the financial services sector.
 With the growth of international trade, mobility of labor, and more closely connected financial
markets, movements in the business cycles of countries have become more closely aligned with
each other.
 Economic indicators—measures of economic activity—are regularly reported and analyzed.
These measures may be leading, lagging, or coincident indicators.
 Economic growth, inflation, and unemployment are major concerns of central banks and
governments. They each use different financial tools to affect economic activity. Central banks,
which are often independent of governments, use monetary policy. Governments use fiscal
policy.
 Both fiscal and monetary policies have limitations: they are affected by time lags, and the
responses to and consequences of each may not be as expected.
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CAREER OPPORTUNITIES

CORPORATE FINANCE
Corporate finance jobs involve working for a company in the capacity of finding and managing
the capital necessary to run the enterprise. This is done while maximizing corporate value and reducing
financial risk. The functions you may implement while in such a position include:

 Setting up a company's overall financial strategy

 Forecasting profits and losses
 Negotiating lines of credit
 Preparing financial statements
 Coordinating with outside auditors

More sophisticated corporate finance jobs might involve mergers and acquisitions activity, such as
calculating the value of an acquisition target or determining the value of a division for a spinoff. Corporate
finance positions can be found in companies of all sizes, from large international entities to small startups.
Additional corporate finance positions include financial analysts, treasurers, and internal auditors.

COMMERCIAL BANKING
Commercial banks, which include large entities to local institutions, offer a range of financial services,
from checking and savings accounts to IRAs and loans. Career options available in this sector include -
bank tellers, loan officers, operations, marketing, and branch managers.

INVESTMENT BANKING
Some of the most glamorous – and intense – financial careers are jobs in investment banking. Investment
banking jobs deal with facilitating the issuance of corporate securities and making these securities
available for investors to purchase, all while trading securities and providing financial advice to both
corporations and wealthy individual investors.

Typically, investment banking firms have many divisions and groups with many different objectives and
responsibilities. Working in a traditional investment banking firm would allow you to interact with issuers
of securities, mergers and acquisitions professionals, or the trading desk, which trades stocks, bonds and
other securities in the secondary market.

HEDGE FUNDS
Hedge funds are largely unregulated private investment funds whose managers can buy or sell a wide
array of assets and financial products. Because of the mystery that surrounds this type of entity, hedge
fund jobs are also considered by many to be somewhat glamorous.

 Typical hedge fund jobs include:

 Financial analyst
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 Trader
 Regulatory compliance officer
 Quantitative analyst
 Marketing manager
 Portfolio manager

PRIVATE EQUITY AND VENTURE CAPITAL

Private equity professionals help businesses find capital for both expansion and current operations. They
also provide financing for some corporate business transactions, such as
managed buyouts and restructurings.

At times, a private-equity job may involve working as an interim executive at a struggling company, where
your success helps determine the fate of the company.

Venture capital professionals (VCs) spend most of their time with startups or small, fast-growth
companies. Venture capital firms evaluate pitches by founders and small-company leaders to determine
if the firm will invest. Sometimes referred to as "vulture capitalists," VCs are known to structure deals that
favor the investor, not the company receiving funding.

The VC hopes that the funded company will someday go public – that is, make its stock available on the
public stock market. Venture capital is a tough business wherein the failure rate is high, but the rewards,
if they are realized, can be huge.

FINANCIAL PLANNING
Financial planners help individuals develop plans that will ensure their present and future financial
stability. Typically, they review a client's financial goals and generate an appropriate plan for saving and
investing that fits the client's individual needs. The plan may focus on wealth preservation or investment
growth and may even include estate and tax planning.

Most financial planners work in either large, nationwide groups or smaller, locally based firms. Some
planners charge flat fees, others a percentage of assets under management, receiving commissions on
the products they sell (such as mutual funds). Generally, financial planners with the Certified Financial
Planner (CFP) designation are the most in-demand, as they must obtain three years of financial planning
experience and pass several exams.

INSURANCE
Finance jobs in the insurance industry involve helping businesses and individuals anticipate potential risks
and protect themselves from losses. Most insurance jobs are with large insurance companies. You
could begin a career in this sector working as a sales rep selling insurance policies, as a customer
service rep working with existing clients, or as an actuary computing risks and premium rates according
to probabilities based on historical, quantitative data sets.
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PUBLIC ACCOUNTING
The field of public accounting is broad, with many opportunities. Public accountants help businesses and
individuals keep track of their finances according to generally accepted accounting principles (GAAP).
Public accountants’ record business transactions, help prepare financial statements, financial audit
records, prepare income tax returns, and provide related consulting services.

Accountants generally work in partnerships. The largest partnerships are known as the Big 4(previously
the Big 8 and the Big 6) and include Deloitte Touche Tohmatsu, PricewaterhouseCoopers (PwC), Ernst &
Young (EY) and KPMG. But many jobs also exist at many smaller firms. Typically, new hires start as a staff
accountant, then advance to audit manager, then tax manager and, eventually, if they can maintain the
tough working schedule for many years, a partner in the firm.

CHOOSING THE RIGHT DIRECTION FOR YOU

It is always wise to consider the direction of the market before seeking a financial job. To effectively pursue
jobs with the highest probability of success, you must measure the demand for the position.

Different financial jobs require different skills and present vastly different work environments, so it's wise
to select one that aligns with your long-term interests and abilities. Someone with solid interpersonal
skills, for example, might do well as a financial advisor, while someone who enjoys crunching numbers
might do better in public accounting.

Do the research first to discover your options. The time spent uncovering the most interesting
possibilities can be time saved working in a job that just doesn't fit.