Stock market

A stock market or equity market is a public entity (a loose network of economic transactions, not a physical facility or discrete entity) for the trading of companystock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market was estimated at about $36.6 trillion at the beginning of October 2008.[1] The total world derivatives market has been estimated at about $791 trillion face or nominal value,[2] 11 times the size of the entire world economy.[3] The value of the derivatives market, because it is stated in terms ofnotional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.

History
In 12th century France the courretiers de change were concerned with managing and regulating the debts of agricultural communities on behalf of the banks. Because these men also traded with debts, they could be called the first brokers. A common misbelief is that in late 13th century Bruges commodity traders gathered inside the house of a man called Van der Beurze, and in 1309 they became the "Brugse Beurse", institutionalizing what had been, until then, an informal meeting, but actually, the family Van der Beurze had a building in Antwerp where those gatherings occurred;[7] the Van der Beurze had Antwerp, as most of the merchants of that period, as their primary place for trading. The idea quickly spread around Flanders and neighboring counties and "Beurzen" soon opened in Ghent and Rotterdam. In the middle of the 13th century, Venetian bankers began to trade in government securities. In 1351 the Venetian government outlawed spreading rumors intended to lower the price of government funds. Bankers in Pisa, Verona, Genoa and Florence also began trading in government securities during the 14th century. This was only possible because these were independent city states not ruled by a duke but a council of influential citizens. Italian companies were also the first to issue shares. Companies in England and the Low Countries followed in the 16th century.

Behavior of the stock market[edit]

From experience it is known that investors may 'temporarily' move financial prices away from their long term aggregate price 'trends'. (Positive or up trends are referred to as bull markets; negative or down trends are referred to as bear markets). Overreactions may occurso that excessive optimism (euphoria) may drive prices unduly high or excessive pessimism may drive prices unduly low. Economists continue to debate whether financial markets are 'generally' efficient. According to one interpretation of the efficient-market hypothesis (EMH), only changes in fundamental factors, such as the outlook for margins, profits or dividends, ought to affect share prices beyond the short term, where random 'noise' in the system may prevail. (But this largely theoretic academic viewpointknown as 'hard' EMHalso predicts that little or no trading should take place, contrary to fact, since prices are already at or near equilibrium, having priced in all public knowledge.) The 'hard' efficient-market hypothesis is sorely tested and does not explain the cause of events such as the stock market crash in 1987, when the Dow Jones index plummeted 22.6 percentthe largest-ever one-day fall in the United States.[13]

Share trading
Companies issue shares of their company in order to raise capital. Share trading is the exchange of securities between two individuals or brokerage firms. The shares must be registered with a stock exchange such as the New York Stock Exchange (NYSE) or the National Association of Securities Dealers Automated Quotation System (NASDAQ).

History

Regulated share trading first begun in 1698 when the London Stock Exchange was formed. John Castaing founded the London Stock Exchange in a coffee shop with only a few stocks and commodities. A commodity is a physical good such as an orange or grain that can be exchanged with a similar product which traders buy and sell under a futures contract, which is a legal agreement that states the goods will be delivered at a specified date and price. Since 1698 dozens of various stock exchanges have emerged.

Function

The exchange of shares of a company is intended to help adjust the intrinsic value of a security. Many factors change the price of securities such as global news and company reports. Through exchanging shares of a company, the intrinsic value of a security is represented.

Features

Investors buy and sell securities in order to create a profit. The intention is to buy and then sell at a higher price to make a profit. This can be done through investing in a company through buying shares or through short selling and an options contract. Short selling is the process of borrowing shares of a company from a broker to sell the shares, then buying the shares back in order to compensate the broker. An option is a legal agreement which provides the buyer the power to sell or buy a share at an agreed upon price.

Effects

The exchange of shares of a company by individual investors helps create liquidity in the market. Liquidity is the ability to convert a security into cash. In addition, the price at which the security is exchanged helps reflect the value of the company. Many companies receive financing based on the current price per share of their company. Thus, if the stock is traded at a high price the company is more likely to receive a good financing deal.

Definition of 'Subsidiary'
A company whose voting stock is more than 50% controlled by another company, usually referred to as the parent company or holding company. A subsidiary is a company that is partly or completely owned by another company that holds a controlling interest in the subsidiary company. If a parent company owns a foreign subsidiary, the company under which the subsidiary is incorporated must follow the laws of the country where the subsidiary operates, and the parent company still carries the foreign subsidiary's financials on its books (consolidated financial statements). For the purposes of liability, taxation and regulation, subsidiaries are distinct legal entities. A subsidiary company, subsidiary, or sister company[1] is a company that is completely or partly owned and partly or wholly controlled by another company that owns more than half of the subsidiary's stock.[2][3] The subsidiary can be a company, corporation, or limited liability company. In some cases it is a government or state-owned enterprise. The controlling entity is called itsparent company, parent, or holding company.[4] An operating subsidiary is a business term constantly used within the United States railroad industry. In the case of a railroad, it refers to a company that is a subsidiary but operates with its own identity, locomotives and rolling stock. In contrast, a nonoperating subsidiary would exist on paper only (i.e. stocks, bonds, articles of incorporation) and would use the identity and rolling stock of the parent company. Subsidiaries are a common feature of business life, and all multinational corporations organize their operations in this way.[5] Examples include holding companies such as Berkshire Hathaway,[6]Time Warner, or Citigroup; as well as more focused companies such as IBM, or Xerox Corporation. These, and others, organize their businesses into national and functional subsidiaries, oftentimes with multiple levels of subsidiaries.

Statutory liquidity ratio

Statutory liquidity ratio refers to the amount that the commercial banks require to maintain in the form of gold or govt. approved securities before providing credit to the customers. Here by approved securities we mean, bond and shares of different companies. Statutory Liquidity Ratio is determined and maintained by the Reserve Bank of India in order to control the expansion of bank credit. It is determined as percentage of total demand and time liabilities. Time Liabilities refer to the liabilities, which the commercial banks are liable to pay to the customers after a certain period mutually agreed upon and demand liabilities are such deposits of the customers which are payable on demand. example of time liability is a fixed deposits for 6 months, which is not payable on demand but after six months. example of demand liability is deposit maintained in saving account or current account, which are payable on demand through a withdrawal form of a cheque .it is ratio. SLR is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold,cash or other approved securities.Thus, we can say that it is ratio of cash and some other approved liabilities(deposits). It regulates the credit growth in India

The objectives of SLR are to restrict the expansion of bank credit. 1. 2. To augment the investment of the banks in government securities. To ensure solvency of banks. A reduction of SLR rates looks eminent to support the credit growth in India.

Value and formula[edit]

The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the liabilities of the bank which are payable on demand anytime, and those liabilities which are accruing in one months time due to maturity) of a bank. SLR rate = (liquid assets / (demand + time liabilities)) 100% This percentage is fixed by the central bank. The maximum and minimum limits for the SLR are 40% and 25% respectively in India.[1] Following the amendment of the Banking regulation Act(1949) in January 2007, the floor rate of 23% for SLR was removed. Presently, the SLR is 23%.

Definition of 'Reserve Ratio'

The portion (expressed as a percent) of depositors' balances banks must have on hand as cash. This is a requirement determined by the country's central bank, which in the U.S. is the Federal Reserve. The reserve ratio affects the money supply in a country. This is also referred to as the "cash reserve ratio" (CRR). CASH RESERVE RATIO (CRR) Cash Reserve Ratio (CRR) Cash Reserve Ratio (CRR) is the amount of funds that all Scheduled Commercial Banks (SCB) excluding Regional Rural Banks (RRB) are required to maintain without any floor or ceiling rate with RBI with reference to their total net Demand and Time Liabilities (DTL) to ensure the liquidity and solvency of Banks (Section 42 (1) of RBI Act 1934). The current CRR is 4.75% and at present no incremental CRR is required to be maintained by the banks. Computation of DTL Demand Liabilities are liabilities which are payable on demand and Time Liabilities are those which are payable otherwise than on demand. The components for computation of DTL include Demand Liabilities, Time Liabilities and Other Demand & Time Liabilities (ODTL) as under:a) Demand Liabilities:- Current Deposits, Savings bank deposits, Margins held against letters of credit/guarantees, Balances in overdue fixed deposits, Outstanding TTs, MTs, DDs, Unclaimed deposits, Credit balances in the Cash Credit account and deposits held as security for advances which are payable on demand, & Money at Call and Short Notice from outside the Banking System (Liability to others). b) Time Liabilities:- Fixed deposits, cash certificates, cumulative and recurring deposits, time liabilities portion of savings bank deposits, staff security deposits, margin held against letters of credit, if not payable on demand, & deposits held as securities for advances which are not payable on demand and Gold deposits.

Reserve repo rate

what is the reverse repo rate? ans. In India when RBI lends money from commercial banks against secuerities and the lending rate given by RBI to these bank called reverse repo rate to control supply of money and to control inflation. that is also decleared by RBI. niraj jain indore Meaning of Repo Rate - A repo or more broadly, a repurchase agreement, is normally a contract through which a seller of securities promises to buy them back at a later date for a mutually agreed price. Overnight repo, term repo, reverse repo, purchase agreement, buyback, and leaseback are some of the other related terms used in these kinds of operations. Financial instruments like treasury or government bills, treasury/government or corporate bonds, and stocks/shares

are offered as securities in a repurchase agreement. Typically, in this agreement, a prospective seller submits the instruments for cash, with a promise to repurchase them from the buyer at a specified time. The sum being repaid is always greater than the sum received at the time of agreement. The difference amount is termed as repo rate.

Repo rate
The discount rate at which a central bank repurchases government securities from the commercial banks, depending on the level of money supply it decides to maintain in the country's monetary system. To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash). To contract the money supply it increases the repo rates. Alternatively, the central bank decides on a desired level of money supply and lets the market determine the appropriate repo rate. Repo is short for repossession.

Definition of 'Indemnity'
Compensation for damages or loss. Indemnity in the legal sense may also refer to an exemption from liability for damages. The concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party. A typical example is an insurance contract, whereby one party (the insurer) agrees to compensate the other (the insured) for any damages or losses, in return for premiums paid by the insured to the insurer. Under section 4 of the Statute of Frauds (1677), a "guarantee" (an undertaking of secondary liability; to answer for another's default) must be evidenced in writing. No such formal requirement exists in respect of indemnities (involving the assumption of primary liability; to pay irrespective of another's default) which are enforceable even if made orally. (Ref: Peel E: "Treitel, The Law of Contract") In the UK, under the Unfair Contract Terms Act 1977 s4, a consumer cannot be made to unreasonably indemnify another for their breach of contract ornegligence.

Definition of 'Bank Guarantee'

A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it.