Tag: Quantitative Techniques-II

Preference Shares

Preference shares or preferred stock represent ownership in a company. Preference shareholders enjoy the preference over common shareholders on the assets and earnings. Also, in case of bankruptcy, preferred shareholders enjoy the priority to receive the company’s assets before common shareholders.

A company issues preference shares to raise capital. This becomes part of the preference share capital. Preference shareholders receive dividends before the equity shareholders. A specific type of preference share is eligible to receive arrears of dividends. Furthermore, you can easily convert these shares to equity shares.

The following are the types of preference shares:

• Participating Preference Shares
• Non-Participating Preference Shares
• Convertible Preference Shares
• Non-Convertible Preference Shares
• Cumulative Preference Shares
• Non-Cumulative Preference Shares

Equity Shares

Equity shares are the ordinary shares of the company. The holder of the equity shares are the real owners of the company, i.e. the amount of shares held by them is the portion of their ownership in the company.

Equity shareholders have some privileges like they get voting rights at the general meeting, they can appoint or remove the directors and auditors of the company. Apart from that, they have the right to get the profits of the company, i.e. the more the profit, the more is their dividend and vice versa. Therefore, the amount of dividends is not fixed. This does not mean that they will get the whole profit, but the residual profit, which remains after paying all expenses and liabilities on the company.

Profit and loss are the terms used to identify whether a deal is profitable or not. We use these terms very often in our daily lives. If the selling price is greater than the cost price, then the difference between the selling price and cost price is called profit. If the selling price is less than the cost price, then the difference between the cost price and the selling price is called loss. The price at which a product is purchased is called its cost price. The price at which a product is sold is called its selling price. Let us learn more about profit and loss in this article.

Profit and Loss Related Terms

When a person buys an article for a certain price and then sells it for a different price, he makes a profit or incurs a loss. There are various terms that are associated with the entire process of making a transaction. For example, cost price of the article (C.P.), selling price (S.P.), discount, marked price, profit, and loss. Let us understand the meaning of these terms one by one.

Cost Price

The price at which an article is purchased is called its cost price. For example, if Neil bought an umbrella for Rs. 8, this is the cost price of the umbrella. It is abbreviated as C.P.

Selling Price

The price at which an article is sold is known as the selling price of the article. For example, if Neil sold the same umbrella for Rs. 10, then Rs. 10 is considered the selling price of the umbrella. It is abbreviated as S.P.

Profit

When, in a transaction, the selling price is greater than the cost price, it means we earn a profit. Using the above example, the profit that Neil earned is Rs. 2. It is calculated with the help of the formula: Profit = Selling price – Cost price. In the above example, the Cost price of the umbrella was Rs. 8 and the Selling price of the umbrella was Rs. 10, so the profit that he made can be calculated by using the formula:

Profit = Selling price – Cost price. Substituting the values, we get, Profit = 10 – 8 = 2. Therefore, he makes a profit of Rs. 2.

Loss

When, in a transaction, the cost price is greater than the selling price, it means we incur a loss. For example, if a bag is bought for Rs. 20 and it is sold for Rs. 17, it means we incurred a loss of Rs. 3 in this transaction. Loss is calculated with the help of the formula:

Loss = Cost price – Selling price.

Taking the same example, the Cost price of the bag is Rs. 20 and the Selling price is Rs. 17, so the loss can be calculated with the formula:

Loss = Cost price – Selling price.

Substituting the values, we get, Loss = 20 – 17 = 3. Therefore, there is a loss of Rs. 3 in the transaction.

Marked Price

Marked price is the price set by the seller on the label of the article. It is a price at which the seller offers a discount. After the discount is applied on the Marked price, it is sold at a reduced price known as the selling price.

Example: Sandra goes shopping at a store where everything is at a 50% discount. The price tag on a dress is Rs. 120. This means that the Marked Price of the dress before discount = Rs. 120.

Discount

To cope with the competition in business and boost the sale of goods, shopkeepers offer discounts to customers. The rebate or the offer given by the shopkeepers to lure the customers is called a discount. Discount is always calculated on the Marked price of the article.

Discount = Marked Price – Selling Price

Discount (%) = (Discount/Marked Price) × 100

If the marked price of an article is Rs. 600, and there is a 40% discount on it, this means that the customer can buy the article at the following price:

40% discount on marked price = (40/100) × 600

Discount ($ )= 24000/100 = Rs. 240

Therefore, Selling Price = Marked Price – Discount ($) = Rs. 600 − Rs. 240 = Rs. 360

Profit and Loss Formulas

Now, let us learn the formulas for calculating profit and loss.

Profit Formula

If the selling price of an article is greater than its cost price, there is a gain in the transaction. The basic formula used for calculating the profit is:

Profit = Selling Price – Cost Price.

Loss Formula

If the selling price of an article is lesser than the cost price, there is a loss in the transaction. The basic formula used for calculating the loss is: Loss = Cost Price – Selling Price

Illustration

To calculate the selling price on this basis, the food costs have to be expressed as a percentage of the selling price using the following calculation. Food cost ÷ Food cost as a % of the selling price × 100

For example, if food costs for a dish come to £4.50 and the gross profit target is 75%, the food cost as a percentage of the targeted sale is 25%.

1. Speed, Time and Distance:

2. km/hr to m/sec conversion:

3. m/sec to km/hr conversion:

4. If the ratio of the speeds of A and B is a: b, then the ratio of

5. Suppose a man covers a certain distance at xkm/hr and an equal distance at y km/hr. Then,

Capital market refers to facilities and institutional arrangements through which Medium and long-term funds (for a period of minimum 365 days and above), both debt and equity are raised and invested. It provides all with a series of channels through which savings of the community are made available for industrial and commercial enterprises and for the public in general. The capital market consists of development banks, commercial banks and stock exchanges.

A capital market assists an economy by providing a platform to gain funds for business operations, development activities, or wealth enhancement. The functioning of a capital market follows the theory of the circular flow of money.

For example, a firm needs money for business operations and usually borrows it from households or individuals. In the capital market, the money from individual investors or households is invested in a firm’s shares or bonds. In return, investors gain profits as well as goods and services.

The market comprises suppliers and buyers of finance, along with trading instruments and mechanisms. There are also regulatory bodies. Stock exchanges, equity markets, debt markets, options markets, etc., are some capital market examples.

Primary Market

The primary market is for trading freshly issued securities, i.e., first-time trading. It enables an initial public offering. It is also known as the new issues market.

Here, companies raise funds with the help of preferential allotment, rights issue , electronic IPOs, or the pre-selected issue of securities or private placement. Usually, like an investment bank, the intermediary attaches an initial price to the shares. Once the sale materializes, firms take their shares to the stock exchange to facilitate trading between different investors.

Secondary Market

The trading of old securities occurs in the secondary market, which occurs after transacting in the primary market. Both stock markets and over-the-counter trades come under the secondary market. We also call this market the stock market or aftermarket.

Examples of secondary markets are the London Stock Exchange, the New York Stock Exchange, NASDAQ, etc.

Elements of a Capital Market

• Individual investors, commercial banks, financial institutions, insurance companies, business corporations, and retirement funds are some significant suppliers of funds in the market.
• Investors offer money intending to make capital gains when their investment grows with time. In addition, they enjoy perks like dividends, interests, and ownership rights.
• Companies, entrepreneurs, governments, etc., are fund-seekers. For instance, the government issues debt instruments and deposits to fund the economy and development projects.
• Usually, long-term investments such as shares, debt, government securities, debentures, bonds, etc., are traded here. In addition, there are also hybrid securities such as convertible debentures and preference shares.
• Stock exchanges operate the market predominantly. Other intermediaries include investment banks, venture capitalists, and brokers.
• Regulatory bodies have the authority to monitor and eliminate any illegal activities in the capital market. For instance, the Securities and Exchange Commission overlooks the stock exchange operations.
• The capital market and money market are not the same. Securities exchanged in the former would typically be a long-term investment with over a year lock-in period. Short-term investments trade in the money markets and include a certificate of deposits, bills of exchange, promissory notes, etc.

Functions of Capital Market

• It mobilizes parties’ savings from cash and other forms to financial markets. It bridges the gap between people who supply capital and people in need of money.
• Any initiative requires cash to materialize. Financial markets are central to national and economic development as they provide rich sources of funds. For example, the World Bank collaborates with global capital markets to mobilize funds to achieve its goals, such as poverty elimination.
• The International Bank for Reconstruction and Development (IBRD) has assisted over 70 countries by raising nearly $ 1 trillion since the first bond in 1947. Likewise, a report suggested that the European Union companies need to turn to this market to manage their pandemic balance sheet as banks alone will not suffice.
• For the participants, the exchange instruments possess liquidity, i.e., they can be converted into cash and cash equivalents.
• Also, the trading of securities becomes easier for investors and companies. It helps minimize transaction and information costs.
• With higher risks, investors can gain more profits. However, there are many products for those with a low-risk appetite. In addition, there are some tax benefits obtained from investing in the stock market.
• Usually, the market securities can work as collateral for getting loans from banks and financial institutions.

1. Equities:

Equity securities refer to the part of ownership that is held by shareholders in a company.

In simple words, it refers to an investment in the company’s equity stock for becoming a shareholder of the organization.

The main difference between equity holders and debt holders is that the former does not get regular payment, but they can profit from capital gains by selling the stocks.

Also, the equity holders get ownership rights and they become one of the owners of the company.

When the company faces bankruptcy, then the equity holders can only share the residual interest that remains after debt holders have been paid.

Companies also regularly give dividends to their shareholders as a part of earned profits coming from their core business operations.

2. Debt Securities:

Debt Securities can be classified into bonds and debentures:

• Bonds:

Bonds are fixed-income instruments that are primarily issued by the centre and state governments, municipalities, and even companies for financing infrastructural development or other types of projects.

It can be referred to as a loaning capital market instrument, where the issuer of the bond is known as the borrower.

Bonds generally carry a fixed lock-in period. Thus, the bond issuers have to repay the principal amount on the maturity date to the bondholders.

• Debentures:

Debentures are unsecured investment options unlike bonds and they are not backed by any collateral.

The lending is based on mutual trust and, herein, investors act as potential creditors of an issuing institution or company.

3. Derivatives:

Derivative instruments are capital market financial instruments whose values are determined from the underlying assets, such as currency, bonds, stocks, and stock indexes.

The four most common types of derivative instruments are forwards, futures, options and interest rate swaps:

• Forward: A forward is a contract between two parties in which the exchange occurs at the end of the contract at a particular price.
• Future: A future is a derivative transaction that involves the exchange of derivatives on a determined future date at a predetermined price.
• Options: An option is an agreement between two parties in which the buyer has the right to purchase or sell a particular number of derivatives at a particular price for a particular period of time.
• Interest Rate Swap: An interest rate swap is an agreement between two parties which involves the swapping of interest rates where both parties agree to pay each other interest rates on their loans in different currencies, options, and swaps.

4. Exchange Traded Funds:

Exchange-traded funds are a pool of the financial resources of many investors which are used to buy different capital market instruments such as shares, debt securities such as bonds and derivatives.

Most ETFs are registered with the Securities and Exchange Board of India (SEBI) which makes it an appealing option for investors with a limited expert having limited knowledge of the stock market.

ETFs having features of both shares as well as mutual funds are generally traded in the stock market in the form of shares produced through blocks.

 ETF funds are listed on stock exchanges and can be bought and sold as per requirement during the equity trading time.

5. Foreign Exchange Instruments:

Foreign exchange instruments are financial instruments represented on the foreign market. It mainly consists of currency agreements and derivatives.

Based on currency agreements, they can be broken into three categories i.e spot, outright forwards and currency swap.

‘Money Market’ is used to define a market where short-term financial assets with a maturity up to one year are traded. The assets are a close substitute for money and support money exchange carried out in the primary and secondary market. In other words, the money market is a mechanism which facilitate the lending and borrowing of instruments which are generally for a duration of less than a year. High liquidity and short maturity are typical features which are traded in the money market. The non-banking finance corporations (NBFCs), commercial banks, and acceptance houses are the components which make up the money market.

Money market is a part of a larger financial market which consists of numerous smaller sub-markets like bill market, acceptance market, call money market, etc. Besides, the money market deals are not out in money / cash, but other instruments like trade bills, government papers, promissory notes, etc. But the money market transactions can’t be done through brokers as they have to be carried out via mediums like formal documentation, oral or written communication.

Features of Money Market Instruments

• Safety: Since the issuers of money market instruments have strong credit ratings, it automatically means that the money instruments issued by them will also be safe.
• Liquidity: They are considered highly liquid as they are fixed-income securities which carry short maturity periods of a year or less.
• Discounted price: One of the main features of money market instruments is that they are issued at a discount on their face value.

Purpose of a Money Market

Provides Funds at a Short Notice

Money Market offers an excellent opportunity to individuals, small and big corporations, banks of borrowing money at very short notice. These institutions can borrow money by selling money market instruments and finance their short-term needs.

It is better for institutions to borrow funds from the market instead of borrowing from banks, as the process is hassle-free and the interest rate of these assets is also lower than that of commercial loans. Sometimes, commercial banks also use these money market instruments to maintain the minimum cash reserve ratio as per the RBI guidelines.

Maintains Liquidity in the Market

One of the most crucial functions of the money market is to maintain liquidity in the economy. Some of the money market instruments are an important part of the monetary policy framework. RBI uses these short-term securities to get liquidity in the market within the required range.

Utilisation of Surplus Funds

Money Market makes it easier for investors to dispose off their surplus funds, retaining their liquid nature, and earn significant profits on the same. It facilitates investors’ savings into investment channels. These investors include banks, non-financial corporations as well as state and local government.

Helps in monetary policy

A developed money market helps RBI in efficiently implementing monetary policies. Transactions in the money market affect short term interest rate, and short-term interest rates gives an overview of the current monetary and banking state of the country. This further helps RBI in formulating the future monetary policy, deciding long term interest rates, and a suitable banking policy.

Aids in Financial Mobility

Money Market helps in financial mobility by allowing easy transfer of funds from one sector to another. This ensures transparency in the system. High financial mobility is important for the overall growth of the economy, by promoting industrial and commercial development.

Money Market Instrument

• Banker’s Acceptance

A financial instrument produced by an individual or a corporation, in the name of the bank is known as Banker’s Acceptance. It requires the issuer to pay the instrument holder a specified amount on a predetermined date, which ranges from 30 to 180 days, starting from the date of issue of the instrument. It is a secure financial instrument as the payment is guaranteed by a commercial bank.

Banker’s Acceptance is issued at a discounted price, and the actual price is paid to the holder at maturity. The difference between the two is the profit made by the investor.

• Treasury Bills

Treasury bills or T- Bills are issued by the Reserve Bank of India on behalf of the Central Government for raising money. They have short term maturities with highest upto one year. Currently, T- Bills are issued with 3 different maturity periods, which are, 91 days T-Bills, 182 days T- Bills, 1 year T – Bills.

T-Bills are issued at a discount to the face value. At maturity, the investor gets the face value amount. This difference between the initial value and face value is the return earned by the investor. They are the safest short term fixed income investments as they are backed by the Government of India.

• Repurchase Agreements

Also known as repos or buybacks, Repurchase Agreements are a formal agreement between two parties, where one party sells a security to another, with the promise of buying it back at a later date from the buyer. It is also called a Sell-Buy transaction.

The seller buys the security at a predetermined time and amount which also includes the interest rate at which the buyer agreed to buy the security. The interest rate charged by the buyer for agreeing to buy the security is called Repo rate. Repos come-in handy when the seller needs funds for short-term, s/he can just sell the securities and get the funds to dispose. The buyer gets an opportunity to earn decent returns on the invested money.

• Certificate of Deposits

A certificate of deposit (CD) is issued directly by a commercial bank, but it can be purchased through brokerage firms. It comes with a maturity date ranging from three months to five years and can be issued in any denomination.

Most CDs offer a fixed maturity date and interest rate, and they attract a penalty for withdrawing prior to the time of maturity. Just like a bank’s checking account, a certificate of deposit is insured by the Federal Deposit Insurance Corporation (FDIC).

• Commercial Papers

Commercial paper is an unsecured loan issued by large institutions or corporations to finance short-term cash flow needs, such as inventory and accounts payables. It is issued at a discount, with the difference between the price and face value of the commercial paper being the profit to the investor.

Only institutions with a high credit rating can issue commercial paper, and it is therefore considered a safe investment. Commercial paper is issued in denominations of $100,000 and above. Individual investors can invest in the commercial paper market indirectly through money market funds. Commercial paper comes with a maturity date between one month and nine months.

National Small Industries Corporation Limited (NSIC) is a Mini Ratna government agency established by the Ministry of Micro, Small and Medium Enterprises, Government of India in 1955 It falls under Ministry of Micro, Small & Medium Enterprises of India. NSIC is the nodal office for several schemes of Ministry of MSME such as Performance & Credit Rating, Single Point Registration, MSME Databank, National SC ST Hub, etc.

Objectives

Government of India to promote small and budding entrepreneurs of post independent India, decided to establish a government agency which can mediate and provide help to small scale industries (SSI). As such they established National Small Industries Corporation with objectives to provide machinery on hire purchase basis and assisting and marketing in exports. Further, SSIs registered with NSIC were exempted from paying Earnest money and provided facility of free participation in government tendered purchases. Also, for training persons the training facilities centres and for providing assistance in modernising the small industries several branches of NSIC were opened up by government over the years in several big and small towns, where small industries were growing.

NSIC also helps in organising supply of raw materials like coal, iron, steel and other materials and even machines needed by small scale private industries by mediating with other government companies like Coal India Limited, Steel Authority of India Limited, Hindustan Copper Limited and many others, who produce these materials to provide same at concessional rates to SSIs. Further, it also provides assistance to small scale industries by taking orders from Government of India owned enterprises and procures these machineries from SSI units registered with them, thus providing a complete assistance right from financing, training, providing raw materials for manufacturing and marketing of finished products of small-scale industries, which would otherwise not be able to survive in face of competition from large and big business conglomerates. It also helps SSI by mediating with government owned banks to provide cheap finance and loans to budding small private industries of India.

Nowadays, it is also providing assistance by setting up incubation centres in other continents and also international technology fairs to provide aspiring entrepreneurs and emerging small enterprises a platform to develop skills, identify appropriate technology, provide hands-on experience on the working projects, manage funds through banks, and practical knowledge on how to set up an enterprise.

Schemes of NSIC

National Small Industries Corporation facilitates MSMEs with specially tailored scheme to build and improve their competitiveness. National Small Industries Corporation provides complete integrated services under Finance, Marketing, Technology and another allied Support service.

Marketing Support

Marketing support has been considered as one of the most important tools for the development of any business. It is crucial for the survival and growth of Micro, Small and Medium Enterprises in today’s intensely competitive market.  National Small Industries Corporation devised numerous of schemes to support enterprises (both domestic and foreign markets) in their marketing efforts. These schemes are briefly described as under:

Consortia and Tender Marketing

Micro and Small Enterprises in their individual capacity encounter several issues in order to procure & deliver large orders, which negate them a level playing field vis-a’-vis large enterprises. National Small Industries Corporation forms consortia of MSEs manufacturing the same or similar product or products, thereby combining in their capacity.

National Small Industries Corporation applies the tenders on behalf of single Micro and Small Enterprise/Consortia of Micro and Small Enterprise for securing orders for them. Finally, these orders are dispersed amongst Micro and Small Enterprises in tune with their capacity of production.

Marketing Intelligence

Disseminate and collect both international as well as domestic marketing intelligence for the benefit of Micro and Small Enterprises. This Marketing Intelligence cell, apart from to spreading awareness about several schemes for MSMEs, will maintain a database in detail and distribute information.

Exhibitions and Technology Fairs

To showcase the core competencies of Micro and Small Enterprises in India and to capitalize market opportunities, National Small Industries Corporation participates in National and International Trade Fairs and Exhibitions every year. National Small Industries Corporation facilitates the participation of the MSEs by offering concessions in rental etc. Participation in these national and international events exposes Micro and Small Enterprises units to international practices and improves their business competencies and prowess.

Credit Support

National Small Industries Corporation enables credit requirements of MSEs in the following areas:

Financing for Raw Material Procurement

The scheme framed by National Small Industries Corporation for the assistance of Raw Material helps MSEs by way of financing the procurement of Raw Material (both indigenous & imported). The salient features are as follows:

• Bulk purchase of basic raw materials at competitive rates.
• Financial Assistance for Raw Materials procurement up to 90 days.
• National Small Industries Corporation facilitates import of scares raw materials.
• National Small Industries Corporation takes overall care of all the documentation, procedures and issuance of a letter of credit in case of imports.

Financing for Marketing Activities

National Small Industries Corporation provides assistance in the financing of marketing actives such as Exports, Internal Marketing and Bill Discounting.

Finance Through Syndication with Banks

To make the sure smooth flow of credit to MSEs, National Small Industries Corporation enters into strategic alliances with several commercial banks to facilitate working capital/ long-term financing of the MSEs across the country. The engagement foresees forwarding of loan applications of the interested MSEs by National Small Industries Corporation to the banks and sharing the processing fee.