Financial World/Concepts

  KURTOSIS Kurtosis- definition, explanation and relevance to finance Kurtosis in stats is used to describe the distribution of the data set. Kurtosis depicts to what extent the data set points of a particular distribution differs from the data of a normal distribution. Kurtosis is used to determine whether a distribution contains extreme values. In the area of finance the kurtosis is used to measure the volume of financial risk associated with any instrument or a transaction. More the kurtosis more is the financial risk associated with the concerned data set. Skewness is a measure of symmetry in a distribution whereas the kurtosis is the measure of heaviness or the density of distribution tails. These two factor differ from each other in their definition, Kurtosis is an important descriptive statistic of data distribution. An excess kurtosis is a metric which compares distribution kurtosis against normal distribution kurtosis. Excess Kurtosis= Kurtosis-3   Below i...

  Free cash flow for a firm is the cash that company generates through its operations less cost of capex. In other words FCF is the cash left over after capex and operational expenses. It is one the crucial parameter for investors before investing in the company. A company with plenty of FCF implies its capability to pay debts, dividends, buyback shares and also to facilitate the growth of firm. Unlike net income which is easy to manipulate FCF is difficult to tweak and acts as crucial parameter in valuating company profitability. A negative FCF need not simply imply downturn of the firm but if the firm has actually undergone huge investments for better returns on the long term. A positive FCF imply that the firm is generating more cash than       that used to run the company, in other terms profitability. The capex will usually last for more than a year thus costly when they incur in FCF. This makes FCF itself different from year to year. Firms can also...

  EFFICIENT PORTFOLIO An efficient or an optimal portfolio is a portfolio which has the best expected return for a given risk rate or otherwise has minimum risk for a given expected returns. Unlike an inefficient portfolio, efficient portfolio refer to the efficient frontier with the highest return to risk combination for a given investor’s tolerance for risk. In other terms, efficient portfolio is one which is designed to give the highest return for a specific risk rate of investor.   IMG SRC- Archimedesfinancial.com In the above picture portfolio A and B fall under effective portfolio. Even though PF A has low returns, it has lowest risk rate and PF B has highest returns even though it has highest risk. Portfolio C fall outside efficient frontier as its risk is higher compared to PF A for same returns and compared B, its returns is lesser for the same risk. A brief on EFFICIENT FRONTIER- In modern portfolio management theory, the efficient frontier is a type of...

  FIPB (Foreign Investment Promotion Board) FIPB stands for Foreign Investment Promotion Board is a government of India agency which exists to control and co-ordinate the foreign direct investment (FDI) which doesn’t come under the automatic route. FIPB was a body under the Dept. of economic affairs, ministry of finance till it ceases to exist from 24 th May 2017. To speed up the inflow of funds and also to increase the transparency in the system through FDI the FIPB was abolished by then Finance minister Arun Jaitley in the year 2017. Currently FIFP (Foreign Investment Facilitation Portal) has replaced the roles and responsibilities of FIPB. The board was dissolved followed by the Jaitley’s budget in the year 2017. The government claimed to be taking out a layer which required the government approval and could be delaying the process of raising FDI.   Roles of FIPB FIPB acts as a medium for bringing FDI into the country with in the cap of 1200 crore. It makes sure ...

  Vendor Financing The lending of money by vendor to its customers who in turn uses the money to buy products/services from the same vendor is known as vendor financing in terms of finance. In other terms it can be referred to as the trade credit. The person providing the service or products lends the money to the person who is buying it. Once the customer pushes these products (from the customer’s perspective these are inventories on credit in their book of account) to the markets, the credit amount is repaid as previously agreed with the supplier or the vendor. This type of feature helps the firms utilize the vendor’s lending ability and thus meet their working capital requirement. Customer need not pay for the products upfront when they are buying the goods but after the sale of the product. Vendor gives a line of credit to its customer based on their goodwill and rapport to pay for the products after a certain period of time or over a period of time.   The importan...

  SHAREHOLDER A person who legally owns one or more shares of stock in a public or a private corporation. A shareholder can be an individual or an institution. In layman terms a shareholder is the owner of the company. The number of shares he/she holds defines his/her percentage of ownership of the company. The law defines the shareholder only after his/her name or the entity’s name (in case of institution) is mentioned in the company’s register of shareholder or members. Shareholders of a company or the corporation are legally separate from the corporation itself and thus are not liable for the corporation’s liability. Until and unless the shareholder has offered guarantee, he/she has limited liability to the unpaid share price underlying. Shareholder can acquire share either from primary market (during the IPO of the company) and thus provide the capital for the corporation or from the secondary market. Shareholders are considered to be the subset of stakeholders of the com...