Tag: Financial

  • Difference between the Financial and Management Accounting

    Difference between the Financial and Management Accounting

    Financial Accounting and Management Accounting are two interrelated facets of the accounting system. A common question asked around, What is the primary difference between the Financial and Management Accounting? Financial accounting provides the basic structure for collecting data. The data collection structure is suitably modifying or adjusts for accumulating information for management accounting purposes. They are not exclusive of each other; they are supplementary.

    What is the Difference between Financial and Management Accounting? Discussion.

    In a broader sense, management accounting includes financial accounting.  They differ in their emphasis and approaches.

    Difference between Financial and Management Accounting - Table
    Difference between Financial and Management Accounting – Table

    Basic Difference:

    They are as follows;

    1. Financial serves the interest of external users (i.e. investors etc.) while management caters to the needs of internal users (i.e. management).
    2. Financial accounts govern by the generally accepted accounting principles while management accounts no set principles.
    3. The Financial presents historical information while management represents predetermined as well as past information.
    4. Financial accounts statutory while management accounts optional.
    5. Financial accounting presents annual reports while management accounting reports are of both shorter and longer durations.
    6. The Financial reports cover the entire organization while management reports are prepared for the organization as well as its segments.
    7. The financial account emphasizes the accuracy of facts while the management account requires prompt and timely reporting of facts even if they are less precise.

    This article will explain to you the difference between financial accounting and management accounting.

    Focus:

    Financial accounting emphasized the external use of accounting data. Management accounting, on the other hand, utilizes accounting data for internal uses. The major objective of financial accounting is to prepare a balance sheet and profit and loss account to inform shareholders and others about the firm’s profitability and the state of its resources and obligations.  The purpose for which management accounting collects and reports relevant information is to make decisions to ensure optimum use of the firm’s resources.

    Principle: 

    The accounting profession has developed certain principles for preparing and presenting financial reports for external uses.  Financial accounting adheres to these generally accepted accounting principles. This introduces consistency and meaningfulness of data from the investors’ point of view. They can make inter-firm comparisons of performance and analyze performance trends over the years when some set of generally accepted principles are followed by all firms.

    Management accounting, in contrast, is not based on any set of accepted rules or principles. Every enterprise, depending on its requirements for facts, evolves its procedures and principles for preparing reports for internal uses.  The information should be relevant and aid management in making decisions.

    Information:

    Financial accounting accumulates and reports historical information to investors. Financial accounting reports tell what has happened in the past.  Through balance sheet and profit and loss account, to the investors is revealed how the resources entrusted by them to the firm have been utilized.  Management accounting being a decision-making process focuses on the future.  It analyses past data and adjusts them in the light of future expectations to make plans.

    Need:

    Financial accounting is an outcome of the statute.  For example, in India, it requires under the Companies Act, 1956 to prepare the balance sheet and profit and loss account for submission to shareholders and others.  The financial statements are generally required to prepare in the formats prescribed by the law.

    Management accounting is the result of the management’s need for information for making decisions.  It is, therefore, optional.  Management accounting functions would differ from firm to firm. A firm may have a sophisticated, elaborate, and comprehensive system while another may have a partial system only.

    Timing:

    Financial accounting adopts twelve months (one Year) period for reporting financial performance to shareholders and other investors.  In contrast, management accounting reports are for shorter durations.  Some companies in India prepare daily budgets.  Monthly and quarterly reports are quite common.  Management accounting information also collects for preparing long-term plans for five or more years.  Capital expenditure plans, for example, cover a longer duration.

    Coverage:

    While reporting the state of affairs of a company, financial accounting covers the entire organization.  Financial statements show revenues, expenses, assets, and equities of the firm as a whole.  For management accounting purposes, however, the organization is divided into smaller units or centers.  These centers may head by responsible persons.  Cost data and other information are collecting and reporting by these centers. Thus, the data requirements of management accounting are more specific.

    Reporting:

    Financial statements-balance sheet and profit and loss account – are subject to the verification of statutory audit.  Therefore, financial accounting stresses the accuracy and precision of accounting data.  Management accounting requires information promptly for decision-making.  The continuous and speedy flow of approximate information is more useful than the precise but delayed information.

    The above points of difference between Financial Accounting and Management Accounting (Hindi Medium) prove that Management Accounting is a flexible approach as compared to the rigid approach in the case of Financial Accounting. In brief, financial accounting simply shows how the business has moved in the past while management accounting shows how the business has to move in the future.

    Difference between Financial and Management Accounting
    Difference between Financial and Management Accounting.

  • What is the Financial Statement Analysis?

    Learn, Explain What is the Financial Statement Analysis?

    Financial performance, as a part of financial management, is the main indicator of the success or failure of the companies. Financial performance analysis can be considered as the heart of the financial decisions. Rational evaluation of the performance of the companies is essential to prepare sound financial policies and to attract potential investors. Shareholders are interested in EPS, dividend, net worth and market value per share. Also learned, Concept of Accountability in Financial Management, What is the Financial Statement Analysis?

    Management is interested in all aspects of financial performance to adopt a good financial management system and for the internal control of the company. The creditors are primarily interested in the liquidity of the company. Government is interested from the regulatory point of view. Besides, other stakeholders such as economists, trade associations, competitors, etc are also interested in the financial performance of the company. Therefore, all the stakeholders are interested in the performance of the companies but their perspective may be different.

    Financial statement analysis helps to highlight the financial performance of the company. It is the process of identifying the financial strength and weakness of a firm by properly establishing the relationship between the items on the Balance Sheet and those on the Profit and Loss Account. It is a general term referring to the process of extracting and studying information in financial statements for use in management decision making, for example, financial statement analysis typically involves the use of ratios, comparison with prior periods and budget, and other such procedures. The financial appraisal is a scientific evaluation of the profitability and strength of any business concerns. It seeks to spotlight the significant impacts and relationships concerning managerial performance, corporate efficiency, financial strength and weakness and creditworthiness of the company.

    The objective of financial statement analysis is a detailed cause and effect study of the profitability and financial position. Financial Analysis is the process of determining the significant operating and financial characteristics of a firm from accounting data and financial statement. The goal of such analysis is to determine the efficiency and performance of the firm’s management, as reflected in the financial records and reports. Financial statements are such records and reports, which contain the data required for performance management. It is therefore important to analyze the financial statements to identify the strengths and weaknesses of the company.

    The financial statements of a business enterprise are intended to provide much of the basic data used for decision making, and in general, evaluation of performance by various groups such as current owners, potential investors, creditors, government agencies, and in some instance, competitors. Financial statements are the reports in which the accountant summarizes and communicates the basic financial data. The financial statements provide the summary of accounts of the company the Balance Sheet reflecting the assets, liabilities, and capital as of a certain date and the Profit and Loss Account showing the results of operation during a period. The financial statements are a collection of data organized according to logical and consistent accounting procedures. The function of financial statement is to convey an understanding of some financial aspects of the company.

    Financial statement analysis involves appraising the financial statement and related footnotes of an entity. This may be done by accountants, investment analysts, credit analysts, management and other interested parties. Financial statements indicate an appraisal of a company’s previous financial performance and its future potential. The analysis of a financial statement is done to obtain a better insight into a firm’s position and performance. Analyzing a financial statement is a process of evaluating the relationship between component parts of the financial statement to obtain a better understanding of the firm’s position and performance. The financial analysis is thus the analysis of the financial statements, which is done to evaluate the performance of the company. Ratio Analysis, Trend Analysis, Comparative Financial Statement Analysis and Common Size Statement Analysis are the major tools of the financial analysis.

    Financial statement analysis involves the computation of ratios to evaluate a company’s financial position and results of operation. A ratio is an important tool for financial statement analysis. The relationship between two accounting figures expressed mathematically is known as the financial ratio. The ratio used as an index of yardstick for evaluating the financial position and performance of the firm. It helps analysts to make a quantitative judgment about the financial position and performance of the firm. It uses financial reports and data and summarizes the key relationship in order to appraise financial performance.

    Ratio analysis is such a powerful tool of financial analysis that through it, the economic and financial position of a business unit can be fully x-rayed. Ratios are just a convenient way to summarize large quantities of financial data and to compare the performance of the firms. Ratios are exceptionally useful tools with which one can judge the financial performance of the firm over a period of time. Performance ratio can provide an insight into a bank’s profitability, return on investment, capital adequacy and liquidity.

    The above theories suggest that financial analysis helps to measure the performance of the companies. Different analysts desire different types of ratios, depending largely on whom the analysts are and why the firm is being evaluated. Short-term creditors are concerned with the firm’s ability to pay its bills promptly. In the short run, the amount of liquid assets determines the ability to pay off current liabilities. They are interested in liquidity. Long-term creditors hold bonds or debentures; mortgages against the firm are interested in current payment of interest and the eventual repayment of the principal.

    The company must be sufficiently liquid in the short-term and have adequate profits for the long-term. They examine liquidity and the profitability. Stockholders, in addition to liquidity and profitability, are concerned about the policies of the firm’s stock. Without liquidity, the firm could not pay the cash dividends. Without profits, the firm could not be able to declare dividends. With poor policies, the common stock would trade at a lower price in the market.

    Analysis of the financial statement of a company for one year or for a shorter period would not truly reflect the nature of its operations. For this, it is essential that the analysis reasonably cover a longer period. The analysis made over a longer period is termed as Trend Analysis. Trend Analysis of the ratio indicates the direction of change. This method involves the calculation of percentage relationship that each item bears to the same item in the base year. Trend percentage discloses the changes in the financial and operating data between specific periods and makes it possible to form an opinion as to whether favorable and unfavorable tendencies are reflected by the data.

    Comparative Statement Analysis is another method of measuring the performance of the company. It is used to compare the performance and position of the firm with the average performance of the industry or with other firms, such a comparison will identify areas of weakness which can then be addressed to rectify the situation.

  • What is the Concept of Accountability in Financial Management?

    Accountability has different forms. First, the individualizing form of accountability can be studied in which the accountability contributes to making the realization of the image an individual perceives it. This perspective helps a person to polish his senses and action thereby improving his image that is noticed by others. The second view of accountability is the socializing form in which a person can improve its performance and efficiency by interacting with some of the experienced people in the organization. Accountability institutionalizes the use of accounting through which it operates in the organizations and firms. Also learned, Types of Product, What is the Concept of Accountability in Financial Management?

    Learn, Explain What is the Concept of Accountability in Financial Management?

    “Accountability breeds responsibility” This is a famous quote by Dr. Stephen R. Covey gives the meaning of accountability in rather general terms. The concept of accountability can be defined as the process through which a person is held answerable for his actions and deeds. Under the umbrella of the organization, the notion of accountability can be stated as the phenomenon through which whether a person at the higher level of hierarchy or at the lower level is accountable for his works and services that he renders to the organization. Accountability from the organizational perspective bears great importance as it is the measure through which the performance of the organization and a person serving can be judged and analyzed.

    How Does Accountability work?

    Accountability within the organizations mainly works through three different levels of accounting. They are auditing, management accounting, and financial reporting. Financial reporting and management accounting aspect of accounting has been dealt with in detail in representation and control part respectively. The third and more applicative form in which accountability holds in the organizations is the auditing in which companies accounts are checked and verified by some agency or authority assigned for it is covered in detail here.

    When it comes to organizational perspective the application of accountability expands. From the past, there has been a practice in business and organizations to maintain the accounts of each and every transaction that takes place in the organization. In the modern era, this system has become more advanced and transparent. The organizations can be judged or held responsible economically on the grounds of the accounts or financial statements that they produce. This involves the concept of auditing of company accounts. Audit serves as a vital economic process and plays an important role in serving the public interest by strengthening the accountability and reinforcing the trust and confidence in financial reporting.

    Auditing of accounts are generally performed by the people employed by the owner of the company, these persons are called auditors, agents or stewards. They generally work in the interest of the company with the focus on the economic performance of the institution. This phenomenon is called an agency theory which suggests that because of the information asymmetries people employ agents or stewards who work for the benefit of the company. Auditing gives a clear idea of accounts and also imparts the correct information to the shareholders.

    The interplay between Accounting and Accountability:

    Accounting can be defined as the process of identifying, measuring and communicating the financial information about the entity to permit informed judgments and decisions by users of information. Initially, there were cruder forms of accounting first one was double entry system which was a binary system method used for recording the events in which all the debts and credits were represented in the tabular form and the second was bookkeeping which was the maintenance or the summary of all the financial transactions taken place. Accountability often comes to play where there is some accounting failures or discrepancies and the company or the person producing the account is held responsible.

  • What is OTCEI (Over The Counter Exchange of India)?

    Learn and Study, What is OTCEI (Over The Counter Exchange of India)?

    Over the Counter Exchange of India (OTCEI) was incorporated in October 1990 under Section 25 of the Companies Act, 1956 with the objective of setting up a national, ring-less, screen-based, automated stock exchange. It is recognized as a stock exchange under Section 4 of the Securities Contracts (Regulations) Act, 1956. It was set up to provide investors with a convenient, efficient and transparent platform for dealing in shares and stocks; and to help enterprising promoters set up new projects or expand. Also learned, ISE, NSE, SEBI, What is OTCEI (Over The Counter Exchange of India)?

    Their activities, by providing them an opportunity to raise capital from the capital market in a cost-effective manner. Trading in securities takes place through OTCEI’s network of members and dealers spanning the length and breadth of India.

    Over The Counter Exchange of India was promoted by a consortium of financial institutions including:

    • Unit Trust of India.
    • Industrial Credit and Investment Corporation of India.
    • Industrial Development Bank of India.
    • Industrial Finance Corporation of India.
    • Life Insurance Corporation of India.
    • General Insurance Corporation and its subsidiaries.
    • SBI Capital Markets Limited.
    • Canbank Financial Services Ltd.

    The Over the Counter Exchange of India is based on the model of the national association of securities dealers’ automated quotation (NASDAQ) of USA, with modifications to suit the Indian conditions. The OTCEI arose out of the need to have a second tire market in the country. It was set up to provide small and medium companies an access to the capital market for raising finance in a cost-effective manner and investors with a convenient, transparent and efficient avenue for capital market investment.

    The OTCEI was the first ring less, electronic and national exchange with a screen-based trading system listing an entirely new set of companies of small size. It allowed companies with paid-up capital as low as 30 lacs to get listed, It brought the screen-based trading system in vogue for the first time; this was quite different from the open outcry system at BSE.

    Moreover, each strip listed on the exchange had at least two market makers who continuously gave two way quotes. Market makers are merchant bankers willing to make a market in securities by continuously offering to buy and sell quotes. They act as a dealer cum stockiest and do not charge any commission or brokerage. Their profit margin is the spread between the bid and offer prices.

    A voluntary market maker can be appointed for a period of six months. Market making is a unique concept of OTCEI. The other player on OTCEI is the custodian or registrar a safe keeper of share certificates. The OTCEI provides a liquid cash market for retail investors with a T+3 rolling settlement systems and no problem of bad of short deliveries.

    Salient Features of Over the Counter Exchange of India:

    1. Ring-less and Screen-based Trading: The over the Counter Exchange of India was the first stock exchange to introduce automated, screen-based trading in place of the conventional trading ring found in other stock exchanges. The network of on-line computers provides all relevant information to the market participants on their computer screens. This allows them the luxury of executing their deals in the comfort of their own offices.
    2. Sponsorship: All the companies seeking the listing on Over the Counter Exchange of India have to approach one of the members of the OTCEI for acting as the sponsor to the issue. The sponsor makes a thorough appraisal of the project; as by entering into the sponsorship agreement, the sponsor is committed to making the market in that scrip (giving a buy sell quote) for a minimum period of 18 months, sponsorship ensures quality of the companies and enhance liquidity for the scrip’s listed on OTCEI.
    3. Transparency of Transactions: The investor can view the quotations on the computer screen at the dealer’s office before placing the order. The OTCEI system ensures that trades are done at the best prevailing quotation in the market. The confirmation slip/trading document generated by the computers gives the exact price at which the deals has been done and the brokerage charged.
    4. Liquidity through Market Making: The sponsor-member is required to give two-way quotes (buy and sell) for the scrip for 18 months from the commencement of trading. Besides the compulsory market maker, there is an additional market maker giving two way quotes for the scrip. The idea is to create an environment of competition among market makers to produce efficient pricing and narrow spreads between buy and sell quotations.
    5. Listing of Small and Medium-sized Companies: Many small and medium-sized companies were not able to enter the capital market due to the listing requirement of Securities Contracts (Regulation) Act, 1956 regarding the minimum issued equity of Rs.10 crores in case of the Mumbai stock Exchange and Rs.3 crores in case of other stock exchanges. The OTCEI provides an opportunity to these companies to enter the capital market as companies with issued capital of Rs.30 lacks onwards can raise finance from the capital market through OTCEI.
    6. Technology: Over The Counter Exchange of India uses computers and telecommunications to bring members/dealers together electronically, enabling them to trade with one another over the computer rather than on a trading floor in a single location.
    7. Nation-wide Listing: Over the Counter Exchange of India network is spread all over India through members, dealers and representative office counters. The company and its securities get nation-wide exposure and investors all over India can start trading in that scrip.
    8. Bought-out Deals: Through the concept of a bought-out deal, OTCEI allows companies to place its equity with the sponsor-member at a mutually agreed price. This ensures swifter availability of funds to companies for timely completion of projects and a listed status at a later date.

    Benefits of getting OTCEI Listing for Companies:

    The Over the Counter Exchange of India offers facilities to the companies having a issued equity capital of more than Rs. 30 lakhs.

    The benefits of listing at the Over the Counter Exchange of India are:

    • Small and medium closely-held companies can go public.
    • The OTCEI encourages entrepreneurship.
    • Companies can get the money before the issue in cases of Bought-out-deals.
    • It is more cost-effective to come with an issue of OTCEI.
    • Small companies can get listing benefits.
    • Easy issue marketing by using the nation-wide OTCEI dealer network.
    • Nation-wide trading by listing at just one exchange.

    Benefits of Trading on OTCEI for Investors:

    • The OTCEI trading counters are easily accessible by any investors.
    • The OTCEI provides greater confidence to investors because of complete transparency in deals.
    • At the OTCEl, the transactions are fast and are completed quickly.
    • The OTCEI ensures security, liquidity by offering two-way quotes.
    • The OTCEI is an investor friendly exchange with Single Window Clearance for all investor requests.

    The OTC Exchange Of India (OTCEI), also known as the Over-the-Counter Exchange of India, is based in Mumbai, Maharashtra. It is India’s first exchange for small companies, as well as the first screen-based nationwide stock exchange in India. OTCEI was set up to access high-technology enterprising promoters in raising finance for new product development in a cost-effective manner and to provide a transparent and efficient trading system to investors.

    OTCEI is promoted by the Unit Trust of India, the Industrial Credit and Investment Corporation of India, the Industrial Development Bank of India, the Industrial Finance Corporation of India, and other institutions, and is a recognised stock exchange under the SCR Act.

    The OTC Exchange Of India was founded in 1990[3] under the Companies Act 1956 and was recognized by the Securities Contracts Regulation Act, 1956 as a stock exchange. The OTCEI is no longer a functional exchange as the same has been de-recognised by SEBI vide its order dated 31 Mar 2015.

  • What is ISE (Inter-Connected Stock Exchange)?

    Learn, What is ISE (Inter-Connected Stock Exchange)?

    The formation of NSE changed the way in which the stock exchanges were functioning. Modern infrastructure, technology, transparency and corporate governance are now becoming the features in the corporate the world. It also forced BSE to adopt the new technology and with this, NSE and BSE crossed boundaries and started functioning, operating throughout India. This affected the functioning of small and regional exchanges. This led to the birth of the Inter-connected Stock Exchange of India Ltd. (ISE). Federation of Indian stock exchanges, in a meeting held in 1996, constituted a steering committee to evolve an interconnected market system. Also learned, NSE, SEBI, What is ISE (Inter-Connected Stock Exchange)?

    In 1997, the market governing the body of India, Securities and Exchange Board of India (SEBI) granted approval to the proposal of the ISE to set up a national level stock exchange promoted by 14 regional stock exchanges.  ISE was launched with an objective of converting small, fragmented and illiquid markets into a large, efficient and liquid market. Inter-Connected Stock Exchange (ISE) has set up an Inter-connected Market System (ICMS) which provides its trading members a facility to trade on the national market in addition to the trading facility at the regional stock exchanges. The trading members of the ISE, who are already the members of the 14 stock exchanges (which are the constituents of the ISE), satisfy the capital adequacy requirements of the ISE separately and in addition to the capital adequacy requirements of the regional stock exchange.

    The ISE has set up a separate clearinghouse for settlement of the trades at the national market. The ISE has also made arrangement to appoint a clearing bank for online transfer of funds from regional centers to the national center. The ISE has an adequate risk management system for safety, integrity of the market and also to protect the interest of the investors. The participating exchanges of ISE have about 4,500 members and a large number of listed securities. It is a stock exchange of stock exchanges, members of the stock exchanges being traders on the ISE. The ISE has provided a highly automated trading system to the traders of the participating regional stock exchanges with direct access to the national level trading platform on an equal footing regardless of the location of the particular stock exchanges.

    Important Features of Inter-Connected Stock Exchange of India

    There are some of the features which make ISE a new age stock exchange are as follows:

    • ISE is a national level recognized stock exchange having moderate listing fees and granting listing and trading permission to small and medium-sized companies having a post public issue paid-up capital of Rs. 3 crore to Rs. 5 crores (subject to the appointment of market makers), besides companies with a capital of above Rs. 5 crores.
    • All traders and dealers of ISE have access to NSE through ISE securities and Services Ltd. (ISS), which ensures the continuous attention of investors.
    • ICSE has set up an ‘Investor Grievance and Service Cell’ which looks after all types of complaints of investors located across the country and provides decentralized support.
    • Listing of stocks with ISE would give the company an advantage of being identified as a technology-savvy and investor-friendly company.

    Inter-connected Stock Exchange Ltd. (ISE) is an Indian national-level stock exchange, providing trading, clearing, settlement, risk management and surveillance support to its trading members. It started its operation in 1998 in Vashi, Mumbai, and has 841 trading members, who are located in 18 cities. These intermediaries are administratively supported through the regional offices at Delhi, Kolkata, Patna, Ahmedabad, Coimbatore, and Nagpur, besides Mumbai.

    The ISE is promoted by 12 regional stock exchanges namely at Bangalore, Bhubaneshwar, Chennai, Kochi, Coimbatore, Guwahati, Indore, Jaipur, Kanpur, Mangalore, Magadh, and Vadodara. The participating exchanges of ISE have 4,500 members and listed securities. It is a stock exchange of stock exchanges, members of the stock exchanges being traders on the ISE.

  • What are a Mutual Funds?

    What are a Mutual Funds?

    Learn and Study, What are a Mutual Funds?

    A Mutual Fund is a special type of investment institution which collects or pools the savings of the community and invests large funds in the variety of Blue-chip Companies which are selected from a wide range of industries with the objects of maximizing returns/incomes on investments. Mutual Funds are basically a trust which mobilizes savings from the people and invests them in a mix of corporate and government securities. Money collected by the investors is invested in various issues of primary and secondary markets in order to gain profits on such investments. Also learned, the Process of Investment, What are a Mutual Funds?

    What are a Mutual Funds - ilearnlot

    A Mutual Fund is a Trust, which combines the investments of various investors having similar financial goals. The Trust issues units to the investors in the proportion of their investments. A fund manager then invests these funds in different types of assets, which provide returns in the form of dividends, interests, and capital appreciation. This is distributed to the various investors in the proportion of their contribution to the pool funds. Ordinary investors, who want to invest their savings, neither understand the complexities of financial markets nor have the time to watch, research and analyze different equities, securities or any other investments opportunities that are available in the market.

    At present, all the markets viz. the debt market, the equity market, the money market, real estates, derivatives, and the market dealing with the other assets have now reached a stage where a minimal information affect the markets. Besides this, the economy has opened up and global events influence their performance.

    It is very difficult for a layperson to keep track of various investments, transactions, brokerages etc. In the present scenario, mutual funds are some of the most efficient financial instruments as it offers services like managing investments at a very low cost.

    What is NAV or Net Asset Value?

    NAV of the Fund is the market value of all the assets of the Fund subtracting the Liabilities. NAV reflects the Fund that will be available to the shareholders if the Fund is liquidated and all the liabilities are paid. In the mutual fund industry NAV refers to Net Asset Value per unitholder, which NAV of the Fund divided by the outstanding number of the units.

    It shows the performance of the Fund.

    • Calculation of NAV = Net Asset Value of the fund sum of market value of shares/debentures + Liquid assets/cash Dividends/interest accrued – All liabilities
    • Net asset value per unit =NAV of the fund / Outstanding number of units

    The market value of the shares and debentures is calculated by multiplying the number of shares/units by the closing price of the shares/debentures. The closing price will be of the previous day of the stock exchange from where the shares have been purchased.

    If the shares were not traded on the previous day in that stock exchange, then the closing price of the shares of any other stock exchange is taken where the shares were traded. If the shares were not traded on any stock exchange the previous day, then the closing price of the shares when they were last traded is taken.

    For untraded shares, the value has to be determined by the other methods such as Book Value, comparable company approach, etc. Value of the illiquid bond is estimated on the basis of yields of comparable liquid bonds.

    To many people, Mutual Funds can seem complicated or intimidating. We are going to try and simplify it for you at its very basic level. Essentially, the money pooled in by a large number of people (or investors) is what makes up a Mutual Fund. This fund is managed by a professional fund manager.

    It is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. The income/gains generated from this collective investment is distributed proportionately amongst the investors after deducting certain expenses, by calculating a scheme’s “Net Asset Value or NAV. Simply put, a Mutual Fund is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.

  • Explain, What is SEBI (Securities and Exchange Board of India)?

    Explain, What is SEBI (Securities and Exchange Board of India)?

    Securities and Exchange Board of India (SEBI) is the nodal agency to regulate the capital market and other related issues in India. It was established in 1988 as an administrative body and was given statutory recognition in January 1992 under the SEBI Act 1992 which came into force on January 30. The Act charged the SEBI, the first national regulatory body in India with comprehensive statutory powers over practically all aspects of capital market operations, “to protect the interests of the investors and to promote the development of, and to regulate the securities markets by such measures as it thinks fit.” Also learned, NSE, Explain, What is SEBI (Securities and Exchange Board of India)?

    Learn, Explain, What is SEBI (Securities and Exchange Board of India)?

    Explain What is SEBI (Securities and Exchange Board of India) - ilearnlot

    SEBI has been vested most of the functions and powers under the Securities Contract Regulation (SCR) Act, which brought stock exchanges, their members, as well as contracts in securities which could be traded under the regulations of the Ministry of Finance. It has also been delegated certain powers under the Companies Act.

    In addition to registering and regulating intermediaries, service providers, mutual funds, collective investment schemes, venture capital funds and takeovers, SEBI is also vested with the power to issue directives to any person(s) related to the securities market or to companies in areas of issue of capital, transfer of securities and disclosures. It also has powers to inspect books and records, suspend registered entities and cancel the registration.

    Before the establishment of Securities and Exchange Board of India (SEBI), the principal legislation governing the securities market in India was the capital issues control act 1956 and the securities contract act 1956. The regulatory powers were vested with the controller of capital issues for the primary market and the stock exchange division for the secondary market in the Ministry of Finance, Government of India.

    SEBI has been constituted on the lines of Securities and Exchange Commission of USA. SEBI is consisting of the Chairman and 8 Members (one member representing the Reserve Bank of India, two members from the officials of Central Government and five other public representatives to be appointed by the Central Government from different fields). SEBI has been playing an active role in the Indian Capital Market to achieve the objectives enshrined in the SEBI Act, 1992.

    The major objective of the Securities and Exchange Board of India (SEBI) may be summarized as follows:
    • To provide a degree of protection to the investors and safeguard their rights and to ensure that there is a steady flow of funds in the market.
    • To promote fair dealings by the issuer of securities and ensure a market where they can raise funds at a relatively low cost.
    • To regulate and develop a code of conduct for the financial intermediaries and to make them competitive and professional.
    • To provide for the matters connecting with or incidental to the above.
    Section 11 of the SEBI Act deals with the powers and functions of the SEBI as follows:

    It shall be the duty of Board to protect the interests of the investors in securities and to promote the development of and to regulate the securities market by measures as deemed fit.

    To achieve the above, the Board may undertake the following measures:
    • Regulating the business in stock exchanges;
    • Registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, merchant bankers, underwriters, portfolio managers;
    • Registering and regulating the working of the depositories, participants, credit rating agencies;
    • Registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds;
    • Prohibiting fraudulent and unfair trade practices relating to securities markets;
    • Promoting investors education and training of intermediaries of securities markets;
    • Prohibiting insider trading in securities;
    • Regulating substantial acquisition of shares and take-over of companies; and
    • Calling for information from undertaking, inspection, concluding inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market intermediaries and self-regulatory organizations in the securities market.

    In order to attain these objectives, SEBI has issued Guidelines, Rules, and Regulations from time to time. The most important of these is the “SEBI (Disclosure and Investor Protection) Guidelines,2000”. The provisions of these Guidelines,2000 are aimed to protect the interest of the investors in securities.

    The Guidelines, 2000 deals with the following areas :
    • Eligibility norms for companies issuing securities,
    • Pricing of securities by companies,
    • Promoters contribution and lock-in requirements,
    • Pre-issue obligations of the merchant bankers,
    • Contents of the prospectus/abridged prospectus letter of offer,
    • Post issue obligation, of merchant bankers,
    • Green shoe option,
    • Guidelines on advertisements,
    • Guidelines for issue of debt instruments,
    • Guidelines for the book building process,
    • Guidelines on public offer through the stock exchange on-Line system,
    • Guidelines for issue of capital by financial institutions,
    • Guidelines for preferential issues of securities,
    • Guidelines for bonus issues,
    • Other operational and miscellaneous matters.

    In order to regulate and control and to provide a code of conduct for the merchant bankers, other participants of the capital market, and other matters relating to the trading of securities, Securities, and Exchange Board of India (SEBI) has issued several Rules and Regulations.

    These are related to Bankers to the issues, Buyback of securities, Collective Investments Schemes, Delisting of securities, Depositors, Derivatives, Employee stock options, Foreign Institutional Investors(FII’s), Insider Trading, Lead Manager, Market Makers, Merchant Bankers, Mutual Funds, Ombudsman, Portfolio Manager, Registrars and Share Transfer Agents, Securities Lending Scheme, Sweat Equity, Stock Brokers and sub-brokers, Takeover Regulations, Transfer of Shares, Underwriters, Unfair Trade Practices, venture capital Funds, Annual Reports, etc.

  • Explain, What is NSE (National Stock Exchange)?

    Explain, What is NSE (National Stock Exchange)?

    Learn, Explain, What is NSE (National Stock Exchange)?

    The National Stock Exchange of India Limited (NSE) was set up by leading institutions to provide a modern, fully automated screen-based trading system with national reach. The Exchange has brought about unparalleled transparency, speed & efficiency, safety and market integrity. It has set up facilities that serve as a model for the securities industry in terms of systems, practices, and procedures. Also learned, Corporate Planning, Explain, What is NSE (National Stock Exchange)?

    Explain What is NSE (National Stock Exchange) - ilearnlot
    Image: #NSE (National Stock Exchange).

    The National Stock Exchange of India Limited has played a catalytic role in reforming the Indian securities market in terms of microstructure, market practices, and trading volumes. The market today uses state-of-art information technology to provide an efficient and transparent trading, clearing and settlement mechanism, and has witnessed several innovations in products & services viz. demutualization of stock exchange governance, screen-based trading, compression of settlement cycles, dematerialization and electronic transfer of securities, securities lending and borrowing, professionalization of trading members, fine-tuned risk management systems, emergence of clearing corporations to assume counterparty risks, market of debt and derivative instruments and intensive use of information technology.

    The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. On its recognition as a stock exchange under the Securities Contracts (Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment commenced operations in November 1994 and operations in Derivatives segment commenced in June 2000.

    The National Stock Exchange of India Limited’s mission is setting the agenda for change in the securities markets in India. The NSE was set-up with the following objectives:
    • Establishing a nation-wide trading facility for equities, debt instruments, and hybrids,
    • Ensuring equal access to investors all over the country through an appropriate communication network,
    • Providing a fair, efficient and transparent securities market to investors using electronic trading systems,
    • Enabling shorter settlement cycles and book-entry settlements systems, and
    • Meeting the current international standards of securities markets.

    The standards set by The National Stock Exchange of India Limited in terms of market practices and technologies have become industry benchmarks and are being emulated by other market participants. NSE is more than a mere market facilitator. It’s that force which is guiding the industry towards new horizons and greater opportunities.

    Till the advent of The National Stock Exchange of India Limited, an investor wanting to transact in a security not traded on the nearest exchange had to route orders through a series of correspondent brokers to the appropriate exchange. This resulted in a great deal of uncertainty and high transaction costs. One of the objectives of NSE was to provide a nationwide trading facility and to enable investors spread all over the country to have an equal access to NSE.

    NSE has made it possible for an investor to access the same market and order book, irrespective of location, at the same price and at the same cost. NSE uses sophisticated telecommunication technology through which members can trade remotely from their offices located in any part of the country. NSE trading terminals are present in 363 cities and towns all over India.

    The National Stock Exchange of India Limited has been promoted by leading financial institutions, banks, insurance companies and other financial intermediaries NSE is one of the first demutualized stock exchanges in the country, where the ownership and management of the Exchange is completely divorced from the right to trade on it. Though the impetus for its establishment came from policymakers in the country, it has been set up as a public limited company, owned by the leading institutional investors in the country.

    From day one, NSE has adopted the form of a demutualized exchange – the ownership, management, and trading is in the hands of three different sets of people. NSE is owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries and is managed by professionals, who do not directly or indirectly trade on the Exchange. This has completely eliminated any conflict of interest and helped NSE in aggressively pursuing policies and practices within a public interest framework.

    The NSE model, however, does not preclude, but in fact accommodates involvement, support, and contribution of trading members in a variety of ways. Its Board comprises of senior executives from promoter institutions, eminent professionals in the fields of law, economics, accountancy, finance, taxation, etc, public representatives, nominees of SEBI and one full-time executive of the Exchange.

    While the Board deals with broad policy issues, decisions relating to market operations are delegated by the Board to various committees constituted by it. Such committees include representatives from trading members, professionals, the public and the management. The day-to-day management of the Exchange is delegated to the Managing Director who is supported by a team of professional staff.

    The National Stock Exchange replaced open outcry system, i.e. floor trading with the screen based automated system. Earlier, the price information can be accessed only by few people but now information can be seen by the people even in a remote location. The paper-based settlement system was replaced by electronic screen-based system and settlement of trade transactions was done on time. NSE also created National Securities Depository Limited (NSDL) which permitted investors to hold and manage their shares and bonds electronically through a demat account.

    An investor can hold and trade in even one share. Now, the physical handling of securities eliminated so the chances of damage or misplacing of securities reduced to the minimum and to hold the equities become more convenient. The National Security Depository Limited’s electronically security handling, convenience, transparency, low transaction prices and efficiency in trade which is affected by NSE, has enhanced the reach of Indian stock market to domestic as well as international investors.

    #Promoters of National Stock Exchange of India (NSE):

    Following financial institutions were the promoters of National Stock Exchange :

    • Industrial Development Bank of India(IDBI).
    • Industrial Finance Corporation of India(IFCI).
    • Industrial Credit and Investment Corporation of India(ICICI).
    • Life Insurance Corporation of India(LIC).
    • General Insurance Corporation of India(GIC).
    • SBI Capital Markets Limited.
    • Stock Holding Corporation of India Limited.
    • Infrastructure Leasing and Financial Services Limited.

    #Market Segments of National Stock Exchange of India (NSE):

    The National Stock Exchange of India Limited was intended to establish a viable and vibrant debt market which was in an underdeveloped stage. Now, it provides the traditional retail market for securities and also operates a Wholesale Debt Market (which may be termed as money market segment).

    The NSE consists of three mutually exclusive segments :

    1. Wholesale debt market segment, started operations in June 1994.
    2. The capital market segment started operations in November 1994, and
    3. Derivatives (Futures and Options) Trading, started operations in June 2000.

    The Wholesale Debt Market segment of The National Stock Exchange of India Limited is a facility for institutions including subsidiaries of banks engaged in financial services and corporate bodies including companies to enter into high value transactions in instruments such as Public Sector Undertakings (PSUs) bonds, Treasury Bills (T-BilIs), Governments Securities, Units of UTI, Commercial Papers (CPs), Certificate of Deposits (CDs), Floating yields bonds, etc. Members of the Wholesale Debt Market segment can trade on their own behalf and on behalf of their clients. NSE trading system facilitates making two ways quotes in a highly flexible manner.

    The Capital Market segment covers trading in equities and retail trade in the convertible or non-convertible debentures and hybrids. This particular segment comprises the securities of medium and large companies with nation-wide investors base. These will also include securities which are being traded on their stock exchanges. By virtue of equal access nationwide, such securities can be traded at the same price from any part of the country. This provides good trading and investment opportunities, increases the volume of the trade and increases the liquidity considerably.

    Besides the capital market segment, The National Stock Exchange of India Limited also provides the opportunity to the investors to deal in the derivative products, i.e., futures and options. At present, NSE provides facility to trade in Nifty Futures, Nifty Options, Individual Stock Options and Individual Stock Futures.

  • What is the Concept of Investment? Saving and Investing

    What is the Concept of Investment? Saving and Investing

    Concept of Investment – Investment is the employment of funds to get the return on it. In general terms, investment means the use of money in the hope of making more money. In finance, investment means the purchase of a financial product or another item of value with an expectation of favorable future returns. A study, PDF Reader with free Download PDF File. Also learn, Two Types: economic and financial investment, Difference between Saving and Investing, GST, What is the Concept of Investment?

    Learn and Understand, What is the Concept of Investment?

    What is Investment? An investment is an asset or item acquired to generate income or appreciation. In an economic sense, an investment is the purchase of goods that do not consume today but use in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later sell at a higher price for a profit, mutual funds.

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    Investment of hard-earned money is a crucial activity of every human being. Also, Investment is the commitment of funds that have been saved from current consumption with the hope that some benefits will be received in the future. Thus, it is a reward for waiting for money. Savings of the people invest in assets depending on their risk and return demands. Also Importance, Industrial Relations!

    Investment refers to the concept of deferred consumption, which involves purchasing an asset, giving a loan, or keeping funds in a bank account to generate future returns. Various investment options are available, offering differing risk-reward tradeoffs. An understanding of the core concepts and a thorough analysis of the options can help an investor create a portfolio that maximizes returns while minimizing risk exposure.

    There are two concepts of Investment:

    Economic Investment:

    The concept of economic investment means an addition to the capital stock of the society. Also, The capital stock of the society is the goods that use in the production of other goods. The term investment implies the formation of new and productive capital in the form of new construction; and, producers of durable instruments such as plants and machinery. Also, Inventories and human capital include in this concept. Thus, an investment, in economic terms, means an increase in building, equipment, and inventory.

    Financial Investment:

    This is an allocation of monetary resources to assets that expect to yield some gain or return over a given period of time. It means an exchange of financial claims such as shares and bonds, real estate, etc. Financial investment involves contracts written on pieces of paper such as shares and debentures. People invest their funds in shares, debentures, fixed deposits, national saving certificates, life insurance policies, provident fund, etc. in their view investment is a commitment of funds to derive future income in the form of interest, dividends, rent, premiums, pension benefits and the appreciation of the value of their principal capital. In primitive economies, most investments are of the real variety whereas in a modern economy much investment is of the financial variety.

    The economic and financial concepts of investment are related to each other; because, investment is a part of the savings of individuals; which flow into the capital market either directly or through institutions. Thus, investment decisions and financial decisions interact with each other. Also, Financial decisions are primarily concerned with the sources of money whereas investment decisions are traditionally concerned with the uses or budgeting of money.

    Wise investing requires knowledge of key financial concepts and an understanding of your personal investment profile and how these work together to impact investing decisions. Here we will understand the difference between saving and investing. Illustrate the risk/rate-of-return tradeoff, the importance of the time value of money and asset allocation; your personal risk tolerance, recognize your financial goals, and in defining an appropriate investment plan and asset mix for you and your family

    The Difference Between Saving and Investing:

    Even though the words “saving” and “investing” are often used interchangeably, there are differences between the two.

    Saving provides funds for emergencies and for making specific purchases in the relatively near future (usually three years or less). Also, the Safety of the principal and liquidity of the funds (ease of converting to cash) are important aspects of savings Rupees. Because of these characteristics, savings Rupees generally yield a low rate of return and do not maintain purchasing power.

    Investing, on the other hand, focuses on increasing net worth and achieving long-term financial goals. Investing involves risk (of loss of principal) and is to consider only after you have adequate savings.

    Savings v/s Investment Rupees
    SavingsInvestment
    SafeInvolve risk
    Easily accessibleVolatile in short time periods
    Low returnOffer potential appreciation
    Used for short-term goalsFor mid- & long-term goals
    What is the Concept of Investment - ilearnlot
    What is the Concept of Investment? Saving and Investing,
  • Factors Affecting the Major Types of Financial Decisions!

    Factors Affecting the Major Types of Financial Decisions!

    Learn and Understand, Factors Affecting the Major Types of Financial Decisions!

    Definition: The Financing Decision is yet another crucial decision made by the financial manager relating to the financing-mix of an organization. It is concerning the borrowing and allocation of funds required for the investment decisions. Types of Decisions: i. Investment decision ii. Financing decision iii. Dividend decision iv. Liquidity Decision. Also learn, Simple Types of Financial Decisions, Factors Affecting the Major Types of Financial Decisions!

    Some of the important functions which every finance manager has to take are as follows:

    A. Investment decision.

    B. Financing decision.

    C. Dividend decision, and.

    D. Liquidity Decision.

    The following decision is explained below:

    A. Investment Decision (Also Know, Capital Budgeting Decision):

    This decision relates to the careful selection of assets in which funds will be invested by the firms. A firm has many options to invest their funds but the firm has to select the most appropriate investment which will bring maximum benefit to the firm and decide or selecting most appropriate proposal is investment decision.

    The firm invests its funds in acquiring fixed assets as well as current assets. When decision regarding fixed assets is taken it is also called capital budgeting decision.

    Factors Affecting Investment/Capital Budgeting Decisions:

    1. Cash Flow of the Project:

    Whenever a company is investing huge funds in an investment proposal it expects some regular amount of cash flow to meet day to day requirement. The amount of cash flow an investment proposal will be able to generate must assess properly before investing in the proposal.

    2. Return on Investment:

    The most important criteria to decide the investment proposal is the rate of return it will be able to bring back for the company in the form of income for, e.g., if project A is bringing 10% return and project В is bringing 15% return then we should prefer project B.

    3. Risk Involved:

    With every investment proposal, there is some degree of risk is also involved. The company must try to calculate the risk involved in every proposal and should prefer the investment proposal with the moderate degree of risk only.

    4. Investment Criteria:

    Along with return, risk, cash flow there are various other criteria which help in selecting an investment proposal such as availability of labor, technologies, input, machinery, etc.

    The finance manager must compare all the available alternatives very carefully and then only decide where to invest the most scarce resources of the firm, i.e., finance.

    Investment decisions are considered very important decisions because of following reasons:

    (i) They are long-term decisions and therefore are irreversible; means once taken cannot change.

    (ii) Involve huge amount of funds.

    (iii) Affect the future earning capacity of the company.

    Importance or Scope of Capital Budgeting Decision:

    Capital budgeting decisions can turn the fortune of a company. The capital budgeting decisions are considered very important because of the following reasons:

    1. Long-Term Growth:

    The capital budgeting decisions affect the long-term growth of the company. As funds invested in long-term assets bring the return in future and future prospects and growth of the company depend upon these decisions only.

    2. Large Amount of Funds Involved:

    Investment in long-term projects or buying of fixed assets involves the huge amount of funds and if the wrong proposal is selected it may result in wastage of huge amount of funds that is why capital budgeting decisions are taken after considering various factors and planning.

    3. Risk Involved:

    The fixed capital decisions involve huge funds and also the big risk because the return comes in long run and company has to bear the risk for a long period of time till the returns start coming.

    4. Irreversible Decision:

    Capital budgeting decisions cannot reverse or change overnight. As these decisions involve huge funds and heavy cost and going back or reversing the decision may result in heavy loss and wastage of funds. So these decisions must take after careful planning and evaluation of all the effects of that decision because adverse consequences may be very heavy.

    B. Financing Decision:

    The second important decision which finance manager has to take is deciding source of finance. A company can raise finance from various sources such as by issue of shares, debentures or by taking loan and advances. Deciding how much to raise from which source is the concern of financing decision.

    Mainly sources of finance can divide into two categories:

    1. Owners fund.

    2. Borrowed fund.

    Share capital and retained earnings constitute owners’ fund and debentures, loans, bonds, etc. constitute borrowed fund.

    The main concern of finance manager is to decide how much to raise from owners’ fund and how much to raise from a borrowed fund.

    While taking this decision the finance manager compares the advantages and disadvantages of different sources of finance. The borrowed funds have to pay back and involve some degree of risk whereas in owners’ fund there is no fixing commitment of repayment and there is no risk involved. But finance manager prefers a mix of both types. Under financing, decision finance manager fixes a ratio of owner fund and borrowed fund in the capital structure of the company.

    Factors Affecting Financing Decisions:

    While taking financing decisions the finance manager keeps in mind the following factors:

    1. Cost:

    The cost of raising finance from various sources is different and finance managers always prefer the source with minimum cost.

    2. Risk:

    More risk is associated with the borrowed fund as compared to owner’s fund securities. Finance manager compares the risk with the cost involved and prefers securities with the moderate risk factor.

    3. Cash Flow Position:

    The cash flow position of the company also helps in selecting the securities. With smooth and steady cash flow companies can easily afford borrowed fund securities but when companies have a shortage of cash flow, then they must go for owner’s fund securities only.

    4. Control Considerations:

    If existing shareholders want to retain the complete control of business then they prefer borrowed fund securities to raise further fund. On the other hand, if they do not mind to lose the control then they may go for owner’s fund securities.

    5. Floatation Cost:

    It refers to the cost involved in the issue of securities such as broker’s commission, underwriters fees, expenses on the prospectus, etc. The firm prefers securities which involve least floatation cost.

    6. Fixed Operating Cost:

    If a company is having high fixed operating cost then they must prefer owner’s fund because due to high fixed operational cost, the company may not be able to pay interest on debt securities which can cause serious troubles for the company.

    7. State of Capital Market:

    The conditions in capital market also help in deciding the type of securities to raise. During boom period it is easy to sell equity shares as people are ready to take risk whereas during depression period there is more demand for debt securities in the capital market.

    C. Dividend Decision:

    This decision is concerned with the distribution of surplus funds. The profit of the firm is distributed among various parties such as creditors, employees, debenture holders, shareholders, etc.

    Payment of interest to creditors, debenture holders, etc. is a fixed liability of the company, so what company or finance manager has to decide is what to do with the residual or left over the profit of the company.

    The surplus profit is either distributed to equity shareholders in the form of the dividend or kept aside in the form of retained earnings. Under dividend decision, the finance manager decides how much to distribute in the form of dividend and how much to keep aside as retained earnings.

    To take this decision finance manager keeps in mind the growth plans and investment opportunities.

    If more investment opportunities are available and company has growth plans then more is kept aside as retained earnings and less is given in the form of dividend, but if company wants to satisfy its shareholders and has fewer growth plans, then more is given in the form of dividend and less is kept aside as retained earnings.

    This decision is also called residual decision because it is concerned with the distribution of residual or leftover income. Generally new and upcoming companies keep aside more of retain earning and distribute less dividend whereas established companies prefer to give more dividend and keep aside less profit.

    Factors Affecting Dividend Decision:

    The finance manager analyses following factors before dividing the net earnings between dividend and retained earnings:

    1. Earning:

    Dividends are paid out of current and previous year’s earnings. If there are more earnings then company declares the high rate of dividend whereas during the low earning period the rate of dividend is also low.

    2. Stability of Earnings:

    Companies having stable or smooth earnings prefer to give the high rate of dividend whereas companies with unstable earnings prefer to give the low rate of earnings.

    3. Cash Flow Position:

    Paying dividend means outflow of cash. Companies declare the high rate of dividend only when they have surplus cash. In the situation of shortage of cash, companies declare no or very low dividend.

    4. Growth Opportunities:

    If a company has a number of investment plans then it should reinvest the earnings of the company. As to invest in investment projects, the company has two options: one to raise additional capital or invest its retained earnings. The retained earnings are the cheaper source as they do not involve floatation cost and any legal formalities.

    If companies have no investment or growth plans then it would be better to distribute more in the form of the dividend. Generally, mature companies declare more dividends whereas growing companies keep aside more retained earnings.

    5. Stability of Dividend:

    Some companies follow a stable dividend policy as it has the better impact on shareholder and improves the reputation of the company in the share market. The stable dividend policy satisfies the investor. Even big companies and financial institutions prefer to invest in a company with regular and stable dividend policy.

    There are three types of stable dividend policies which a company may follow:

    (i) Constant dividend per share:

    In this case, the company decides a fixed rate of dividend and declares the same rate every year, e.g., 10% dividend on investment.

    (ii) Constant payout ratio:

    Under this system, the company fixes up a fixed percentage of dividends on profit and not on investment, e.g., 10% on profit so dividend keeps on changing with the change in profit rate.

    (iii) Constant dividend per share and extra dividend:

    Under this scheme, a fixed rate of dividend on investment is given and if profit or earnings increase then some extra dividend in the form of bonus or interim dividend is also given.

    6. Preference of Shareholders:

    Another important factor affecting dividend policy is expectation and preference of shareholders as their expectations cannot ignore the company. Generally, it is observed that retired shareholders expect the regular and stable amount of dividend whereas young shareholders prefer capital gain by reinvesting the income of the company.

    They are ready to sacrifice present-day income dividend for future gain which they will get with growth and expansion of the company.

    Secondly poor and middle-class investors also prefer the regular and stable amount of dividend whereas wealthy and rich class prefers capital gains.

    So if a company is having a large number of retired and middle-class shareholders then it will declare more dividend and keep aside less in the form of retained earnings whereas if company is having a large number of young and wealthy shareholders then it will prefer to keep aside more in the form of retained earnings and declare low rate of dividend.

    7. Taxation Policy:

    The rate of dividend also depends upon the taxation policy of the government. Under present taxation system dividend income is tax-free income for shareholders whereas. The company has to pay tax on dividend given to shareholders. If the tax rate is higher, the company prefers to pay less in the form of dividend whereas. If the tax rate is low then the company may declare the higher dividend.

    8. Access to Capital Market Consideration:

    Whenever company requires more capital it can either arrange it by the issue of shares or debentures in the stock market or by using its retained earnings. Rising of funds from the capital market depends upon the reputation of the company.

    If capital market can easily access or approach and there is enough demand for securities of the company then company can give more dividend and raise capital by approaching capital market, but if it is difficult for company to approach and access capital market then companies declare low rate of dividend and use reserves or retained earnings for reinvestment.

    9. Legal Restrictions:

    Companies’ Act has given certain provisions regarding the payment of dividends that can pay only out of current year profit or past year profit after providing depreciation fund. In case the company is not earning the profit then it cannot declare the dividend.

    Apart from the Companies’ Act, there are certain internal provisions of the company that is whether the company has enough flow of cash to pay the dividend. The payment of dividend should not affect the liquidity of the company.

    10. Contractual Constraints:

    When companies take a long-term loan then financier may put some restrictions or constraints on the distribution of dividend and companies have to abide by these constraints.

    11. Stock Market Reaction:

    The declaration of the dividend has an impact on the stock market as an increase in dividend is taken as a good news in the stock market and prices of security rise. Whereas a decrease in dividend may have the negative impact on the share price in the stock market. So possible impact of dividend policy on the equity share price also affects dividend decision.

    D. Liquidity Decision:

    It is very important to maintain a liquidity position of a firm to avoid insolvency. Firm’s profitability, liquidity, and risk all are associated with the investment in current assets. In order to maintain a tradeoff between profitability and liquidity. It is important to invest sufficient funds in current assets. But since current assets do not earn anything for business, therefore, a proper calculation must do before investing in current assets.

    Current assets should properly value and dispose of from time to time once they become non-profitable. Currents assets must use in times of liquidity problems and times of insolvency.

    Factors Affecting the Major Types of Financial Decisions - ilearnlot