Face Value: The value that appears on the face of the scrip, same as the nominal or par value of share/debentures.
Factor Risk: Common trait that causes many securities to trade together. For example, country risk, sector risk, and economic growth rate.
Fair Value: Price deemed to accurately reflect the price of a security, based on measurable valuation fundamentals. Considered to be an equitable valuation from the points of view of both buyer and seller. Removes the potential for a market participant to make risk-free profits from arbitrage.
False Breakout (TA): A breakout of a chart pattern that aborts. To ensure that a breakout is genuine, look for confirmation by the same or other indicators.
Family of Funds: A group of mutual funds, each typically with its own investment objective, managed and distributed by the same company.
Feeder Fund: Unit Trusts or Mutual Funds which invest in other trusts promoted by the same manager.
Federal Funds Rate: The interest rate at which the Federal Reserve (the US Central Bank) lends funds from depository banks with excess reserves to depository banks seeking additional reserves overnight. Manipulation of the federal funds rate is the principal instrument for managing monetary policy in the US. Also known as the fed funds rate.
Fiduciary: Person or entity that acts for the benefit and on behalf of another person or group of persons. A fiduciary holds a legally enforceable position of trust.
FERA: Foreign Exchange Regulation Act, 1973.
Fiscal Policy: Collective term for decisions made by a government in relation to tax and spending. It is a tool by which a government influences its economy. Typically, spending will exceed income (taxation) when a government is trying to stimulate the economy, and vice versa when it is trying to temper inflationary growth
Fighting the Tape: Going against the stock market trend. From the New York Stock Exchange, where share prices used to be reported on a ticker tape. If one is buying when the tape is showing a downtrend, or short selling when the share prices are rising, one is fighting the tape.
Fitch Ratings: Independent rating agency that assesses the creditworthiness of companies and their debt. The highest rating awarded is AAA, and the lowest is D. Other well-known agencies are Standard & Poor’s and Moody’s.
Financial Crisis: Sharp, brief, ultracyclical deterioration of all or most of a group of financial indicators – short-term interest rates, asset (stock, real estate, land) prices, commercial insolvencies, and failures of financial institutions.
Firewall: A barrier designed to prevent losses or risks taken in one part of a financial institution from weakening other parts of the institution.
Firm Allotment: Allotment on a firm basis in public issues by an issuing company made to Indian and multilateral development financial institutions, Indian mutual funds, foreign institutional investors including non-resident Indians and overseas corporate bodies, and permanent/regular employees of the issuer company.
First in/First out: A popular inventory cost accounting procedure in which the first item manufactured is assumed to be the first one sold by the company
Five Against Bond Spread: A spread in the futures markets created by taking offsetting positions in futures contracts for five-year treasury bonds and long-term (15-30 year) treasury bonds.
Fixed Asset: An item of value used in a current operation that would normally be of use for more than one year.
Fixed Liability: An obligation of a company payable more than a year hence.
Financial Ratios: Ratios of values obtained from a firm’s financial statements are used to study the firm’s health and the price of its shares. The more important among these are Current Ratio. P/E Ratio, Earnings to Equity Ratio, Payout Ratio, price-book value ratio, and quick ratio.
Financial Year: Now 1st April to 31st March for income tax purposes, although previously companies could choose one year periods of their convenience. It is the year of profit and loss accounting.
Fixed Interest Securities: A type of security that pays fixed, agreed with interest at regular intervals. These comprise gilt-edged securities, bonds, preference shares, and debentures. Less risky than equity shares, they offer better yield for money but have very little scope for capital appreciation. At times of high inflation, they are a poor investment as the value of the yield as well as the principal are fast eroded.
Flag: A chart pattern in technical analysis, formed when the share prices move up and down in a narrow range, forming a parallelogram, with a sharply rising or a falling mast at the beginning.
Flip-Over: A provision in a poison pill that gives shareholders the right to buy the company’s shares (or the shares of the surviving company after a merger) at half price. Unlike a Flip-in, a flip-over right does not become effective simply because an interested shareholder buys some stock. Usually it becomes effective when (i) there is an interested shareholder and (ii) the company engages in certain transactions with the interested shareholder or an affiliate, such as a merger or a sale of all or a large part of its assets. Historically, the flip-over poison pill was devised several years before the more powerful flip-in. At that time the essential discrimination against the interested shareholder that the flip-in entails was widely considered illegal. Now the two are generally combined, although under most circumstances the flip-in provision of the pill dominates any potential bidder’s attention.
Flip-in Poison Pill Plan: Shareholders are issued rights to acquire stock in the target at a significant discount which is usually 50%.
Flip-in: The most important characteristic of the most effective rights plan (position pill) in use today. It gives shareholders the right to buy the company’s shares at half price when someone becomes an ‘interested shareholder’, that is, crosses some stock ownership threshold such as 15% or 20%. The interested shareholder’s rights are void. Other shareholders can (typically) use each of their rights to buy a number of shares equal to two times the exercise price (set in advance), divided by the current market price of the target company’s stock. Usually, from the standpoint of a bidder, the flip-in right is a complete show stopper unless the bidder can convince a court that it should intervene. In the text, we have tried to describe when courts intervene against poison pills under Delaware law.
Flip-over Poison Pill Plan: The most popular type of poison pill anti-takeover defense. Shareholders of the target firm are issued rights to purchase common stock at an exercise price high above the current market price. If a merger occurs, the rights flip over and allow shareholders to purchase the acquiring firm’s common stock at a substantial discount.
Float: The number of shares issued and outstanding of a company’s stock.
Floating Rate Coupon: Coupon rate that varies with (“floats against”) a standard market benchmark or index.
Floating Stock: The fraction of the paid-up equity capital of a company that normally participates in day-to-day trading.
Floor: Trading hall of the Stock Exchange where transactions in securities take place. The trading ring is where members and their assistants assemble with their order books for executing the order of their constituents.
Floor price: The minimum offer price below which bids cannot be entered. The Issuer Company in consultation with the lead book runner fixes the floor price.
Flow Back: Securities were recently placed in the markets that are resold on the issuers’ national market. It is one of the major risks in an equity placement because it may frustrate the objective of internationalization of the equity market and cause downward pressure on its market price
Footsie: Financial times – stock exchange 100 share index, a weighted index of the price of 100 shares of major companies traded on the London Exchange, the base being 1000 on 3rd January 1984.
FTSE Indices: Family of indices compiled and promoted by FTSE International, covering most major stock markets and regions worldwide.
Forex: Foreign Exchange- Forex in Europe and FX in the United States.
Foreign Exchange Rate: The price of one currency in terms of the other.
Foreign Institutional Investor: An institution established or incorporated outside India that proposes to make the investment in India in securities; provided that a domestic asset management company or domestic portfolio manager who manages funds raised or collected or brought from outside India for investment in India on behalf of a sub-account, shall be deemed to be a Foreign Institutional Investor.
Fortune 500 (U.S.): Since 1958, Fortune Magazine has published a list of five hundred largest American Industrial Corporations, ranked according to the size of sales.
Forward Contract: An agreement for the future delivery of the underlying commodity or security at a specified price at the end of a designated period of time. Unlike a futures contract, a forward contract is traded over the counter and its terms are negotiated individually. There is no clearinghouse for forwarding contracts, and the secondary market may be non-existent or thin.
Forward Rate Agreement: A forward contract on interest rates in which the rate to be paid or received on a specific obligation for a set period of time, beginning at some time in the future, is determined at contract initiation.
Free Cash Flow: Calculated by adding depreciation to net income, and subtracting capital expenditures. Free cash flow represents the cash that is available for a company to spend after financing a capital project.
Free-rider Paradox: Sometimes benefits and costs cannot be allocated accurately or at all to users by the markets or otherwise. A free-rider tries to take advantage of this situation. The paradox is that if everyone tries to free-ride no one can and everyone is worse off. An important example is a natural environment. Most industrial users of the natural environment are free riders. Everyone collectively is worse off but no one individually finds it worthwhile to stop. In takeovers, an important recent example is the basic research part of corporate research and development. It is impossible to limit the benefits from basic research to the corporation that pays the bill. Therefore, there will be a strong temptation for companies to free ride. Competition in the product and takeover market should increase this temptation.
Front Office: Dealing, research and marketing activity of an investment management company.
Front Running: An unethical practice where brokers trade an equity-based on information from the analysis department before their clients have been given the information. Fund manager /broker buys or sells securities in advance of a substantial client order or whereby a futures or options position is taken about an impending transaction in the same or related futures or options contract.
Fund of Funds: Fund of funds scheme means a mutual fund scheme that invests primarily in other schemes of the same mutual fund or other mutual funds.
Fungible Securities: Securities are easily interchangeable with another in the same class.
Free Lunch Theorem: The theorem states that there is no such thing as a free lunch. If one wishes to make money on the stock market one must work hard and take carefully selected risks.
Free Market Economy: Also simply, market economy. An economic system in which the government does not interfere in any way with business activity. There are no price controls, no permits, no kickbacks, no trading restrictions, or foreign exchange control. India is making hesitant moves toward this economy.
Fundamental Analysis: Scientific study of the basic factors which determine a share’s value. The analyst studies the industry and the company’s sales, assets, liabilities, debt structure, earnings, products market share, evaluate the company’s management, compares the company with its competitors, and then estimates the share’s intrinsic worth. The fundamental analysts' tools are Financial Ratios arrived at by studying the company’s balance sheet and Profit and Loss Accounts over a number of years.
Funding Risk: Possibility that a defined benefit plan fails to accrue sufficient assets to meet the liabilities as and when they fall due (or more generally the likelihood that funding deteriorates).
Futures: Shares or commodities bought or sold for delivery at a future date. These can be sold at a profit before delivery if prices in the market have changed.
Futures Contract: A contractual agreement to buy or sell a specified quantity of a commodity, currency, or shares at a particular price at a fixed date in the future. It differs from an option in that it does not provide an option to buy or sell, but is a definite contract to do either. Futures are a hedge against price fluctuations for those who must buy future dates. There are speculators who buy and sell these contracts for price. A bought futures contract can only be canceled by a sales contract.
Futures Margin: When a futures contract is initiated, a deposit (the initial margin) is paid to the future exchange. This normally represents a small percentage of the value of the contract and helps in protecting the exchange against defaults. As the value of the contract changes, additional payments may be requested (the variation margin).Stock Market Reference (A-Z)