Understanding commonly confused financial terms
The following article explains the meanings of some of the commonly used financial terms as well as the differences between terms that people generally get confused…
#1. COMMON STOCK vs. PREFERRED STOCK
The stock of an incorporated business constitutes the equity stake of the owners. The stock of the corporation is partitioned into shares. This basically represents the extent of the ownership of the corporation by the owner of these shares. Now, there can be two classes of stock: Preferred and Common Stock. A “C” Corporation (any corporation that, under United States federal income tax law, is taxed separately from its owners) can offer both these classes of stock whereas; A “S” Corporation (which generally is not taxed separately) can offer only one class.
The class of stock a corporation issues depends on how it wants to handle dividends and whether it wants the shareholders to have a say in the management. Following are some of the key differences between Common Stock and Preferred Stock:
- The holders of common stock can reap two benefits: Dividends and Capital Appreciation (When the value of the stock increases over the amount initially paid for it , the stockholders makes a profit by selling the stock at its current market value after capital appreciation). Dividends that are taxable payments are paid from company’s retained or current earnings. Whereas, holders of preferred shares reap benefits through regular dividends.
- Preferred stockholders get priority when it comes to the payment of dividends. Common stockholders get dividends only after every other investor including preferred stockholders have received their dividends. However, they can earn a lot extra if the company have made tremendous profits, as well as might end up earning a lot less or even nothing, if the company goes bankrupt.
- Common stockholders have the additional benefit of enabling its holders to vote on company issues and also when choosing the company’s management. Preferred shareholders lack this benefit.
Thus, although not much difference between both these terms, it is very important to understand their main differences.
#2. RECESSION vs. DEPRESSION
In simplest words, recession is a decline in the Gross domestic product (GDP) for two or more consecutive quarters. However, this definition is not completely accurate. The attributes of a recession also include declines in coincident measures of overall economic activity such as employment, investment, and corporate profits. Recessions are the result of falling demand and may be associated with falling prices (deflation), or sharply rising prices (inflation) or a combination of rising prices and stagnant economic growth (stagflation). It is generally short-term. They occur quite frequently in various economies.
Depression simply means a recession that lasts longer and has a larger decline in business activity. It is long term. A severe recession with 10% decline in GDP is usually called a depression. They are very infrequent and happen once in generations. The three notable depressions were the Great Depression in 1930’s, Depression from 1870’s-1890 and the panic of 1837.
There is an old joke among economists that states: A recession is when your neighbor loses his job. A depression is when you lose your job. Thus, the latter is the worse form of the preceding term.
#3. NEFT vs. RTGS
NEFT (National Electronic Fund Transfer) and RTGS (Real Time Gross Settlement) are online systems for transferring funds from one financial institution to another within India (usually banks).
NEFT, launched in Nov 2005 was set to inherit every bank that was assigned by the SEFT Clearing system. RTGS is a funds transfer system where the transfer takes place in “Real Time” and on “Gross Basis”. It is the fastest possible way to transfer funds. Here, the payment transaction is not subject to any waiting period and is completed as soon as the processing is done.
Under both these systems, the payment is cleared within one day. The fundamental difference between NEFT and RTGS is that RTGS is based on Gross settlement, where a transaction is completed on a one-to-one basis without bunching with other transactions. NEFT is based on net settlement, where transactions are completed in batches at specific times. Also, the transaction of amount rupees two lacs or below uses NEFT for the transfer of funds whereas, with amount above two lacs uses RTGS for the transfer.
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