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Finance GlossaryCash Ratio
Cash Ratio
Definition of Cash Ratio
A cash ratio measures a company’s ability to fulfill short-term debt obligations using only its cash and cash equivalents, which are known to have high liquidity. The formula for calculating cash ratio is:
Cash Ratio: Cash + Cash Equivalents / Current Liabilities
Cash Ratio: Cash + Cash Equivalents / Current Liabilities
Related Terms
Index Arbitrage
Index arbitrage is the method of generating returns by trading the difference between the same or different indices that have a standard value but has diverged momentarily. The way one does index arbitrage can vary as it is possible to trade indices via ETFs, Options, Futures, and more.
Indices
Indices are a collection of financial instruments that measure the performance of those very instruments.
For example, stock market indices like Nifty 50 and Sensex measure the top 50 and 30 stocks by market capitalization.
If indices go up, it generally means that the underlying stocks are performing well. The opposite is true when indices plummet.
By the way, there’s no limit to how many instruments an index can track. The Nifty Smallcap 250 tracks 250 stocks whereas Nifty Bank tracks 12 stocks.
For example, stock market indices like Nifty 50 and Sensex measure the top 50 and 30 stocks by market capitalization.
If indices go up, it generally means that the underlying stocks are performing well. The opposite is true when indices plummet.
By the way, there’s no limit to how many instruments an index can track. The Nifty Smallcap 250 tracks 250 stocks whereas Nifty Bank tracks 12 stocks.
Debt To Equity Ratio
The debt to equity ratio is a measure of a company’s financial health that’s calculated by dividing liabilities from shareholder equity.
Debt to equity ratio: Total liabilities / Shareholder equity
A high debt to equity ratio means that a company is taking on more debt to run its business. A low debt to equity ratio means that a company is operating at low debt.
That’s why investors calculate the D/E ratio to understand a company’s ability to operate without debt. Generally, D/E is used for comparative analysis within sectors, not across industries because the ideal debt ratio may vary.
Debt to equity ratio: Total liabilities / Shareholder equity
A high debt to equity ratio means that a company is taking on more debt to run its business. A low debt to equity ratio means that a company is operating at low debt.
That’s why investors calculate the D/E ratio to understand a company’s ability to operate without debt. Generally, D/E is used for comparative analysis within sectors, not across industries because the ideal debt ratio may vary.
Capital in Trading
Capital is the total amount of money that a trader can use to buy and sell securities. There are variations of the term, the most common one is “starting capital”. This is the amount of money a trader starts their journey with.
Equity Market
The Equity Market is a place where shares are traded, money is raised, and stock is offered to investors. That's why it is divided into two categories:
- Primary Market: An equity market where shares are offered to investors for the first time through IPOs while fundraising also happens through private placements.
- Secondary Market: An equity market where shares, bonds, futures, options, more are traded
The primary market is typically over the counter but may be regulated in the case of exchange traded IPOs. The secondary market is often well-regulated as most securities listed are exchange traded.
Anchoring and Adjustment
Anchoring is a bias that drives people to make decisions that are based on (anchored to) pre-existing notions, ideas, and suggestions that may or may not be true.
Adjustments around anchoring are common as it becomes a starting point for many when it comes to decision-making.
For example, someone is anchored to a financial model or strategy. They may choose to use the anchor in situations where it may not fit and as a result, may end up getting an unfavorable outcome.
Adjustments around anchoring are common as it becomes a starting point for many when it comes to decision-making.
For example, someone is anchored to a financial model or strategy. They may choose to use the anchor in situations where it may not fit and as a result, may end up getting an unfavorable outcome.
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