Banking Terms - Set 2 (Check 21 Act, Warrants, Capital Gains Distribution, Derivatives, Odd Lot)

Odd Lot

An odd lot tender is an offer to shareholders with odd lots, to sell those shares at a given price. Odd lot offer is usually for Tenders where in Firm will be purchasing back their shares in market from holders who hold very less numbers of shares, usually Odd lots are considered to be anything less than the standard 100 shares for stocks.

E.g. If the board lot is for 100 and a shareholder holds 150 shares, an odd lot tender will give the shareholder to dispose of 50 shares at a given price. When the odd lot is announced by the concerned organization the above shareholder will be able to place his bid for those 50 shares which he holds other than the standard 100s group.

Derivatives

A financial instrument whose characteristic/value depends upon the characteristics/value of an underlying security, which can be of any kind like currency, bond, equity (or) commodity. Investors may purchase or sell derivatives in order to manage the risk associated with the underlying security, as a means to safeguard against fluctuations in value. It’s a kind of high risk technique and complicated too.

E.g. a FOREIGN investor buying shares of a company may be exposed to exchange rate risk [currency exchange] so, to hedge this risk, investors will usually purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back to his home country's.

Capital Gains Distribution

The Corporate event pays shareholders an amount in cash issued from the Capital account. There is no reduction to the face value of a single share (or the share has no par value). The number of circulating shares remains unchanged. Many funds allow automatic reinvestment of capital gains instead of distribution. Capital gains distributions will be taxed, as capital gains to the person receiving the distribution.

E.g. Capital gains distribution occurs when a mutual fund manager liquidates underlying positions that have made gains since they were added to the fund.       

Warrants

Warrants are the securities that give an entitlement for the holder to purchase shares in a specific company at a set price, at a future date. A Shareholder willing to exercise Warrants will pay the exercise price [price at which a warrant holder can purchase/sell the underlying securities] to receive new share(s) for every Warrant held. As a holder of Warrants, the shareholder would hope that the price of the share rises above the exercise price so that he/she can buy the shares for less than the market price.

E.g. if Company A issues bonds with warrants attached, each bondholder will get a $1,000 face-value bond and the right to purchase 100 shares of Company A at $20 per share over the next five years.       

The Check Clearing for the 21st Century Act - Check 21 Act 

The law facilitates check truncation by creating a new negotiable instrument called a substitute check, which permits banks to truncate original checks, to process check information electronically, and to deliver substitute checks to banks that want to continue receiving paper checks. The law does not require banks to accept checks in electronic form nor does it require banks to use the new authority granted by the Act to create substitute checks. Check 21 is designed to foster innovation in the payments system and to enhance its efficiency by reducing some of the legal impediments to check truncation.