A familiarity with investment banking terminology can impress prospective employers, but it is important that you use them correctly. Let’s take a look at some terms and what they really mean.
Property owned by a person or company regarded as having a value, and which can repay debts. Examples can include cash, property, securities, stock, gold, or art.
A person who studies a market or industry sector and makes recommendations to either “buy”, “hold”, or “sell”. It is also one of the most common entry-level career positions in the investment banking industry.
A diversified mutual fund with a mix of common stock, preferred stock, or bonds. The companies selected will typically be in different industries and different geographic regions. This mix of investment options helps hedge against risk.
An investor who sells with the belief that the prices of the financial product they’re selling will fall.
A standard, often unmanaged, index used to assess performance of a portfolio or mutual fund.
The Dow Jones Industrial Average, the S&P 500, or the Russell 2000 are examples of benchmark indexes. These are standards that measure the performance of mutual funds, stocks, bonds and securities in the stock market.
The price which a buyer is willing to pay for a financial product.
Governments or companies can raise capital by issuing and selling bonds. Bondholders’ investments will be repaid with interest, also known as a “coupon”, once the bond reaches maturity. Bonds have low credit risk because the government can always repay the debt by raising taxes or printing money, but it does depend on a stable political system.
The difference between bonds and loans is that bonds can be further traded between investors, while loans cannot.
An intermediary between a buyer and a seller. Brokers will receive a commission if the trade closes successfully.
The payment a client makes to a broker.
The opposite of a bear. A bull is an investor who buys, believing prices of the financial product they’re acquiring will rise.
A financial marketplace for buying and selling medium- or long-term funding instruments such as bonds, debt, and equity.
A term referring to information barriers within investment banks. Such barriers exist to minimise potential compliance or conflict of interest issues.
For instance, merger and acquisitions teams and analysts are forbidden from communicating to ensure that potential takeovers will not be affected by analysts advising their clients to buy or sell shares in the acquired company.
The process for making transactions happen – matching the buyer with the seller, and making sure the buyer actually has the cash, and that the seller actually holds the securities.
Physical goods that are traded on a global scale. Examples include oil, petrol, rare metals, or grain.
The term commonly used to refer to a severe shortage of money or credit within a market.
Credit default swap
An insurance-like contract for transferring credit risk. The buyer of the swap makes payment to the seller in exchange for protection in the event of a default. Banks and other financial institutions typically use credit default swaps to cover the risk of mortgage holders defaulting.
Debt capital markets (DCM)
An investment bank division responsible for refinancing or restructuring a client’s existing debt, or raising a client’s debt for acquisitions.
Though increasing debt may seem counterproductive, the benefit of debt is that it grants a company a greater diversity of funding options, as opposed to relying solely on selling shares/equity.
The practice of raising capital for a company through selling fixed debt instruments (e.g. credit notes, bills, or bonds) with interest.
The general term for financial contracts between buyers and sellers of commodities or securities including futures, options, forwards and swaps. The value of a derivative is determined by fluctuations in the value of its underlying commodity/security.
Since they allow profit from the asset despite its rise or fall, derivatives are typically used as instruments for hedging risk.
Otherwise referred to as shares. Shareholders own a percentage of the company, and enjoy a share in its profits paid out as dividends. They may also have control of company management decisions via voting rights.
Equity capital markets (ECM)
An investment bank division responsible for structuring and pricing the issuance of companies’ equities, such as at an IPO.
A contract between two parties to trade a commodity or a security at a fixed price, on a fixed future date.
A situation where a product or service is scarce for purchase within a market. The opposite is a “soft market”, in which the product or service is readily available.
A strategy where an investor acquires a portfolio of different financial instruments with contrary positions, in order to offset the possibility of loss.
A private investment fund that uses a range of strategies to maximise returns while minimising the risk of loss. They are usually managed professionally.
Initial Public Offering (IPO)
The first sale of a public-listed company's shares to the public, also known as a stock market listing or flotation.
Insider dealing and trading
The act of trading using knowledge of non-public – “insider” – information in order to gain an advantage over other traders or investors. This is a criminal offence.
Lenders demand interest on loans, and the rate hinges on future inflation projections as well as the “real interest rate”, derived by removing the cost of inflation from the interest rate in order to discern its actual value.
Borrowers might be asked to pay an additional percentage of interest in order to compensate lenders for the credit risk.
A collective investment structure where investors pool their money and then hire a fund manager to invest in a variety of securities on their behalf. A trust can also trade shares on the stock market, though the share price may not always equal the price of its underlying assets.
An investment trust’s value will fluctuate with demand for shares on the stock market.
Leveraged buyout (LBO)
A corporate takeover funded mostly by high-risk bonds or loans. Though risky, this move allows the acquiring company to purchase a significant amount of assets in a short time while contributing only a small amount of real capital.
The act of taking out a loan or using debt to supplement investments. An institution that has
borrowed heavily in addition to putting forward its own funds or equity to finance growth is called “highly leveraged”.
The efficiency or ease with which an asset or security can be converted into cash without changing its market price. The most liquid asset of all is cash itself.
The bank or firm that’s obliged to quote “buy” and “sell” prices for a financial instrument, and stands ready to trade in said instrument on a regular and continuous basis throughout the trading day.
The practice of using a combination of debt and equity to raise capital for a company. Lenders have the right to convert their debts to equity in the company in the event of a default.
A marketplace for short-term funding, such as certificates of deposit and treasury bills. Money market securities typically have a brief maturity period – less than one year.
These are similar to futures, but provide the buyer with the right to choose whether or not to complete the contract before the fixed date. The buyer must pay a premium on the seller’s futures for this ability.
A collection of securities, financial instruments, and investment options held by an investor. It’s also known as a “fund”.
A term referring either to an investor who trades on his or her own account and risk, or the owner of a private company.
Equity that’s not publicly listed on a stock exchange. Trading in private equity is considered a high-risk yet potentially high-return investment – the investor can hold large stakes in an organisation, but the investment will be largely non-liquid.
Buying and selling securities with the bank/firm’s own money rather than a client’s money, to make direct profit for the bank/firm.
A class of risk where the only outcome is the possibility of loss. “Speculative risk”, by contrast, offers the possibility of either loss or gain.
The act of managing the pure risks an investor might be exposed to. This involves analysing all possible risks and determining how best to handle them, either through trading them out, or hedging risk with derivatives.
The trading of a company’s bonds and equities among investors themselves. The “primary
market” refers to the direct sale of the company’s securities through the stock market.
A generic term for tradable financial instruments used to raise capital, such as bonds and equities.
The act of turning something into a security, such as combining the collective debt from a number of loans to create a financial product that can be traded.
Banks may securitise debt such as homeowner mortgages to earn extra profit on top of the interest they collect from the loans themselves.
The stage once a deal has been made and clearing has taken place, and where securities and cash are successfully transferred between the seller and the buyer.
The investment strategy of borrowing an asset (e.g. shares) from another investor at low to no cost and proceeding to sell it on the relevant market, hoping the price will fall.
The aim is to buy back the asset at a lower price and then return it to its owner, allowing the borrower to pocket the difference.
The difference between the bid and offer price of a security. Pocketing this difference after a sale is one way that banks make profits.
A speculator who buys shares upon issue to sell them as soon as they begin trading on the market. They’re also called “flippers”.
A combination of stagnation and inflation, where economic growth slows even as prices continue to rise.
High-risk loans to clients with poor or no credit histories.
Borrowing rates between financial institutions. The “lender” bank charges this to the “borrower” bank in order to offset risk.
Debt that will very likely incur losses on an investor. This is typically debt that has a very low chance of being repaid with interest, has a phenomenally high default rate, or has grown too large to even be repaid.
Also known as a “mutual fund”. Investors pool their assets into the trust, and the trust issues “units” which represent underlying shareholdings. The trust’s units are traded on markets, and if there are profits, the unit holders will receive the profits directly.
This is in contrast to an investment trust, where profits must be re-invested back into the fund and can only be paid out as dividends.
An investor who specialises in lending capital to companies to fund business growth, in exchange for equity in the company. They do this in the hopes that the venture will succeed and the value of their equity will grow.
This type of investor specialises in extracting value from failing companies. They purchase equity in troubled companies at rock-bottom prices, and will either attempt to aggressively revive the business or sell off company assets for quick profits before cashing out again.
The total return on investment for a security. This is usually expressed as a percentage of the security’s price.