Financial Terminology Guide

FINANCIAL TERMINOLOGIES
One of the important concepts in bankings is knowing all necessary financial terminologies. We
have collected them together so that you can take a copy of them and start preparing for all
competitive examination and business quizzes.
by Mastermind Quizzers
kunaladeshmukh@gmail.com
Accretion/Dilution
Analysis that determines the change in a company's projected EPS due to a potential M&A or capital
markets transaction. A transaction is "Accretive" when there is a positive change in EPS and "Dilutive"
when there is a negative change.
Accrued interest
The interest earned on a loan or note between two interest payment dates.
Acquisition
The act of one corporation acquiring control of another corporation or asset.
Agent
The bank responsible for administering a project's financing.
American Depository Receipt (ADR)
A certificate of ownership issued by a U.S. bank representing a claim on underlying foreign securities.
ADRs may be traded in lieu of trading in the actual underlying shares.
Amortization
Writing off an intangible asset investment over the projected life of the assets. Also the spreading out of
intangible costs over several years, such as amortization of stock option expense.
Analyst
Entry level position typically filled by graduates or lateral hires in a U.S. investment bank. Usually 2-3
years until promotion to Associate.
Arbitrage
Buying securities in one country/market and selling them in another, while taking advantage of
dislocations/inefficiencies in the market.
Arrangement fee
A fee paid to a mandated bank or group of banks (lead arrangers) for arranging a transaction. It includes
fees to be paid to participating banks.
Arranger
A bank or other financial institution responsible for originating and syndicating a loan transaction. The
arranger always has a senior role, is often the agent, and usually participates in the transaction at the
most senior level (it holds the largest share of the loan).
Asset allocation
The relative weightings of regions, sectors and types of investments (i.e. equities, bonds, etc) within a
portfolio, determined by client's risk and return requirements and the market outlook. This is central to
financial planning and investment management.
Asset class breakdown

Percentage of holdings in different types of investments (i.e. large stocks, international, bond, etc.).
Asset swap
The bond's swapped spread, in basis points. The asset swap spread, or gross spread, is derived by
valuing a bond's cash flows via the swap curve's implied zero rates. This gross spread is the basis point
amount added to the swap curve, which causes a bond's computed value to equal the market price of the
bond.
Associate
Position above an Analyst and below a Vice President. Typically filled by Analysts promoted after 2-3
years of experience, lateral hires or MBA graduates.
Audit
Professional examination and verification of a company's accounting data.
B
Balloon payment
A final debt repayment that is substantially larger than the preceding repayments.
Bank syndicate
A group of banks that have been banded together to underwrite and sell a specific issue of
securities/loans.
Base currency
The first currency quoted in a currency pair on the Foreign Exchange.
Basis point
A unit that is equal to a hundredth of a percent, a basis point is used to denote the change in a financial
instrument. It's commonly used for calculating changes in interest rates, equity indexes and the yield of a
fixed-income security.
Bear
An investor who has a negative view on the market.
Bear market
A market in which traders and investors are feeling negative and prices are falling or static.
Beauty contest
The informal term for the competitive process by which clients choose an investment bank to mandate for
a deal.
Benchmark index
An index that correlates with a fund, used to measure a fund manager's performance.
Best efforts
Term used by banks in selling an entire new security issue by a certain date. They agree to make their
best effort to sell an issue to the public. Instead of actually buying and reselling the issue (that would be
called an underwrite), the banks leave the risk with the issuer by maintaining an option to buy and the
authority to sell.
Beta
Mathematical measure of the sensitivity of rates of return on a portfolio or a given stock compared with
rates of return on the market (a diversified portfolio) as a whole. A beta of 1.0 indicates that an asset
closely follows the market; a beta greater (smaller) than 1.0 indicates greater (less) volatility than the
market. Hence, beta is a measure of risk: the higher the beta, the higher the risk.
Bill of Exchange
A bill made out by one party addressed to another requiring the addressee to pay a fixed sum of money
by a certain date. The bill is then traded on the money markets.
Bid
The price at which a market maker is willing to pay for a security.
Bid Offer
Bid Offer is the difference in price or spread between where one can buy a security and one can sell it at
the same moment.
Big Figure
The whole dollar price of a quote often used to reference foreign currencies. For example, if a foreign
currency (EUR/USD) was trading at 1.5520, the big figure would be 1.55.
Bloomberg
Computer terminals providing real time quotes, news and analytical tools, often used by traders and
investment bankers.
Bonds
A debt security in which an investor loans money to an entity (corporate or government) that borrows the
funds for a defined period of time at a fixed or floating interest rate. Principal is paid back at maturity.
Book runner
The investment bank that runs the debt or equity offering in the primary market.
Book value
The net-asset value of a company as determined by subtracting its liabilities from its assets.
Brady bonds
Bonds issued by developing countries under a debt-reduction plan.
Bridge financing
Interim or temporary financing - usually shorter than 12 months.
Broker
Someone who earns commission for providing the link between buyers and sellers. Brokers generally
take little to no risk, as they match buyers with sellers.
Bulge bracket
The largest and most prestigious firms on Wall Street.
Bull
An investor who has a positive view on the market.
Bull market
A market in which traders and investors are feeling positive and in which prices are rising.
Buy-side
1. Investor end of a capital markets transaction.
2. M&A process when J.P. Morgan is working with a potential buyer. It refers to the entity acquiring the
asset.
Calendarization
Act of adjusting company financials to a December 31 year-end in order to standardize financial
performance across companies with different fiscal years.
Call option
The right to buy shares at an agreed price at a future date (see put option).
Capital
Money put into a business by its shareholders.
Capital Asset Pricing Model (CAPM)
An economic model for valuing stocks by relating risk and expected return. Based on the idea that
investors demand additional expected return (called the risk premium) if they are asked to accept
additional risk.
Capital expenditures
Money spent to acquire or upgrade physical assets such as buildings and machinery. Also called capital
spending or capital expense.
Capital gain
The amount by which an asset's selling price exceeds its initial purchase price. A realized capital gain is
an investment that has been sold at a profit. An unrealized capital gain is an investment that hasn't been
sold yet but would result in a profit if sold. Capital gain is often used to mean realized capital gain.
Capital markets
At J.P. Morgan, our capital markets teams are Equity Capital Markets and Debt Capital Markets. They are
responsible for the origination of equity and debt instruments respectively. They are private-side teams
that report into investment banking.
Capitalization
1.
The sum of a corporation's long-term debt, stock and retained earnings. Also called Invested
Capital.
2.
The market price of an entire company, calculated by multiplying the number of shares outstanding
by the price per share. Also called Market Cap or Market Capitalization.
CEO
Chief Executive Officer.
Certificate of Deposit (CD)

A certificate given by a bank to a depositor that can be traded on the money market. The depositor is able
to get high levels of interest by putting their money in the bank for a fixed term but can sell the CD to
someone else to get their capital back at short notice.
CFA
Chartered Financial Analyst qualification. This is the industry qualification for research Analysts on the
buy side (markets) and Analysts and fund managers on the sell side (investment management and
private banking).
CFO
Chief Financial Officer.
Chinese wall
The physical and regulatory separation between the public and private sides of a bank.
Clearing
The process of matching, guaranteeing and registering transactions.
Clearing house
An institution that practices clearing, which significantly reduces the number of inter-bank payments.
Closing Position
A traders position at the end of the trading day. Equal to the Opening Position plus or minus any trades
done on that trading day.
Club
A group of underwriters who do not need to proceed to syndication as part of fund-raising.
Collateral
Assets pledged as security under a loan to assure repayment of debt obligations.
Collateralized Bond Obligation (CBO)
Securities issued against a portfolio of bonds with different degrees of credit quality.
Collateralized Loan Obligation (CLO)
Securities issued against a portfolio of loans with different degrees of credit quality.
Commercial Paper (CP)

Short term debt obligations issued by corporations and bought by money market funds in large quantities.
Maturities range from several days to 9 months.
Commitment Fee
A per annum fee applied to undisbursed balances that lenders are committed to lend. The fee is charged
until the end of the availability period.
Commodities
Physical items such as oil, gold or grain. Commodities are traded for spot (trade date plus two business
days) and also for future delivery. There also exist options to buy and sell commodities.
Common Stock
Also called common equity, common stock represents an ownership interest in a company (as opposed
to preferred stock). The vast majority of stock traded in the markets today is common, as common stock
enables investors to vote on company matters. An individual with 51% or more of shares owned controls
a company's decisions and can appoint anyone he/she wishes to the board of directors and/or to the
management team.
Compound Annual Growth Rate (CAGR)
The year over year growth rate applied to an investment or other part of a company's activities over a
multiple-year period. The formula for calculating CAGR is (Current Value/Base Value)^(1/# of years) - 1.
Comps or Comparables
Analysis that uses ratios to compare company trading performance (trading comps) or previous M&A and
capital market transactions (transaction comps). Often used as part of a valuation analysis. Simply put,
comps are used to compare different companies on price/ valuation to one another.
Conditions Precedent (CPs)
A set of preconditions that must be satisfied before the borrower can request drawdown or other credit
facilities be made available under a lending agreement.
Convertible bond
A bond that can be converted into shares in a company at a certain conversion price. Because
convertible bonds provide the option of converting debt into equity, their coupon rates are typically low.
Convexity
The rate of change of duration as yields change. A security exhibits positive convexity when its price rises
more for a downward move in its yield than its price declines for an equal upward move in its yield.
COO
Chief Operating Officer.
Cost of capital
The opportunity cost of an investment. This is, the rate of return that a company would otherwise be able
to earn at the same risk level as the investment that has been selected. For example, when an investor
purchases stock in a company, he/she expects to see a return on that investment. Since the individual
expects to get back more than his/her initial investment, the cost of capital is equal to this return that the
investor receives, or the money that the company misses out on by selling its stock.
Cost of carry
The cost of carry specifies the cost involved of carrying a security (i.e. bond) on the balance sheet. The
cost of carry is calculated as difference between interest income (income generated by the security, e.g.
coupon payment) and the cost of financing the purchase of the security (e.g. Libor).
Coupon
The interest payment on a bond.
Covenant
An agreement by a borrower to undertake (a positive covenant) or not to undertake (a negative covenant)
a specific action. Breaching a covenant is considered an event of default. Breaching a covenant can be a
pre-cursor to an event of default.
Coverage ratio
A measure of a corporation's ability to meet a particular expense.
Credit Default Swap (CDS)
CDS is an insurance contract in which the buyer of CDS pays a quarterly fee in return for the insurance
contract which protects them in the case of default by the reference entity. Buying CDS represents a
bearish view on a credit, selling CDS represents a bullish view.
Cross-over trading
Offsetting buy and sell orders without recording the transaction on the exchange. This is prohibited as it
may mean the investor does not get the best price for the transaction.
Currency pair
The quotation and pricing structure of currencies traded on the Foreign Exchange (FX) market.
Custodian
A bank or institution that holds securities for safe-keeping and handles administrative arrangements such
as collecting coupons and dividends.
Custody
The retention of assets (e.g. stock certificates) on behalf of mutual funds, individuals and corporate
clients. This invovles lending of securities, collecting income, and the information of positions, and
reporting this to clients.
D&A
Acronym for Depreciation & Amortization. Often combined into a single line item on financial statements
due to the non-cash nature of both items.
Data Room
Collection of documents (physical or virtual) used for due diligence surrounding potential M&A and capital
markets transactions.
DCM
Acronym for Debt Capital Markets - the area of an investment bank responsible for the issuance and
pricing of bonds and other debt securities.
Debenture
A debt obligation secured by the borrower's general credit rather than being backed by a specific line on
property. In other words, the debt obligation is not collateralized.
Debt
Money owed to creditors or lenders or buyers of debt securities.
Debt Capacity
The total amount of debt a company can prudently support given its earnings expectations, equity base,
and asset liquidation value.
Debt Capital Markets

Markets where capital funds (i.e. debt) are traded. This includes private placement as well as organized
markets and exchanges.
Delivery
The settlement of a futures contract, or upon settlement of a trade, securities are delivered.
Depreciation
1. A non-cash expense that reduces the value of an asset as a result of wear and tear, age, or
obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be
replaced once the end of their useful life is reached. Because it is a non-cash expense, depreciation
lowers the company's reported earnings while increasing free cash flow.
2. A decline in the value of a given currency in comparison with other currencies.
Derivative
A synthetic instrument whose market price depends on the value of an underlying security such as a
share or a bond. A derivatives market is a market in which derivative securities are traded.
Discount Rate
The interest rate used in discounting future cash flows. Often determined using CAPM (see Capital Asset
Price Model) analysis, its intended to approximate the level of risk to the cash flows.
Discounted Cash Flow (DCF)
A common means of valuing companies. This is done by forecasting the cash flows expected from a
company in the future and discounting them back to today.
Divestiture
When a company sells off a subsidiary or assets of the business to a buyer which acquires the subsidiary
or assets. This differs from a spin-off arrangement under which a company establishes a subsidiary as a
new and separate business and distributes shares in the new company to its shareholders.
Dividend
A payment by a company to shareholders of its stock, usually as a way to distribute profits to
shareholders.
Dow Jones Industrial Average (DJIA)

Price-weighted average of 30 actively traded shares of blue-chip US industrial corporations listed on the
New York Stock Exchange.
Duration
A weighted average maturity of all future cash flows of a bond. In more practical terms when trading
bonds, duration is used as a measure of a bond's sensitivity to changes in interest rates/yields (i.e. a
bond's price volatility).
EBITDA
Earnings Before Interest, Taxes, Depreciation and Amortization. An approximate measure of a company's
operating cash flow based on data from the company's income statement.
ECM
Acronym for Equity Capital Markets - the area of an investment bank responsible for structuring and
pricing the sale of equity.
ED
See Executive Director
Emerging markets
Developing countries with fledgling capital markets. Banks make loans to emerging markets nations and
also assist them in issuing bonds and other debt securities.
Enterprise value
A measure of what the market believes a company's ongoing operations are worth. Enterprise value is
equal to the company's market capitalization minue cash and cash equivalents plus preferred stock plus
debt and plus minority interest. The number is of importance both to individual investors and potential
acquirers considering a takeover attempt.
EPS
Acronym for Earnings Per Share. Total earnings divided by the number of shares outstanding.
Companies often use a weighted average of shares outstanding over the reporting term. EPS can be
calculated for the previous year ("trailing EPS"), for the current year ("current EPS"), or for the coming
year ("forward EPS").
Equities
Shares - certificates that represent a part ownership in a corporation.
Equity
The risk-sharing part of capital.
Equity Capital Markets

Markets where capital funds (i.e. equity). This includes private placement as well as organized markets
and exchanges.
Equity Default Swaps

Equity Default Swaps are contracts structured to provide the buyer with protection (typically for five years)
against a severe decline in the price of a company's stock.
Eurobond
A bond issued in the Euromarket.
Eurocurrency
A currency held outside its country of origin, traded in the Euromarket.
Eurodollar
U.S. Dollars deposited in foreign banks or foreign branches of U.S. banks.
Euromarket
The offshore international financial market.
Exchange-traded fund (ETF)

An index fund which is traded on the stock market.
Executive Director (ED)

Title given by the Investment Bank when promoted from Vice President.
Face amount
The quantity purchased. Also called notional.
Fairness Opinion
The professional opinion of an investment bank, provided for a fee, regarding the fairness of a price
offered in a merger or takeover.
Fallen Angel
A credit that has fallen from investment grade ratings to below BBB-, into high yield ratings.
Fed (The)
The Federal Reserve, which manages the country's economy by setting interest rates.
Financial instruments
Collective noun for established financial contracts (securities and derivatives).
Fixed Income
Debt securities or bonds.
Float
The number of shares available for trade in the market times the price. Generally speaking, the bigger the
float, the greater the stock's liquidity.
Floating rate
An interest rate that is benchmarked to other rates (such as the rate paid on U.S. Treasuries) that allows
the interest rate to change with market conditions.
FOREX or FX
The Foreign Exchange Market. This market deals in foreign currency, specifically the exchange of one
currency for another. In global markets, the underlying reference currency is generally the US Dollar, but
"crosses" may be traded with different currencies.
Form 10K
Audited document required by the SEC and sent to a public company's or mutual fund's shareholders at
the end of each fiscal year, reporting the financial results for the year (including the balance sheet,
income statement, cash flow statement and description of company operations).
Form 10Q
Unaudited document required by the SEC for all U.S. public companies, reporting the financial results for
the quarter and noting any significant changes or events in the quarter. The Form 10Q contains financial
statements, a discussion from the management, and a list of "material events" that have occurred with the
company (such as a stock split or acquisition).
Form 8K
A document required by the SEC to announce certain significant changes in a public company, such as a
merger or acquisition, a name or address change, bankruptcy, change of auditors, or any other
information which a potential investor should know about.
Free Cash Flow

Operating cash flow (net income plus amortization and depreciation less increases in net working capital)
minus capital expenditures and dividends. Free cash flow is the amount of cash that a company has left
over after it has paid all of its expenses, including investments. Future free cash flows are the discounted
cash flows in a DCF (see Discounted Cash Flow) valuation.
Future
The right and the obligation to enter into a security transaction at a date in the future and at a price fixed
now.
Futures contract
A contractual agreement transacted through an organized exchange to buy or sell a security or
commodity at an agreed price for delivery at some data in the future. Futures contracts can be freely
traded on the exchange. Some contracts such as index futures are cash settled and no actual physical
delivery takes place.
FTSE
The Financial Times Stock Exchange 100 stock index, a market cap weighted index of stocks traded on
the London Stock Exchange.
Global Custody
Retention of client's assets for worldwide firms. Their assets can be monitored regardless of currency and
geographical location.
Goodwill
An intangible asset which provides a competitive advantage, such as a strong brand, reputation, or high
employee morale. In an acquisition, goodwill appears on the balance sheet of the acquirer in the amount
by which the purchase price exceeds the net tangible assets of the acquired company.
H
Hedge
Holding two contrary positions in two or more financial instruments in order to offset a loss in one by a
gain in the other.
Hedging
A strategy that eliminates a risk through the post sale of the risk or through a transaction in an instrument
that represents an obligation to sell the risk in the future. The goal is to ensure that any profit or loss on
the current sale or purchase will be offset by the loss or profit on the future purchase or sale.
High Grade
Bonds that are rated AAA through BBB-.
High Yield
Description of investments with high rates of return. Generally, these are bonds that are rated BB+ and
lower, and offer higher yields to compensate for the greater risks.
I
Index fund
An index fund is a mutual fund that mirrors as closely as possible the performance of a stock market
index. For example, many mutual fund companies have since established S&P 500 index funds to mirror
that index by purchasing all 500 stocks in the same percentages as the index.
Information Memorandum (IM)

A document that describes a potential M&A or capital markets transaction (including project descriptions
and financing details). It is used during the marketing and due diligence phase of a transaction and is also
referred to as Offering Memorandum (OM) and Descriptive Memorandum (DM).
Institutional clients
Organizations with large amounts of assets, who together make up well over half of the assets traded in
all markets. Examples include: governments, banks, insurance companies, central banks, and pension
funds.
Intangible Asset
Something of value that cannot be physically touched, such as a brand, franchise, trademark, or patent.
Goodwill created during an M&A transaction is an intangible asset.
Investment Grade
An investment rating level of "BBB" or better from Standard & Poor's Corporation, or "Baa3" or better from
Moody's Corporation. See also 'High Grade'.
IPO
Initial Public Offering - a company's first issuance of shares in the market.
IRR
Internal Rate of Return. The rate of return that would make the present value of future cash flows plus the
final market value of an investment or business opportunity equal the current market price of the
investment or opportunity. Used as a measure of return on equity in an LBO scenario.
Junk Bond
High risk, high yielding bonds. This is an nformal term, see also 'High Yield'.
Last trading day

The final day on which trading is allowed in a futures contract.
League tables
Tables that rank investment banks based on underwriting volume in numerous categories, such as
stocks, bonds, high grade debt, high yield debt, convertible debt, etc. High rankings in league tables are
key selling points used by investment banks when trying to land a client engagement.
Leverage
A company's debts relative to its equity capital. Usually expressed as a percentage.
Leveraged buy-out (LBO)

An LBO is the acquisition of a company financed with a substantial amount of debt/ loans that lever up
the balance sheet of the entity being acquired. LBO activity accelerated in the 1980s as investors looked
to extract additional value for shareholders from companies. The book Predators Ball by Connie Bruck
immortalizes the rise of the LBO market.
LIBOR
London Inter-bank Offered Rate. A widely used short-term interest rate that resets daily. LIBOR
represents the rate banks charge one another on overnight loans. LIBOR is often used by banks to quote
floating rate loan interest rates. Typically the benchmark LIBOR is the three-month rate.
Lien
A legal security interest on property to secure the repayment of debt and the performance of related
obligations.
Liquidity
The ease with which a financial asset can be bought and sold in the market. A currency like the euro is
extremely liquid; a life-insurance policy is not.
Long
When you have bought securities you are said to be long of the market or long risk, and hope that prices
will rise.
Lot
A quantity of the financial instrument being traded determined by an exchange or regulatory body.
LTM
Acronym for Last Twelve Months. Can be calculated for any income statement line item. LTM= Last full
year statement - previous year quarter + current year quarter.
M&A
Acronym for Mergers and Acquisitions, also known as Advisory. This is the department of an investment
bank which provides transaction advice and its execution to large corporatations.
Management fee
The annual fee charged to investors in a fund.
Managing Director
Title given by the Investment Bank when promoted from Executive Director.
Mandate
1. The portfolio given to investment managers by clients to be managed within their risk control
requirements.
2. A contract to work with a corporate client on an M&A or capital markets transaction.
Market capitalization
The value of shares in a public company at a certain point in time. This value is equivalent to the number
of shares issued multiplied by their current market price.
Market maker
A firm or individual who sets a price at which they're willing to sell or buy securities, providing a stable
price against which to judge any rise or fall.
Material Adverse Change (MAC)

Prior to closing, an event or occurrence that allows the lender to adjust the terms (i.e. rate) of a loan
agreement. After closing, a MAC is an event that gives lenders the right to refuse further drawings or to
require immediate debt repayment.
MD
See Managing Director.
Modified duration
The percentage price change of a security for a given change in yield. The higher the modified duration of
a security, the higher its risk.
Moody's
Bond rating service.
Multiples
A typical valuation technique in corporate finance (see Price Earnings and Comps). What multiple is a
company's market value of its earnings, employees, sales or other measure = trading multiple. What
multiple of earnings, employees, sale or other measure was paid in a recent similar deal = transaction
multiple.
Municipal bonds (Munis)

Bonds issued by local and state governments (a.k.a. municipalities). Municipal bonds are structured as
tax-free for the investor, which means investors in muni's earn interest payments without having to pay
federal taxes. Sometimes investors are exempt from state and local taxes, as well. Consequently,
municipalities can pay lower interest rates (and therefore have a lower cost of funding) than other bonds
of similar risk.
Nasdaq
A computerized system established by the NASD to facilitate trading by providing broker/dealers with
current bid and ask price quotes on over-the-counter stocks and listed stocks. Unlike the NYSE, the
Nasdaq (once an acronym for the National Association of Securities Dealers Automated Quotation
system) does not have a physical trading floor to bring together buyers and sellers.
National Association of Securities Dealers (NASD)
A self-regulatory organization operating under the supervision of the SEC. Its purpose is to standardize
practices, establish high ethical standards, and enforce fair and equitable rules.
Net asset value (NAV)

The total value of an ETF's (or mutual funds) portfolio at any given time - the sum of the value of its
holdings less any liabilities. Usually quoted on a per-share basis.
NYSE
New York Stock Exchange. The oldest and largest stock exchange in the U.S., located on Wall Street in
New York City. The NYSE is responsible for setting policy, supervising member activities, listing
securities, overseeing the transfer of member seats, and evaluating applicants.
Offer
The price at which a market maker is willing to sell a security.
Offering Memorandum (OM)

A document that describes a potential M&A or capital markets transaction (including project descriptions
and financing details). It is used during the marketing and due diligence phase of a transaction and is also
referred to as Information Memorandum (IM), Descriptive Memorandum (DM) or commonly as the red
herring.
OPEC
Organization of Petroleum Exporting Countries - an organization which tries to control the price and
production of oil.
Opening Position
A traders position in each contract/security at the start of the trading day. Equal to the Closing Position
from the previous day.
Option
The right, but not the obligation, to buy (a call option) or sell (a put option) a given stock, security or
commodity at a fixed price (known as the strike price or exercise price) on a specified date in the future
(the expiry date). Includes traded options, currency options and interest rate options. Similar to a
Future (see Future), however, the purchaser pays a premium to gain the option, rather than the
obligation, to complete the contract.
Pitchbook
The book of exhibits, graphs, and initial recommendations presented by bankers to a prospective client
when trying to land a mandate.
Portfolio
A collection of investments (can be shares, bonds, convertibles, cash, convertibles, derivatives, property,
art, etc) held by an individual or institutional investor. The purpose of a portfolio is to reduce risk by
diversifying investments (i.e. holding many and spreading out the risk.)
Position
A long position is the amount of a security owned by an individual or dealer. A short position is the
amount of a security net sold and (often) borrowed by an individual or dealer.
Premium
1. The price of an option determined by traders on the Exchange float.
2. 2. The difference between the issued price and market price of a new security if it rises in value after it
is issued.
Price/earning ratio
A figure indicating the investor confidence a company enjoys. This is calculated by the current share price
divided by the most recent figure for the earnings per share. Typically, the higher the figure, the more
confident the investors.
Price spread
The difference between the "bid" and "ask" price on a security, also referred to as the bid/offer.
Principal
An investor who buys or sells on their own account at their own risk as opposed to a broker acting on
behalf of someone else. Also refers to the face value of a bond, repaid upon final maturity.
Private clients
People with significant personal assets (cash, company stock, art, shares) requiring professional
investment management.
Private Equity
Private equity firms buy companies and restructure them, adding/ extracting value from the entity and
look to resell them for significantly more than they bought them for.
Proprietary trading
Trading of the firm's own assets (as opposed to trading client assets).
Prospectus
Final version of the Offering Memorandum that is distributed to investors in the transaction. In the case of
an SEC registered debt transaction, it will be filed with the SEC and available to the public on the EDGAR
site. If it is a 144a debt transaction, it is exempt from registering with the SEC and the prospectus is
private, available only to those investors who hold the security.
Put option
The right to sell shares at an agreed price on a future date (see call option.)
Quote
Indicative market made by the trader.
R
Rating agency
A company that publishes ratings for securities such as debt issues based on the likelihood of consistent
and timely payments. These rankings are arrived at by looking at a variety of balance sheet data. Some
rating services are very influential, and an upgrade or downgrade can affect the borrowers financing
costs significantly. The major US rating agencies are Moody's, S&P and Fitch.
Red herring
See Offering Memorandum.
Reserve Bank
A country's lender of last resort.
Retail clients
Individuals who buy investments on their own behalf, not for an organization. Typically these investments
are much smaller than those by institutional clients and therefore fees are higher. The opposite of an
institutional client, commonly referred to as Mom and Pop investors.
Return on equity (ROE)

The ratio of a firm's profits to the value of its equity. Return on equity is a commonly used measure of how
well an investment bank is doing because it measures how efficiently and profitably the firm is using its
capital.
Revolver or Revolving Credit Line

An agreement by a bank to lend a specific amount to a borrower, and to allow that amount to be
borrowed again once it has been repaid.
Rights issue
Selling new shares to existing shareholders to raise capital.
Risk management
Measuring and quantifying the risks in a trading book/ portfolio of securities. To reduce the risk, one will
hedge out different types of risk that the trader does not want to take a view on or does not want
exposure to.
Roadshow
The series of presentations to investors that a company undergoing an IPO or a debt offering usually
gives in the weeks preceding the offering. Here's how it works: several weeks before the IPO/debt
offering is issued, the company and its investment bank will travel to major cities throughout the country.
In each city, the company's top executives make a presentation to analysts, mutual fund managers, and
others attendees and also answer questions.
S&P (Standard & Poors)

Bond rating service.
S&P 500
Standard & Poor's 500. A basket of 500 stocks that are considered to be widely held. The S&P 500 index
is weighted by market value, and its performance is thought to be representative of the stock market as a
whole.
SEC
Acronym for Securities and Exchange Commission. The U.S. government agency that supervises the
exchange of securities to protect investors against malpractice.
Securities
Collective noun for bonds and shares.
Securitization
The replacement of conventional ways of raising finance (e.g. loans) by instruments like Euronotes; the
process whereby untradable assets become tradable.
Sell side
1. Commonly refers to the investment bank, vs. the buy-side, made up of investors.
2. M&A process when J.P. Morgan is working with a potential seller.
Shares
A certificate issued by a company for general purchase entitling the holder to dividends from any profits
the company may make.
Short
When you have net sold securities you are said to be short of the market and will benefit if prices
fall.
Short squeeze
A situation in which a lack of supply forces prices upwards.
Spot price
The current value of an asset.
Spread
1. The difference between the price at which a financial institution will buy a security and the price at
which it will sell.
2. The difference between the yield of a corporate bond and U.S. Treasury security of a similar maturity.
Stockbroker
Member of the Stock Exchange advising those buying/selling securities.
Stocks
Also known as equities or shares, stocks represent ownership of a corporation and claims to its assets
and earnings.
Swaps
A contract between two parties to make a cash flow exchange now or at a point in the future. The two
borrowers agree to pay the interest on each other's debt; under a currency swap, they may also repay the
capital.
Sweep
Typically a covenant that requires all or a specified fraction of available cash flow to be used for debt
service, including prepayments of principal.
Syndicated loan
A loan which several banks have clubbed together to make.
Tenor
The length of a deal. Or the time period over which money is borrowed or lent.
Tick
1 tick = 1 basis point.
Terminal value
The value of any item at the end of a specified time period. Examples include the maturity value of a bond
and the value of a fully depreciated asset.
Tombstone
The advertisements that appear in publications like Financial Times or The Wall Street Journal
announcing the issuance of a new security. The tombstone ad is typically placed by the investment bank
to publicize that it has completed a major deal. This term can also refer to the lucite made to
commemorate a debt or equity offering.
Trading a 'book'
An individual trader's total positions in the market.
Treasury
The section of a bank or business involved in the financial management of the organization's liquidity
through dealing and borrowing.
U
Underwriting
The function performed by investment banks when they help companies issue securities to investors.
Technically, the investment bank buys the securities from the company and immediately resells the
securities to investors for a slightly higher price, making money on the spread. This spread is often preagreed with the borrower, and is commonly known as the fee paid by the borrower on the transaction.
USPP
Acronym for US Private Placement. A negotiated sale in which the securities are sold directly to
institutional or private investors, rather than through a public offering. These placements are not
registered with the Securities and Exchange Commission.
Vice President (VP)

Title given when promoted from Associate. Usally after 2-5 years as an Associate.
Weighted Average Cost of Capital (WACC)

Weighted Average Cost of Capital. An average representing the expected return on all of a company's
securities. Each source of capital, such as stocks, bonds, and other debt, is assigned a required rate of
return, and then these required rates of return are weighted in proportion to the share each source of
capital contributes to the company's capital structure. The resulting rate is what the firm would use as a
minimum for evaluating a capital project or investment.
Working Capital
Working capital measures how much in liquid assets a company has available to build its business. This
value, measured in liquid assets, is derived by subtracting a companys current liabilities form their current
assets.
Yield
The return on an investment. Yields on bonds move inversely to prices.
YTD
Acronym for Year to Date.

Financial Terminology Guide

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FINANCIAL TERMINOLOGIES

Asset class breakdown

Certificate of Deposit (CD)

Commercial Paper (CP)

Debt Capital Markets

Dow Jones Industrial Average (DJIA)

Equity Capital Markets

Equity Default Swaps

Exchange-traded fund (ETF)

Executive Director (ED)

Free Cash Flow

Information Memorandum (IM)

Last trading day

Leveraged buy-out (LBO)

Material Adverse Change (MAC)

Municipal bonds (Munis)

Net asset value (NAV)

Offering Memorandum (OM)

Return on equity (ROE)

Revolver or Revolving Credit Line

S&P (Standard & Poors)

1 tick = 1 basis point.

Vice President (VP)

Weighted Average Cost of Capital (WACC)

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