A Graduate's Guide to Investment Banking Job-Speak
Analyst: A person who studies a market or industry sector and makes “buy”, “hold”, or “sell” recommendations. Less glamorously, it also refers to an entry-level career position in many investment banks and firms.
Bear: An investor who sells, believing that prices of the financial product they are selling will fall.
Bid price: The price which a buyer is willing to pay for a financial product.
Bonds: 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. The difference between bonds and loans is that bonds can be further traded between investors, while loans cannot.
Broker: An intermediary between a buyer and a seller. Brokers will receive a commission if the trade closes successfully.
Brokerage: The payment a client makes to a broker.
Bull: The opposite of a bear. A bull is an investor who buys, believing prices of the financial product they are acquiring will rise.
Capital markets: A financial marketplace for buying and selling medium- or long-term funding instruments (e.g. bonds, debt, and equity).
Chinese walls: A term referring to information barriers within investment banks. Such barriers exist to minimise potential compliance or conflict of interest issues (e.g. M&A 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).
Clearing: 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.
Commodities: Physical goods that are traded on a global scale, such as oil, petrol, rare metals, or grain.
Credit crunch: The term commonly used to refer to a severe shortage of money or credit within a market. The start of the “Global Credit Crunch” can be dated to August 2007, when default rates on sub-prime loans in the US housing market rose to record levels.
Credit default swap: An insurance-like contract for transferring credit risk. The buyer of the swap makes payments 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. The benefit of debt is that it grants a company a greater diversity of funding options, as opposed to relying solely on equity.
Derivatives: The general term for financial contracts between buyers and sellers of commodities or securities. This includes futures, options, forwards, or swaps. The value of a derivative is determined by fluctuations in the value of an underlying asset (e.g. a commodity or a security). Since they allow profit from the asset despite its rise or fall, derivatives are typically used as instruments for hedging risk.
Equity: Otherwise referred to as shares. Shareholders own a percentage of the company, and have a share in its profits. They 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 (or shares), such as at an IPO.
Futures: A contract between two parties to trade a commodity or a security at a fixed price, and on a fixed future date.
Hard market: 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.
Hedge: A strategy where an investor acquires a collection of different financial instruments with contrary positions, in order to offset the possibility of loss.
Hedge fund: A private investment fund that uses a range of strategies to maximise returns while minimising the risk of loss.
Initial Public Offering (IPO): The date when a company’s shares are released (“floated”) for trading on the stock exchange.
Insider dealing/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 offense.
Interest rates: Lenders demand interest on loans, and the rate hinges on future inflation projections, as well as the “real interest rate” (removing the cost of inflation from the interest rate in order to discern its actual value). Borrowers might pay an additional percentage in order to compensate lenders for the credit risk.
Investment bank: A bank providing financial services for governments, companies, or very wealthy individuals. Generally more exclusive than commercial banks, which provide loans and savings accounts to the general public as well.
Investment trust: A collective investment structure where investors pool their money and then commission a fund manager to invest in a variety of stocks and shares 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.
Leveraging: The act of 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 termed as being “highly leveraged”.
Libor: Short for the “London Inter Bank Offered Rate”. Libor is the rate at which banks may offer money to other banks.
Liquidity: The ability of an asset to be traded quickly and without changing its market price.
Market maker: The bank or firm that is obliged to quote “buy” and “sell” prices for a financial instrument, and then stands ready to trade in said instrument on a regular and continuous basis throughout the trading day.
Money market: 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.
Options: 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, as opposed to a binding obligation. The buyer must pay a premium on the seller’s futures for this ability.
Portfolio: A collection of securities, financial instruments, and investment options held by an investor. It is also known as a “fund”.
Principal (person): A term referring either to an investor who trades on his/her own account and risk, or the owner of a private company.
Private equity: Equity that is not publically 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 in liquid.
Proprietary trading: Trading carried out on a firm’s own behalf, using its own capital.
Pure risk: 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.
Risk management: The act of managing the pure risks to which a company 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.
Secondary market: The trading of a company’s bonds and equities among investors. The “primary market” refers to the initial launching (issuing) and direct sale of the company’s securities.
Securities: A generic term for bonds and equities.
Securitisation: The act of turning something into a security (e.g. combining the collective debt from a number of mortgages to create a financial product that can be traded). Banks owning securities that include mortgage debt earn income when homeowners make mortgage payments.
Settlement: The stage once a deal has been made and clearing has taken place, where stock and cash are transferred between the seller and the buyer.
Short selling: The investment strategy of borrowing an asset (such as shares) from another investor and then selling it in 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.
Spread: The difference between the bid and offer price of a security. Pocketing this difference after a sale is one way in which banks make profits.
Stag: A speculator who buys shares upon issue, to sell them as soon as they begin trading on the market. They are also called “flippers”.
Stagflation: A combination of stagnation and inflation, where economic growth slows even as prices continue to rise.
Sub-prime loans: High-risk loans to clients with poor or no credit histories.
Swap rates: Borrowing rates between financial institutions. The “lender” bank charges this to the “borrower” bank in order to offset the risk of having to pay the fluctuating Libor rate.
Toxic debt: Shorthand for 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.
Unit trust: Also known as a “mutual fund”. The trust issues units which represent holdings of the underlying shares. The fund can then pass profits directly to the individual shareholders, proportionate to the amount of units they hold. This is in contrast to an investment trust, where profits must be re-invested back into the fund.
Universal bank: An all-in-one bank that offers both investment and commercial banking services to consumers and small businesses, as well as corporate clients.
Yield: The total return on investment for a security. This is usually expressed as a percentage of the security’s price.