Financial Glossary
A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
Accrued interest
The interest incurred on a loan that has not been paid
Accounts Payable
A finance department in a company that chases outstanding payments
Acquisition
When a corporation takes over or acquires control of another corporation
Actuals
The physical commodities. In the petroleum industry examples of actuals are heating oil and crude oil. In the precious metals, examples of actuals are gold and silver.
Administration
When a company is in severe trouble, a procedure takes place whereby the company is monitored under close supervision with the hope that it will recover
Agent
The bank that is given the responsibility (by receiving the mandate) to administrate the financing of a project
AMEX
After the New York Stock Exchange, this is the third largest stock exchange in the US. The AMEX generally has stocks of small to medium-sized companies
Amortization
The repayment of a loan through a series of instalments
Arbitrage
A trade where securities are purchased in one country or market and immediately sold in another at a profit
Asset Backed Securities
Bonds or notes backed by loan paper or accounts receivable originated by banks, credit card companies, or other providers of credit
Back office
Operations that do not effect the market differentiation of a company, such as compliance, IT, etc
Balance of payments
The amount each country will owe to other countries, or is owed by other countries depending on its balance of imports and exports
Balloon repayment
The final debt repayment by the borrower that is much larger than earlier repayments
Basis
The differential which exists at any time between the futures market price for a given commodity and the comparable cash or spot price for the commodity or security
Bear
An investor who believes the market will fall/decline (a bearish attitude reflects a pessimistic attitude).
Bear market
In a bear market, prices fall. As a result investors sell believing there will be losses
Beauty contest/parade
An informal/colloquial term used when companies are invited to submit a tender and one is then chosen for the deal
Bid
A motion to buy a security, such as an option or a futures contract at a specified price
Bond
An IOU issued by a corporate or bank where the capital is repaid later with interest
(often distinguished by reference to the currency, for example a ‘bulldog’ bond is denominated in UK sterling, a ‘yankee’ bond in the US dollar and a ‘samurai’ bond in Japanese yen)
Bonus issue
An issue of further shares, without charge, at nominal value to existing shareholders in proportion to their holdings
Broker
Also referred to as an ‘agent’ – a person or company employed by another person or company (called the principal) for the purpose of arranging contracts
Bull
An investor who believes the market will rise (a ‘bullish’ attitude reflects an optimistic outlook)
Business Continuity
A plan that is implemented if a business is affected by events outside its normal activities- e.g. extreme weather, terrorist action, power cut
Capital
Money invested in a business by its shareholders (normally through equity/shares)
CEO
Chief Executive Officer
Central Bank
A (usually) government controlled entity that may have a regulatory function and/or an economic policy function over a single monetary system
Certificate of deposit
A negotiable certificate, issued by a bank, which certifies that a deposit has been made at that bank which will be repaid with interest on a given date
Cherry Picking
Picking the preferred and best assets of a company instead of buying it whole
Chinese Wall
A physical and regulatory barrier between two functions of a bank to ensure that sensitive information is not shared
Clean price
The price quoted for a bond which ignores accrued interest
Closing price
The price of a given security or commodity generated by trading at the close (the end of the trading day) on the exchange
Commission
The fee charged by a broker for the execution of an order
Commodities
Physical items (oil, gold or grain) which are traded
Convertible bonds
Bonds which may be converted into equity of the issuing company at a given rate on certain future dates
Covenant
A contractual clause within a loan agreement, imposed by the lender that requires the borrower to do, or refrain from doing certain things. The breach of a covenant typically makes the loan immediately repayable.
Corporate Social Responsibility
Companies focus on their wider influence on society and stakeholders by undertaking activities that will benefit society in some way
Credit crunch
When banks greatly decrease the amount of money they lend. This results in loans and mortgages becoming more expensive and consumers spending less
Debt
Money that is owed to creditors/ lenders/ buyers of debt securities, it is paid back with interest added. Debt can be in the form of a loan note, bond, mortgage or other form
Debt Capital Markets
The area of an investment bank where debts and debt instruments are traded
Default
Failure of a debtor to repay a loan on time (usually because the borrower is bust)
Deflation
An economic situation where the price of goods and services declines
Delivery
The satisfaction of a futures contract position through the tendering and receipt of the actual commodity or security
Depreciation
An accounting term for the non-cash allowance representing the using up of an asset over time
Depression
A long period of severe recession resulting in falling prices and increased unemployment
Derivative
A way of investing in a particular product or security without owning it. The derivative’s market price will depend on the value of an underlying security (e.g. a share or bond).
Dirty price
The price paid for a bond including accrued interest
Discounted Cashflow (DCF)
A means of valuing companies’ future cash flows by taking into account the time value of money and discounting them back to today. DCF applies a discount rate to future cash flows to determine their present worth
Disintermediation
The exclusion of the banks from the lending network – particularly prominent after the debt crises of the early 1980s where corporations were often considered safer than banks
Duration
The weighted average maturity of the bond. The rule of thumb is: the longer the duration the more volatile the price of the bond
EBITDA
Earnings before Interest, Taxes, Depreciation and Amortization. This is used to estimate a company’s cash flow and thus its value
ECP
European Commercial Paper – short term debt issued by companies
Emerging markets
Countries that are classed as developing and are given loans by banks because there is a potential for rapid economic growth; there are also often high political and economic risks involved
Equity
Equity is an alternative term for shares. Shareholders put up risk capital in return for the prospect of capital growth on their shares and dividend payments
Equity Capital Markets (ECM)
The part of an Investment Bank that structures, prices and trades equity
Eurobond
A term for a bond that is issued into the ‘euromarket’ – basically a bond issued to international investors.
Ex Gratia
A payment made with no legal obligation but out of a sense of moral obligation
Face value
The value of a bond/note that is printed on the document. This is only its nominal value because its market price will fluctuate, but at maturity the face amount is repaid
Federal reserve
The central bank of the US
Financial covenants
Particular clauses within the agreement between a borrower and lender. These financial covenants will require the borrower to maintain certain financial ratios, such as balance sheet ratios in excess of a certain level.
Fixed assets
Assets that are long term in nature, and are generally a permanent part of the firm’s operating capacity and without which it could not function (e.g. equipment)
Floating/flotation
When a company decides to list its shares on a stock market. Also called an ‘initial public offering’ (IPO), ‘listing’ or ‘going public’
Floor
Level below which an asset is not able to fall under the terms of a contract.
Forecast
When a prediction is made about the future based on current and historical data
Forex
Short for foreign exchange or the foreign exchange market. Foreign currencies are bought and sold on the foreign exchange market, the largest market in the world.
FRA
Forward Rate Agreement. A cash-settled forward contract on a short term loan.
FTSE-100
The stock market index that includes the 100 largest companies listed in London by market capitalisation.
Fundamental analysis
The study of security and commodity market behaviour involving the evaluation of influences on supply and demand in the physical market, such as weather, politics, inventories, company performance, industry comparisons. The objective of fundamental analysis is price forecasting
GDP
Gross domestic product - the calculation of a country’s annual output
Globalisation
The economic trend that is moving the world towards a single market of similar products and services
Gross earnings
An employee’s total taxable income prior to any amendments or deductions
Hedge fund
A private investment fund which invests the funds of experienced investors in high risk activities, commonly using large amounts of leverage
High-net-worth
A very wealthy individual
High Yield
Investments which have a high rate of return (but which also have a high change of default)
Hostile Takeover
A takeover bid where the target company’s directors are hostile towards the bid and oppose it going ahead. This reaction can be temporary as a ploy to encourage the bidder to raise the offer to result in a ‘friendly’ takeover
Inflation
A persistent rise in prices for goods and services causing a reduction in the real value of money
Insolvent
When a person or company is unable to pay their debts
Institution
An established bank or institutional investor (i.e. insurance company, pension fund, trust etc)
Insurance
An upfront payment to protect property against loss or damage, with the agreement that the insurance company will pay the insured if necessary
Interest
Excess charge borrowers pay when they borrow money and if money is lent or invested, this is the income received
IPO
Initial Public Offering – the first time a company issues shares in the market
Joint venture
A legal agreement between two or more business to work together using the same business strategy and plan of action, often resulting in a third business
Junk bond
A loan or bond which is below the normal investment grade as it has a high risk of default, but it is also high yielding with high interest rates
LBO
Leveraged Buy-Out: A company is taken over by investors and the transaction goes ahead using the company’s assets as security to raise substantial borrowings
Leverage
Borrowing or using debt to increase investment which can result in a higher loss or gain
LIBID
London Interbank Bid Rate
LIBOR
London Interbank Offered Rate- the rate at which creditworthy banks will lend money to each other
Limited liability
Protection guaranteed to shareholders if the company they invested in fails – the most they can lose is typically limited to the amount they have already paid for their shares.
Liquidity
How tradable a company’s shares are, i.e. how easy they can be converted into cash
Listing
The same as an IPO- the process of a company going public and its shares being listed on the stock exchange
Loan
Temporarily being lent a sum of money provided in the form of debt
Long
A gilt or bond which has a remaining life of more than 15 years. Also a person who has bought futures or options, other derivatives or other securities in the expectation that they will increase in value.
M&A
Mergers and acquisitions (also called Advisory) – the part of an investment bank which advises on transactions and takeovers
Macro-economic
Overall view of economic behaviours (including unemployment, government spending, interest rates etc)
Management buy-out (MBO)
The sale of a company’s shares to the managers who run the business
Mandate
A contract won by an investment bank to manage a transaction/deal
Market capitalisation
The current value of a company, calculated by multiplying the number of issued shares by their current price
Market value
The price a bond/ share is traded at, i.e. what investors believe it is worth and are prepared to pay for it
Maturity
The redemption date for a bond. Also the point in time when a futures contract can be settled by delivery of the actual commodity
Mezzanine finance
A mix of debt and equity financing that is used to finance the expansion of an existing company
Monopoly
The position of dominance gained by a company so it has absolute control and can inflate the prices of its services or goods
National debt
The debt owned by the government
Nationalisation
When an industry (or asset) is taken control of by the state
Negative cash flow
When a business spends more than it is earning
Negative equity
When the value of a house is below the amount of mortgage that still needs to be paid
Networking
When people interact with others so as to develop their social and business contacts
Nominal value
The face value of a security. For bonds this is the price against which coupon payments are calculated - normally the same as the bond’s redemption value
Non-Executive Director
A senior role in a company whereby their responsibility does not lie in day to day activities but has a strategic focus
Not-for-profit
An organisation that has charitable, humanitarian, or educational purposes and that is exempt from certain taxes
Offshoring
Moving some functions of a company to a country that has a lower cost base, a strategy that aims to increase profitability
Option
A derivative that gives the holder a choice, for example the right to sell shares at a fixed price
Outperform
To achieve more than a particular benchmark, or for a company to do better than an industry average
P & L
Profit and loss
Parent
A company which owns another company
Pitch
When a company or government asks competing providers to bid for their business
Pitchbook
A book created by bankers that is presented to a prospective client in order to win a mandate/pitch
Portfolio
A collection of various investments owned by an institution or individual
Premium
The cost of an option - the amount agreed upon between the purchaser and seller of the option
Price/earnings ratio (PE ratio)
A calculation of the company’s current share price divided by its earnings per share. This indicates the company’s rating by the stock market and therefore the confidence of investors
Principal finance
An area within an Investment Bank which uses its own capital to buy and sell businesses which in turn generates its own profit
Privatisation
The process of transferring a public sector asset(s) to the private sector by various methods
Profit
The remaining money left after the cost of the business activities are deducted from the revenues generated
Quantitative easing
The economy is flooded with new notes being printed in order to increase the supply of money to prevent deflation and encourage consumer spending and borrowing. The negative outcome of this could be hyperinflation
Quarter
The financial year of a company is often divided into four quarters, each being three months in length
Rating
The rating given to a bond based on the issuer’s likelihood to repay it. The safest rating is AAA, the most risky is on the lowest scale of D (this company would have already defaulted on its borrowing)
Recapitalisation
The act of injecting money into a firm to reduce its debt. This can be done by a government as a means of intervening in return for a guarantee; the outcome will benefit taxpayers if the entity recovers
Recession
A period of falling economic activity, usually defined by two consecutive quarters of negative growth
Remuneration package
The total amount of money, benefits, shares and bonus paid to an employee
Restructuring
The process of reorganising a company in trouble through various advised activities in order to be more adept going forward
Risk-averse
An investor who, when given two investment options with the same expected return but different risks, will select the option with the lower risk
Sector
A market that is a group of securities that have the same goods or services made, provided or sold
Securities
A paper certificate that is valued as a share or bond and then traded
Securitisation
Combining assets and turning them into tradable securities. Enabling assets that were difficult to trade become tradable
Share
A portion of a company, each shareholder is a part-owner of the company entitled to vote and receive distributions of profits in the form of dividends from the company
Short
A gilt or bond with a remaining life of less than 5 years
Short selling
When an investor borrows an asset which they think will fall in price. The investor then sells it in the market and hopes to buy it back at a lower price, return it to its owner and realise a profit
Start-up
The early stage of a business venture, when a company might first be formed.
Swaps
An interest rate swap is an agreement between two parties whereby one party pays a floating rate of interest on a sum of money in return for a fixed rate of interest on the same amount, and the other party does the opposite. An interest rate swap involves no exchange of principal
Syndicate
A group of banks or investors acting together, the risk is then shared equally among these institutions
Syndicated loan
A large, long-term bank loan which a syndicate of banks club together to provide
Takeover
The change of control of a company, due to it being acquired by another company either in a friendly or hostile manner
Target
A company that is being focused on for a bid by another company
Tender Offer
An offer by a bidding company to the shareholders of a target to buy their shares usually made subject to the bidder being able to acquire at least a minimum number of shares.
Tombstone
The advertisement that is published in the financial press by a bank to outline the syndication of a loan, bond issue or a major deal it has just completed
Treasury
The part of a company involved in managing its cash
Underwriting
A procedure where a bond/equity is bought by an investment bank from a company and it guarantees that the issuer will raise the intended amount money regardless of the market sentiment on the day of issue
USP
Unique selling point; how a business sells itself above its competitors
Valuation
Establishing a value, for example of a company’s shares
Vanilla
Refers to a security that has no unusual features
VAT
Value added tax
Venture capital
Also known as risk capital. Venture capitalists invest in high risk start-up companies and can provide financial support if necessary. In return for this they receive equity and other benefits from the company
Volatility
A measure of the degree to which price fluctuations have occurred in the past or can be expected to occur in the future. Securities and commodities which are subject to large swings in prices are said to be very volatile
Warranty
An agreement between a buyer and seller than guarantees the buyer against any product failure should this occur during a fixed agreed period
Working Capital
The measurement of liquid assets that a company currently has
Yield
The return on an investment, usually expressed as an annual percentage