You graduated with a double major in finance and entrepreneurship. You beat out the competition for a highly regarded internship at a prestigious financial firm. You put in your hours, made the right choices, and got the call from a prominent investment bank. You eagerly return the call and are met with a conversation full of terms that make you wonder if you were studying the same numbers as everyone else.
Why do investment bankers talk like that? What does all of this jargon actually mean?
This is what this article is going to address. Once you commit these terms to memory, you can have a comfortable dinner with everyone from Jerome Powell to Jamie Dimon.
Here we go!
Alpha: In finance, alpha is used to describe an investment strategy's ability to beat the market. It is the advantage, the secret sauce, the edge. It is a measure of performance and the higher the better. So if you hear your manager say that fund had an alpha of 3 last year, that means your fund outperformed the market by 3%.
Alternative Investment: These are financial assets that don’t fit into traditional investment categories (bonds, cash or stocks). Instead, it could be anything from venture capital to antiques and art.
Assets: A resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. It could be anything from intellectual property to the manufacturing equipment in a factory.
Asset class allocation: Investment strategy that aims to balance risk and reward via an allocation in different classes of assets (I.E. investing in a variety of stocks, bonds, and not putting all your eggs in one basket).
Beta: Beta is a measure of the volatility of a security or portfolio compared to the market as a whole. If there are stocks with a beta higher than 1.0, these can be interpreted as volatile.
Black Swan: An economic theory that refers to events which are difficult to predict in the normal course of business. These are unexpected and random events that have a major impact. They are considered rare outliers (hence the name) as previous data that could point toward their occurrence does not exist.
Block Trade: A large, privately negotiated securities transaction carried out by hedge funds and institutional investors. The New York Stock Exchange and the Nasdaq define a block trade as one involving at least 10,000 shares of stock, or one worth more than $200,000.
Bonds: Investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments. In other words, it is an I-O-U. The issuer repays the borrowed money with a fixed amount of interest to the bondholder.
Broker-dealer: A person who buys and sells securities for their own firm or on behalf of its customers.
Designated market maker (DMM): Person responsible for maintaining orderly and fair markets for assigned blocks of listed stocks.
Diversification: The process of composing an investment portfolio of multiple types of investments and assets. This is done to limit the risk when it comes to investing.
Dividend: A payment from a company to its investors (not all companies pay dividends). This is often a certain percentage of the company’s profit and is paid annually, quarterly, or under special circumstances (such as a quarter of record breaking profits).
Due Diligence: Financial analysis that is conducted to prevent harm to all parties involved in a transaction via the review of financial records.
Hedge Fund: An investment partnership where investors pool their money into a fund and give that fund the freedom to invest aggressively in a wide range of assets.
Initial Public Offering (IPO): The process of a private company offering its shares in a regulated public market. This allows companies to raise capital and increase their growth and lets the private shareholders (founders, executives, employees) have a liquidity event (in other words, exchanging their shares for money).
Leveraged buyout (LBO): A strategy where one company is acquired via a large amount of borrowed funds to meet the costs. The borrowed funds could be loans or bonds.
M&A (Mergers and acquisitions): transactions in which the ownership of companies or their operating units are transferred to another entity. This includes all associated liabilities and assets.
Options: A contract between parties that give buyers a right to buy or sell an asset at an agreed price and date. Buyers are under no obligation to buy or sell.
Portfolio: A collection of all investments. This includes stocks, bonds, ownership in private companies (startups for example) property, cash, etc.
Return: The amount of money made or lost on an investment over time (essentially a change in dollar value).
Risk: The likelihood that invested capital will be lost. Stocks and bonds both carry different degrees of risk.
Risk Tolerance: The degree of risk that an investor is willing to endure, especially when it comes to the volatility in the value of the investment (I.E. their willingness to stomach loss). Risk tolerance is incredibly important in an overall investment strategy.
Shares: Shares are equal parts into which the capital of a company is divided and then traded on public stock markets. Companies looking to raise capital sell their shares to buyers on the public markets.
Shell Corporation: A company without active business operations or significant assets. They are non-traded companies and are sometimes used to disguise business ownership from the public.
Special purpose acquisition company (SPAC): A black check company, essentially a company without commercial operations and is formed strictly to raise capital through an IPO. This is done to acquire other companies or merge with an existing company. SPACs have investors that include high net worth individuals, celebrities, and private equity funds.
Syndicate: A temporary group of broker-dealers and investment banks that sell new issues of a company's equity or debt to investors. This is due to the new issue being too large for a single firm to underwrite on their own.
Tombstone: An advertisement of a public offering placed by investment bankers who are underwriting the offering. It provides the details about the offering and lists what banks are underwriting the deal.
Underwriting: The process where a bank raises capital for a client in the form of equity or debt securities. The client could be an institution, corporation, or government. For example, investment banks underwrite IPOs.
Volatility: The rate at which the price of a stock increases or decreases over a particular period. A higher the stock price volatility, the higher the risk. An investor uses volatility to estimate possible fluctuations that could occur in the future.
Yield: Income an investment generates, separate from the principal (often expressed as a percentage). An example would be dividend payments or interest payments on a bond.