Basic Financial Terminology
Basic finance terms for technical jobs.

If you are a technical person, a programmer perhaps, who wants to move into the financial sector, knowing these basics of finance can give you a big advantage. Or if you already do, and just need a quick refresher, read on. These definitions and terms are written to be short, concise, and easily remembered.

1. Basic Terms

Instruments

CuDeeB says : Financial instruments are entities that can bought or sold, between companies or people. A pension is a financial instrument. House insurance is a type of financial instrument. The best way to understand instruments is to look at some examples.

Wiki says : Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity (share), or a contractual right to receive or deliver (e.g., Currency; Debt: bonds, loans; Equity: shares; Derivatives: options, futures, forwards).

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Investment Bank

CuDeeB says : Investment Banks include the likes of Barclays Capital, Credit Suisse, Morgan Stanley, Citigroup and others. These are not high street banks. They are generally huge companies employing many thousands of staff, clustered in financial areas like "Canary Wharf" in London, New York, Frankfurt, Paris etc...
They carry out a range of functions, such as market making, trading, and following regulations.
On the technical side, they produce, test and support huge, multi-server, distributed and often global applications (think hundreds/thousands of servers and desktops in several countries). They employ lots of normally well paid technical staff.

Wiki says : An Investment bank is a financial services company or corporate division that engages in advisory-based financial transactions on behalf of individuals, corporations, and governments. Traditionally associated with corporate finance, such a bank might assist in raising financial capital by underwriting or acting as the client's agent in the issuance of securities. An investment bank may also assist companies involved in mergers and acquisitions (M&A) and provide ancillary services such as market making, trading of derivatives and equity securities, and FICC services (fixed income instruments, currencies, and commodities). Most investment banks maintain prime brokerage and asset management departments in conjunction with their investment research businesses. As an industry, it is broken up into the Bulge Bracket (upper tier), Middle Market (mid-level businesses), and boutique market (specialized businesses). Unlike commercial banks and retail banks, investment banks do not take deposits. From the passage of Glass–Steagall Act in 1933 until its repeal in 1999 by the Gramm–Leach–Bliley Act, the United States maintained a separation between investment banking and commercial banks. Other industrialized countries, including G7 countries, have historically not maintained such a separation. As part of the Dodd–Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd–Frank Act of 2010), the Volcker Rule asserts some institutional separation of investment banking services from commercial banking.[1]

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2. Examples of instruments, or securities

Bonds

CuDeeB says : A bond is a financial instrument. You purchase one for a certain price (determined by the financial markets). Then, once a year, you get some money (a dividend). You still own the bond. You receive this dividend every year, until the bond matures (10 or 20 years being examples). When the bond matures, you receive some more money back, (the nominal amount), usually what you paid for the bond in the first place. You can sell the bond before this happens, after any amount of time, if you can find someone to buy it !. If you sell the bond before it matures, you obviously will not receive any more yearly dividends.

Wiki says : This, and a lot more. Give it a read perhaps, then come back for a simpler (and admittedly less precise) answer. Bonds are issued by public authorities, credit institutions, companies and supranational institutions in the primary markets. The most common process for issuing bonds is through underwriting. When a bond issue is underwritten, one or more securities firms or banks, forming a syndicate, buy the entire issue of bonds from the issuer and re-sell them to investors. The security firm takes the risk of being unable to sell on the issue to end investors. Primary issuance is arranged by bookrunners who arrange the bond issue, have direct contact with investors and act as advisers to the bond issuer in terms of timing and price of the bond issue. The bookrunner is listed first among all underwriters participating in the issuance in the tombstone ads commonly used to announce bonds to the public. The bookrunners' willingness to underwrite must be discussed prior to any decision on the terms of the bond issue as there may be limited demand for the bonds.

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Stocks and Shares

CuDeeB says : The term "stocks" and the term "shares" are sometimes used interchangeably.
Technically a share is the smallest unit of stock in a (public) company, and owning a share or shares indicates that you own a fraction of a public company.
So you can buy some shares in a public company. The company issues a dividend when it makes a profit (this is the idea anyway). If the company fails to make a profit, you don't pay anything extra. You still own the shares, but they might be worth less, and the dividends might be on the smaller side.
Put simply, you are purchasing a share of a company (a public company). The idea is that if the company wins, you win. If the company loses, you lose. There's more to it of course.

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3. Execution, Clearing and Settlement

Execution

CuDeeB says : The term "execution" refers to the part of the whole trading process where a buyer agrees to buy some security and the seller agrees to sell it, in a legally enforceable transaction. Nothing is yet physically transferred. An agreement has been made between buyer and seller.

Example usage : "A broker executed the order". "Execution of the order could not be completed."

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Clearing

CuDeeB says : Clearing is easiest to understand as anything that occurs inbetween execution and settlement. This includes updating the accounts of the buyer and seller, and arranging for the transfer of money, commodities, securities etc.

If execution is the original agreement, and settlement is essentially the delivery (perhaps electronically) of goods, then clearing is everything inbetween.

Wiki says : In banking and finance, clearing denotes all activities from the time a commitment is made for a transaction until it is settled. This process turns the promise of payment (for example, in the form of a cheque or electronic payment request) into the actual movement of money from one account to another. Clearing houses were formed to facilitate such transactions among banks.

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Settlement

CuDeeB says : Settlement refers to the stage of the process whereby the actual exchange takes place. For example, money is exchanged for actual government bonds.

In the past, settlement of things like bonds involved an actual exchange of the bond itself (represented by a physical piece of paper). In the modern age, most settlement occurs electronically. The exception here is settlement in commodities (for example, food or oil), which still occurs physically.

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