The financial industry may seem hideously complicated and confusing place to be at the start. In reality, however, investment banking and financial industry is simple: based on common sense and some modicum of intelligence.
The jargons may obscure the view and make it difficult for entrants as well as professionals to understand even some of the often-used concepts.
Here’s to help aspiring investment bankers and finance industry professionals’ piece together the jigsaw, modern financial system, that is. These 10 terminologies are at the basics of investment banking. You should be familiar with these concepts before you start in the industry. Let’s start.
10 Must-Know Investment Banking Concepts
Shares are equity financing instruments. When a company is divided into equal parts, each portion of that company (equity) can be referred to as a share. Shares are traded in the stock market, where companies raise money by selling a portion of their companies through shares and buyers pay to buy shares (in the desired company). The terms, shares and stocks, are often used interchangeably, particularly in the US financial markets. Investment banking professionals play a significant role in facilitating these transactions.
Bond, unlike shares, is a debt financing instrument. This means, if you own a bond of a company, you wouldn’t get ownership in the company, wouldn’t be entitled to vote at the AGMs or EGMs for instance and so on. Bonds are also issued by the companies looking to raise funds to finance their business activities. They are sold to interested investors in the financial markets. The difference between shares and bonds is, in bonds, the issuer promises to pay the borrowed money along with a fixed amount of interest. A recognized and certified investment banker would usually be active in facilitating these transactions.
3.Primary and Secondary Market
There are two types of financial markets where buying and selling of shares and other financial instruments take place. In primary markets, companies sell shares to investors and use the proceeds in their business. Secondary markets are where shares are sold and bought between investors themselves. Stock markets, for instance, London Stock Exchange, provide a good source of a secondary market. A trustworthy and efficient secondary market is vital to encourage investors to buy shares in the primary market.
Corporate loans are through which banks lend finances or debt to a business, pursuant to a contract or agreement. The company or party at the receiving end of the finances pay interest for the amount borrowed. The lending authority can be a bilateral or a syndicate depending upon the number of lenders.
Finance assembled for a specific project, such as infrastructural or energy projects, is referred as Project Finance. The loan and equity returns are tied to the cash flows of the project, instead of the parent company. It constitutes usually a large investment, with extended payback periods based on long-term predictability of cash flows structured by fixed contracts.
Trade finance refers to the financial instruments or projects
used to facilitate international trade and comm
erce. It is an umbrella term for the portfolio of products required to facilitate international trade, enable exports and imports. The products can be in the form of buyer’s credit, letters of guarantee, discount of invoices and insurance, etc. These instruments help in mitigating the risks existing in international trades.
7.Initial Public Offering (IPO)
This is a popularly known process with which investment banking professionals are associated with. It refers to a process when companies float their shares in public for the first time. These are big money-spinner times for the investment banks. In Initial Public Offering (IPO), a company offers its shares to the general public in a regulated public market for the first time.
8.Seasoned Equity Offering (SEO) or Capital Increase
When a company, already on the stock market, needs to raise funds for expansion, they can take Seasoned Equity Offerings (SEO) or Capital Increase route. This process involves issuing new shares and selling them to existing shareholders through rights issue, or to outsiders by placing a new offer.
9.Merger and Acquisition
Mergers Acquisition is about acquiring of business by another or merging two businesses. They are also referred to as business growth strategies wherein companies buy a stake, acquire, and takes control to expand. Often certified investment bankers act as the advisors to both parties – sell-and buy-side, helping them reach a common ground.
Portfolio management is the act of making decisions about investments on behalf of investors who may be individuals or institutions. Portfolio managers match the investments to investor objectives to realize a deal. Investment is usually made in a combination of financial products that together are called the investor’s portfolio.
These key investment banking terminologies will help you better navigate through day-to-day conversations in your banking and finance career.