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An Overview of Banking
June, 2009
Table of Contents

Capital Structuring........................................................................................................7
Mergers and Acquisitions (M&A)..............................................................................10
New Issues (Debt and Equity) ....................................................................................13
Financial Engineering.................................................................................................17
Glossary of Terms.......................................................................................................20

Welcome to Banking
Unlike retail banking, investment banking has only really been in existence since the early 1900s with many of the concepts that it employs
today being first put into full practice as late as the 1950s.
Investment Banking is all about adding value to existing businesses. It aims to achieve this goal in a number of different ways, but Investment
Banking is perhaps best described as the discipline that helps businesses make the right financial and investment choices.
Companies are usually managed to maximize the shareholder value of the company. Of course, each business may have different short, medium
or long-term views on how to maximize shareholder value. For example, one company may wish to increase its market share of a sector, even at
the expense of short-term profits, while another company may wish to streamline its operations or concentrate on increasing its profit margins.
If the companys management are not achieving this then somebody else will be it the competition (and the business goes under) or some other
party in the form of a takeover or a merger.
Thus the role of the investment bank is clear its role is to aid the management of a company to maximize the companys shareholder value.
Therefore todays investment bank has to be a client driven organization, tailoring its expertise and product offerings to best meet and
accomplish whatever financial and investment needs clients may have.
For this reason investment banking is constantly evolving and creating a range of (and in todays diverse and competitive market increasingly
complex) solutions. These solutions are more commonly known as transactions or deals.
Investment banks will thus operate in a number of different areas and sectors, offering an equally diverse range of expertise and products.
Although by no means totally inclusive, investment banking is generally considered to relate to one of the following activities. It is important to
note that several of these activities could be part of any one transaction or deal.
Capital Structuring
Mergers and Acquisitions
New Issues (Equities and Debt)
Financial Engineering
We will now take a closer look at these activities and outline the role that investment banking plays in each.
Given that the management of a company is tasked with the maximization of shareholder value, it follows then that the biggest challenge for any
company management is to come up with the ideas and recommendations that allow this maximization to occur.
Even the most successful management teams cannot afford to be complacent. In todays ever-changing world, nothing remains the same for
long, especially a business advantage.
The old saying if its not broken then dont fix it has been replaced with if you are standing still, then you are already behind the competition.
The challenge then for a companys management is to both constantly review where they have been (i.e., what has been successful and what
needs to change) and where they are going (i.e. what will the marketplace, the competition, the technology and a host of other variables be like
in the short and long term future).
Maximum shareholder value is thus achieved through strategic and sound financial management decisions. These decisions are most successful
when based upon past performance and future plans.
This process can be enhanced by following the advice of an investment bank which will assess the value of the company (the past) and proposed
projects (the future).
Investment banks are experts at calculating what a business is worth.
They are also able to predict how that worth could be altered (i.e. what happens to the value of a company in a number of different scenarios and
what those potential futures would mean financially).
This is invaluable to a management team that is considering one of several future plans.
It is much easier to make the right decision (to maximize shareholder value) once it is known what the likely outcomes will be (i.e. what that
transaction will add to future shareholder value).
This valuation ability is generally used for the following purposes:
To price a securities offering (i.e. what is the likely price and best time to sell company stocks and bonds)
To measure the impact of any restructuring (i.e. selling off or down sizing existing business areas) or investment plans
To set the value of a merger or acquisition (i.e. how much it would cost to buy a company)
Financial models* are constructed by investment banks to capture the most important fixed and variable financial components that could
influence the overall value of a company.
These models, depending upon the proposed transaction, can be extremely complex with special variables being added for special areas (i.e.
there are different financial factors to consider in different sectors, countries and markets when predicting or measuring a companys value).
* Models are mathematical representations of the companys value in various scenarios.
Capital Structuring
Capital Structuring is, simply put, how a company chooses to arrange its finances in terms of income, expenses, assets and debts.
How a company chooses to structure its capital is not dissimilar to how someone structures their personal finances.
On a daily basis people have to make decisions with regard to how they choose to spend their money and a companys management is no
Some people may take a long-term view with their finances and save for a point in the future while others may decide to take the short-term
view and enjoy themselves in the present. Of course both views have their own rewards and consequences.
Likewise, a company may choose to make maximum short-term profits (a fast buck) or invest for middle and long-term gain.
Of course on both a personal and business level, spending money in itself is not necessarily bad, rather it is what you spend your money on that
Lets take some personal examples.
There is a big difference, in terms of capital structuring, between spending money on a holiday and a car (besides the obvious material ones).
The holiday has a very limited value in that when the holiday is over you cannot get back any of the money that you spent on it.
A car, on the other hand, is an asset because, depending on general wear and tear, it has some re-sale value. A re-sale value that could at some
point in the future be utilized.
Another good example would be the use of a mortgage to help purchase a home.
As the years go by the actual outstanding debt decreases, the owner holds more equity value in the house and eventually the owner will own the
property outright.
Because both the car and the property purchases have an asset-based component to them, the type of borrowing offered is normally cheaper than
non-asset based lending.
A mortgage-lending rate, for instance, may be a quarter of that charged by a credit card company.
The reason for this difference is simple with asset based lending the risk to the lender is reduced because if the person owing the debt cannot
meet the repayments then the assets that the loan was used to purchase can simply be resold and all or part of the debt repaid.
For the managers of a business the same choices apply when deciding how to spend the companys money and how to finance those purchases.
The role of Capital Structuring is simply to get the right balance between equity (its own money) and debt (borrowed money).
Getting the right balance between what a company owns and how it uses those assets to fund itself is a complex task.
An investment bank can constantly review a companys capital structure, assessing the requirements for change based on the companys latest
business outlook, investment requirements and financial market conditions.
This review is not just limited to raising funds for investment and expansion. It can also be done to ensure that a company is being as efficient as
possible in managing its debt.
Let us use another personal example. If a person who has many debts (i.e. credit cards, store cards and personal loans) each with its own
repayment amount then it can be cheaper to take out one new loan, with an asset or assets as security (i.e. property).
This new loan can then pay off all the other debts. Its repayment amount will be substantially less because unlike the other loans this new one is
secured. The money saved, by having this lower repayment, can then be used to purchase something else or save.
An investment bank can offer similar advice to a company and thus can change the existing balance between equity and debt. This process is
known as restructuring.
When it comes to funding an investment or expansion as a company then there will always be a choice between risk and expected return.
The modeling work done by an investment bank during valuation can help to map out what the risks and the expected returns might be and
hence allow a companys management to make fully informed decisions.
This work may also help convince potential lenders that this is a low risk venture (i.e. investors are likely to get their original money back with
J ust as with personal lending, the amount of risk attached to the lender will determine to a large extent the amount charged for the raising of
As you can imagine, there is a vast amount of ways in which a company can raise funds, or restructure its debt, and the investment bank can use
its expertise here to help the firm choose a path that maximizes its shareholder value.
The level of risk attached to lending money to a business in order for that business to expand or grow can be placed on the following spectrum:
At one end of the spectrum are the expansion plans in which all the money lent will be used to purchase assets. A good example is the
purchase of a new vehicle that will be used in the core business of the company. These types of projects are good candidates for low-cost
Asset-backed loans, usually from one lender, are the most common type of lending for this type of expansion
At the other end of this spectrum are projects in which a substantial portion of the money lent is to be used to fund soft costs (i.e. they do not
involve the purchase of assets research and development being a common example). Because this type of expansion generates little in the
way of assets, in the short term, it is more difficult to secure a traditional (secured) loan
The company may, therefore, issue securities (stocks and bonds) to fund this action.
Somewhere in the middle of this spectrum lie those situations in which the asset values are too low to secure asset-backed financing for the
entire transaction, but in which the historic performance of the business is such, or the likelihood that the expansion effort will succeed are so
great, that a senior lender will make what is termed a cash flow loan.
With a cash flow loan the lender holds his or her, metaphorical, breath for the period of the time that the loan is outstanding, hoping that the loan
repayments hold up and the loan itself is repaid.
As you can imagine, cash flow loans are always more expensive than asset-backed, or secured, loans and are generally only available from
larger, more sophisticated banks and financial institutions.

Mergers and Acquisitions (M&A)
Merging with, or acquiring, a business is one way of increasing business value for a company.
It can include the following:
Acquisitions - buying a company by acquiring some or all of its stock or assets
Divestitures - splitting up and/or selling off existing parts of a business
Mergers buying a company through a legal arrangement whereby all shareholders of the acquired company receive stock or cash
Strategic alliances - working closely with other companies to pursue a mutual advantage
Joint ventures - forming a new company with other parties. However, unlike a merger, this new company is a separate entity, with the parent
companies still retaining their original identities
When increasing competitive pressures are placed on businesses and with the trend to globalization, companies engage in M&A activity.
Many companies looking to expand, or streamline, their business will use investment banks for advice on potential targets and/or buyers. This
will normally include a full valuation and recommended tactics. Each party to a transaction will have their own M&A advisor.
Such advice is particularly necessary for M&A deals that involve uniting companies from different countries. These types of deals, that involve
more than one country, are known as cross border deals. As you can imagine, cross border deals often involve working with different countries
accounting, tax and company laws. These types of deals can then become extremely complex.
Many large international companies have, therefore, set up internal M&A teams. These teams have developed substantial experience in planning
and executing deals and tend to carry out the search for potential targets and threats themselves. However, these companies are still open to
investment banks bringing forward potential deals and will still generally need an investment bank to advise on valuations and tactics /
In an ideal world M&A transactions would simply involve the matching of a seller and a buyer, or in the case of a merger, the bringing together
of two interested parties. However, this is not always the case and sometimes one company will be threatened by another. In these types of deals
one company will try and buy or merge with another without that companys consent. This is better known as a hostile takeover.
M&A transactions can occur through an acquisition of stock, an acquisition of assets or a merger. A merger is a legal arrangement whereby all
shareholders of the acquired company automatically receive stock in the acquiring company as consideration in return for their stock in the
acquired company. A merger often requires a shareholder vote and board approval.
The Investment banks role, in both these types of deals, falls into one of either two buckets: seller representation or buyer representation (also
called target representation and acquirer representation).
For an investment bank, M&A advising is highly profitable, and the possibilities of types of transactions are virtually unlimited. Perhaps a small
private company's owner/manager wishes to sell out for cash and retire. Or perhaps a big public firm aims to buy a competitor through a stock
Also, remember that investment banks do not just rely on buyers and sellers approaching them, they will also study the market themselves and
have been known to approach companies with their own strategic ideas (i.e. they might suggest that two companies merge, or that one company
acquires, or sells, to another).
Let us look in more detail at the role of the investment bank in representing either the seller or the buyer.
An investment bank that represents a potential seller has a much greater likelihood of completing a transaction (and therefore being paid) than an
investment bank that represents a potential acquirer.
This seller representation, also known as sell-side work, is the type of advisory assignment that is generated by a company when it approaches an
investment bank and asks it to find a buyer of either the entire company or part of its assets.
Generally speaking, the work involved in finding a buyer includes writing a "Selling Memorandum" (a detailed sales document) and then
contacting potential strategic or financial buyers.
If the client hopes to sell a high tech factory, for instance, then the investment bank will contact firms in the same industry, as well as "buyout"
firms that focus on purchasing technology or high-tech manufacturing operations.
In advising sellers, the investment bank's work is complete once another party purchases the business up for sale (i.e. once another party buys the
client's company or assets).
However, representing a buyer is not always as straight forward.
The advisory work itself is simple enough: the investment bank contacts the firm their client wishes to purchase, attempts to structure an
acceptable offer for all parties, and make the deal a reality.
However, many of these proposals do not work out; few firms or owners are willing to readily sell their business. Because the investment banks
primarily collect fees based on completed transactions, their work often goes unpaid.
In many cases a firm will, therefore, pay a non-refundable retainer fee to hire an investment bank and say, "find us a target company to buy."
These acquisition searches can also last for months and produce significant volumes of work as numerous iterations of merger models are built.
However, these types of deals are still very attractive to investment banks because when the deals do "get done" the fees that are generated can
be enormous.
Typical fees depend on the size of the deal, but generally fall in the range of 0.5% 1.0%. A $500 million deal, would in effect result in an
investment bank taking home $2.5-$5million in fees.
Of course, buying a company will require funds; indeed as we have read in the section on Capital Structuring any type of company investment
requires cash.
One of the options available to a company wishing to raise funds, as we know, is to sell shares in itself or raise debt financing. The investment
banks can, yet again, play a role in making this happen.
New Issues (Debt and Equity)
New Issues of securities may be used by a business to raise funds. They typically fall into two main types, those being debt and equity.
Debt covers offerings of securities which must be repaid by the company.
A bond is, put simply, a lending agreement between the bond issuer (in this case the company) and the lender (i.e. the person who buys the
A bond is just like a loan in that the bond issuer will pay back the price of the bond (i.e. the amount of money borrowed) at the end of an agreed
fixed period of time (say 10 years). Also, like a loan, the bond will yield an amount of interest over that period. The rate of interest and the way
in which that interest will be paid is set when the bond is first issued. The rate of interest is used to attract investors and is usually set higher than
other, more traditional saving rates such as those that a bank would offer.
Bonds can also be exchanged amongst lenders and are traded on the financial markets. As you will appreciate, a bond that has a high rate of
interest is more popular in an economy that has low interest rates and is less popular when that economy has interest rates that are high.
The other way in which a company can raise money is through the use of its equity. Unlike debt, this does not involve the borrowing of funds
from lenders.
Equity is where a company raises funds by selling shares in itself. The shareholders exchange funds for a stake in the company and become part
owners. They do not expect those funds to be repaid, as a loan would be, rather they are banking on the company being successful and that
their investment (i.e. the shares) will provide a profit by growing in value.
However this success, and hence profit, is not guaranteed.
A shareholder is not a lender but rather an investor in a company. Unlike secured lending, (where the money lent is secured by assets of an equal
value) holding shares in a company does not guarantee the holder anything. It can be a risky business because not all companies do well and so
the value of shares can go down as well as up. In other words, as a shareholder, you could lose all or part of the money that you have invested in
A company that is issuing shares becomes answerable to those shareholders. For example, if the company managers are not operating to the
shareholders liking then they can sell those shares or, if they have a big enough stock of shares, they can get those managers replaced with
people more to their own choosing.
The price of the shares is normally a good indicator of how a business is being managed. If the share price is going up the signs are good,
however if the price is dropping it could mean that the company is in trouble. Along with the price many shares will also pay a dividend this is
in simplistic terms a share of the profit that the company has made. Many people hold shares for the income that the dividends yield. Again a
high dividend is a good indicator that the company is doing well.
How the value of shares will change is really dependant on basic economics. There are only a finite number of shares (in other words the
company, like a cake, can only be divided up so many times). If the shares are popular i.e. that company is expected to, or is doing, well then a
lot of investors will want to buy those shares.
However, the people who already own the shares will not be in a hurry to sell them because, just as the potential investors have noticed, all the
indicators are indicating that their shares will increase in value.
Therefore, there would be a lot of demand and very little supply. This lack of supply will drive up the price of the shares. People will be willing
to pay more for them because they believe they are worth it and if the price goes high enough, then some of those people holding the shares will
be willing to sell.
Likewise the opposite can be true and if the indicators are not good for a company then there may be more sellers than there are buyers. This
lack of demand will cause the price to fall, until the price is attractive enough to pull in more buyers.
Shares are usually sold via stock markets. A market in which the majority of share prices are rising is known as a bull market. When the opposite
is true, and the majority of share prices are falling, it is called a bear market
Companies are most interested in the scope for new issues, be they debt or equity, when they have a requirement to raise funds for normal
business activities, major new investments or M&A transactions.
However, they may also consider taking advantage of attractive conditions in the financial markets to make an issue at a time when they have
not earmarked the funds for new investment.
This is particularly true of the debt markets (where a company is raising funds) when timing can be critical to obtaining attractive terms. For
example, it may be a good time to issue bonds when the economys interest rates are low because the cost of that debt over the long term will be
less than if a company were to try and sell bonds in an economy that has high interest rates.
As we know, the new issue will either be equity or debt based and, thus, within investment banks, you normally have two areas of expertise.
Namely, those that focus on the debt capital markets (DCM) and those that focus on the equity capital markets (ECM).
In both markets an investment bank and its expertise is critical.
Not only can an investment bank determine the best price for new issues, be they equity or debt, by valuing the company and examining the
market, but they can also find buyers for those new issues.
Those buyers are found either in the public or private domain. Issues sold in the public domain (i.e. direct to anyone in the public via the
markets) are known as public offerings or underwriting, while those sold to private investors are known as private placements.
Firms wishing to raise capital often discover that they are unable to go public for a number of reasons. The company may not be big enough; the
markets may not have an appetite for their issues or the company may simply prefer not to have its stock be publicly traded.
Such firms with solidly growing businesses make excellent private placement candidates. Private placements, then, are usually the province of
small companies aiming ultimately to go public. The process of raising private equity, or debt, changes only slightly from a public deal.
Often, one firm will be the sole investor in a private placement. In other words, if a company sells stock through a private placement, usually
only one firm or a small number of firms will buy the stock offered.
Conversely, in a public offering, shares of stock fall into the hands of literally thousands of buyers immediately after the deal is completed.
From an M&A point of view, a private placement is thus similar to a merger because it usually involves an institution (rather than numerous
public investors) acquiring a stake (assets) in a company.
Indeed the investment banker's work involved in a private placement is quite similar to sell-side M&A representation. The bankers attempt to
find a buyer by writing the Private Placement Memorandum and then contacting potential strategic or financial buyers of the client.
Because private placements involve selling equity and debt to a single buyer or a small number of buyers, the investor(s) and the seller (the
company) typically negotiate the terms of the deal. Investment bankers function as negotiators for the company, helping to convince the
investor(s) of the value of the firm.
Fees involved in private placements, like those in public offerings, are usually a fixed percentage of the size of the transaction. (Of course, as
with all sell-side transactions, the payment of the fees depends on whether the deal is completed or not.)
Financial Engineering
Companies are interested in innovative first ever products. These products are tailored to meet certain needs and are thus more attractive to
both the clients concerned and the potential investors required.
Many investment banks, therefore, obtain a competitive edge through constant product innovations. In other words they attract business by
developing new products that best match the needs of their clients and investors.
Many investment banks will thus commit additional resources to this activity.
They will have a financial engineering or structured products group that is dedicated to creating solutions for a number of different client
As well as creating solutions to individual client needs, these teams will also look at developing new structures for executing a transaction / deal
as well as how best to cross sell in-house products and expertise.
Todays investment bank needs to be a client driven organization. It must be able to tailor its expertise and product offerings so that it can best
meet and accomplish the financial and investment needs of the client.
A term that is often used to describe the level of service offered by an investment bank to a client is Trusted Advisor.
An investment bank also needs to provide a wide range of product and service offerings while maintaining an in-depth sector and regional
expertise. This combination will allow an investment bank to establish strong longterm relationships with its clients, relationships that are, in
terms of usage and fees, both broad and deep.

A Glossary of Terms

Glossary of Terms
involved in withdrawing from a project.
ACQUISITION A joining of two or more
corporations in which one company takes control
of the other. Generally, the newly formed
company will retain the name of the acquirer and
with few exceptions, the management team of
the acquirer will survive. Two types of
acquisitions are: hostile takeover and friendly
ANNUITY - A series of equal, periodic cash
ARBITRAGEUR - A market participant
who earns low risk profits by buying a financial
instrument in one market and selling it
simultaneously in another, taking advantage of
the price difference.
Buying at the Chicago Board of Trade
(CBOT)/Selling at the New York Mercantile
Exchange (NYMEX).
of managing institutional clients money for
them. Asset managers generally have a stated
risk initiative and use a variety of investment
options (stocks, bonds, options, forwards,
futures, swaps) to achieve their goals.
ASSET STRIPPING - The disposal of a
target companys assets by the raider following
the acquisition. Asset stripping can occur as part
of a corporate turnaround strategy or
harmonization of activities between the two
groups. Asset stripping also occurs when the
raiders projections indicate that the proceeds
realized by the sale of various components of the
group will be in excess of the price paid to
acquire the target. This often can be the rationale
of a takeover. Asset stripping often results in
considerable loss of jobs.
The maximum share capital a company can
issue, as authorized by its shareholders.
BALANCE SHEET - A statement,
generated at a specific point in time, which
reflects all of a companys assets and liabilities
and lists the sources of funding for each item.
Funding can come from either debt or equity.

Assets - All of a companys possessions
including, but not limited to property, cash,
equipment and financial investments

Debt - Money borrowed through loans or
the sale of bonds

Equity - Money borrowed through the sale
of stocks
BEARER BOND - A bond whose title
(ownership) belongs to the person holding it.
BEST EFFORTS - A type of underwriting
agreement in which the underwriter attempts to
sell as much of the new issue as possible, with
the understanding that the unsold portion may be
returned to the issuer for a full refund.
BID-ASK SPREAD - The difference
between the highest price a trader is willing to
pay for a stock and the lowest price the trader is
willing to accept for selling the same stock.
BIG BANG - The deregulation of the UK
stock market in October 1986.
BLUE SKY LAWS - Laws that have been
enacted to prevent securities fraud. These laws,
which vary from state to state, require issuers to
provide detailed financial information on all
newly issued securities so that investors may
make educated decisions based on factual data.

BOND - A debt instrument issued by a
corporation or government office. Generally, the
issuer agrees to pay the creditor, or bondholder, a
predetermined interest rate for a specified length
of time and promises to repay the bond in full on
the maturity date. After issuance, bonds are
typically traded in the Secondary Market.
BOOK RUNNER - An Investment Bank
which polls potential investors to get an
indication of the demand for a new stock prior to
an issuance. Book runners may also help the
issuer decide what price to issue the stock at.
BOOK VALUE - The value of an asset as it
appears on the balance sheet
BROKER - Registered representative who
earns a commission for executing trades on
behalf of buyers and sellers in the marketplace
(a.k.a. Financial Consultant).
BROKER-DEALER - Firms or individuals
that trade for their own account, as well as on
behalf of investors.
different securities (shares and debt) issued by a
CAPITAL BUDGET - Financial plan for
investment projects.
CENTRAL BANK - The principal bank of a
country whose primary functions include
printing money, regulating the money supply,
controlling interest rates and handling the
governments borrowing needs. (Examples: the
U.S. Treasury in America, the Bank of England
in England, the Bundesbank in Germany and the
Ministry of Finance (MOF) in J apan).
CHINESE WALL - The legal barrier that
exists to prevent the flow of non-public
information from the Investment Banking side of
a firm to the Sales and Trading side. Violation
of this divide is termed Insider Trading and is
punishable by fine, jail sentence, or most
commonly, suspension.
MERGERS - A code of practice drawn up by
the Panel on Take-overs and Mergers in the UK
to control the activities of all parties in a take-
over bid involving a listed company. The code
does not have the force of law but the stock
exchange has a clause binding companies to
abide by the code written into its listing
CLEARING HOUSE - The organization
responsible for comparing the trade details
submitted by both parties involved in a
transaction. If the details match, the trade is
settled and if not, the parties must follow
procedures for clarifying discrepancies. Clearing
houses are usually part of an exchange and
confirm all trades executed at that exchange.
debt typically maturing in less than a year.
COMMODITIES - Tangible goods which
may be physically delivered following
settlement. Commodities are traded at
specialized commodities exchanges and are
typically one of three principal types: food
products (live cattle, pork bellies, orange juice),
grains (wheat, corn, soy), and metals (gold,
silver, platinum).
COMPLIANCE - Self-policing by securities
firms to ensure that all applicable rules are being
obeyed. Compliance officers within firms act as
internal deputies to the outside regulatory
CONFIRMATION - A physical or
electronic document which confirms the trade
details, including: stock traded, buying price,
selling price, quantity and settlement date. Two
types of confirmations are sent following each
transaction: client confirmations and
counterparty confirmations.
document sent by the broker to the client, the
investor, to confirm that the trade has been
executed as requested.

- The document sent from one party of a
transaction to the other, to confirm that the trade
has been executed as agreed upon.
instrument which is purchased as a bond, but
may be exchanged for the companys stock at the
bond holders discretion. Conversion rates are
pre-specified. Most U.S. Corporate Bonds are
convertible bonds.
COST OF CAPITAL Average minimum
rate of return holders of debt and equity expect
on their investment in the firm.
COST OF DEBT - The rate of interest
required by Debt holders.
COST OF EQUITY - Minimum rate of
return shareholders expect on their investment in
an all-equity financed firm.
targets purchase of raiders shares on the open
offer by a target for some portion of the shares of
a company, which is simultaneously trying to
acquire it.
COVENANTS - Conditions in a loan
agreement signed by the bank and the borrower,
which the borrower must respect.
DEALER - A professional who executes
trades on his own behalf, receiving profits and
assuming risk by buying at a low price and
selling at a high price. Dealers hold their
securities in the firms inventory.
DELIST - The process by which a company
requests permission from the exchange where
their stocks are traded, to cease trading of their
stocks at that exchange. Following a delisting, a
company may decide to trade their stocks in the
OTC market or to take them out of circulation
and hold them privately.
DEPOSITORY - The institution which holds,
in either electronic or physical form, the
securities which are traded among market
participants and records ownership of individual
DERIVATIVES - Any financial instrument
whose value is determined by the price of
another instrument or commodity. (Example:
The value of a pork belly future is calculated
based on the price of pork bellies in the market
DISCLOSURE - The concept of disclosure is
based on the view that the more information is
required to be made publicly available, the
harder it is for any company to be dishonest.
Companies must for example disclose in their
annual report and accounts the names of the
directors and details of their shareholdings,
important events affecting the company which
have occurred since the end of the year etc.
paid out in dividends divided by the number of
shares that the dividend is paid on.
DUE DILIGENCE - Responsibility of the
underwriter of a new issue to thoroughly
investigate the background and financial
prospects of the issuer of a new stock. The
underwriter is legally obligated by the Securities
Act of 1933 to disclose any findings that could
potentially threaten or impact the issuers future
earnings capability.
EBIT - Earnings before interest and taxes.
EPS - Earnings per share, calculated by the
firms total post-tax earnings divided by the
number of shares outstanding.
EQUITY - A companys share capital. It is
permanently employed in the business and does
not have to be repaid, unless the company is
liquidated. The term is most commonly used to
mean shareholders equity.

ESOP - Employee Stock Ownership Plan.
Often, the target companys ESOP is used to
purchase its own securities when it is attacked by
a hostile raider.
EUROBOND - A bond which, when issued,
borrows eurocurrency.
EVENT OF DEFAULT - A covenant in a
loan agreement, which the borrower failed to
meet, enabling the bank to call the loan in for
EXCHANGE - A centralized public location
where buyers and sellers of securities and
commodities go to transact their trades.
Registered representative who earns a
commission for executing trades on behalf of
buyers and sellers in the marketplace (a.k.a.
FINANCIAL RISK - The additional risk
that a firms equity holders face because of the
amount of debt in the firms capital structure.
understanding that the underwriter will assume
financial responsibility for any part of the new
issue which they are not able to sell during the
FLOTATION - The process by which
companies obtain a public quotation. In the US,
this is called an initial public offering.
derivative, defined as an agreement to buy or sell
a predetermined amount of a security or
commodity in the future at a price agreed upon
today, despite interim market fluctuations.
Forward contracts are entered into in the OTC
market, they are not executed at an exchange.
(Example: A cattle farmer agrees to sell 65 cows
to a deli on March 20, 1999 for a price of $100
FREE CASH FLOW - The amount of a
firms operating cash flow that is not required to
fund the ongoing operations of the firm and can
be used at managements discretion.
acquisition in which the management of the
target company agrees to be taken over by the
FUND MANAGER - The person responsible
for investing a large pool of money contributed
by multiple investors. Fund managers are
generally guided by the objectives of the fund
(Example: high risk/high yield, low risk/slow
contract entered into at an exchange and
regulated by the guidelines of that exchange
(Example: quality, quantity and settlement date
are all standardized in a futures contract.)
Futures contracts are more common than forward
FUTURE VALUE (V) - The value of an
investment at the end of a specified time period
after interest has been earned and added to the
initial investment.
GEARING - The relationship of borrowing
funds to shareholders funds of a company. The
higher the proportion of borrowed funds to
shareholders funds, the higher the gearing.
(Sometimes referred to as Financial Leverage.)
GREENSHOE - A type of underwriting
agreement in which the underwriter reserves the
right to request that the issuing company put
additional shares of their stock into circulation.
Utilized if demand for the newly issued stock is
greater than the amount the issuer intended to
GROSS SPREAD - The monetary difference
between the low price at which an underwriter
buys issuance stocks from an issuer and the
higher price at which they sell those stocks in the

HEDGER - A market participant who uses a
financial instrument to reduce price risk.
(Example: A pig farmer can enter into a forward
agreement to sell his pigs at $100 each in three
weeks, this protects, or hedges, him against the
possibility of losing money if the price of pigs
falls in the market.)
acquisition in which the acquirer takes over
controlling power of another company despite
the objections of the target company. The
following terms are types of defenses that target
companies may deploy in order to protect
themselves against a hostile takeover:
Poison Pills A redeemable legal right
granted to a targets shareholders that allows
them to buy more stock cheaper. It makes a
takeover too expensive for a hostile party.
Golden Parachute - The method by which
executives of the target company write
themselves severance packages so large that it
would negatively impact the financials of the
company if they were acquired and the
executives were dismissed.
Recap - The method by which the target
company strives to increase its debt by taking
on loans and issuing bonds, making
themselves financially unappealing
Scorched Earth - The method by which the
target company sells off its most profitable
assets, taking away the acquirers incentive.
White Knight - The method by which the
target company locates and secures a friendly
company to acquire them, eliminating the
threat of being taken over by a hostile party.
offer that the target companys board has decided
is unfriendly.
the first time a company offers its stock to the
public. Prior to the IPO, a company that does
not offer shares to the investing public is referred
to as a privately held company.
INTRODUCTION - A method of listing
shares on a stock exchange for the first time,
when the shares are already quite widely held by
shareholders other than directors and no new
money is being raised either by the company
itself or by the directors from sales of their
shareholdings. The two main purposes are to:
(i) Provide a wider market for the shares.
(ii) Enhance value by becoming listed.
INVESTOR - An individual (a.k.a. Retail) or
corporation (a.k.a. Institutional) which uses its
existing capital to purchase a security in order to
earn additional money in the long term.
COMMUNITY - Entities, which provide
funds to companies. Investors buy shares in the
company (Equity), while Creditors lend money
to companies (Debt).
ISSUANCE - When a company enters its own
stocks or bonds into circulation through an
underwriting syndicate.
ISSUER - The company which puts its stocks
or bonds into the marketplace.
LEAD MANAGER - the Investment Bank
chosen by the issuer to head up the Underwriting
Syndicate. They are generally responsible for
selling the greatest number of shares during an
Issuance. The Lead Manager also has the most
direct contact and interaction with the issuer and
plays an integral role in the decision making
process surrounding the issuance.
Occurs when an individual or corporation
intends to takeover a target company but doesnt
possess the necessary funds. The acquirer
attempts to borrow the money through loans and
by issuing bonds, frequently using the target
companys asset as collateral. This type of
acquisition creates a large amount of debt on the
balance sheet of the combined company,
rendering the company highly leveraged.

LIQUIDITY - The ease with which buying
and selling can take place in a market.
MANDATE - The contract by which the
issuer grants a specific Investment Bank the right
to be the lead manager on an issuance. The
mandate also allows the Investment Bank to
select the members of the Underwriting
Syndicate and provides that Bank with the
largest portion of the shares being issued for
resale. It also places on them the responsibility
of carrying out the required Due Diligence
investigations on an Initial Public Offering.
purchase of a part of a large company by its
managers. That part of the company is then
established by the management as an
independent company.
MARKET MAKER - A securities firm
which declares that it will maintain shares of a
particular stock in its inventory so that a buyer
may deal directly with their company, as
opposed to the original issuer. There may be
multiple market makers for one security.
MERGER A legal arrangement whereby all
the shareholders of one company give up their
shares in that company in exchange for stock of
the acquirer or cash.
A bond whose repayments to the investor are
derived from the payment of interest and
principal on a mortgage debt.
MUTUAL FUND - A type of investment
vehicle in which investors purchase partial
ownership in a collective pool of securities. The
fund specifies a predetermined investment
strategy, limiting their investments to specific
types of investment vehicles (Example:
automobile stocks, municipal bonds, technology
stocks.) The return on a mutual fund is based on
the returns yielded by its investments and is
divided among the owners based on their
percentage of ownership in the fund.
NASDAQ - National Association of Securities
Dealers Automated Quotation System.
NET ASSET VALUE - Total net assets
divided by the number of issued shares.
investments contribution to creating wealth for
the company (i.e. the discounting value of its
future cash flows minus the initial cost of
OFFER FOR SALE - The most common
method of making a new issue of shares to
investors. The shares are bought from the
company by the issuing house and then sold to
the investing public. The issue is usually fully
underwritten (see underwritten).
OPEN OFFER (UK specific) - An offer to
existing shareholders to apply for new shares in a
company. There are no rights attached, and the
amount raised must be less than 5% of the
companys total equity capital.
A capital structure at which a firms value is
OPTION - One type of derivative, there are
two categories of options:
Call Option - The right to buy a security or
commodity at a preset price and time in the
future. These options yield a profit when the
market price exceeds the price at which one
may purchase the security or commodity.
A woman working for XYZ Corporation
was given a stock option at the end of the
year, which gave her the right to purchase
one of XYZ Corporations stocks for $31 at
any point during the next five years
regardless of the selling price of the stock in
the market.
Put Option - The right to sell a security or
commodity at a preset price and time in the
future. These options yield a profit when the

market price is lower than the purchase price
of the option.
A man purchases put options from ABC
Corporation for $3 each which give him the
right to sell his shares of ABC Corporations
stocks for $82 at any point during the next
seven years regardless of the selling price of
the stock in the market.
transactions involving previously issued
securities which do not take place on an
exchange are said to take place Over-The -
P/E RATIO - Price/earnings ratio. The
companys share price divided by its earnings
per share.
PLACING - A method of making a new issue
of shares to investors. The shares are placed with
a group of large investing institutions rather than
offered generally to the public.
have a preferential right to receive a fixed
dividend ahead of any ordinary shareholder.
PRIMARY MARKET - The first buyers of
a security following an issuance are referred to
as the primary market. Usually these are
institutional investors. When the primary market
resells these same securities, the new purchasers
are said to be part of the secondary market.
of stock that is not made available to the
investing public; rather the shares are sold
directly to a few sophisticated investors chosen
by the issuer. Private placements do not involve
an underwriter and are not required to be
registered with the Securities & Exchange
Commission (SEC).
PRIVATIZATION - 1) Occurs when a
corporation decides to remove its previously
issued stocks from circulation and offer them to
a few selected investors or 2) The process of
selling ownership in an asset which is privately
owned by the government, thus turning it into a
publicly held company.
PROSPECTUS - A marketing tool used by
an Investment Bank during an issuance to make
potential investors aware of the upcoming
issuance and the details involved. The
prospectus includes the name of the company,
the quantity of shares that will be available, the
price of each share, the disclosure of any
information uncovered in the Due Diligence
investigations, specifics about the financials of
the Issuer and a disclaimer stating that the
issuance may not yet have been approved by the
Securities Exchange Commission. The
prospectus, once distributed to potential
investors, is used to gauge public interest and
PROXY CONTEST - An attempt by a
shareholder or acquiring company to solicit the
voting rights of another shareholder of the same
stock. This technique is common during
takeover attempts where the acquiring company
can gain enough voting rights through proxy
contest to change either the management or
board of directors of the target company.
RATINGS - The assessment of a companys
financial standing by rating agencies (Moodys,
Standard & Poors).
which debt or redeemable shares can be
RETAIL MARKET - Comprised of
individual investors, as opposed to institutional
RIGHTS ISSUE - An offering of newly
issued stocks to existing shareholders before they
become available to the public. Rights Issues are
done on common stock to allow existing
shareholders the opportunity to maintain their
same percentage of company ownership and
voting privileges following a new issue.

ROAD SHOW A traveling sales effort by
investment bankers and executives from the
issuing company to promote a security which is
about to be issued for the first time.
RISK PREMIUM - The additional
compensation or return that an investor requires
for taking on the risk of a specific investment.
SALESPERSON - A person specifically
employed to approach either retail or
institutional clients in an attempt to sell financial
instruments based on what the salesperson
knows of the companys prospects and their
clients needs coupled with their clients long
term investment goals.
SCRIP ISSUE - The issue of shares, free of
charge, by a company to its shareholders in
proportion to their existing holdings, also known
as a Capitalization Issue, Free Issue or a Bonus
Issue. The purpose of a scrip issue is to bring the
share capital of a company more into line with its
business needs and to reduce the price of each
share while increasing the number available in
order to make the shares more marketable.
primary market resells securities, the new
purchasers are said to be part of the secondary
COMMISSION (SEC) - The United States
regulatory body that was created to protect
investors from securities market violations. All
stocks must obtain SEC approval before they are
made available to the general public.
SELF-TENDER - A tender offer by a
company for its own shares. The purpose of the
self-tender is to reduce the number of free-
floating shares on the market, which are
available to a potential raider.
transaction on trade date (T), the date upon
which securities and form of payment
(frequently cash) actually change ownership.
Prior to settlement, the trade must be confirmed
by both parties. For United States equities,
settlement date is trade date plus three days
SHARE SPLIT - The issuing of an
additional number of shares for every share
already held in order to increase the number of
shares of a company. This does not increase the
capital of the company or involve a cash
payment. There is a reduction in the nominal
value of the shares. For example, under a 4 for 1
share split, a holder of A $1 or 1 share would
become a holder of four 25 or 25p shares.
SPECULATOR - A market participant who
tries to profit by anticipating market price
movements. Speculators assume a great deal of
risk since their actions are based largely on
conjecture and instinct.
SPECIALIST - An employee of an
Investment Bank who is approved by the New
York Stock Exchange (NYSE) to physically
work at the exchange in a very specific capacity.
The Specialists primary function is to remove
any temporary excess in supply or demand for a
stock. To insure this, specialists will buy stocks
when there are no buyers for a particular stock
and sell stocks when there are no sellers for a
particular stock, minimizing extreme fluctuations
in stock price.
SPLIT - A device used when share price has
risen to the point that makes the stock
unattainable to the average investor. A company
will divide each one of their stocks into two,
halving the value and making twice as many
shares available to the public.
SPONSOR - The issuing house, stockbroker
or investment bank that brings a company to the
underwriting agreement in which the Lead
Manager guarantees investors that they, the Lead
Manager, will re-purchase newly issued stocks
for a certain period of time, at a fixed price. This

tactic protects investors from possible decreases
in share price, allowing them to gain confidence
and encouraging them to buy the shares.
agreement in which the underwriter commits to
purchasing any unsold shares resulting from a
rights issue, in which current shareholders are
given the opportunity to buy any newly issued
stocks before they are made available to the
general public.
STOCK - Also known as shares or equities,
stock signifies partial ownership of a
corporation. Such securities entitle the
shareholder to dividends, or a percentage of the
companys annual net earnings and may provide
additional privileges, such as the right to vote.
Two basic types of stock are common and
SUNK COSTS - Costs of a project that have
been incurred and cannot be reversed and which
should, therefore, be ignored in assessing the
present value of the project.
SWAP - One type of derivative that is an
agreement whereby two parties agree to
exchange one series of payments for another for
a predetermined period of time
Investor A agrees to pay Investor B a fixed
price of $11 per barrel of oil each month for
a period of two years. In return, Investor B
agrees to pay Investor A the current market
price per barrel of oil each month for a
period of two years. Investor A will benefit
from this scenario if oil prices in the market
rise, whereas Investor B will benefit if oil
prices in the market drop. NOTE: In this
exchange, no physical oil is traded, the
investors are only exchanging the price of
TOMBSTONE An official notice put in the
newspaper by the underwriters of a new issue.
The tombstone provides basic details about the
issuance, lists the underwriters, in order of the
importance of their role, and makes the public
aware that the complete prospectus is available
for review. The tombstone clearly states that it is
not an ad to buy or sell, it is simply a notification
that an issuance has occurred.
TRADE DATE - The actual day on which
two parties enter into a trade agreement.
TRADER - A person employed by a Securities
firm who executes trades on behalf of the firms
brokers and clients. The traders goal is to buy
securities at a low price and sell them at a high
price, yielding profit from that price spread
(a.k.a. the trading spread).
TREASURIES - Bonds issued by the United
States Treasury in order to borrow money used
to fund the government. Common types of
treasuries are: Treasury Bills (T-Bills), Treasury
Notes (T-Notes) and Treasury Bonds (T-Bonds).
UNDERWRITER - An institution that
agrees to purchase the remaining balance of an
issue of securities if investor demand is
insufficient to take up the whole issue.
UNDERWRITING - Purchasing newly
issued securities from the Issuer. The lead
manager and other members of the underwriting
syndicate are usually responsible for purchasing
the entire issuance for resale in the market.
group of investment banks chosen by the lead
manager to help purchase the securities from the
issuer. Each bank in the underwriting syndicate
is responsible for selling a predetermined
number of securities during the issuance.
VENTURE CAPITAL - The provision of
finance to companies in the early stages of
development, in the form of either loans or