English for Finance 4/5/2011: Funds

Assignment Prepare Flash Cards for Funds terminology Prepare for Quiz on Friday on Wall Street Terminology Extra Credit – Anyone who scored less than the average of 71% – Hand Write the word and its definition from the last quiz 3 times each. – Due on Friday by class time – I will adjust your quiz score upwards as a result

Last Quiz

Fund Terminology Fund – To finance something – If you are funding a company, you are an investor who is giving the company money Cover – To repurchase a previously sold financial instrument Repurchase – To buy something back that was sold For example, you can short a stock, which means to sell a stock that you borrow from someone else. You later have to buy the stock back and return it to the person you borrowed it from. This repurchase is called a short cover.

Fund Terminology You would short a stock when you are betting that the stock will go down. For example, after the Tsunami in Japan damaged the nuclear power plant, you may bet that Tokyo Electric’s stock will fall. So, you short Tokyo Electric’s stock – Your profit would be (S – X), where S is the price of the stock when you sell it short, and X is the price of the stock when you cover the short later.

Fund Terminology Long – Owning a financial instrument – It is the opposite of a short Short – When you borrow a financial instrument and sell it. – Later, you have to buy it back so that you can return it – You are hoping to buy it back at a lower price than you sold it for, so that you have a profit Client base – This is the list of your customers

Fund Terminology Institutional Investor – A business whose primary job is to hold financial assets. – An Asset is anything that can be sold for money such as a house, car, watch, boat, financial instruments, etc. – Examples include pension funds, mutual funds, banks, hedge funds, insurance companies, etc. Retail Investor – This is you and I…also called individual investors or general investors

Fund Terminology Leveraged Clients – Clients who borrow money to buy more financial instruments Margin – Borrowing against the value of your securities in order to purchase more securities. Securities is another name for financial instruments Leveraged Buy-Out – Borrowing money in order to buy a company

Fund Terminology Collateralized – To secure a financial instrument with a financial asset. – For example, a home loan is secured by the house, therefore we say that the house is collateral for the loan or that the house has been collateralized Retail Banking – Banking services for individual consumers like you and I Commercial Banking – Banking services for corporations or government entities – Entities are another word for organizations in this case. We are an entity, corporations are entities, and government organizations are entities. It means we are separate from one another. Investment Bank – A bank that acts as an underwriter or agent for a corporation wishing to issue securities – An underwriter – They also facilitate mergers and acquisitions and

Fund Terminology Hedge Fund – An investment fund that uses sophisticated investment strategies such as derivatives – It is limited to sophisticated investors with a minimum net worth requirement, such as $1 million – Hedge fund managers typically receive 20% of the investment return

Fund Terminology Mutual Fund – A portfolio of stocks, bonds, and cash typically – Mutual funds are typically used by individual investors – The typically charge 0.5% to 1.5% of your investment amount as a management fee Insurance Company – Insurance companies assume risk for people who do not want the risk – For example, a property insurance company will assume this risk of your house burning down, so that you do not have to worry about that risk – Insurance companies collect a fee from you for this insurance. That fee is called a premium – Insurance companies make money by collecting premiums, investing those premiums as institutional investors and paying out less in Claims than they collect in premium and make from their investments – Claim $ < Premium $ + Investment Earnings

Fund Terminology Sovereign Investor – A government fund that is financed with foreign exchange reserves – The sovereign fund will make investments in companies around the world – For example, China has a sovereign wealth fund as do many of the oil exporting countries in the middle east

Fund Terminology Underwriter – An investment bank acts as an underwriter for a firm issuing securities – For example, if I want to raise money for my company by selling stock, I do not go directly to you to sell the stock. Instead, I go to an investment bank. The investment bank “underwrites” the stock issuance, by purchasing the stock from me at a certain price. They then take on the risk of selling that stock. They try to sell it for more and thereby make a profit. They will sell the stock to institutional investors in the primary market. Sovereign Investor – A government fund that is financed with foreign exchange reserves – The sovereign fund will make investments in companies around the world – For example, China has a sovereign wealth fund as do many of the oil exporting countries in the middle east Foreign Investments – Making an investment in a country in which you are not a citizen of – For example, I have bought an ETF that called EEM that invests in developing countries stock markets Stake – To have an ownership interest in something – If you say you have a “Stake” in Apple Computers, it means that you own stock in Apple Corporation…You are a partial owner of that company Investment Vehicle – Very similar to financial instrument definition – Refers to any place you can put your money – For example, a mutual fund is a good investment vehicle for beginning investors

Fund Terminology Securitization – The pooling together of assets and turning them into a security which can be sold. – For example, a bank will take $100 million worth of mortgage loans and combine them into a security – They then sell the security to investors – Now, the payments on the mortgage loans go to the investors instead of the bank – It is a risk management tool and also a way for the bank to increase its liquidity and lending ability Indirect Financing – Obtaining money through an intermediary or 3 rd person – If you lend me money, it is called direct financing, as you gave me the money directly – If instead, you put your money in the bank, and the bank lends me money, you have indirectly lent money to me. Direct Financing – Lending directly to another person or corporation without going through a 3 rd party such as a bank