Investment Banking Lingo, Terms & Definitions

We’ll look at all sorts of cool investment banking lingo, terms and definitions here…for aspiring bankers that is!

That means we’re not going to waste time defining the unimportant banking lingo, eg Bollinger bands, or the super basic terms and definitions, eg AAA rating.

Instead, we want to focus on industry lingo that you will need to know for your banking interviews or you may want to use during your summer internship…the type of lingo that will help set you apart from other students by a mile.  Let’s get started.

 

BONUS: Download a free reporton how bankers can judge your resume based on how you use the banking terms and definitions below, plus find out how 5 of us managed to break into bulge bracket banks without having perfect grades, the best schools or insider connections.

 

How to talk like MD Larry Larryson

10k – your new best friend, the 10k is the annual financial report that all publicly traded companies must submit each year.  It’s fat, complicated, but essential to master, because it’s from this document that a junior banker can extract so much goodness for presentations and whatnot.  You’ll find information like a summary of the year, important news (eg management changes, upcoming deals, strategy rethinks etc), disclosure of risks etc.  Plus you’ll get a nice nifty “Outlook Ahead” BS filled statement from the CEO most likely.  But the real fun is in the financial statements and their associated footnotes.

10q – a quarterly financial statement…think of it as a mini 10k.

All nighter – you’re allowed to go home at 7am, great!  Oh, but you need to be back in by 9.30am…

American option – options done American freedom fries style…meaning you can exercise them anytime during the contract.  Freedom!

After the bell – once the market is closed to regular trading (ie the bell has rung) it is said to be after the bell.  A lot of the exciting stuff can happen after hours, with news and announcements by companies often delayed to this point, eg oh shit, PS Dear Facebook shareholders, we are merging with Google tomorrow.

Antitrust laws – also called competition laws, they’re made to prevent monopolies within any market or sub-market.  Look to the tech market (eg Google and Microsoft) for some working examples of what constitutes a monopoly and thus invokes ALs.

Anti-takeover measure – crazy stuff directors get up to, to make sure no one can take over ‘their’ company without their approval.  Hello poison pills like “Existing shareholders, some evil conglomerate just bought 25% of Class B shares…so you can now buy Class A shares at a 90% discount…let’s dilute this mofo to the ground”!

Arbitrageur – someone who makes money by buying and selling assets at different prices in different markets.  Ie they’re taking advantage of inefficiencies across the markets.  As Warren Buffett has said, this is a trading approach that was much easier back in the day when information was not as free as it is now thanks to tech.

Asset management group – create investment products, manage/invest funds and generally cater for the every whim of big institutional investors and companies with huge funds to invest.  They have one goal…beat the benchmark.

Backdoor listing – a very nifty little magic trick employed by companies who try to list, but get rejected because they don’t meet certain standards or disclosure or whatnot.  To get listed they just merge with an already listed company.  Easy.

Back office – that cold, lonesome place where no one really appreciates what people do, because they don’t generate rev like front office.  Hello ops group!

Bandwidth – geek speak for ‘capacity’, as in do you have any bandwidth/time to do x, y and z?

Bear raid – a devilish practice where a bunch of traders meet over beers and pick out a very sick company (and sometimes even a healthy one), and decide to do everything in their power to kill its price through a combination of short selling and spreading market disinformation.

Beauty contest – when a bunch of banks smear on their lipstick, put on their high heels and try to win the business of a company that is going to IPO, M&A etc.

Black Thursday & Tuesday – shit hit the fan on Thursday 10/24/1929 and got less shit on Tuesday 10/29/1929.

Black Monday – in one day…just one day, the market dropped about 20%.  We are of course talking about the crash of 87.

Blue chip stock – see Coca Cola!

The Board – the big dogs of the money world, the Board consists of 7 people, all chosen by the President (and confirmed by Senate), who then run the Federal Reserve.  2 are appointed to be Chairman and Vice, also by President/Senate.

BPM – how good a banker is at wowing clients into submission by talking BS BS BS, aka going through a pitch!  Bullshit Per Minute is a thing of pride, but bankers think of it more as intelligence per minute.

Broken IPO – shortly after the IPO the shares start selling below the IPO price.  This does not look good!

BSD – MD Larry Larryson is a big swinging d***.

Buyback – when a company buys back some of its shares on the open market, because it wants to reward shareholders (an alternative to dividends) or it thinks its price is lower than its value etc.  By taking shares out of the market and offering a good price, you can see a nice jump in price following a buyback announcement.

Buttonwood agreement – the agreement struck about 200 years ago under a buttonwood tree, between a bunch of brokers and businessmen to form the now-named NYSE.  Good move.

Buy-side analyst – balla, big cat, whatever you want to call them, these analysts work for the investment firms, eg a private equity house.  They do the same shit as a ‘normal’ analyst, eg an equities analyst working for a typical investment bank’s research division, but their findings stay in house for the use of the company’s money managers.

Call option – gives buyer right to buy x amount of securities at x price during x time; this is a right, not an obligation.  You’d buy these options if you thought there’s a good chance the price may go up during the time period, and you want to lock in today’s price…but you’re a bit scared of the loss if the price goes down, so you just want the option to buy at this price in the future.

Catch a falling knife – not an important term, but a cool one.  Think about the visual…we’re talking about investors who see a downward market and think “Ooh, there’s opportunity here now, we’re approaching the bottom”.  But the reality is the downwardness is all spirally-like. And so they invest in a market that’s losing it’s ass, and soon enough they lose theirs too! That made sense, right.

Covered call – the seller of the call option makes sure they have the actual underlying securities so that they can limit their own downside should the option be exercised.  If you write an option, but you don’t own the securities, you’re naked and you leave yourself open to having to go out and buy the securities at a high price if/when the option is exercised.

Chinese wall – a bit like Santa Claus, you want to think it exists, but you’re fairly sure it doesn’t!  We’re talking of course about anything done to keep employees and confidential information from different divisions of the same company separate, when they have different interests.  Eg an equities analyst giving buy/sell recommendations vs a M&A banker of the same bank (but different division) trying to get a merger across the line.

Commercial bank – they cater for everyone.  Your typical CB would have retail operations, eg giving home loans to Mrs Jones down the road, as well as bigger commercial operations, eg lending money in a syndicate.  And since 1999 (see Graham-Leach-Bliley Act below) the activities of CBs have overlapped with IBs, so it’s all a little confusing and hard to stick with this narrow definition that CBs are just lenders.

Contrarian – a person who thinks the opposite of the majority view.  You would have seen some bad ass contrarians make bags of money during the subprime!

Corporate raider – see Gordon Gekko.  Meaning any investor who goes after control of a company with a view to making some big changes; from board members to asset sell offs etc.

Dead cat bounce – perhaps the greatest insider term, it’s used to describe the movement of a stock that has crashed in price and then gone on to see a very slight lift in price not long after as short sellers take profits and some ballsy investors buy up stock thinking it can’t go lower.  The dead cat visual…well, think about a dead cat being dropped to ground and then bouncing up every so slightly.

Deal dinner – the night you go out to celebrate a deal completed…the night you bond just a little closer with your team by way of 15 shots of Patron…the night you pick your MD up from the floor and return him to his family.

Deflation – you can see it in full action when prices drop across the board due to dropping demand (from consumers, businesses etc), and sometimes also due to tight monetary policy.  See Japan.

Dollar cost averaging – involves buying a little bit of a security repeatedly over a medium to long time horizon.  You believe the market will go up over time, but that timing the market is a fool’s game.  Dollar cost averaging into the index is Warren Buffett’s recommendation for mom & pop investors without the time or ability to become expert stock pickers like himself.  Hello monthly deposits into a Vanguard fund!

Downtime – when you aren’t getting fire drilled up the wazoo and you actually have some spare time…whether it’s a few hours in the afternoon (hello gym) or a free weekend (hello beer), it’s so so sweet.  The biggest problem is convincing yourself that it is real, and that your BB is not going to start flashing like a mofo on Saturday morning.

Double dip recession – what we’re seeing now!  Ie the economy first goes into recession, then The Economist prints articles about seeing green shoots, people are happy again (or at least drinking less hard liquor), and then all of a sudden people realize that the fundamental issues that caused the original recession haven’t actually been dealt with and all poo hits the fans, expectations and earnings go poo, and we’re back in the dip.  Again.  Hence, double dip shit!

Due diligence – a bunch of poor junior bankers holed up in a 4 by 4 locked room poring over 1000s of pieces of information to determine the true financial condition of a company, it’s outlook and all the material risks associated with it.  Financial CSI.

EBITDA – a very sexy thing…to a banker.  Earnings before interest tax depreciation & amortization is so useful for many calculations important to a banker (eg EV / EBITDA), but in and of itself (and immediately) it is useful to tell us how a business can satisfy their debt obligations and how it’s performing if we ignore how it’s financed, which is useful when we want to compare entities with different financing strategies.

Electronic trading system – the sweet sweet technology that allows us to execute orders without the need for open-outcry jacket-wearing nutjobs.

Enterprise value – how much it would cost to acquire a company.  We get to this figure by putting market cap and the company’s debt together, and then shaving a tiny bit off to take into account transaction costs.  Super important number, which together with EBITDA gives us that very juice valuation multiple every banker loves.

European option – can only be exercised at expiry.  How European…

Extended hours trading – this simply refers to trading after the bell; something that can be kinda hit or miss, given the lack of real time information/prices.  Tasty opportunities for those in the know however. Understandably this type of trading was limited to IIs (institutional investors) for years, but now is open to far more players, including you, if you use a broker on your behalf who has access.

Face time – the need to prove to everyone else that you’re a hard worker by staying past 10pm every night, even when you don’t have any freaking work!

Federal Reserve – the central bank, well duhh!  It consists of 12 banks and is governed by The Board.  It sets monetary policy for the US…and to some extent, the world.  And it also does a few other things, eg lending money to big players whose failure would hurt the national economy…you might remember them playing this particular role a few times in the last couple of years.

Fed speak – important words to go by, because they come straight from the mouth of the Fed and contain all sorts of hints regarding future monetary policy etc.  Deciphering fed speak is not for the faint hearted.

Finance group – the mofos that sit at their desk, green cap on, counting the bank’s cash, making sure no one’s pulling any crazy shit (not sure if the French or Swiss had a Finance Group!) and that everyone’s making money.

Fire drill – when bankers have to hustle like their slinging crack and five-0 is on the way.  Eg a client meeting is going down in 45 minutes and one of the MDs all of the sudden realizes he wants 2 other slides in the presentation and holas at your poor monkey ass to do it…fireeeee.

Flight to quality – when investors start to realize they hold a bunch of toilet paper quality stocks and bonds, they start selling them and buying up quality like AAA bonds of governments…oops!  This happened a lot in recent years.

Free cash flow – how much money the company has after paying its expenses and debt bills, but also it Capex.  Which brings up the point that FCF is not the clearest indicator of an entity’s financial strength, eg if it has negative FCFs, this might just be because it’s heavily reinvesting in valuable Capex.  Like with all measures, you should never be too quick to judge numbers on their face.

Generally accepted accounting principles – or GAAP if you like, is gospel for accounting with standards on how to properly account for just about anything.

Glass-Steagall Act – passed a couple years after the 1929 crash, this legislation broke up banks into two…you either lent (commercial bank) or you got all crazy and issued and traded securities (investment bank).  Over the last couple of decades the separation weakened (a lot!), and although it seemed good at the time, a lot of the troubles we had in recent times came from banks being allowed to play both games, and the one game almost killing both.

Graham-Leach-Bliley Act – the 1999 piece of legislation that really killed the Glass-Steagall Act.  It’s aim was to bring banking into the 21st century, by allowing commercial and investment banks (as well as insurance companies) to rub up on each other and create high-growth love children.

Hostile takeover – this occurs when the board of the target company ain’t too happy about the takeover approach.  Although shareholders will be advised on the proposal by the board of directors (ie NO!), it can be put to a vote of shareholders quite easily, and if it gets approved the takeover goes through.

Investment bank – we focus more on serving corporations.  Whether it’s helping them raise funds through a listing or to merge with another company, we’re there to help.  Humanitarians of the capitalist world.

Leveraged buyout – when you borrow a bunch of other people’s money to buy a company, and the debt you accrue is lent against the company you’ve just bought…ie collateralized.  This is a very efficient approach to investment (high ROE), but obviously comes at greater risk thanks to the leverage.

Leveraged finance group – the nuts who have the balls to organize finance for leveraged buyouts (any left?!), which are often being advised by the M&A division of the same bank.

Lock up period – that nervous time after an IPO during which company employees can’t sell their shares / offload them!  It can be anywhere from a couple weeks to couple months, and is something that differs from deal to deal as it’s an agreement reached between company and underwriter.

Make a market – to hold a bunch of securities and then to fill both sell and buy orders for them.  Brings market liquidity.

Margin call – when your heavily leveraged share portfolio poos a little, and the value of your shares lowers to a point that they’re almost not equal to the amount of debt held against them, such that your lender gets all nervous like Kevin Spacey on 20-cups of Joe, and calls for more funds to be deposited in your account to maintain a minimum margin (between value and debt).  If you fail to add funds in, the lender can liquidate your account and take the proceeds to pay out the debt.

Negative carry – when you borrow money to invest and end up paying more in interest than you receive in profit from the investment.

Operations group – make sure the show runs smooth, from the tech systems to support.  Just like front line troops need a solid transport contingent, so do bankers need this vital Ops group.

Piggybacking – when a broker makes a buy/sell move on their personal account after taking a big buy/sell order from a client.  It’s unethical, but it’s also illegal if the broker reckons their client was making the big move using insider information.  Hard to prove.

Pit – where the big dogs bark orders on the trading floor on futures and options.  Cocaine-fuelled open outcry at its best.

Price to earnings – similar to EV / EBITDA in that it’s a valuation multiple we use to compare the performance and over/undervalue of different entities etc, but using slightly different numbers.

Pro forma statement – any financial statement that gives ‘future’ figures, ie numbers that will result if x and y occur.  You will see pro forma numbers a lot as expected future numbers pop up all the time, eg you analyze a potential merger and then spit out a guess at what the merged entities financials would look like in 12 months time…that’s a pro forma statement.

Proprietary trading – prop trading happens when a bank trades on their own account.  Although it had helped a lot of bank’s make a killing, it’s also one of the easiest ways for a bank to do it’s ass when traders make stupid trades, trade naked or well, just make huge illegal trades!

Prospectus – that thick, glossy (and legal) document issued by companies looking to list/sell a security product to the public.  Although it sometimes looks like more of a marketing brochure, the prospectus is a very serious document and one that the SEC rules over with an iron fist.  You’re required to disclose all material information a potential investor needs to make a decision whether to buy your stock or not.  Think info about the company, the operations, the management team, the financial state, the risks and also info about the actual security product itself, eg voting rights.  Junior bankers working in capital raising will get to know these very very well!

Pump & dump – see Boiler Room!  Ie you buy stock in a company (often at the IPO stage), you then promote the stock hard to your clients and other buyers so the increased demand bumps the price nice and high, and then you sell (or dump!) your own stock, leaving you with a very nice profit…but also the need to move offices every 6 months!

Risk group – the pessimistic mofos who are always worrying about things like liquidity, liability, capital risk etc.  Boring!  Haha, but actually so so vital, and after the last couple of years more and more people are appreciating their work.

Roadshow – when companies smear lipstick all over themselves and go out to present their company/team/financials to banks/asset managers and institutional investors ahead of an IPO.  Typically led by the CEO him/herself, companies (along with their advising IB) do this to raise interest and excitement so that their public offering gets fully subscribed (and then some), and at a good price.  Bankers will hopefully start filling the order book soon after these presentations!

Rule of 72 – an easy way to figure out how long it will take your investment to double in size.  You take 72 and divide it by the annual compound rate you expect, and voila.

Sarbanes-Oxley – legislation courtesy of the smartest guys in the room, Enron & Co.  The SO Act is all about forcing companies to be vigilant (ie accurate) in the financial info they disclose to the market.  Super necessary given the absolute madness that came out of reporting pre-2002.  Watch the documentary on Enron if you want to see how a Ben Stiller – Dr Evil lovechild would do the books.

Series 7 license – what you needed to be an extra in the movie, Boiler Room.  Ie the license you needed to be Vin Diesel…soliciting buy/sells from 70-year-old retirees in Miami for shares in some NJ dental gum factory.

Shareholders’ equity – simply assets minus liabilities.

Sleeper – the beautiful company; one where it is trading below it’s real value, but which isn’t garnering the attention of many investors.

Spin off – when you take a slice of an existing company’s operations and bundle it off into a separate entity with new shares and everything!

Staffer – workflow manager in banks, well, that’s the polite term.

Stock split – what you do to deal with the fact humans think unit price alone matters.

Stress test – no it’s not anything to do with all nighters, but rather involves taking assets/companies etc through extreme hypothetical scenarios and seeing how they do…ie whether they survive!

Ticker – the heart attack maker, crack for brokers, whatever you call it, this refers to the streaming of prices/quotes.  Back in the day these quotes were printed on ticker tape, but now you just see them as thin horizontal lines of prices going from right to left on your television, computer, iPad or whatever.

Tombstone – that awesome little statue of a Boeing 747 you see sitting on MD Larry Larryson’s desk.  It marks the completion of a deal (IPO, M&A etc) for…well, in this case Boeing!  If you touch it, just pack your bags and leave.  Bankers don’t play nice with their toys!

Warren Buffett – God.

 

BONUS: Download a free reporton how bankers can judge your resume based on how you use the banking terms and definitions above, plus find out how 5 of us managed to break into bulge bracket banks without having perfect grades, the best schools or insider connections.