Investment Banking Jargon buster for distance MBA Banking and Finance Management

Indian economy is witnessing strong growth. The financial sector is undergoing rapid changes. This sector comprises retail banks, commercial banks, insurance companies, non-banking financial companies (NBFC), co-operatives etc. The financial sector in India is predominantly a banking sector with commercial banks with more than 64% of the total assets in the financial system.

There are many career opportunities for candidates who are passionate and have right skills. Someone who wants to pursue a distance MBA in Banking and Finance or distance MBA in financial management would study different types of core subjects related to finance and banking.

Investment banking is a term came into limelight in last few years. This is a special type of credit system which is equally popular in individuals and corporations. An aspiring finance management professional who wants to pursue a growing career after his distance MBA program, knowledge of investment banking is a key.

Let’s us try and explain some of the commonly used terms in investment banking.

Common/Equity shares

This is one of the most popular financial instrument. This is also referred to as ‘stock’. Equity shares represent ownership in a company. The shares are traded on stock exchanges like in NASDQQ, NSE, BSE etc. As the owners of stocks are part owners of the company, they can vote on important matters and even for electing the board of directors.
Shareholders earn return in the form of dividend. Equity shareholders are the last to get or receive their dividend or their stake on dissolution of the company. However as the shares are traded on the stock exchanges, the market price of the shares are driven by company‘s performance. The market price can increase manifold if the firm is profitable. So, equity shares offer highest possible return and carry highest possible risk.

Preference shares

These are the shares which carry fixed rate of dividend but do not give the owner voting rights. Preference shareholders have a preference over equity shareholders for the payment of dividends and stakes on liquidation.
Preference shares receive dividends only when company makes profits. If such dividend remains unpaid, it can be paid in subsequent years when company declares profits. Preference shares could be repayable after a specific time period or they may be perpetual. They offer lower risk and low returns as compared to equity shares.

Bonds

Bond is a long term obligation for an issuer. Issuer promises to pay the bondholder a fixed amount of interest called ” coupon ” each year, for a fixed time period. At the end of the time period called maturaty the bondholder gets the face value of the bond. This is like a loan taken by an issuer from the buyer of the bond and the interest is paid to him.
These bonds are also traded on exchanges like stocks. Bonds are debt instruments used for purpose of raising capital. Unlike shares bonds do not create ownership.

Zero-coupon bonds

There are some bonds where the bond interest may not be paid out explicitly. In such cases the bond is issued at a discount to the face value of the bond. These are typically called as zero-coupon or discount bonds. In case of zero-coupon bonds, there is no intermediate payment of interest and whosoever holds the bond at the time of maturity gets paid the face value. The actual return called ” yield ” to the investor who sell the bond before maturity depends on difference between the market price and the issue price
bond.

Mutual funds
Mutual funds is an indirect way of investing in stock market. Here the fund operators raise the money from the shareholders and invests in a group of assets. Every mutual fund has its own set objectives for its investments. They invest in equities like bluechip stocks, a particular sector like Pharma based on their themes. Mutual fund raise money by selling their units to the public and they invest money in various instruments like stocks or bonds or money market instruments and in return they receive an equity position in the fund.

In mutual funds shareholders are free to sell their units at any time. The price of the unit in mutual funds depends upon the performance of securities held by the fund. Price of a unit is declared every day and is called NAV or net asset value.

There are two types of mutual funds open-ended and close-ended. Units from an open-ended fund can be purchased any time. However, units from a close-ended fund can be purchased only during the initial offer.

Pension Funds

Pension funds are retirement related funds established by corporations for their employees and they are regulated by government. They provide regular income for retired people.

Treasury bills

Treasury bills are instruments issued by central bank of the country (like RBI in India). They are backed by government and hence viewed as having no default risk or credit risk. The interest rates of government securities are taken as risk-free interest rate benchmark.

Commercial paper
Commercial paper is an unsecured promissory note issued by a corporation for a specific amount and it matures on a specific date which is more than 270 days in future. It is an alternative for short-term bank borrowing.

Distance MBA in Banking and Finance: why study jargon

It is very important that one has to know the jargon or key terminology for a specific domain. These key terms convey more than their English language meaning. When these terms are used appropriately, it helps you demonstrate your professional expertise and knowledge.
After starting with the basic terms, if you read further and develop expertise in domain of investments you can not only create wealth for yourself but help others to do so with your fine advice.