Equities basics

Here is a list of equities related banking terms and an attempt at me explaining them. Ordered starting with the simplest of the simplest.  Oh, most of these definition depend on the context the word in question is used in.

Equity – In general it means the value of an asset after all the costs associated with it are subtracted.

In the equities context it means a stock or any other security meaning an ownership interest.

Short – This means to sell.
In the context of options it would mean writing (and selling) an options contract to someone else.
In regular equities it could mean the sale of borrowed stock creating a ‘short position’ for the seller.

Long – Opposite of short, buying instead of selling. Long because you are buying shares to have them in the Long Term (at least, when compared to shorting them).

Spread – This is the difference between the bid and the ask price of a security and is therefore the gap in which some of the profit of the deal can be derived.
This can be influenced by many factors such as liquidity of the market, size of deal etc..

Bid – An offer to buy in the marketplace.
A bid is made up of both a price and a quantity that is wished to be purchased.

Ask – An offer to sell in the marketplace. Opposite to a bid.
An offer is made up of both a price and a quantity that is wished to be sold.

Premium – Again several meanings depending on the context.
in Options it is the total cost of the option
in Fixed income it is the difference between the face value at issue and the current value of the security
in insurance it is the periodic premium required to maintain cover

Direct Market Access – Electronic facilities to allow buy side firms to access liquidity. Allows buy side to use sell side’s infrastructure whilst taking more control of how the trade is executed. Used frequently by hedge funds.

Volume Weighted Average Price (VWAP) – The average price, weighted by volume purchased at each price, of an amount of equities traded over a given period. VWAP is used to measure the average final execution price of a large order split into several smaller order and then executed over a whole trading day.

Sell side – The part of the equities business performing the equities transactions on behalf of the buy side e.g. brokers, traders etc.

Buy side – The part of the equities business originating equities orders to be performed by the sell side e.g. mutual funds, insurance companies and money managers.

if anyone else ever reads this suggest some terms you think should be included for the equities newbie or feel free to suggest corrections for definitions above.

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2 responses to “Equities basics

  1. Excelent! This should help me blag some vague knowledge of finance speak.

    Why don’t you define Fixed Income and Options? 😉

  2. The options one has been drafted just need to find the time.
    My fixed income knowledge isn’t much more than ‘thats to do with debt right?’.

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