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Suppose you were asked this on an interview: Explain how an inverted, reverse, IO floater, puttable bond works. Would you be able to respond correctly?
The arcane field of finance has an arcane vocabulary to match. To avoid becoming tongue-tied, finance job seekers should take the time to review the terminology before an interview or networking event. Knowing the terms will help you decipher job descriptions, too.
Asset Allocation
This term refers to how a money manager or individual places certain percentages of financial assets into different categories of investments. For instance, the most common expression of asset allocation is the percentage placed into stocks, bonds and cash. An aggressive posture would be 80 percent, 15 percent and 5 percent. That means 80 percent stocks, 15 percent bonds and 5 percent cash. A more conservative allocation would be 50 percent, 30 percent, 20 percent.
Historical Volatility
This terms refers to the amount of up-and-down movement in the price of a stock or other financial asset over a period of time. It might measure volatility over a month or even a week, but it is a critical number in option trading. The higher the volatility number, the higher the stock or asset will be priced.
Spot and Forward
In the spot market, you exchange your money and assets today -- or tomorrow at the very latest. In the forward market, you agree today on the terms of a transaction that will take place on a specific date in the future; no exchange takes place until that later date. These forward contracts are used to hedge financial risks that arise from the normal course of doing business.
Selling Short
To make money in the stock market, currency market or commodity market, the goal is to buy low and sell high. However, you don't have to do it in that order. If an investor thinks the price of a stock is going down, the investor could borrow the stock from a broker and sell it. Eventually, the investor must buy the stock back on the open market. For example, you borrow 1,000 shares of ABC Company on March 1 and sell them for $12 per share. Then, on April 1, you purchase 1,000 shares of ABC at $11 per share. You've made $1,000 (less commissions and other fees) by selling short. You bought low and sold high -- just the other way around.
There isn't enough space here to cover all the terms you might encounter on a job interview or in a job description. For a listing of useful financial terms, check out the Finance Glossary developed by Campbell R. Harvey, a professor at Duke University's Fuqua School of Business.
By the way, there is no such thing as an inverted, reverse, IO floater, puttable bond. Well, not yet, anyway.
