Financial English 2 - full course - 25-26.docx

# Introduction to financial vocabulary and concepts This study guide section introduces fundamental financial vocabulary and concepts, covering personal finance basics like budgeting and providing an overview of corporate finance. ## 1\. Introduction to financial vocabulary and concepts This section lays the groundwork for understanding financial terminology, personal financial management, and the core principles of corporate finance. ### 1.1 Unit 1: Let’s talk money This unit focuses on essential verbs and commonly confused words within the financial domain, while also establishing a general understanding of finance. #### 1.1.1 The basics: verbs in finance Understanding the various roles verbs play in financial contexts is crucial for building vocabulary. Many financial terms are derived from verbs. * **To invest:** To commit money or capital with the expectation of financial return. * **To deposit:** To place money into a bank account. * **To waste:** To use or expend carelessly, extravagantly, or fruitlessly. * **To withdraw:** To take money out of an account. * **To accumulate:** To gather or acquire (an increasing number or quantity of something). * **To owe:** To be under obligation to pay or repay someone. * **To transfer:** To move from one place to another. * **Consolidation:** The act of combining several separate loans or financial obligations into a single, new transaction that replaces the old ones. * **To borrow:** To take and use (something belonging to another) with the intention of returning it after use. * **To regulate:** To control or supervise by means of rules and regulations. #### 1.1.2 Language corner: commonly confused words Distinguishing between similar-sounding or similarly spelled words is vital to avoid misunderstandings in financial communication. * **Salary vs. Wages:** Salary typically refers to a fixed amount paid at regular intervals (e.g., monthly or bi-weekly), while wages are usually paid hourly and can vary based on hours worked. * **Net income vs. Revenue:** Revenue is the total income generated by a company from its business operations before any expenses are deducted. Net income, on the other hand, is the profit remaining after all expenses, taxes, and interest have been paid. * **Lend vs. Borrow:** To lend is to give something to someone temporarily, expecting it to be returned. To borrow is to take and use something from someone temporarily, with the intention of returning it. * **Obligation vs. Bond:** An obligation is a moral or legal duty to be indebted to someone or something. A bond is a type of debt security where an issuer owes the holders a debt and is obliged to repay the principal and interest. * **Liability vs. Asset:** A liability is a debt or financial obligation that is owed to another party. An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide future benefit. #### 1.1.3 Building your vocabulary: finance in general Finance can be broadly categorized, with each category having distinct focuses. * **Finance:** The management of large amounts of money, especially by governments or large companies. It involves the study of money, credit, investments, and financial institutions. * **Personal finance:** The financial planning and management of an individual's or household's money. This includes budgeting, saving, investing, and insurance. * **Public finance:** The study of the role of the government in the economy. It covers government expenditure, taxation, and debt. * **Corporate finance:** Concerns the financial activities of corporations. This includes how companies raise capital, invest in projects, and manage their financial risks. ### 1.2 Unit 2: Personal finance This unit delves into the practicalities of managing personal finances, with a focus on budgeting and the impact of inflation. #### 1.2.1 The basics: let’s talk about budgeting Budgeting is a cornerstone of personal finance, enabling individuals to plan and control their spending to meet their financial goals. * **Budget:** A plan for how to spend your money over a specific period, typically a month. * **Expenses:** The costs incurred to live and operate. * **Fixed expenses:** Costs that remain the same each month and are generally non-negotiable (e.g., rent/mortgage, loan repayments, insurance premiums). * **Flexible expenses:** Costs that can change from month to month and can be adjusted or reduced (e.g., groceries, entertainment, clothing, utilities if usage varies). * **Income:** Money earned or received. * **Gross income:** Total income before any deductions. * **Disposable income:** Income remaining after taxes and other mandatory deductions, available for spending or saving. * **Budget deficit:** A situation where expenses exceed income. * **Balanced budget:** A situation where income equals expenses. * **Emergency fund:** Money set aside to cover unexpected expenses or emergencies. * **Financial plan:** A comprehensive strategy for managing an individual's finances to achieve their short-term and long-term goals. #### 1.2.2 Words in context: the impact of inflation Inflation, the rate at which the general level of prices for goods and services is rising, erodes purchasing power. * **Inflation rate:** The percentage increase in the general price level of goods and services in an economy over a period of time. * **Consumer price index (CPI):** A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. * **Purchasing power:** The value of a currency expressed in terms of the amount of goods or services that one unit of money can buy. Inflation reduces purchasing power. * **(Global) supply chain:** The network of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer. Disruptions can affect prices. * **Aggregate money supply:** The total amount of money that is in circulation or in existence in a country. #### 1.2.3 Language corner: linking words Linking words (or transition words) are essential for creating coherent and logical connections between ideas and sentences. * **Showing contrast:** * **Whereas:** Used to compare and contrast two different things. * **By contrast:** Used to emphasize the difference between two things. * **Nevertheless:** Used to introduce a statement that contrasts with or seems to contradict what has just been said. * **Although:** Used to introduce a subordinate clause that contrasts with the main clause. * **Showing cause and effect/reason:** * **Consequently:** As a result. * **Therefore:** For that reason; for this purpose. * **Adding information:** * **Furthermore:** In addition; moreover. * **Moreover:** A further point or argument in defense or support of the first. * **Showing sequence/addition:** * **Afterwards:** At a later time; subsequently. * **Then:** After that; next. ### 1.3 Unit 3: Preparation - What is corporate finance? Corporate finance is a critical area that deals with the financial decisions made by businesses. * **Corporate finance:** The field of finance that deals with the financial activities of corporations. It covers how companies raise capital, invest in projects, and manage their financial risks. * **Capital investment:** The purchase of capital goods, such as property, plant, and equipment, by a company. * **Tax considerations:** The impact of various taxes on financial decisions and profitability. * **Financial planning:** The process of setting financial goals and developing strategies to achieve them, including budgeting, saving, and investing for a company. ### 1.4 Unit 3: Corporate finance This unit explores key aspects of corporate finance, including company capital, financial statements, and the concepts of bankruptcy and insolvency. #### 1.4.1 Words in context: company capital Companies require capital to operate and grow. This capital can come from various sources, representing different forms of financial claims on the company. * **Equity:** Represents ownership in a company. It is the residual interest in the assets of an entity after deducting all its liabilities. * **Ordinary share (Common share):** Represents ownership in a company and entitles the holder to voting rights and a share of profits through dividends, which are not predetermined. * **Preferred share:** A class of ownership that has a higher claim on assets and earnings than common stock. Preferred shares typically have a fixed dividend that must be paid out before common shareholders receive any dividends, and they usually do not carry voting rights. * **Debt:** Represents borrowed money that must be repaid, typically with interest. * **Bond:** A type of debt security where the issuer owes the holders a debt and is obliged to repay the principal and interest. Bonds have a predetermined maturity date. * **Security:** A financial instrument that represents ownership (like stocks) or debt (like bonds). * **Principal:** The original amount of a loan or investment, on which interest is calculated. * **Holders:** Individuals or entities that own a security. #### 1.4.2 Financial statements Financial statements are formal records of the financial activities and position of a business, person, or other entity. They provide insights into a company's performance and financial health. * **Income statement (Profit and Loss Statement):** Reports a company's financial performance over a specific accounting period. * **Sales revenue:** The total income generated from the sale of goods or services. * **Cost of Goods Sold (COGS):** The direct costs attributable to the production or purchase of the goods sold by a company. * **Matching principle:** An accounting principle that dictates that expenses should be recognized in the same period as the revenues they help generate. * **Accrual accounting:** An accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash is actually received or paid. * **EBIT (Earnings Before Interest and Taxes):** A measure of a firm's profit that includes all revenues and all expenses except interest expenses and income tax expenses. * **Balance sheet:** Reports a company's assets, liabilities, and shareholders' equity at a specific point in time. * **Shareholders' equity:** The amount of money that shareholders have invested in a company and the profits that have been retained. It is calculated as Assets - Liabilities. * **Cash (and equivalents):** Includes physical currency, bank deposits, and highly liquid short-term investments that can be readily converted to cash. * **Retained earnings:** The portion of a company's net income that is not paid out as dividends to shareholders but is kept by the company to reinvest in its operations or pay down debt. * **Cash flow statement:** Reports the cash generated and used by a company during a specific period. * **Deferred taxes:** Taxes that are owed but not yet paid, often due to differences between accounting and tax rules. * **Pure cash movement:** Highlights actual cash transactions, often undoing accrual accounting principles to show only cash inflows and outflows. * **Working capital:** The difference between a company's current assets and current liabilities. It indicates the company's liquidity and short-term financial health. * Amounts in parentheses typically indicate negative figures, such as cash outflows or liabilities. #### 1.4.3 The basics: bankruptcy Bankruptcy is a legal status of a person or other entity that cannot repay debts. * **To declare bankruptcy:** To formally state that a company is unable to pay its debts. * **Insolvent:** Unable to pay debts owed. * **Liquidation:** The process by which a company (or part of a company) is brought to an end, and its assets and property are redistributed. * **Claim:** A creditor's assertion of a right to payment from the debtor or the debtor's property. * **Lien:** The right to take and hold or sell the property of a debtor as security or payment for a debt or duty. * **Priority:** The ranking of claims that determines the order in which they will be paid if there is not enough money to pay all claims in full. * **Secured debt:** Debt that is backed by a mortgage, pledge of collateral, or other lien; debt for which the creditor has the right to pursue specific pledged property upon default. #### 1.4.4 Concepts related to insolvency Insolvency refers to a state of financial distress where an entity is unable to meet its financial obligations. * **Centre of Main Interests (COMI):** The location of a company's primary place of business and where its main interests are centered. This is a key factor in determining jurisdiction in cross-border insolvency cases. * **Undermined creditworthiness:** A situation where a company's ability to borrow money or obtain credit is weakened due to poor financial performance or reputation. * **Cessation:** The fact or process of ending or being brought to an end. * **To be delinquent on:** To fail to perform an obligation or duty, especially a financial one. * **To fall due:** To become payable or receivable at a specific time. ### 1.5 Unit 4: Preparation - Words in context: what is the NYSE? The New York Stock Exchange (NYSE) is a prominent global marketplace for securities. * **NYSE (New York Stock Exchange):** The world's largest securities exchange, providing a marketplace for buying and selling corporate stocks and other securities. * **Auction:** A public sale in which property or merchandise is sold to the highest bidder. In financial markets, it refers to the process of matching buyers and sellers. * **Broker:** An individual or firm that charges a fee or commission for executing buy and sell orders submitted by an investor. * **Dealer:** A person or firm in the business of buying and selling securities for their own account. * **Bid price:** The price at which a buyer is willing to purchase a security. * **Ask price:** The price at which a seller is willing to sell a security. * **Fee:** An amount of money paid for a particular piece of work or service. * **To execute a transaction:** To complete a buy or sell order for a security. ### 1.6 Unit 4: Stock markets This unit introduces stock markets, the types of markets and securities traded, and the various participants involved. #### 1.6.1 The basics: types of markets Stock markets facilitate the trading of securities, connecting buyers and sellers. * **Stock market:** A market where stocks (shares) of publicly listed companies are bought and sold. * **Primary market:** The market where new securities are issued for the first time by corporations or governments to investors. This is how companies raise new capital. * **Secondary market:** The market where previously issued securities are traded between investors. This provides liquidity for investors. * **Over-the-counter (OTC):** A decentralized market where participants trade securities directly with each other without a central exchange. #### 1.6.2 The basics: types of securities Securities are financial instruments that represent ownership or debt. * **Equity securities:** Represent ownership in a corporation. * **Common shares:** See 1.4.1. * **Preference shares (Preferred stock):** See 1.4.1. * **Debt securities (Fixed-income security):** Represent a loan made by an investor to a borrower (typically corporate or governmental). * **Bond:** See 1.4.1. * **Corporate bond:** A debt security issued by a corporation. * **Government bond:** A debt security issued by a national government. * **Maturity date:** The date on which the principal amount of a debt, such as a bond, is due to be repaid. * **Promise of repayment:** A commitment by the issuer to pay back the borrowed amount. * **Interest:** The cost of borrowing money or the return on an investment. #### 1.6.3 Building your vocabulary: derivatives Derivatives are complex financial instruments whose value is derived from an underlying asset. * **Derivative:** A contract between two or more parties whose value is based on an agreed-upon security and that is commonly used for hedging or speculation. The underlying assets can include stocks, bonds, commodities, currencies, interest rates, and market indices. * **To hedge:** To make an investment to reduce the risk of adverse price movements in an asset. * **To speculate:** To engage in risky financial transactions in an attempt to profit from fluctuation in the price of a financial instrument. * **Option:** A contract that gives the investor the right, but not the obligation, to buy (call option) or sell (put option) an asset at a fixed price on or before a specific date. * **Call option:** Gives the holder the right to buy an asset. * **Put option:** Gives the holder the right to sell an asset. * **In-the-money:** When an option is profitable to exercise immediately. * **Out-of-the-money:** When an option is not profitable to exercise immediately. * **Swap:** A customized, individual contract between two parties to exchange interest rates or currencies. * **Forward contract:** A customized contract to buy or sell an asset at a specified price on a future date. * **Future contract:** A standardized contract to buy or sell an asset at a predetermined price at a specified time in the future, traded on an exchange. #### 1.6.4 Language corner: contrasting concepts Understanding contrasting concepts is essential for clear communication, especially when explaining financial products or strategies. * **Market order vs. limit order:** A market order is an instruction to buy or sell a security at the best available current price, while a limit order is an instruction to buy or sell a security only at a specified price or better. * **Bull market vs. bear market:** A bull market is characterized by rising prices, while a bear market is characterized by falling prices. * **Hedge fund vs. mutual fund:** Mutual funds are pooled investment vehicles available to the general public, regulated by government authorities. Hedge funds are private investment partnerships that use aggressive strategies, often with less regulation. * **Ask price vs. bid price:** As discussed in 1.5. #### 1.6.5 The basics: types of investors and how they are protected Investors can be classified based on their investment style, background, and strategy. * **Active strategy:** Involves frequent buying and selling of securities with the aim of outperforming the market. * **Passive strategy:** Involves holding a diversified portfolio designed to mirror a market index, with minimal trading. * **Angel investor:** An individual or group who provides capital for a startup business, usually in exchange for convertible debt or ownership equity. * **P2P lender (Peer-to-peer lender):** An investor who lends money to individuals or businesses through online platforms. * **Personal investor:** An individual who invests their own capital for personal gain. * **Bank:** A financial institution that provides loans and other financial services. They can act as investors by providing capital. * **Venture capitalist:** A type of private equity investor that provides capital to firms exhibiting long-term growth potential, typically in the form of equity or through a structure that enables them to gain a stake in the firm. #### 1.6.6 Words in context: MiFID II/MiFIR MiFID II (Markets in Financial Instruments Directive II) and MiFIR (Markets in Financial Instruments Regulation) are EU regulations aimed at increasing transparency and investor protection in financial markets. * **Purpose of MiFID II/MiFIR:** To improve the transparency, efficiency, and competitiveness of financial markets, and to enhance investor protection. * **Harmonised protection:** A standardized level of investor protection across different member states of the European Union. * **Directive:** An EU law that sets out a goal that all EU countries must achieve. However, it is up to the individual countries to decide how to do this. * **Regulation:** An EU law that is binding and directly applicable in all member states without the need for national legislation. * **Dark pool:** A private forum or exchange for trading securities that is not accessible by the investing public. Trades are not disclosed in real-time. * **Central counterparty (CCP):** An entity that acts as an intermediary between buyers and sellers in a transaction, reducing counterparty risk by guaranteeing the completion of the trade. * * * # Corporate finance and financial statements This section explores the fundamental aspects of corporate finance, focusing on company capital, the essential financial statements, and concepts related to financial distress. ### 2.1 What is corporate finance? Corporate finance deals with the sources of funding and the capital structure of corporations, the actions that managers take to increase the value of the firm to shareholders, and the tools and analysis used to allocate financial resources. Key areas within corporate finance include: * **Capital investment:** The process of planning and managing a firm's long-term investments. This involves deciding which projects or assets to invest in to generate future returns. * **Tax considerations:** Understanding and managing the tax implications of business decisions. This involves optimizing the tax burden legally to maximize after-tax profits. * **Financial planning:** The process of setting financial goals and developing strategies to achieve them. This encompasses budgeting, forecasting, and managing financial risks. ### 2.2 Company capital Company capital refers to the financial resources a company needs to operate and grow. This can be sourced through various means, and understanding its structure is crucial. #### 2.2.1 Equity capital Equity represents ownership in a company. * **Ordinary shares:** These are common shares that represent ownership in a company and entitle the owner to a vote in matters put before shareholders, typically in proportion to their percentage ownership. They do not have predetermined dividend amounts. * **Preferred shares:** This class of ownership in a corporation has a higher claim on its assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders, and these shares usually do not carry voting rights. #### 2.2.2 Debt capital Debt represents borrowed money that must be repaid, usually with interest. * **Bonds:** A bond is a security that consists of a debt where the authorized issuer owes the holders a debt and is obliged to repay the principal and interest. * **Corporate bonds:** These are debt securities issued by corporations. * **Government bonds:** These are debt securities issued by governments. #### 2.2.3 Other concepts related to capital * **Shareholders' equity:** This is the total value of a person or company, calculated by subtracting liabilities from total assets. In accounting, equity is often represented as assets minus liabilities. * **Working capital:** This refers to the difference between a company's current assets and current liabilities. It represents the operational liquidity of a business and is a key indicator of short-term financial health. A positive working capital indicates that a company has sufficient funds to meet its short-term obligations. ### 2.3 Financial statements Financial statements are formal records of the financial activities and position of a business, person, or other entity. They provide a snapshot of a company's financial performance and health. The three primary financial statements are: #### 2.3.1 Income statement The income statement, also known as the profit and loss (P&L) statement, reports a company's financial performance over a specific accounting period. * **Sales revenue:** The total amount of money a company earns from its primary business activities, such as selling goods or services. * **Cost of goods sold (COGS):** The direct costs attributable to the production or purchase of the goods sold by a company. * **EBIT (Earnings Before Interest and Taxes):** A measure of a firm's profit that includes all revenues and expenses except interest expenses and income taxes. It reflects the profitability of a company's core operations. * **Matching principle:** This accounting principle requires that expenses be recorded in the same period as the revenues that generated them. * **Accrual accounting:** This method of accounting recognizes revenues when earned and expenses when incurred, regardless of when cash is exchanged. #### 2.3.2 Balance sheet The balance sheet provides a summary of a company's assets, liabilities, and shareholders' equity at a specific point in time. It is based on the fundamental accounting equation: Assets = Liabilities + Shareholders' Equity. * **Assets:** Resources owned by a company that have economic value and are expected to provide future benefits. * **Liabilities:** Obligations of a company to pay money or provide services to other entities. * **Shareholders' equity:** The residual interest in the assets of an entity after deducting all its liabilities. * **Cash and equivalents:** Highly liquid investments that can be readily converted into cash, such as short-term government bonds or money market funds. * **Retained earnings:** The portion of a company's net income that is not distributed to shareholders as dividends but is instead kept by the company to reinvest in its business or pay off debt. The term "retained" refers to the earnings being kept within the company. #### 2.3.3 Cash flow statement The cash flow statement tracks the movement of cash into and out of a company during a specific period. It is divided into three main activities: operating, investing, and financing. * **Deferred taxes:** Taxes that are owed but not yet paid. They arise from the difference between accounting profit and taxable profit. * **Pure cash movements:** The cash flow statement "undoes" accrual accounting principles to show the actual cash movements in and out of the business. This provides a clearer picture of a company's ability to generate cash. > **Tip:** The cash flow statement is crucial because it shows the actual cash a company has available to meet its obligations, unlike the income statement which can be affected by accrual accounting. ### 2.4 Bankruptcy and insolvency concepts Bankruptcy and insolvency refer to a company's inability to meet its financial obligations. #### 2.4.1 Bankruptcy Bankruptcy is a legal process that allows individuals or businesses that cannot repay their debts to a lender to be discharged from those debts. * **Bankruptcy:** The legal status of a person or entity that is unable to pay their debts. * **Insolvent:** A company that is no longer able to pay its debts. * **Liquidation:** The process by which a company (or part of a company) is brought to an end, and the assets and property of the company are redistributed. This can be voluntary or compulsory. * **Claim:** A creditor's assertion of a right to payment from the debtor or the debtor's property. * **Lien:** The right to take and hold or sell the property of a debtor as security or payment for a debt or duty. * **Priority:** The ranking of unsecured claims that determines the order in which unsecured claims will be paid if there is not enough money to pay all unsecured claims in full. * **Secured debt:** Debt that is backed by a mortgage, pledge of collateral, or other lien; debt for which the creditor has the right to pursue specific pledged property upon default. * **Declared bankruptcy:** To formally file for bankruptcy protection when a company's financial difficulties prevent it from continuing to operate independently. > **Tip:** While bankruptcy is a formal legal process, insolvency describes the state of being unable to pay debts, which may or may not lead to bankruptcy. #### 2.4.2 Concepts related to insolvency * **Undermined creditworthiness:** A situation where a company's ability to borrow money is significantly reduced due to its poor financial standing or past defaults. * **Center of Main Interests (COMI):** In the context of cross-border insolvency, COMI refers to the jurisdiction where a debtor company's main interests are located, which often determines which country's insolvency laws will apply. * **Pursuant to:** In accordance with or according to. * **Cessation:** The process of ending or stopping. * **To be delinquent on:** To be late or overdue in making a payment. * **To fall due:** When a payment or debt becomes payable. * **To enjoy discretion:** To have the freedom to make a decision or act as one thinks best. * * * # Stock markets and investment instruments This section delves into the fundamental components of stock markets, exploring various market types, securities, derivatives, and the protections afforded to different investor categories. ### 3.1 Types of markets Stock markets facilitate the buying and selling of securities. They can be broadly categorized into primary and secondary markets. * **Primary market:** This is where securities are created and sold for the first time. Issuers, such as corporations or governments, sell newly issued stocks or bonds directly to investors to raise capital. * **Secondary market:** This is where previously issued securities are traded among investors. The issuing entity is not directly involved in these transactions. This market provides liquidity for investors, allowing them to buy and sell securities after their initial issuance. Two prominent examples of secondary markets in the United States are the New York Stock Exchange (NYSE) and the NASDAQ. * **New York Stock Exchange (NYSE):** The NYSE is one of the world's largest securities exchanges, serving as a marketplace for trading a vast number of corporate stocks and other securities. It lists a significant percentage of major indices like the S&P 500 and the Dow Jones Industrial Average, as well as many of the world's largest corporations. Trading on the NYSE historically involved brokers on the trading floor who would auction securities, with brokers setting "bid" prices (what they are willing to pay) and dealers matching sellers who set "ask" prices (what they are willing to sell for). Dealers profit from the difference between the bid and ask prices. While floor trading still exists, a substantial portion of transactions now occur electronically. * **NASDAQ:** The NASDAQ is another major U.S. stock exchange known for its technology-heavy listings. It operates primarily as an electronic market, with computers matching buyers and sellers. **Over-the-counter (OTC) market:** This is a decentralized market where participants trade securities directly with each other, rather than through a central exchange. Prices are typically determined by negotiation between buyers and sellers, and it's common for less liquid or smaller companies' securities to be traded OTC. ### 3.2 Types of securities Securities are financial instruments that represent an ownership position in a publicly-traded corporation (stock), a creditor relationship with a governmental body or a corporation (bond), or rights to ownership as represented by an option. There are two fundamental types of securities: equity securities and debt securities. #### 3.2.1 Equity securities Equity securities represent ownership in a corporation. Holders of equity securities are known as shareholders. * **Common shares (Ordinary shares):** These are the most prevalent type of stock. They represent ownership in a corporation and typically come with voting rights, allowing shareholders to participate in key company decisions. Common shareholders are entitled to a share of the company's profits (through dividends) and its assets in case of liquidation, but only after debt holders and preferred shareholders have been paid. Their return is linked to the company's fortunes. * **Preferred shares (Preference shares):** These are a class of ownership that has a higher claim on a company's assets and earnings than common stock. Preferred shareholders usually receive a fixed dividend that must be paid out before any dividends are paid to common shareholders. They generally do not carry voting rights. #### 3.2.2 Debt securities Debt securities represent a loan made by an investor to a borrower (typically a corporation or government). The borrower promises to repay the principal amount of the loan on a specific date (maturity date) and usually pays periodic interest payments. These are also known as fixed-income securities. * **Bonds:** Bonds are a type of debt security where the issuer owes the holders a debt and is obliged to repay the principal and interest at a specified maturity date. * **Corporate bonds:** Issued by corporations to raise capital. * **Government bonds:** Issued by national governments to finance their spending. * **Other debt instruments:** Various other forms of debt exist, such as notes, debentures, and certificates of deposit, each with specific terms regarding repayment and interest. ### 3.3 Derivatives Derivatives are a class of securities whose value is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties. Its value is determined by fluctuations in the underlying asset, which can include stocks, bonds, commodities, currencies, interest rates, and market indices. Derivatives are primarily used for two main purposes: speculation and hedging investments. * **Speculation:** Using derivatives to bet on the future direction of an asset's price, aiming to profit from price movements. * **Hedging:** Using derivatives to reduce or offset the risk of adverse price movements in an underlying asset. #### 3.3.1 Types of derivatives * **Options:** An option is a contract that gives the investor the \_right, but not the obligation, to buy (call option) or sell (put option) an asset at a fixed price on or before a specified date. If the option is exercised, the investor can be "in-the-money" (profitable) or "out-of-the-money" (unprofitable). * **Futures Contracts:** A futures contract is a standardized legal agreement to buy or sell a particular commodity, asset, or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange. * **Forward Contracts:** Similar to futures, a forward contract is a customized contract between two parties to buy or sell an asset at a specified price on a future date. They are often used for hedging but are not standardized and are traded over-the-counter. * **Swaps:** A swap is a derivative contract through which two institutions exchange interest rates or currencies. They are customized and individual contracts, often used for hedging or speculation. ### 3.4 Types of investors and how they are protected Investors can be classified in various ways, including by their investment style, background, and strategy. Understanding these classifications is crucial for understanding regulatory protections. #### 3.4.1 Investor classification * **Active vs. Passive Strategy:** * **Active strategy:** Investors actively manage their portfolios, making frequent buy and sell decisions in an attempt to outperform market benchmarks. They often conduct in-depth research and analysis. * **Passive strategy:** Investors aim to match the performance of a market index by holding a diversified portfolio of securities that mirror the index. This approach typically involves less trading and lower fees. * **Investor Backgrounds:** * **Angel investor:** Typically an individual or group of individuals who provide capital to startups or small businesses in exchange for equity. They often invest in early-stage companies with high growth potential. * **P2P lender:** An investor who lends money to individuals or businesses through online peer-to-peer lending platforms. * **Personal investor (Retail investor):** An individual investing their own capital for personal gain. They may invest in various opportunities, including businesses, stocks, and bonds. * **Venture capitalist (VC):** An investor who invests in startups and small businesses that have been deemed to have long-term growth potential. VCs typically invest in exchange for equity. * **Bank:** Banks act as investors by providing loans to businesses and individuals, earning returns through interest payments. #### 3.4.2 Investor protection Regulatory frameworks exist to protect investors from fraud, manipulation, and unfair practices. * **MiFID II/MiFIR (Markets in Financial Instruments Directive II / Markets in Financial Instruments Regulation):** These EU regulations aim to ensure a high degree of harmonized protection for investors in financial instruments. They cover areas such as transparency, market structure, and investor conduct. * **Harmonised protection:** This refers to a consistent and uniform level of investor protection across all member states of the European Union. * **Directive vs. Regulation:** A directive sets out a goal that all EU countries must achieve, but it is up to each country to decide how to implement it into national law. A regulation is a binding legislative act that must be applied in its entirety across the EU. * **Dark Pools:** These are private financial forums or exchanges for trading securities. They are called "dark" because they are generally inaccessible to the investing public. Trades executed in dark pools are typically not reported publicly until after they have been completed, leading to a lack of pre-trade transparency. * **Central Counterparty (CCP):** A CCP acts as an intermediary between buyers and sellers in financial transactions, becoming the buyer to every seller and the seller to every buyer. This role is crucial in managing counterparty risk, as it guarantees the completion of trades even if one party defaults. > **Tip:** Understanding the distinction between different investor types (e.g., retail vs. institutional, active vs. passive) is important for grasping the varying levels of regulatory scrutiny and protections they receive. Institutional investors, due to their sophistication and size, often have different regulatory requirements and protections than individual retail investors. * * * # Common language errors and vocabulary building This section focuses on common pitfalls in financial English, including subject-verb agreement and precise word usage, alongside effective strategies for expanding one's financial vocabulary. ### 4.1 Common Language Errors This subsection details frequent mistakes students make, which can negatively impact their grades and professional communication. #### 4.1.1 Subject/verb agreement A verb must agree in number (singular or plural) with its subject. A singular subject requires a singular verb, and a plural subject requires a plural verb. Teachers are particularly attentive to the absence of the '-s' ending on third-person singular subjects in the present tense. > **Example:** > > * ✅ CORRECT: "That company **is** listed on the Stock Exchange." > > * ✅ CORRECT: "Companies **benefit** from additional funding." > > * ❌ WRONG: "He **work** for InBev." (Should be "He works") > #### 4.1.2 Adjective/Adverb An adjective modifies a noun or pronoun and is often used with the verb 'to be'. An adverb, on the other hand, modifies a verb, an adjective, or another adverb. Many adjectives are formed by adding '-ly' to another adjective. > **Example:** > > * "A **successful** firm." (Adjective modifying the noun "firm") > > * "He **is successful**." (Adjective used with the verb 'to be') > > * "He negotiated the deal **successfully**." (Adverb modifying the verb "negotiated") > > * "A **successfully modified** product." (Adverb modifying the adjective "modified") > #### 4.1.3 Uncountable nouns Uncountable nouns, such as \_advice, \_information, \_transport, \_research, and \_training, do not have singular or plural forms. They cannot be used with articles like "a" or "an," nor with quantifiers like "many" or "few." > **Example:** > > * ❌ WRONG: "I gave him **an advice**." > > * ✅ CORRECT: "I gave him **some advice**." or "I gave him **a piece of advice**." > #### 4.1.4 Commonly confused words Several pairs of words are frequently mistaken for one another. It is crucial to understand their distinct meanings and usage. * **To vs. too:** * `to`: Used as a preposition (e.g., "a trip to London") or an infinitive marker (e.g., "something to do," "to work"). * `too`: Used as an adverb, indicating excess (e.g., "too red," "too much"). * **They’re vs. their vs. there:** * `they're`: Contraction of "they are." * `their`: Possessive pronoun (e.g., "their home"). * `there`: Indicates a place or existence. * **Were vs. where:** * `were`: Past tense of "to be." * `where`: Interrogative adverb used to ask about place. * **Then vs. than:** * `then`: Refers to time (e.g., "Then she kissed me."). * `than`: Used for comparison (e.g., "larger than him"). * **Your vs. you’re:** * `your`: Possessive pronoun (e.g., "your book"). * `you’re`: Contraction of "you are." * **Of vs. off:** * `off`: Can indicate separation or a state of being turned off (e.g., "The plane took off," "Switch off the light," "gives off a suspicious smell"). * `of`: Indicates possession, origin, or composition (e.g., "made of wool," "of Spanish descent," "member of a social club"). > **Tip:** Create flashcards or a personal dictionary with these commonly confused words, including their definitions and example sentences, to aid memorization. #### 4.1.5 Use of texting language Avoid informal abbreviations and language typically found in text messages (e.g., "u" for "you," "i" for "I"). Maintain the appropriate language register, whether formal or informal, depending on the context. ### 4.2 Building your vocabulary Effective vocabulary building in finance involves understanding core concepts, recognizing word families, and actively engaging with new terms. #### 4.2.1 Understanding finance categories Finance can be broadly divided into three major areas: * **Personal finance:** Deals with the financial decisions and activities of individuals and households, such as budgeting, saving, investing, and managing debt. * **Public finance:** Concerns the financial activities of governments, including taxation, government spending, and debt management. * **Corporate finance:** Focuses on the financial decisions and actions of corporations, including capital investment, financial planning, and tax considerations. #### 4.2.2 Word families and derivations Recognizing how words can change form (e.g., a verb becoming a noun or adjective) is a powerful tool for vocabulary expansion. > **Example:** > > * **Verb:** `To invest` > > * **Noun:** `Investment` > > * **Adjective:** `Investable` > #### 4.2.3 Creating a personal vocabulary list A structured approach to vocabulary building can significantly enhance learning. A recommended format for a vocabulary list includes: * **Word:** The basic form of the word (verb or concept). * **Synonym:** Other words with similar meanings, useful for understanding nuances (caution: not all synonyms are appropriate in legal or specific financial contexts). * **Definition:** A clear explanation of the word, ideally from the syllabus or a reliable dictionary. The goal is to be able to explain the word, not necessarily to memorize it verbatim. * **Sample sentence:** An example sentence demonstrating the correct usage of the word in its intended context. It's important to ensure the sample sentence reflects the correct meaning of the word, especially for words with multiple definitions. > **Tip:** Do not translate words directly into your native language. Focus on understanding and using the word correctly in English. #### 4.2.4 Vocabulary related to specific financial topics * **Budgeting:** Key terms include \_fixed expenses, \_flexible expenses, \_income, \_expenses, \_disposable income, \_balanced budget, \_budget deficit, \_emergency fund, and \_risk management. * **Inflation:** Concepts such as \_inflation rate, \_consumer price index, \_purchasing power, and \_deflation are crucial. * **Corporate Finance:** Vocabulary encompasses \_capital structuring, \_financial planning, \_share, \_bond, \_equity, \_debt, \_articles of association, and \_memorandum of association. * **Bankruptcy and Insolvency:** Essential terms include \_insolvent, \_liquidation, \_claim, \_lien, \_priority, \_secured debt, \_voluntary liquidation, and \_compulsory winding-up. * **Stock Markets:** Understanding terms like \_broker, \_dealer, \_primary market, \_secondary market, \_stock exchange, \_equity security, \_debt security, \_derivative, \_to hedge, and \_to speculate is vital. * **Types of Securities:** Differentiating between \_equity securities (e.g., \_ordinary share, \_preference share) and \_debt securities (e.g., \_corporate bond, \_government bond) is fundamental. * **Derivatives:** Key terms include \_swap, \_option, \_forward contract, \_future contract, \_call option, and \_put option. * **Types of Investors:** Familiarity with categories such as \_angel investor, \_venture capitalist, and \_personal investor is important. > **Tip:** When encountering new vocabulary, try to identify its root, prefix, and suffix to understand its meaning and potential derivatives. This strengthens your grasp of word families. * * * ## Common mistakes to avoid * Review all topics thoroughly before exams * Pay attention to formulas and key definitions * Practice with examples provided in each section * Don't memorize without understanding the underlying concepts

| Term | Definition | |------|------------| | Finance | The management of large amounts of money, especially by governments or large companies; the management of money and investments. | | Budgeting | The process of creating a plan to spend your money. It involves tracking income and expenses to allocate funds effectively. | | Inflation | A general increase in prices and fall in the purchasing value of money; the rate at which prices are rising and consequently the purchasing power of currency is falling. | | Corporate finance | The division of finance dealing with financial activities of corporations, including funding, capital structuring, and investment decisions. | | Financial statements | Formal records of the financial activities and position of a business, person, or other entity. Key statements include the income statement, balance sheet, and cash flow statement. | | Bankruptcy | A legal status of a person or entity that cannot repay debts; it involves a court-supervised process for dealing with insolvent debtors. | | Insolvency | The state of being unable to pay one's debts; the inability to meet financial obligations as they fall due. | | Stock markets | A centralized or decentralized market where shares of publicly-traded companies are bought and sold, facilitating the exchange of ownership stakes. | | Securities | Tradable financial assets, such as stocks and bonds, that represent ownership or a creditor relationship with an entity. | | Derivatives | Financial contracts whose value is derived from an underlying asset, such as stocks, bonds, commodities, or currencies; used for hedging or speculation. | | Equity securities | Securities that represent ownership in a corporation, such as common stock and preferred stock, entitling holders to a share of profits and assets. | | Debt securities | Securities that represent borrowed money that must be repaid, usually with interest, such as bonds and debentures. | | Investor protection | Measures and regulations designed to safeguard investors from fraudulent or unfair practices in financial markets. | | Liability | A person or entity's legal responsibility for something, especially debts or financial obligations. | | Asset | Anything of value owned by an individual or company, which can be converted into cash. | | Working capital | The difference between a company's current assets and current liabilities, representing the company's short-term financial health and operational efficiency. | | Shareholder's equity | The value of a company's assets that belongs to its owners or shareholders; calculated as total assets minus total liabilities. | | EBIT | Earnings Before Interest and Taxes; a measure of a company's operating profit before accounting for interest expenses and income taxes. | | COGS | Cost of Goods Sold; the direct costs attributable to the production or purchase of the goods sold by a company during a period. | | Primary market | A market where securities are created and sold for the first time, such as during an initial public offering (IPO). | | Secondary market | A market where previously issued securities are bought and sold among investors, such as stock exchanges. |