The first Financial Jargon Buster

The first Financial Jargon Buster - Afrika Kesho

I’ve studied quantum mechanics, cosmology and mathematics, and I’ve come across terms like bremsstrahlung, blackbody radiation, and cholesky factorization, but none of the terms in any of those subjects are ever as difficult to understand as the terms in the world of finance. And it’s all very systemic, because if you don’t understand something, then you either have to rely on someone else who understands it, or you can easily be taken advantage of. That’s why important it is to understand financial terms, and so it is important have jargon busters like this one.

Because the jargon in the financial industry is systematically difficult, we need to make jargon busters systemically easy to understand. I’m going to start with the basics of how the finance industry works, and then delve deeper and deeper in future jargon busters. This is the first in a series of jargon busters, keep your eyes open for the next editions.

Here’s a short list of words and terms that serve as an introduction into the world of finance. I tried my best to let them flow in a certain kind of order:

1. Financial instruments, financial securities or financial claims are certificates or some form of contracts that have monetary value, can be traded and entitle you to payment in the future. An example of a financial instrument is government bonds.

2. The financial system is made up of financial markets, financial intermediaries and other financial institutions that carry out the financial decisions of households, businesses and governments.

3. The term financial markets includes marketplaces and the systems around them where financial securities can be bought and sold.

4. Lenders (or investors) are those who buy or invest in securities. Lenders save.

5. Borrowers are those who use the savings. They borrow the money, and by doing that they are issuing the securities that are being bought by lenders. As an example, if you buy a government bond, you are the lender, and the government is the borrower.

6. Financial intermediaries are how money flows from lenders to borrowers. They serve as both issuers and buyers of securities and other debt instruments because they buy from lenders and sell to borrowers. Banks and insurance companies are examples of financial intermediaries.

7. Brokers (or agents) buy and sell financial securities on behalf of lenders and borrowers.

8. Financial advisors guide investors on their investments and give recommendations on which financial securities to buy or invest in.

9. Dealers (or jobbers) buy and sell financial securities for their own account.

10. The bid price is the maximum price that a buyer is willing to pay for a financial security.

11. The ask (or offer) price is the minimum price that a seller is willing to sell that same financial security.

12. Market makers make it easier for buyers and sellers to transact by being willing to buy or sell certain securities at all times. They quote both a bid and an offer price to the market and profit from the difference between the bid and offer prices, called the spread, as well as from changes in market prices.

I hope that I simplified these terms and have helped you understand the world of finance more.

Happy investing!

This article was written by Tumelo Koko.

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