Investment Foundations® Certificate Glossary

Investment
Foundations®
Certificate
Glossary
The A to Z of finance and investments.
Expand your business vocabulary and master
the key concepts of the financial industry.

The Investment Foundations® Certificate

This Certificate provides:
The Investment Foundations Certificate opens
• An introduction to the language
the door to the language of finance. By investing
of finance
less than 100 hours of self-paced study time,
• An introduction to the key roles you can be fluent in the meta-concepts and
and functions in investment economic influences that make the global
management investment world tick.
• The global forces affecting the
evolution of the investment This certificate is designed to provide
market anyone with real, tangible knowledge of the
• Real-world scenarios that help fundamentals of the investment industry, and
turn abstract concepts into living helps those in professional disciplines outside
stories of investment management to better understand
and communicate complex economic and
investment issues.

The language of investments and finance is a

world unto itself. The Investment Foundations
Certificate opens up this world, revealing a
Key facts: galaxy of investment instruments and global
• Beginner level certificate markets, and the microeconomic conditions
• Format: online, self-paced and far-reaching innovations influencing them
• Price: $350 around the world. The Investment Foundations
• Time commitment: 60-90 hours Certificate lays the groundwork for your entry
to complete into this world, a starting point for your financial
• Content access: 12 months education, whether you are just an “investment-
• Certificate of completion curious” student, or a professional who needs to
understand the language and rationale used by
your investment colleagues.

© 2023 CFA Institute. All rights reserved. 1

Investment Foundations® Certificate Glossary

Active investment managers Brokerage services

Investment managers who try to predict which Trading services provided to clients who want to buy
securities and assets will outperform or underperform and sell securities; they include not only execution
comparable securities and assets and who act on services (that is, processing orders on behalf of clients)
their opinions by buying the securities and assets that but also investment advice and research.
they expect to outperform and selling (or simply not
buying) the securities and assets that they expect to Brokers
underperform. Trading services providers who act as agents and, in
exchange for a commission, arrange trades by finding
Adverse selection sellers for their clients who want to buy and buyers for
Tendency of people who are most at risk to buy their clients who want to sell.
insurance, causing insured losses to be greater than
average losses. Buy-side firms
Institutional investors and investment managers who
Animal welfare purchase investment products and services from sell-
How an animal copes with the conditions in which it side firms.
lives.
Capitalism
Asset allocation An economic system that promotes private ownership
The process to determine the proportion of a portfolio as the means of production and markets as the means
to hold in various asset classes or the proportion of a of allocating scarce resources.
portfolio held in various asset classes.
Circular economy
Asset managers An economic model based inter alia on sharing, leasing,
See investment managers. reuse, repair, refurbishment, and recycling, in an
(almost) closed loop, which aims to retain the highest
Assets utility and value of products, components and materials
Items that have value and include real assets and at all times.
financial assets.
Clearing
Back office All activities that occur from the arrangement of the
Administrative and support functions necessary to trade to its settlement.
run the firm, including accounting, human resources,
payroll, and operations. Clearing houses
Trading services providers that arrange for final
Banks settlement of trades.
Financial institutions that collect deposits from savers
and transform them into loans to borrowers. Conflict of interest
When either the employee’s personal interests or the
Best-in-class investment employer’s interests conflict with the interests of
Investment approach of selecting only the companies the client. Conflicts of interest can also arise when
that overcome a defined ranking hurdle, established employee’s and employer’s interests conflict.
using ESG criteria within each sector or industry.
Controversial sourcing
Bias Ethically debatable cost-driven practices of companies
A set of assumptions and stereotypes that people have in their value chain.
about those different from themselves. Biases may
be conscious or unconscious — that is, intentional or Credit rating agencies
unintentional. Investment research service providers that specialise
in providing opinions about the credit quality of bonds
Block brokers and of their issuers.
Brokers who help investors who want to trade large
blocks of securities.

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Investment Foundations® Certificate Glossary

Custodians Ethical and faith-based investment

Typically, banks and brokerage firms that hold money Ethical (also known as values-driven) and faith-
and securities for safekeeping on behalf of their clients. based investment refers to investing in line with
certain principles, usually using negative screening
Data vendors to avoid investing in companies whose products and
Investment research service providers of historical and services are deemed morally objectionable by the
real-time data about companies and market conditions. investor or certain religions, international declarations,
conventions, or voluntary agreements.
Dealers
Trading services providers who participate in their Equity
clients’ trades and stand ready to buy or sell when Fairness of access, opportunity, and advancement
their clients want to sell or buy, providing liquidity and for all within an organisation, which requires
profiting when they can buy securities for less than eliminating barriers and addressing root causes that
they sell them. Also called market makers. have prevented underrepresented groups from fully
participating in the workplace.
Depositories
Typically, banks and brokerage firms that are regulated Financial assets
and act not only as custodians but also as monitors, Claims on other assets; for example, a share of stock
playing an important role in preventing investment represents ownership in a company or a claim to some
fraud. of the company’s assets and earnings.

Deposit-taking institutions Financial capital

Financial institutions that take deposits, such as banks; Money provided to individuals, companies, and
also called depository institutions. governments to finance their needs.

Direct discrimination Financial institutions

When an individual is discriminated against because of Financial intermediaries, such as banks and insurance
a personal characteristic they possess or are perceived companies, whose role is to collect money from savers
to possess. and to invest it in financial assets.

Diversity Financial intermediaries

Refers to the full spectrum of human attributes, Organisations that act as middlemen between those
perspectives, identities, and backgrounds. who have money and those who need money.

Emissions Financial markets

Pollution discharged into the atmosphere from Places where buyers and sellers can trade securities;
smokestacks, other vents, and surface areas of also called securities markets.
commercial or industrial facilities; residential chimneys;
and motor vehicle, locomotive, or aircraft exhausts. Financial planners
Investment professionals who help their clients set
Environmental, social, and governance (ESG) factors their financial goals and determine how much money
Environmental factors pertain to the natural world. they should save for future expenses and/or how much
Social factors affect the lives of humans. Governance money they can spend on current expenses while still
factors involve issues tied to countries or jurisdictions preserving their capital.
or are common practice in an industry as well as the
interests of broader stakeholder groups. Financial services industry
Industry that offers a range of products and services to
ESG investing those who have money to invest and those who need
An approach to managing assets in which investors money and help channel funds between them.
explicitly acknowledge the relevance of environmental,
social, and governance (ESG) factors in their investment Fraud
decisions as well as their own role as owners and Intentional deception, such as deliberately causing
creditors, with the long-term return of an investment or falsely reporting losses to collect insurance
portfolio in mind. It aims to correctly price social, settlements.
environmental, and economic risks and opportunities.

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Investment Foundations® Certificate Glossary

Front office Indirect discrimination

Client-facing activities that provide direct revenue A situation in which a condition, that has no objective
generation, such as sales, marketing, and customer justification, applies equally to everyone but puts
service activities. individuals that share a personal characteristic at a
disadvantage.
Green bonds
Innovative financial instruments from which the Inclusion
proceeds are invested exclusively (either by specifying A dynamic state of operating in which any employee
the use of the proceeds, direct project exposure, or can be and feel respected, valued, safe, and fully
securitisation) in green projects that generate climate engaged.
or other environmental benefits.
Insurance companies
Green investment Financial institutions that help individuals and
Allocating capital to assets that mitigate the following companies offset the risks they face; also among the
climate change, biodiversity loss, resource inefficiency, largest investors.
and other environmental challenges (e.g., low carbon
power generation and vehicles, smart grids, energy Investment banks
efficiency, pollution control, recycling, and waste Financial intermediaries that assist companies and
management). governments raise capital and can provide other
services, such as strategic advisory services,
Greenhouse gas (GHG) brokerage and dealing services, and research services;
Gases (including carbon dioxide (CO2), water vapour, also known as merchant banks.
methane, and nitrous oxide) that interact with infrared
radiation and, when present in the atmosphere, have Investment industry
the effect of warming the global climate. Without Subset of the financial services industry that
naturally occurring GHGs, the earth’s temperature would comprises all the participants that are instrumental in
be several tens of degrees Celsius colder than it is now helping savers invest their money and spenders raise
(and life would not have evolved in its current form). capital in financial markets.

Harassment Investment managers

Unwanted conduct, verbal and/or physical, that has the Investment professionals who receive authority from
effect of making a person uncomfortable, embarrassed, their clients to trade securities and assets on their
intimidated, or distressed. Sexual harassment is one of behalf. Also called asset managers.
the most common types of harassment.
Loyalty
Human rights An expectation that employees will place the
Rights inherent to all human beings, regardless of employer’s interests above their own and will not
race, sex, nationality, ethnicity, language, religion, misappropriate a company’s property.
or any other status. Human rights include the right
to life and liberty, freedom from slavery and torture, Market makers
freedom of opinion and expression, the right to work See dealers.
and education, and many more. Everyone is entitled to
these rights without discrimination. Middle office
Core activities of a firm, such as risk management,
Impact investing information technology, corporate finance, portfolio
Impact investing refers to investments made with the management, and research.
specific intent of generating positive, measurable social
and environmental impact alongside a financial return Moral hazard
(which differentiates it from philanthropy). Tendency of people to be less careful about avoiding
losses once they have purchased insurance, potentially
leading to losses occurring more often when they are
insured than when they are not.

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Investment Foundations® Certificate Glossary

Passive investment managers Securities

Managers who follow a buy-and-hold approach and Financial assets that can be traded, such as shares
seek to match the return and risk of a benchmark. and bonds.

Payout policies Sell-side firms

Guiding principles that specify how much money an Typically, investment banks, brokers, and dealers that
institution, such as a foundation or an endowment provide investment products and services.
fund, can take from long-term funds to use for current
spending. Settlement
Activity that consists of the final exchange of cash for
Physical capital securities following a trade.
The means of production; tangible goods such as
equipment, tools, and buildings. Settlement risk
The risk that when settling a transaction, a firm
Physical climate-related risks performs one side of the deal but the counterparty
Risks resulting from extreme weather events, either does not complete its side of the deal as agreed, often
acute or chronic risks from longer-term shifts in climate because it has declared bankruptcy.
patterns — for example, higher temperatures.
Shareholder engagement
Portfolio The active process of dialogue with a company in
The group of assets in which savings are invested. which the investor is seeking specific change. This can
often be a lengthy process and involve many iterations
Primary dealers of contact with senior representatives of the company.
Dealers with which central banks trade when
conducting monetary policy. Social investment
Allocating capital to assets that address social
Prime brokerage challenges.
Bundle of services that brokers provide some of their
clients, including typical brokerage services and Socially responsible investment (SRI)
financing of their clients’ positions. SRI refers to approaches that apply social and
environmental criteria to evaluate companies. Investors
Product liability implementing SRI often score companies using a
The legal responsibility imposed on a business for the chosen set of criteria in conjunction with sector-
manufacturing or selling of defective goods. specific weightings. A hurdle level is established for
qualification within the investment universe based
Proprietary traders on using either the full universe or sector-by-sector
Traders who trade directly with their clients rather analysis.
than by arranging trades with others on behalf of their
clients. Stewardship
The broad term for an investor operating as a good
Real assets long-term owner of assets, standing in the shoes of
Physical assets, such as land, buildings, machinery, their underlying clients to ensure that value is added or
cattle, and gold. preserved over time.

Responsible investment Sustainable Development Goals (SDGs)

A strategy and practice to incorporate ESG factors A set of global goals set in 2015 by the UN General
into investment decisions and active ownership. Assembly (UNGA), succeeding the Millennium
It considers both how ESG might influence the Development goals. The SDGs seek to address the key
risk-adjusted return of an asset and the stability global challenges, including those related to poverty,
of an economy as well as how investment in and inequality, climate change, environmental degradation,
engagement with assets and investees can impact peace, and justice. There are 17 interconnected goals.
society and the environment.

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Investment Foundations® Certificate Glossary

Sustainable investment Transition risk

Sustainable investment refers to the selection of Transition risk relates to risks that result from changes
assets that contribute in some way to a sustainable in climate and energy policies, a shift to low-carbon
economy; that is, an asset that minimises natural and technologies and liability issues.
social resource depletion. It is a broad term that may
be used for the consideration of typical ESG issues Triple bottom line (TBL)
and may include best-in-class. It can also include ESG The triple bottom line (TBL or 3BL) is an accounting
integration, which considers how ESG issues impact a framework with three parts: social, environmental (or
security’s risk and return profile. ecological), and financial (people, planet, and profit).

Thematic investment
Selecting companies that fall under a sustainability-
related theme, such as clean-tech, sustainable
agriculture, healthcare, or climate change mitigation.