Definition
Clear in financial terminology is used across multiple contexts including banking, finance, and securities. The specific meaning can vary depending on the precise financial environment:
- Banking: Collection of funds from the bank that issued the check and payment of those funds to the holder of the check.
- Finance: In finance, “clear” refers to assets that are free of any encumbrances or liens. It also refers to making a profit after all expenses have been subtracted, e.g., “After all expenses, they cleared $1 million.”
- Securities: The processes involved in confirming the details of a transaction between brokering parties before settlement and the final exchange of securities for cash on delivery.
Examples
Banking: When you deposit a check into your bank account, the bank must clear the check by ensuring the funds are available from the issuing bank and then crediting those funds to your account.
Finance: A company reporting its annual revenue might state “We cleared a profit of $2 million,” indicating earnings after all expenses have been accounted for.
Securities: A trade executed on a stock exchange involves “clearing”—the verification and validation of transaction details between brokers, ensuring that the securities and cash will be appropriately exchanged.
Frequently Asked Questions
What does it mean to “clear” a check?
Clearing a check involves the collecting bank ensuring there are sufficient funds in the account of the drawer (the person who wrote the check) and then transferring those funds to the account of the payee (the person depositing the check).
How long does the clearing process usually take?
The clearing time can vary but usually takes between 1-5 business days depending on the banks and the amount of the check.
Can a company clear a profit even if it has outstanding debts?
Yes, “clearing a profit” refers specifically to the net earnings after expenses. Outstanding debts affect the balance sheet and debt servicing capabilities, but they do not directly influence the calculation of net profit.
Related Terms
- Settlement: The actual exchange of securities for cash in a transaction, occurring after the clearing phase.
- Encumbered Asset: An asset that has a lien or claim against it, such as a mortgage or other loan.
- Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
- Balance Sheet: A financial statement summarizing a company’s assets, liabilities, and equity at a specific point in time.
Online References
Suggested Books
- “Principles of Banking” by George R. Maisel
- “Financial Markets and Institutions” by Frederic S. Mishkin
- “Securities Operations: A Guide to Trade and Position Management” by Michael Simmons
Fundamentals of Clearing: Finance Basics Quiz
Thank you for exploring the intricacies of financial terminology and testing your comprehension with our sample questions.