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
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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.
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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.
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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
### What happens in the "clearing" process for a check in banking?
- [x] Collection of funds from the issuing bank and payment to the check holder.
- [ ] Immediate transfer of cash from the issuing bank to the Federal Reserve.
- [ ] Continuous round-the-clock transfer between banks.
- [ ] Instant crediting to the check depositor's account regardless of funds availability.
> **Explanation:** Clearing a check involves collecting funds from the bank that issued the check and then crediting those funds to the account of the person who received the check.
### How is "clearing a profit" defined?
- [ ] Revenue generation before subtracting any expenses.
- [ ] Total earnings from sales before deducting taxes.
- [ ] Net profit after all expenses have been subtracted.
- [ ] Transactions without any form of taxation.
> **Explanation:** "Clearing a profit" means the net earnings a company has after subtracting all its expenses from its revenue.
### In the context of finance, what does an "unencumbered asset" indicate?
- [ ] An asset with outstanding loans or claims against it.
- [ ] An asset free of any liens or legally owed debts.
- [ ] An asset channeled through multiple holders.
- [ ] A frozen asset due to legal complications.
> **Explanation:** An unencumbered asset is one that is free of any liens, debts, or other charges against it, making it fully available for use or sale.
### Why is the clearing process essential in securities?
- [x] To verify and confirm the details of a transaction before settlement.
- [ ] To allow immediate exchange of securities ignoring transaction specifics.
- [ ] To briefly hold securities without final exchange.
- [ ] To evade temporary settlement-related processes.
> **Explanation:** In securities, clearing ensures that all the details of a transaction between brokerage firms are confirmed and accurate before the actual exchange of securities for cash.
### How long can the typical process of clearing a check take?
- [ ] Within the hour.
- [x] Typically between 1-5 business days.
- [ ] Over 30 days.
- [ ] It does not involve any delay.
> **Explanation:** The process typically takes from 1 to 5 business days depending on the banks involved and the transaction amount.
### What is the primary goal of the clearing process in financial markets?
- [ ] Immediate liquidity provision.
- [ ] Risk-free investment without any intermediary checks.
- [x] To ensure accurate transaction details and facilitate trade settlements.
- [ ] Shortening transaction processing times without accuracy verification.
> **Explanation:** Clearing seeks to guarantee that transaction details are accurate and facilitate the final settlement of trades, ensuring a smooth exchange of securities and cash.
### What risks are mitigated through the clearing process?
- [ ] Market value fluctuations.
- [x] Settlement risks including defaults and inaccuracies.
- [ ] Competitive market acquisitions.
- [ ] Long-term value depreciation.
> **Explanation:** The clearing process helps mitigate settlement risks such as defaults and inaccurate transaction details, ensuring the integrity and reliability of financial markets.
### In which context is an asset considered "clear"?
- [x] When it is free of encumbrances such as liens.
- [ ] When it has active and ongoing loans.
- [ ] When subjected to multiple liens and tax issues.
- [ ] When it is physically liquidated.
> **Explanation:** An asset is considered "clear" in finance when it is free of any encumbrances like liens, making it available for other uses or sale.
### What is the role of the Federal Reserve in check clearing?
- [ ] Executing personal loan contracts.
- [ ] Issuing new checks.
- [x] Assisting in the collection and payment of interbank checks.
- [ ] Initiating direct currency exchanges.
> **Explanation:** The Federal Reserve plays a role in facilitating the collection and payment of interbank checks, helping streamline the check clearing process.
### In competitive finance, what does the term "clear of expenses" imply?
- [ ] Having infinite resources.
- [ ] Always incurring additional costs.
- [x] Earning net profit after covering all costs.
- [ ] Exclusively generating gross revenue.
> **Explanation:** "Clear of expenses" means that the remaining profit has been calculated after all operational costs and expenses have been deducted from the gross revenue, leading to net earnings.
Thank you for exploring the intricacies of financial terminology and testing your comprehension with our sample questions.
