Financial Glossary

A comprehensive guide to the terminology and concepts driving the global markets.

126 terms

A

Accrued Interest: Interest that has accumulated on a bond or loan since the last payment date but has not yet been paid.
Alpha: A measure of the active return on an investment compared to a market index or benchmark.
Amortization: The gradual reduction of a debt through scheduled payments or the allocation of an intangible asset cost over time.
Annual Percentage Rate (APR): The annualized cost of borrowing, including interest and certain fees, expressed as a percentage.
Annual Percentage Yield (APY): The annual return on an interest-bearing account after accounting for compounding.
Arbitrage: The simultaneous purchase and sale of an asset in different markets to profit from a temporary price difference.
Ask Price: The lowest price at which a seller is currently willing to sell a security.
Asset Allocation: The division of a portfolio among asset classes such as stocks, bonds, cash, and alternatives.
Assets Under Management (AUM): The total market value of investments managed by a fund, adviser, or financial institution.

B

Basis Point: One one-hundredth of a percentage point; 100 basis points equal one percentage point.
Bear Market: A market condition in which the prices of securities are falling, usually defined by a drop of 20% or more from recent highs.
Beta: A measure of how sensitive an investment is to movements in its benchmark or the broader market.
Bid Price: The highest price a buyer is currently willing to pay for a security.
Bid-Ask Spread: The difference between the highest current bid and the lowest current ask for a security.
Bond: A debt security through which an investor lends money to an issuer in exchange for interest and repayment of principal.
Book Value: A company's assets minus its liabilities as reported on its balance sheet.
Bull Market: A financial market in which prices are rising or are expected to rise continually.

C

Callable Bond: A bond the issuer may redeem before maturity under terms stated in the bond agreement.
Capital Gain: The profit realized when an asset is sold for more than its purchase price.
Capital Loss: The loss realized when an asset is sold for less than its purchase price.
Capitalization-Weighted Index: An index in which companies with larger market values have a greater effect on performance.
Cash Flow: The net amount of cash and cash equivalents moving into and out of a business or investment.
Certificate of Deposit (CD): A bank deposit that pays a stated interest rate for leaving funds deposited until a specified maturity date.
Common Stock: An ownership security that generally carries voting rights and a residual claim on company earnings and assets.
Compound Interest: Interest calculated on both the original principal and previously accumulated interest.
Consumer Price Index (CPI): A measure of changes over time in prices paid by consumers for a representative basket of goods and services.
Convertible Bond: A bond that may be converted into a specified number of the issuer's common shares.
Correlation: A statistic ranging from minus one to one that describes how closely two investments move in relation to each other.
Coupon Rate: The annual interest paid by a bond issuer as a percentage of the bond's face value.
Credit Rating: An assessment of an issuer's ability and willingness to meet its debt obligations.
Credit Risk: The risk that a borrower or bond issuer will fail to make required principal or interest payments.
Current Ratio: A liquidity measure calculated by dividing current assets by current liabilities.
Current Yield: A bond's annual coupon payment divided by its current market price.

D

Debenture: An unsecured bond backed by the issuer's general creditworthiness rather than specific collateral.
Debt-to-Equity Ratio: A leverage measure calculated by dividing a company's total debt by shareholders' equity.
Default: Failure by a borrower or issuer to meet a required debt payment or another contractual obligation.
Deflation: A sustained decline in the general price level of goods and services.
Dilution: A reduction in existing shareholders' ownership percentage or earnings per share caused by the issuance of additional shares.
Discount Rate: The rate used to convert future cash flows into present value; it may also refer to a central bank lending rate.
Diversification: The practice of spreading investments across holdings or asset classes to reduce concentration risk.
Dividend: A distribution of a portion of a company's earnings, decided by the board of directors, paid to a class of its shareholders.
Dollar-Cost Averaging: Investing a fixed amount at regular intervals regardless of the asset's current price.
Duration: A measure of a bond's price sensitivity to changes in interest rates, expressed in years.

E

Earnings Before Interest and Taxes (EBIT): A measure of operating profit before interest expense and income taxes.
Earnings Per Share (EPS): A company's profit available to common shareholders divided by its weighted-average shares outstanding.
Enterprise Value: A measure of total business value commonly calculated as market capitalization plus debt minus cash.
ETF (Exchange-Traded Fund): A type of pooled investment security that operates much like a mutual fund but trades on an exchange like a regular stock.
Expense Ratio: The annual operating expenses of a fund expressed as a percentage of its average assets.

F

Face Value: The amount a bond issuer promises to repay at maturity, also called par value.
Federal Funds Rate: The interest rate at which U.S. depository institutions lend reserve balances to one another overnight.
Float: The regular shares a company has issued to the public that are available for investors to trade.
Free Cash Flow: Cash generated by a business after paying operating expenses and capital expenditures.
Fundamental Analysis: Evaluation of a security using financial statements, economic conditions, management, and other underlying factors.
Futures Contract: A standardized agreement to buy or sell an asset at a specified price on a future date.

G

Gross Domestic Product (GDP): The total value of final goods and services produced within a country during a given period.

H

Hedge: An investment or position intended to offset potential losses in another investment.
High-Yield Bond: A bond rated below investment grade that generally offers a higher yield to compensate for greater credit risk.

I

Implied Volatility: The level of future price variability implied by an option's current market price.
Index Fund: A fund designed to track the holdings and performance of a specified market index.
Inflation: A sustained increase in the general price level that reduces the purchasing power of money.
Initial Public Offering (IPO): The first sale of a private company's shares to public investors.
Interest Rate Risk: The risk that changes in market interest rates will reduce the value of an investment, particularly a fixed-rate bond.
Investment Grade: A credit-rating category indicating that a bond or issuer has relatively low default risk.

J

Jensen's Alpha: A risk-adjusted performance measure comparing a portfolio's actual return with the return predicted by the capital asset pricing model.
Joint Account: A financial account owned and controlled by two or more people, with rights determined by the account agreement and applicable law.
Junk Bond: An informal term for a below-investment-grade bond that offers higher potential yield in exchange for greater credit risk.

K

K-Shaped Recovery: An economic recovery in which industries, companies, or groups improve at sharply different rates, causing their outcomes to diverge.
Key Rate Duration: A measure of a bond or portfolio's price sensitivity to a yield change at one specific maturity on the yield curve.
Knock-In Option: An option that becomes active only when the underlying asset reaches a specified barrier price.
Knock-Out Option: An option that terminates if the underlying asset reaches a specified barrier price.

L

Leverage: The use of borrowed money or financial instruments to increase exposure and amplify potential gains or losses.
Limit Order: An order to buy or sell a security only at a specified price or better.
Liquidity: The ease with which an asset can be bought or sold quickly without materially affecting its price.

M

Margin: The money borrowed from a broker to purchase an investment and is the difference between the total value of the investment and the loan amount.
Market Capitalization: The total market value of a company's outstanding shares, calculated as share price multiplied by shares outstanding.
Market Order: An order to buy or sell immediately at the best price currently available.
Maturity: The date on which a debt instrument's principal becomes due for repayment.
Modified Duration: An estimate of the percentage change in a bond's price for a one-percentage-point change in yield.
Monetary Policy: Actions by a central bank to influence interest rates, credit conditions, inflation, and economic activity.
Mutual Fund: A pooled investment vehicle that issues and redeems shares based on its net asset value.

N

Net Asset Value (NAV): A fund's assets minus liabilities, usually expressed on a per-share basis.
Net Income: A company's profit after all expenses, interest, and taxes have been deducted from revenue.

O

Opportunity Cost: The value of the best alternative forgone when making a financial decision.
Options: Financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.

P

Par Value: The principal amount of a bond due at maturity or the nominal value assigned to a security.
Portfolio Rebalancing: The process of buying and selling holdings to restore a portfolio to its intended asset allocation.
Preferred Stock: An equity security that generally has priority over common stock for dividends and liquidation proceeds.
Price-to-Book Ratio: A valuation ratio calculated by dividing a company's market price per share by its book value per share.
Price-to-Earnings Ratio (P/E): A valuation ratio calculated by dividing a company's share price by its earnings per share.
Producer Price Index (PPI): A measure of average changes in selling prices received by domestic producers for their output.
Purchasing Power: The quantity of goods and services that a unit of currency can buy.

Q

Quantitative Easing: A monetary policy in which a central bank purchases securities to add liquidity and lower longer-term interest rates.

R

Real Return: An investment return adjusted for inflation.
Realized Gain: A profit that becomes taxable or reportable when an investment is sold above its cost basis.
Recession: A broad and sustained decline in economic activity across production, employment, income, and spending.
Return on Equity (ROE): Net income divided by average shareholders' equity, used to assess how effectively equity capital produces profit.
Risk Premium: The additional return investors expect for holding a risky asset instead of a lower-risk asset.

S

Sharpe Ratio: A measure of risk-adjusted return calculated using an investment's excess return relative to its volatility.
Short Interest: The number or percentage of a company's shares that investors have sold short and not yet repurchased.
Short Selling: An investment or trading strategy that speculates on the decline in a stock or other security's price.
Stock Split: A corporate action that changes the number of shares outstanding while proportionally adjusting the share price.
Stop Order: An order that becomes a market or limit order after a specified trigger price is reached.

T

Technical Analysis: The study of historical prices, volume, and market patterns to evaluate potential future price behavior.
Total Return: An investment's combined price change and income, including interest and dividends, over a period.
Treasury Bill: A short-term U.S. government debt security issued at a discount and maturing in one year or less.
Treasury Bond: A long-term U.S. government debt security that pays interest and generally matures in more than ten years.
Treasury Inflation-Protected Securities (TIPS): U.S. Treasury securities whose principal adjusts with changes in the Consumer Price Index.
Treasury Note: An intermediate-term U.S. government debt security that pays interest and matures in two to ten years.

U

Unrealized Gain: An increase in an investment's value that has not been realized through a sale.

V

Valuation: The process of estimating the current or fair value of an asset, company, or security.
Volatility: The degree to which an investment's price varies over time, often measured by standard deviation.
Volume: The number of shares, contracts, or units traded during a specified period.

W

Warrant: A security issued by a company that gives its holder the right to purchase company shares at a specified price before expiration.
Wash Sale: A sale of a security at a loss followed by the purchase of the same or a substantially identical security within the period defined by tax rules.
Weighted Average Cost of Capital (WACC): A company's blended required return across debt and equity financing, weighted by each source's share of total capital.
Working Capital: Current assets minus current liabilities, used to assess a company's short-term operating liquidity.
Write-Down: An accounting reduction in the recorded value of an asset when its carrying amount exceeds its estimated recoverable value.
Write-Off: The removal of an asset's value from the balance sheet when it is considered unrecoverable or no longer valuable.

X

X-Date: An informal abbreviation for the ex-dividend date, on or after which a buyer of a stock is not entitled to the next declared dividend.
Xetra: An electronic trading venue operated by Deutsche Börse and used primarily for securities listed in Germany and other European markets.
XIRR (Extended Internal Rate of Return): An annualized return calculation for cash flows that occur on irregular dates.
XNPV (Extended Net Present Value): The present value of cash flows occurring on irregular dates, discounted using their exact timing.

Y

Yield: The income returned on an investment, such as the interest received from holding a bond or the dividends from owning stock.
Yield Curve: A graph showing yields on comparable bonds across different maturities at a point in time.
Yield to Maturity (YTM): The annualized return expected from holding a bond until maturity, assuming payments are made and reinvested as modeled.

Z

Zero-Coupon Bond: A bond that pays no periodic interest and is issued below face value, with the difference earned at maturity.

The Common Catalyst

Informational purposes only

The Common Catalyst

Informational purposes only

Financial Glossary

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