REFERENCE
The glossary 431 ENTRIES 19 CATEGORIES Every investing and trading term this product uses, defined plainly — each with the mechanism, the arithmetic where it matters, and the misreading that costs people money.
TERM OF THE DAY Average daily volume The typical number of shares traded per day, usually averaged over the last month or quarter.
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All431 Starting out31 What you can own10 How markets work33 Orders & execution12 Building a portfolio19 Risk30 Measuring performance28 Valuation26 Reading the accounts51 Bonds & rates30 Options & derivatives30 Funds & wrappers25 The economy17 Charts & technicals13 Corporate actions26 Tax, fees & accounts11 Behaviour16 Digital assets11 Filings & regulation12 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z A 24 TERMS
ADR American depositary receipt · GDR A certificate traded on a US exchange that represents shares in a foreign company. What you can own + Accounts receivable Debtors · Trade receivables Money customers owe for goods or services already delivered. Reading the accounts + Accrual accounting Recording revenue and costs when they are earned or incurred, rather than when cash moves. Reading the accounts + Active management Choosing holdings deliberately in an attempt to beat a benchmark. Funds & wrappers + Active share How much a fund’s holdings differ from its benchmark, as a percentage. Funds & wrappers + Adjusted close A historical closing price restated to account for dividends and splits, so returns compare fairly over time. How markets work + Adjusted earnings Non-GAAP earnings · Underlying profit Company-defined profit that excludes items management considers unrepresentative. Reading the accounts + After-hours trading Extended-hours trading Trading that happens outside an exchange’s regular session, in a much thinner market. How markets work + Algorithmic trading Using computer programs to decide the timing, price and size of orders automatically. How markets work + Alpha Return above what the risk taken would ordinarily have earned — the part attributable to skill. Risk + American and European options American options can be exercised any time before expiry; European ones only at expiry. Options & derivatives + Analyst rating A published recommendation on a share, typically buy, hold or sell. Corporate actions + Anchoring Fixating on an irrelevant reference point, usually the price you paid. Behaviour + Annual report 10-K · Form 20-F A company’s comprehensive yearly filing, including audited accounts and a discussion of risks. Filings & regulation + Annualised A return or volatility figure rescaled to a yearly rate, so different periods can be compared. Measuring performance + Asset Anything you own that has value and could, in principle, be sold or produce income. Starting out + Asset allocation How you divide money between asset classes — the decision that drives most of your long-run experience. Building a portfolio + Asset class A group of investments that behave alike and are driven by the same broad forces. Starting out + Assets Everything a company owns or controls that is expected to produce future value. Reading the accounts + Assignment Being required to fulfil an option you sold, because the buyer exercised it. Options & derivatives + Auction Opening auction · Closing auction A short period where orders are collected and matched at a single price, rather than continuously. How markets work + Audit opinion The auditor’s formal statement on whether the accounts fairly present the company’s position. Reading the accounts + Average cost Treating all purchases of one security as a single pooled holding at a blended price. Tax, fees & accounts + Average daily volume ADV The typical number of shares traded per day, usually averaged over the last month or quarter. How markets work + B 22 TERMS
Backtest Running a strategy over historical data to see what it would have done. Measuring performance + Backwardation When futures prices further out are lower than nearer ones, so rolling earns money. Options & derivatives + Balance sheet A snapshot of what a company owns and owes at one moment in time. Reading the accounts + Basis risk The risk that a hedge and the thing it hedges stop moving together. Risk + Bear market Bull market · Correction A fall of 20% or more from a peak; a correction is 10%, and a bull market is a sustained rise. Charts & technicals + Behaviour gap Investor return gap The difference between what a fund returned and what its investors actually earned in it. Measuring performance + Benchmark The index or reference portfolio you measure yourself against, to see whether your decisions added anything. Measuring performance + Best execution A broker’s regulatory duty to seek the most favourable overall terms reasonably available for your order. How markets work + Beta How much an investment tends to move when the market moves, with 1.0 meaning it moves in line. Risk + Bid-ask spread Spread · Bid-offer spread The gap between the highest price anyone will pay and the lowest price anyone will accept. How markets work + Bitcoin The first and largest cryptocurrency, with a supply capped at 21 million units. Digital assets + Black swan A rare, high-impact event that was not predicted and is explained confidently afterwards. Risk + Blockchain A shared record of transactions maintained by many computers rather than one authority. Digital assets + Bollinger bands Bands drawn a set number of standard deviations above and below a moving average. Charts & technicals + Bond A loan you make to a government or company, which pays you interest and returns your money on a set date. Starting out + Bond fund A fund holding many bonds, offering diversification but no fixed maturity date. Bonds & rates + Book value Shareholders’ equity · Net assets What the balance sheet says shareholders own: total assets minus total liabilities. Reading the accounts + Break-even inflation The inflation rate at which a conventional bond and an inflation-linked bond would perform identically. Bonds & rates + Breakeven The level of sales at which revenue exactly covers costs and profit is zero. Reading the accounts + Broker The firm that holds your account and sends your orders to the market on your behalf. Starting out + Bubble A price rise driven by expectations of further rises rather than by underlying value. Behaviour + Business cycle The recurring pattern of expansion, peak, contraction and recovery in an economy. The economy + C 58 TERMS
CAGR Compound annual growth rate · Annualised return · Geometric mean The steady yearly rate that would have turned your starting value into your ending value. Measuring performance + CAPE ratio Shiller P/E · Cyclically adjusted P/E Price divided by average inflation-adjusted earnings over ten years, to smooth out the business cycle. Valuation + CUSIP A nine-character code identifying a security issued in the United States or Canada. Starting out + Call option The right to buy an asset at a fixed price before a set date. Options & derivatives + Callable bond A bond the issuer can repay early, usually when interest rates have fallen. Bonds & rates + Calmar ratio Annualised return divided by the worst drawdown — return per unit of pain. Measuring performance + Candlestick chart A chart where each period is drawn as a body between open and close, with wicks to the high and low. Charts & technicals + Capital asset pricing model CAPM A model saying an asset’s expected return depends on the risk-free rate plus its market risk. Risk + Capital expenditure Capex Money spent buying or upgrading long-lived assets like property, equipment and technology. Reading the accounts + Capital gain The profit made when you sell something for more than you paid for it. Starting out + Capital gains tax CGT Tax on the profit made when you sell an investment for more than you paid. Tax, fees & accounts + Capital structure The ranking of everyone who funded a company, deciding who gets paid first if it fails. Bonds & rates + Carry trade Borrowing in a low-interest currency to invest in a higher-yielding one, keeping the difference. The economy + Cash burn The rate at which a loss-making company is consuming its cash reserves. Reading the accounts + Cash conversion cycle How many days pass between paying for inventory and collecting cash from the customer. Reading the accounts + Cash drag The return lost by holding cash in a fund or portfolio rather than being fully invested. Funds & wrappers + Cash flow statement The statement tracking actual cash moving in and out, split into operating, investing and financing. Reading the accounts + Cash-secured put Selling a put while holding enough cash to buy the shares if assigned. Options & derivatives + Central bank The institution that sets a country’s benchmark interest rate and manages its money supply. The economy + Circle of competence The set of things you genuinely understand well enough to judge. Behaviour + Circuit breaker Trading halt · Limit up limit down An automatic pause in trading, triggered when prices move too far too fast. How markets work + Closing price The official price a security finished the session at, usually set by the closing auction. How markets work + Commercial paper Short-term unsecured borrowing issued by large companies, usually maturing within nine months. What you can own + Commodity A raw physical good — oil, gold, wheat, copper — traded in standardised units. What you can own + Common stock Ordinary shares The standard form of share ownership, carrying votes and a residual claim on profits. What you can own + Compounding Earning returns on the returns you already earned, so growth accelerates the longer you leave it alone. Starting out + Concentration risk The risk that too much of your outcome depends on one holding, sector, country or currency. Building a portfolio + Conditional value at risk CVaR · Expected shortfall The average loss on the bad days that VaR excludes. Risk + Confirmation bias Seeking and believing information that supports what you already think. Behaviour + Consensus estimate The average of analysts’ forecasts for a company’s revenue or earnings. Corporate actions + Consensus mechanism Proof of work · Proof of stake The method a blockchain uses to agree which transactions are valid. Digital assets + Consumer price index CPI The main official measure of inflation, tracking the price of a fixed basket of goods and services. The economy + Contango When futures prices further out are higher than nearer ones, so rolling a position costs money. Options & derivatives + Contract for difference CFD A leveraged contract paying the difference in an asset’s price, without owning it. Options & derivatives + Contract note Trade confirmation The document a broker issues after a trade, recording exactly what was bought or sold and at what price. How markets work + Contribution to return How many percentage points of the portfolio’s total return one holding was responsible for. Measuring performance + Convertible bond A bond that can be exchanged for a set number of the issuer’s shares. Bonds & rates + Convexity How duration itself changes as yields move — the curvature in a bond’s price-yield relationship. Bonds & rates + Core and satellite Holding a large low-cost index core, with smaller active positions around it. Building a portfolio + Core inflation Inflation excluding food and energy prices, used to see the underlying trend. The economy + Corporate action Any company event that changes the shares you hold or their terms. Corporate actions + Correlation A measure from −1 to +1 of how closely two investments move together. Building a portfolio + Cost basis Book cost What you actually paid for a holding, including fees — the number every gain or loss is measured from. Starting out + Cost of equity The return shareholders require for the risk of owning a company’s shares. Valuation + Cost of goods sold COGS · Cost of sales The direct costs of producing the goods or services a company sold. Reading the accounts + Counterparty risk The risk that the other side of a contract fails to do what it promised. Risk + Coupon The fixed interest a bond pays each year, expressed as a percentage of its face value. Bonds & rates + Covariance How two investments move together, measured in units that also reflect how much each one moves. Building a portfolio + Covenant A condition in a loan agreement that the borrower must keep to. Bonds & rates + Covered call Selling a call option on shares you already own, to collect premium in exchange for capping your upside. Options & derivatives + Credit rating An agency’s assessment of how likely a borrower is to repay, on a lettered scale. Bonds & rates + Credit risk Default risk The risk that a borrower fails to make the payments it promised. Bonds & rates + Credit spread The extra yield a corporate bond pays over a government bond of the same maturity. Bonds & rates + Cryptocurrency A digital asset recorded on a distributed ledger rather than by a bank or government. Digital assets + Currency conversion fee FX spread What a broker charges to convert between currencies when you buy foreign assets. Tax, fees & accounts + Currency risk FX risk · Exchange-rate risk The risk that exchange-rate moves change your return on a foreign holding. Risk + Current yield A bond’s annual coupon divided by its current market price. Bonds & rates + Custodian The institution that physically safeguards the securities you own. How markets work + D 29 TERMS
Dark pool A private venue where large orders are matched without being displayed publicly beforehand. How markets work + Day order An order that expires automatically at the end of the trading session if it has not filled. Orders & execution + Decentralised finance DeFi Financial services built from smart contracts rather than from institutions. Digital assets + Decision journal A written record of what you decided, why, and what would prove you wrong. Behaviour + Default A borrower failing to make a payment, or breaching a term of the debt agreement. Bonds & rates + Deferred revenue Unearned revenue Money already collected from customers for goods or services not yet delivered. Reading the accounts + Delisting A company’s shares being removed from an exchange. Corporate actions + Delta How much an option’s price moves for a $1 move in the underlying. Options & derivatives + Depreciation and amortisation D&A Spreading the cost of a long-lived asset across the years it is used, rather than expensing it at once. Reading the accounts + Derivative A contract whose value comes from the price of something else. Options & derivatives + Dilution The reduction in your ownership share when a company issues new shares. Corporate actions + Discount and premium A bond trading below face value is at a discount; above face value, at a premium. Bonds & rates + Discount rate The rate used to convert future money into what it is worth today. Valuation + Discounted cash flow DCF Valuing a business by estimating its future cash flows and converting them to today’s money. Valuation + Disposition effect Selling winners too early and holding losers too long. Behaviour + Distribution Income units · Accumulation units Income a fund pays out to holders, as opposed to reinvesting it inside the fund. Funds & wrappers + Diversification Spreading money across things that do not move together, so no single failure can decide your outcome. Starting out + Dividend A cash payment a company makes to its shareholders out of its profits. Starting out + Dividend cover How many times over a company’s earnings could pay its dividend. Corporate actions + Dividend cut A company reducing or suspending its dividend. Corporate actions + Dividend discount model DDM · Gordon growth model Valuing a share as the present value of all the dividends it will ever pay. Valuation + Dividend reinvestment DRIP Automatically using dividends to buy more shares instead of taking the cash. Corporate actions + Dividend yield Annual dividends per share as a percentage of the share price. Corporate actions + Dollar-cost averaging DCA · Pound-cost averaging · Regular investing Investing a fixed amount at regular intervals, regardless of the price on the day. Orders & execution + Downside deviation Volatility calculated using only the returns below a threshold, ignoring upside moves. Risk + Drawdown The fall from a portfolio’s previous peak to its lowest point before it recovers. Risk + Drift How far your actual weights have moved away from the weights you intended to hold. Building a portfolio + DuPont analysis Breaking return on equity into margin, asset efficiency and leverage to see where it comes from. Reading the accounts + Duration How much a bond’s price moves when interest rates change, expressed in years. Bonds & rates + E 24 TERMS
EBITDA Earnings before interest, tax, depreciation and amortisation — a rough proxy for operating cash generation. Reading the accounts + ETF Exchange-traded fund A fund whose shares trade on an exchange throughout the day like an ordinary share. Funds & wrappers + EV/EBITDA Enterprise value divided by earnings before interest, tax, depreciation and amortisation. Valuation + EV/Sales Enterprise value divided by revenue — price-to-sales corrected for debt and cash. Valuation + Earnings announcement Results · Earnings report A company’s scheduled publication of its financial results for a quarter or year. Corporate actions + Earnings growth The rate at which a company’s profits are increasing, usually measured per share and per year. Reading the accounts + Earnings per share EPS Net income divided by the number of shares — the profit attributable to each share you own. Reading the accounts + Earnings revision Analysts changing their forecasts for a company’s future earnings. Corporate actions + Earnings surprise The gap between reported earnings and what analysts expected. Corporate actions + Earnings yield Earnings per share divided by price — the P/E ratio inverted, expressed as a percentage. Valuation + Economic data release Scheduled official statistics that move markets when they differ from expectations. The economy + Economic moat Competitive advantage A durable structural advantage that lets a company keep earning high returns without being competed away. Valuation + Economic profit EVA · Residual income Profit left after charging for the cost of the capital used to generate it. Reading the accounts + Effective number of holdings Effective N How many equally weighted holdings your portfolio behaves like, given how uneven the real weights are. Building a portfolio + Efficient frontier The curve of portfolios that deliver the highest expected return available at each level of risk. Building a portfolio + Enterprise value EV What it would cost to buy the whole business: market value plus debt, minus cash. Valuation + Equity Stock · Share A share of ownership in a company, giving you a claim on what is left after everyone else is paid. Starting out + Equity risk premium ERP The extra return investors expect from shares over risk-free government debt, for accepting the risk. Measuring performance + Ex-dividend date The first day a share trades without the right to the next dividend. Corporate actions + Exchange A regulated marketplace where buyers and sellers of securities are matched under published rules. Starting out + Exchange rate The price of one currency in terms of another. The economy + Expectations What the market already assumes about a company’s future, which its current price encodes. Valuation + Expense ratio OCF · TER · Ongoing charge The annual percentage of your money a fund takes to cover its running costs. Funds & wrappers + Expiry Expiration The date after which an option ceases to exist. Options & derivatives + F 23 TERMS
FIFO and other lot methods The rule deciding which purchase you are treated as having sold, when you own several. Tax, fees & accounts + FOMC The committee within the US Federal Reserve that sets American interest-rate policy. The economy + Face value Par value · Principal · Nominal value The amount a bond repays at maturity, and the amount its coupon is calculated on. Bonds & rates + Factor investing Smart beta Building portfolios around characteristics that have historically explained returns. Funds & wrappers + Fallen angel A bond downgraded from investment grade to high yield. Bonds & rates + Fat tails Tail risk The tendency of extreme market moves to happen far more often than standard statistics predict. Risk + Fear of missing out FOMO Buying because something is rising and others are profiting, rather than because of any analysis. Behaviour + Fed model A rough comparison of the market’s earnings yield with the government bond yield. Valuation + Fill-or-kill FOK · All-or-none An order that must execute in full immediately, or be cancelled entirely. Orders & execution + Financial statements The audited accounts a company must publish: balance sheet, income statement and cash flow statement. Filings & regulation + Fiscal policy Government decisions on taxation and spending, and their effect on the economy. The economy + Fixed costs Costs that do not change with how much a company sells, at least in the short run. Reading the accounts + Flash crash A very sudden, very deep price fall that reverses almost as quickly. How markets work + Form 13F A quarterly disclosure of US equity holdings by institutions managing over $100 million. Filings & regulation + Forward P/E Price divided by the earnings analysts expect next year, rather than last year’s actual earnings. Valuation + Fractional shares Buying part of a share, so you can invest a fixed sum rather than a whole number of shares. Orders & execution + Free cash flow FCF Cash left over after paying for the investment needed to maintain and grow the business. Reading the accounts + Free cash flow yield Free cash flow divided by market value — the cash return the business generates relative to its price. Valuation + Free float The portion of a company’s shares that is actually available to trade in the market. Starting out + Fund Collective investment · Pooled fund A pooled vehicle where many investors’ money is managed together under one strategy. Funds & wrappers + Fund domicile The country a fund is legally based in, which determines its tax treatment for you. Funds & wrappers + Funds from operations FFO A property-company profit measure that adds back depreciation, since buildings often appreciate. What you can own + Futures contract A standardised, exchange-traded agreement to buy or sell something at a set price on a future date. Options & derivatives + G 13 TERMS
GAAP and IFRS The two main sets of accounting rules companies must follow when reporting results. Reading the accounts + Gamma How fast delta itself changes as the underlying moves. Options & derivatives + Gap A jump between one session’s close and the next session’s open, with no trading in between. How markets work + Gating Redemption suspension A fund limiting or suspending withdrawals because it cannot sell holdings fast enough. Funds & wrappers + Glide path A plan to shift gradually from higher-risk to lower-risk assets as a target date approaches. Building a portfolio + Going concern The assumption that a company will continue operating for at least the next year. Reading the accounts + Gold A precious metal held as a store of value, with no yield and no cash flow. What you can own + Golden cross and death cross When a shorter moving average crosses above or below a longer one. Charts & technicals + Good-till-cancelled GTC An order that stays live across sessions until it fills or you cancel it. Orders & execution + Goodwill The premium paid over the fair value of a business’s identifiable assets when acquiring it. Reading the accounts + Gross domestic product GDP The total value of goods and services an economy produces in a period. The economy + Gross margin What proportion of revenue is left after the direct cost of producing what was sold. Reading the accounts + Guidance A company’s own forecast of its future results. Corporate actions + H 9 TERMS
Halving The scheduled reduction in the rate of new bitcoin issuance, roughly every four years. Digital assets + Hedge fund A lightly regulated private fund able to use leverage, shorting and derivatives freely. Funds & wrappers + Hedging Taking an offsetting position to reduce a specific risk you do not want. Risk + Herding Following what others are doing rather than reaching your own conclusion. Behaviour + High-frequency trading HFT Automated trading that competes on speed, holding positions for fractions of a second. How markets work + High-water mark The highest value a fund has reached, above which performance fees can be charged again. Funds & wrappers + High-yield bond Junk bond · Speculative grade Debt rated below investment grade, paying more because default risk is materially higher. Bonds & rates + Hindsight bias Believing after the fact that an outcome was obvious all along. Behaviour + Home bias The tendency to hold far more of your own country’s market than its share of the world warrants. Building a portfolio + I 26 TERMS
IPO Initial public offering · Flotation A private company selling shares to the public and listing on an exchange for the first time. Corporate actions + ISIN International Securities Identification Number A twelve-character global code that identifies one security uniquely, anywhere in the world. Starting out + Implied volatility IV The volatility the market is pricing into an option, derived from its premium. Options & derivatives + In the money Out of the money · At the money Whether exercising an option now would produce a gain. Options & derivatives + Income statement Profit and loss · P&L The statement showing revenue, costs and profit over a period. Reading the accounts + Income tax on investments Tax on dividends and interest, usually charged in the year received. Tax, fees & accounts + Index A rules-based list of securities used to represent a market or segment of one. Funds & wrappers + Index fund Tracker · Passive fund A fund that aims to match an index rather than beat it, at very low cost. Funds & wrappers + Inflation The rate at which prices rise, which means the rate at which each pound or dollar buys less. Starting out + Inflation risk The risk that rising prices erode what your money can buy, even when the number grows. Risk + Inflation-linked bonds TIPS · Index-linked gilts · Linkers Government bonds whose principal and coupons rise with an official inflation index. Bonds & rates + Information ratio Excess return over a benchmark, divided by tracking error — the consistency of outperformance. Measuring performance + Insider dealing and disclosure Trading by company insiders, which is legal when disclosed and illegal when based on private information. Filings & regulation + Institutional investor An organisation investing on behalf of others: pension funds, insurers, endowments and asset managers. Filings & regulation + Intangible assets Non-physical assets with value: patents, trademarks, software, licences and customer relationships. Reading the accounts + Interest coverage How many times over a company’s operating profit covers its interest bill. Reading the accounts + Interest rate Policy rate · Base rate The cost of borrowing money, set at the short end by the central bank. The economy + Interest-rate risk The risk that rising interest rates reduce the market value of bonds you already hold. Bonds & rates + Intrinsic value What an asset is actually worth based on the cash it will produce, regardless of its market price. Valuation + Intrinsic value (options) What an option would be worth if it were exercised immediately. Options & derivatives + Inventory Stock Goods a company is holding to sell, valued on the balance sheet at cost or market value, whichever is lower. Reading the accounts + Inverted yield curve When short-term bonds yield more than long-term ones — historically a recession warning. Bonds & rates + Investment grade Debt rated BBB− or better, considered to have a relatively low risk of default. Bonds & rates + Investment policy statement IPS A written document setting out what you are investing for, how, and what would make you change. Building a portfolio + Investment trust Closed-ended fund A listed company whose business is holding investments, with a fixed number of shares. Funds & wrappers + Investor compensation scheme SIPC · FSCS A statutory scheme that compensates clients up to a limit if a regulated firm fails. Filings & regulation + K 2 TERMS
Know your customer KYC · AML The identity checks a regulated firm must perform before letting you invest. Filings & regulation + Kurtosis How much of a distribution sits in its extreme tails rather than near the middle. Risk + L 12 TERMS
Leading indicator A statistic that tends to change before the wider economy does. The economy + Leverage Gearing Using borrowed money to increase exposure beyond what your own capital would buy. How markets work + Leveraged ETF A fund designed to deliver a multiple of an index’s return, reset every single day. Funds & wrappers + Liabilities Everything a company owes to someone else. Reading the accounts + Limit order An instruction to trade only at a specified price or better, accepting that it may never fill. Orders & execution + Limited liability The rule that a shareholder can lose what they invested and no more, whatever the company owes. Starting out + Liquidity How quickly you can turn something into cash at a fair price, without moving the price against yourself. Starting out + Liquidity risk The risk of not being able to sell when you want to, without accepting a bad price. Risk + Listing A company’s admission to trade its shares on a particular exchange, under that exchange’s rules. Starting out + Lock-up period A window after an IPO during which insiders are barred from selling their shares. Corporate actions + Look-ahead bias Using information in a backtest that was not actually available at the time. Measuring performance + Loss aversion The tendency to feel a loss roughly twice as intensely as an equivalent gain. Behaviour + M 27 TERMS
MACD An indicator showing the gap between two exponential moving averages, with a signal line. Charts & technicals + Margin Borrowing from your broker to buy more than your cash allows, using your portfolio as collateral. How markets work + Margin call A demand from your broker to add cash or sell holdings, because your account equity has fallen too low. How markets work + Margin of safety The gap between what you pay and what you think something is worth, sized to absorb being wrong. Valuation + Mark to market Valuing a holding at the price it could be sold for today, rather than what was paid for it. Measuring performance + Market capitalisation Market cap What the market says a whole company is worth: the share price multiplied by the number of shares. Starting out + Market hours Regular trading hours The window in which an exchange’s main continuous trading session runs. How markets work + Market impact The extent to which your own order moves the price against you as it executes. How markets work + Market maker A firm that continuously quotes both a buy and a sell price, so there is always someone to trade with. How markets work + Market order An instruction to trade immediately at the best price currently available, whatever that is. Orders & execution + Market timing Trying to buy before rises and sell before falls, rather than staying invested throughout. Orders & execution + Material event filing Form 8-K · RNS announcement A filing disclosing a significant event promptly, outside the normal reporting schedule. Filings & regulation + Material information Information a reasonable investor would consider important in deciding whether to trade. Filings & regulation + Maximum drawdown Max DD The largest peak-to-trough fall a portfolio or strategy suffered over the period examined. Risk + Mean reversion The tendency of extreme values — margins, multiples, returns — to drift back towards long-run averages. Valuation + Merger and acquisition M&A · Takeover One company buying another, for cash, shares, or a combination. Corporate actions + Modern portfolio theory MPT · Mean-variance optimisation The framework that treats risk as portfolio-level volatility and finds the best return for a given level of it. Building a portfolio + Modified duration Duration adjusted for the bond’s own yield, giving a direct estimate of price sensitivity. Bonds & rates + Momentum The tendency of recent winners to keep outperforming, and losers to keep underperforming, over months. Charts & technicals + Money market fund A fund holding very short-term, high-quality debt, used as an alternative to a deposit account. What you can own + Money-weighted return MWR · IRR · Internal rate of return · Dollar-weighted return The return your actual money earned, counting when each contribution and withdrawal happened. Measuring performance + Monte Carlo simulation Running thousands of randomised return paths to see the range of outcomes a plan could produce. Risk + Moving average MA · SMA · EMA The average price over a trailing window, used to smooth out day-to-day noise. Charts & technicals + Mr Market A parable describing the market as a moody business partner who quotes a different price every day. Behaviour + Municipal bond Munis Debt issued by local or state government, often with tax advantages for domestic investors. Bonds & rates + Mutual fund Open-ended fund · OEIC · Unit trust A fund that creates and cancels units on demand, priced once a day at net asset value. Funds & wrappers + Myopic loss aversion Taking too little risk because you evaluate a long-term portfolio over short periods. Behaviour + N 9 TERMS
Net asset value NAV The value of everything a fund owns, minus what it owes, divided by the number of units. Funds & wrappers + Net debt Total borrowings minus cash — what a company would still owe if it used all its cash to repay debt. Reading the accounts + Net debt / EBITDA How many years of operating earnings it would take to repay net borrowings. Reading the accounts + Net income Net profit · Bottom line · Earnings What is left after every cost, including interest and tax — the profit belonging to shareholders. Reading the accounts + Net margin Net income as a percentage of revenue — what proportion of each sale ends up as profit. Reading the accounts + Nominal return Return measured in currency units, before any adjustment for inflation. Measuring performance + Nominee account An arrangement where your broker is the registered owner of your shares and you are the beneficial owner. How markets work + Normal distribution Bell curve · Gaussian The symmetric bell-shaped curve that much of finance assumes returns follow. Risk + Notional value The total value of the underlying asset a derivative contract controls. Options & derivatives + O 16 TERMS
OHLC The four prices summarising a period: open, high, low and close. Charts & technicals + Off-balance-sheet Obligations that do not appear as liabilities on the balance sheet but still commit the company. Reading the accounts + Operating cash flow Cash flow from operations · CFO The cash a company actually generated from running its business. Reading the accounts + Operating expenses Opex · SG&A The costs of running the business that are not tied directly to producing each unit sold. Reading the accounts + Operating income EBIT · Operating profit Profit from the core business, before interest and tax. Reading the accounts + Operating leverage How much profits amplify revenue changes, because some costs stay fixed as sales move. Reading the accounts + Operating margin Operating income as a percentage of revenue — how much of each sale survives running the business. Reading the accounts + Option A contract giving the right, but not the obligation, to buy or sell something at a set price by a set date. Options & derivatives + Option spread Buying one option and selling another to define both the cost and the maximum outcome. Options & derivatives + Order book Depth of market · Level 2 The live list of every outstanding buy and sell order, arranged by price. How markets work + Organic growth Revenue growth from the existing business, excluding acquisitions and currency effects. Reading the accounts + Out-of-sample testing Checking a strategy on data that was not used to design it. Measuring performance + Outcome bias Judging a decision by how it turned out rather than by whether it was well made. Behaviour + Overconfidence Systematically overestimating your own knowledge, judgement and probability of being right. Behaviour + Overfitting Curve fitting · Data mining Tuning a strategy so precisely to past data that it captures noise instead of a real effect. Measuring performance + Owner earnings Reported profit adjusted to reflect the cash an owner could actually take out without harming the business. Reading the accounts + P 23 TERMS
P/E ratio Price-to-earnings · Earnings multiple The share price divided by earnings per share — roughly, how many years of current profit you are paying. Valuation + PEG ratio The P/E ratio divided by the expected earnings growth rate, to compare companies growing at different speeds. Valuation + Payment date The date a declared dividend is actually paid to shareholders. Corporate actions + Payment for order flow PFOF A broker being paid by a trading firm for the right to execute its customers’ orders. How markets work + Payout ratio The share of earnings a company pays out as dividends rather than reinvesting. Corporate actions + Performance attribution Breaking a return down into where it actually came from. Measuring performance + Performance fee An additional charge taken as a share of returns above an agreed threshold. Funds & wrappers + Platform fee Custody fee · Account fee What a broker or platform charges for holding your account, separate from dealing costs. Tax, fees & accounts + Portfolio Everything you own, considered as one thing rather than as a list of separate holdings. Starting out + Portfolio turnover How much of a fund’s portfolio is bought and sold in a year. Funds & wrappers + Position Everything you currently hold in one investment, however many separate purchases built it up. Starting out + Preferred stock Preference shares Shares that rank ahead of common stock for dividends, usually without voting rights. What you can own + Premium The price paid for an option, made up of intrinsic value plus time value. Options & derivatives + Premium and discount The gap between a listed fund’s share price and the value of the assets it holds. Funds & wrappers + Price return The return from price movement alone, ignoring dividends and interest. Measuring performance + Price-to-book P/B Market value divided by the accounting value of the company’s net assets. Valuation + Price-to-sales P/S Market value divided by annual revenue — a multiple that still works when there are no profits. Valuation + Private equity Funds that buy whole companies not listed on a public market, usually using substantial debt. Funds & wrappers + Private key Seed phrase · Self-custody The secret that proves ownership of a crypto holding, and the only thing that does. Digital assets + Protective put Buying a put on shares you own, as insurance against a fall. Options & derivatives + Proxy vote Voting on company resolutions without attending the meeting in person. Corporate actions + Purchasing power What your money can actually buy, rather than how many units of currency you have. Starting out + Put option The right to sell an asset at a fixed price before a set date. Options & derivatives + Q 2 TERMS
Quantitative easing QE · Quantitative tightening A central bank buying bonds with newly created money to lower long-term rates. The economy + Quarterly report 10-Q · Interim results A shorter, usually unaudited financial update covering three months. Filings & regulation + R 22 TERMS
REIT Real estate investment trust A listed company owning income-producing property, required to pay out most of its profits. What you can own + Real return Return after subtracting inflation — the only measure of whether you got richer. Measuring performance + Realised profit and loss Realised P&L Gains and losses that have been locked in by selling, as opposed to those still on paper. Measuring performance + Rebalancing Selling what has grown and buying what has lagged, to return the portfolio to its target mix. Building a portfolio + Rebalancing band Tolerance band How far a holding is allowed to drift from its target before you act. Building a portfolio + Recency bias Giving too much weight to what happened recently when forecasting what happens next. Behaviour + Recession A significant, broad-based decline in economic activity lasting more than a few months. The economy + Record date The date on which a company checks its register to see who is entitled to a dividend. Corporate actions + Recovery period Time to recover How long it took a portfolio to climb back to its previous peak after a fall. Risk + Recovery rate How much of a defaulted bond’s face value holders eventually get back. Bonds & rates + Regulatory filing A document a company or investor is legally required to submit and make public. Filings & regulation + Relative strength How one security has performed compared with another or with an index. Charts & technicals + Relative strength index RSI An oscillator from 0 to 100 measuring how one-sided recent price moves have been. Charts & technicals + Return What an investment gained or lost over a period, as a percentage of what it was worth at the start. Starting out + Return on equity ROE Net income as a percentage of shareholders’ equity — profit earned on the owners’ capital. Reading the accounts + Return on invested capital ROIC Operating profit after tax as a percentage of all the capital invested in the business, debt and equity alike. Reading the accounts + Revenue Sales · Turnover · Top line The total value of goods and services a company sold in a period, before any costs. Reading the accounts + Reverse DCF Working backwards from the share price to find what growth the market is already assuming. Valuation + Rights issue An offer letting existing shareholders buy new shares at a discount, in proportion to their holding. Corporate actions + Risk tolerance How much decline you can live through without changing your plan. Building a portfolio + Risk-free rate The return available with essentially no risk of default, used as the baseline for every other return. Measuring performance + Runway How long a loss-making company can operate before it runs out of cash at the current burn rate. Reading the accounts + S 41 TERMS
Safe withdrawal rate SWR · The 4% rule The percentage of a portfolio you can take each year with a high chance of it lasting your lifetime. Building a portfolio + Scenario analysis Examining portfolio outcomes across several plausible futures rather than forecasting one. Risk + Sector A grouping of companies doing broadly similar business, used to organise markets. The economy + Securities lending Lending out shares you own, for a fee, usually to someone who wants to sell them short. How markets work + Sequence-of-returns risk Sequence risk The risk that poor returns early in retirement do lasting damage, even if average returns are fine. Building a portfolio + Settlement T+1 · T+2 The process of actually exchanging cash for securities after a trade is agreed. How markets work + Share One unit of ownership in a company — the smallest slice of its equity you can hold. Starting out + Share buyback Repurchase A company buying its own shares in the market, reducing the number in issue. Corporate actions + Share-based compensation SBC · Stock-based comp Paying employees in shares or options rather than cash. Reading the accounts + Shareholder Stockholder Someone who owns shares in a company, and with them a vote and a claim on its profits. Starting out + Shares outstanding The total number of a company’s shares currently held by all its investors. Starting out + Sharpe ratio Return above the risk-free rate, divided by volatility — how much return each unit of risk bought. Measuring performance + Short interest The number of a company’s shares currently sold short, often shown as a percentage of the free float. How markets work + Short selling Shorting Borrowing a security, selling it, and hoping to buy it back cheaper before returning it. How markets work + Short squeeze A sharp price rise caused by short sellers being forced to buy back at once. How markets work + Skewness Whether a return distribution leans towards large gains or large losses. Risk + Slippage The difference between the price you expected and the price you actually got. How markets work + Small-cap, mid-cap and large-cap Rough size bands used to group companies by market capitalisation. Starting out + Smart contract Code deployed on a blockchain that executes automatically when its conditions are met. Digital assets + Sortino ratio Like the Sharpe ratio, but dividing only by downside volatility rather than all volatility. Measuring performance + Spin-off A company separating part of itself into a new, independently listed company. Corporate actions + Spread betting A leveraged bet on price movement, structured as a wager rather than an investment. Options & derivatives + Stablecoin A crypto token designed to hold a fixed value, usually one US dollar. Digital assets + Stagflation High inflation combined with weak growth and rising unemployment. The economy + Staking Locking up tokens to help validate a network, in exchange for a reward. Digital assets + Stamp duty Transaction tax · FTT A tax charged on the purchase of shares in some markets. Tax, fees & accounts + Standard deviation A statistical measure of how far values typically sit from their average. Risk + Stock split Dividing existing shares into more, smaller shares, leaving the total value unchanged. Corporate actions + Stop order Stop loss A dormant order that becomes a market order once the price passes a level you set. Orders & execution + Stop-limit order A stop that becomes a limit order rather than a market order, capping how bad a fill you accept. Orders & execution + Strategic asset allocation The long-term target mix you intend to hold through cycles, set from your goals rather than from market views. Building a portfolio + Stress test Modelling what a portfolio would do under a specific severe scenario, rather than under average conditions. Risk + Strike price Exercise price The price at which an option holder can buy or sell the underlying asset. Options & derivatives + Structured product A packaged investment combining a bond with derivatives to produce a defined payoff. What you can own + Suitability and appropriateness Rules requiring firms to check that a product matches the customer’s knowledge and circumstances. Filings & regulation + Sunk cost fallacy Continuing with something because of what you have already put in, rather than what lies ahead. Behaviour + Support and resistance Price levels where buying or selling has repeatedly appeared in the past. Charts & technicals + Survivorship bias The distortion caused by measuring only the things that made it, and ignoring the ones that failed. Measuring performance + Swap An agreement between two parties to exchange one set of cash flows for another. Options & derivatives + Synthetic ETF An ETF that uses a swap to deliver an index return rather than holding the constituents. Funds & wrappers + Systematic risk Market risk · Undiversifiable risk Risk that affects the whole market and cannot be removed by holding more things. Risk + T 23 TERMS
TWAP Time-weighted average price The average price over a period, weighting every moment equally regardless of volume. How markets work + Tactical asset allocation Deliberately moving away from your long-term target to reflect a shorter-term view. Building a portfolio + Tail-risk hedging Deliberately paying a small ongoing cost to limit losses in a severe market fall. Risk + Tangible book value Book value with goodwill and other intangibles removed. Reading the accounts + Target-date fund Lifecycle fund A single fund that automatically shifts from growth assets to defensive ones as a set year approaches. Funds & wrappers + Tax lot Lot One purchase of a security, tracked separately with its own date and price. Starting out + Tax wrapper ISA · SIPP · 401(k) · IRA An account type that shelters investments from some or all tax. Tax, fees & accounts + Tax-loss harvesting Selling a losing holding to realise the loss and offset it against taxable gains. Tax, fees & accounts + Technical analysis Studying price and volume history to inform decisions, rather than studying the business. Charts & technicals + Term premium The extra yield investors demand for lending long rather than rolling short-term loans. Bonds & rates + Terminal value The estimated value of all cash flows beyond the explicit forecast period in a valuation. Valuation + Theta Time decay How much value an option loses each day simply because time passes. Options & derivatives + Ticker Symbol · Ticker symbol The short code that identifies a security on a particular exchange. Starting out + Time horizon How long until you need the money — the single fact that should shape most of your other decisions. Starting out + Time in the market The idea that how long you stay invested matters more than when you choose to buy. Orders & execution + Time-weighted return TWR A return that strips out the effect of money you added or withdrew, so it measures the investments alone. Measuring performance + Total return The full return from an investment: price change plus every dividend or interest payment received. Measuring performance + Tracking difference The plain gap between a fund’s return and its index’s return over a period. Measuring performance + Tracking error How much a portfolio’s returns deviate from its benchmark, measured as the volatility of the difference. Measuring performance + Trailing stop A stop that follows the price up, staying a fixed distance below the highest level reached. Orders & execution + Transaction costs The trading costs a fund incurs inside the portfolio, on top of its stated expense ratio. Funds & wrappers + Treasury bill T-bill Very short-term government debt, issued at a discount and repaying face value within a year. Bonds & rates + Trend A sustained directional movement in price over time. Charts & technicals + U 5 TERMS
Underwater period Any stretch of time during which a portfolio is worth less than its previous high. Risk + Underwriter The investment bank that arranges a share or bond issue and often guarantees to buy what is unsold. Corporate actions + Unemployment rate The share of people who want work and cannot find it, among those actively looking. The economy + Unrealised profit and loss Paper gain · Mark to market The gain or loss on holdings you still own, based on today’s price. Measuring performance + Unsystematic risk Specific risk · Idiosyncratic risk Risk unique to one company or industry, which diversification can largely remove. Risk + V 10 TERMS
VIX Fear index An index of the volatility the market expects in the S&P 500 over the next thirty days. Options & derivatives + VWAP Volume-weighted average price The average price a security traded at over a period, weighted by how much traded at each price. How markets work + Value at risk VaR An estimate of the most you would expect to lose over a period, at a stated confidence level. Risk + Value investing Buying assets for less than an estimate of their intrinsic worth, with a margin of safety. Valuation + Value trap A share that looks cheap on the numbers and stays cheap because the business is deteriorating. Valuation + Vega How much an option’s price changes when implied volatility moves by one point. Options & derivatives + Volatility Standard deviation · Vol How much an investment’s returns bounce around their average — the standard measure of risk. Risk + Volatility crush The sharp fall in option prices after an anticipated event passes. Options & derivatives + Volatility drag Variance drain The way volatility reduces compounded returns below the simple average of the yearly returns. Risk + Volume The number of shares or contracts traded in a period — a measure of how much activity there was. How markets work + W 7 TERMS
WACC Weighted average cost of capital The blended cost of a company’s debt and equity funding, weighted by how much of each it uses. Valuation + Warrant A long-dated right to buy shares at a fixed price, issued by the company itself. Options & derivatives + Wash sale Bed and breakfasting rules A rule disallowing a tax loss when you repurchase the same security too soon after selling. Tax, fees & accounts + Weight Position size · Allocation How much of your portfolio one holding represents, as a percentage of the total value. Starting out + Withholding tax Tax deducted at source by a foreign country before a dividend reaches you. Tax, fees & accounts + Working capital The money tied up in day-to-day operations: inventory and money owed to you, less money you owe. Reading the accounts + Writedown Impairment Reducing the recorded value of an asset when it is no longer worth what the books say. Reading the accounts + Y 3 TERMS
Yield curve A chart of government bond yields across maturities, from months to decades. Bonds & rates + Yield farming Moving crypto between protocols to capture the highest available rewards. Digital assets + Yield to maturity YTM · Redemption yield The total annual return from holding a bond to maturity, counting coupons and any price gain or loss. Bonds & rates + Z 1 TERMS
Zero-coupon bond A bond that pays no interest and is instead issued well below face value. Bonds & rates + Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.