REFERENCE
The glossary 433 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.
All433 Starting out31 What you can own10 How markets work33 Orders & execution12 Building a portfolio20 Risk30 Measuring performance29 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 24 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 + Fund overlap ETF overlap · Holdings overlap How much of the same underlying companies two or more funds hold, so that owning both diversifies less than it appears to. Building a portfolio + 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 4 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 on cost YOC The dividend a holding pays now, measured against what you originally paid for it rather than what it is worth today. Measuring performance + 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.
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