Investor's glossary: financial terms in plain English
Stock market terms with the formula, the calculation method and a list of pitfalls. Every multiple is explained once and surfaces as a tooltip.
- 1973 oil shockThe abrupt rise in oil prices after the Arab exporters' embargo, which struck importing economies.
- ADR levelsThe tiering of receipt programmes by depth of access, from over-the-counter trading without US-standard reporting to a full listing with a capital raise.
- Accelerated placementThe sale of a large block of shares to institutional buyers within hours, usually once the main session has closed.
- Account maintenance feeA recurring charge for servicing the account that applies whether or not a single trade was made in the period.
- Accounting policyThe set of rules by which a company recognises income and expenses and values its assets.
- Accounts payableWhat a company owes its suppliers and contractors.
- Accounts receivableAmounts customers owe the company.
- Accruals ratioA measure of the gap between profit and cash flow: how much of the profit rests on accruals rather than on cash received.
- Accrued interestThe portion of the coupon that has built up since the last payment.
- Accrued interest in the tax baseAccrued interest paid at purchase reduces the tax base; accrued interest received on a sale increases it.
- Acquisition cost deductionDocumented costs of buying a security — price, commissions, accrued interest paid to the seller — that reduce the taxable base when it is sold.
- Active managementA manager selecting securities with the aim of beating a benchmark.
- Adjusted EBITDAEBITDA from which the company has removed items it considers untypical: write-offs, one-off costs, revaluation effects and sometimes share-based pay.
- Administrative expensesThe cost of running the company: head office, finance and legal functions, office rent, audit fees.
- Admission to tradingThe venue operator's decision that a security may be dealt in on that venue.
- Adverse audit opinionThe auditor states outright that the accounts are not reliable: the misstatements are material and pervasive.
- Affiliated personA person able to influence a company's decisions, or connected with it through participation in its capital and management.
- Aggressive accountingAccounting choices that stretch out the recognition of costs and pull forward the recognition of income: capitalising instead of expensing, long useful lives, early revenue on long contracts.
- All-or-none orderAn execution condition under which an order is filled in full or not filled at all.
- All-weather portfolioAn allocation designed to give an acceptable result in any phase of the economy.
- AllocationThe share of an order actually filled in an oversubscribed offering.
- AlphaThe return earned beyond what the portfolio's market risk explains: what is left after subtracting beta multiplied by the market's own move.
- Ambiguity aversionA readiness to choose the option with known probabilities even when its expected result is worse — anything rather than deal with uncertainty that cannot be measured.
- American depositary receiptA security issued by a US bank against the shares of a foreign company and traded on the American market.
- American-style optionAn option the holder may exercise on any day up to expiry.
- Analysis paralysisThe state in which gathering more information substitutes for deciding: every check spawns the next one and the action is postponed indefinitely.
- AnchoringThe influence of the first number encountered on every estimate that follows.
- Annual general meetingThe mandatory yearly meeting of holders: it approves the accounts and the distribution of profit and elects the board.
- AnnualisationRestating a return earned over an arbitrary period as an annual figure.
- Appraisal rightThe right of a holder who voted against certain resolutions, or did not vote, to sell his shares back to the company.
- ArbitrageExtracting profit from a price discrepancy in the same asset.
- Articles of associationThe company's constitutive document: it names the classes of shares, the rights attached to them, how a meeting is convened and how the preferred dividend is worked out.
- Asian financial crisisThe sequence of devaluations and collapses across South-East Asia that began when Thailand stopped defending its currency in 1997.
- Asset allocationThe proportions between asset classes in a portfolio.
- Asset bubbleA market state in which the price is held up by the expectation of reselling higher rather than by anything the asset itself pays.
- Asset impairmentWriting an asset down to its recoverable amount.
- Asset management companyThe organisation managing a fund's property under the fund's rules.
- Asset turnoverHow much revenue each unit of assets produces: the speed at which property turns into sales.
- AssociateA company the group significantly influences without controlling; its result is reported as a share of profit rather than line by line.
- At the moneyThe state in which the price of the underlying and the strike are practically the same.
- Audit committeeThe board committee responsible for financial reporting, internal control and the relationship with the external auditor.
- Auditor's opinionThe auditor's view on whether the statements are reliable.
- Authorised participantA professional participant entitled to exchange a basket of assets for fund units and back. He does not serve private investors, yet the price in the order book depends on him.
- Authorised sharesThe maximum number of shares a company may place in addition to those already issued, should it decide to.
- Automatic exerciseThe automatic exercise of options that finish in the money on the expiry date.
- Availability heuristicJudging the probability of an event by how easily an example comes to mind.
- Average True RangeA measure of a security's typical daily price range.
- Average cost basisThe weighted average price at which a position was accumulated.
- Averaging downBuying more of a fallen holding to bring the average price of the position down: the break-even point moves, and the size of the bet on the original idea grows with it.
- BacktestTesting trading rules on historical data: how a portfolio would have behaved had decisions in the past been taken by those rules.
- BackwardationA situation in which the far-dated contract is cheaper than the near one.
- Bail-in riskThe risk of a financial institution being resolved with part of its creditors' claims written down.
- BailoutSupport for a failing bank or company out of the budget or from the central bank.
- Balance of paymentsThe record of all a country's transactions with the rest of the world over a period.
- Balance sheetThe statement of what a company owns and how it is financed.
- Bank runDepositors demanding their money back at once, which a bank cannot satisfy because the funds are lent out long.
- Barbell portfolioA holding built from very short and very long issues with nothing in the middle.
- Barbell strategyA bond portfolio built from two extremes instead of the middle: very short and very long maturities with nothing in between, reaching the desired average duration with more flexibility.
- Barriers to entryObstacles preventing new players from entering an industry.
- Base currencyThe first currency in a pair: the one whose single unit is being priced.
- Base effectA distortion in growth rates caused by an unusually low or high value in the comparison period.
- Base metalsIndustrial metals such as copper, aluminium and nickel, traded on world exchanges in standard contracts.
- Base rate neglectJudging probability by the vividness of a description instead of by how common the phenomenon is: a persuasive story displaces the question of how often such things happen at all.
- BasisThe difference between the futures price and the spot price of the same asset.
- Basis convergenceThe futures price closing in on the spot price as expiry approaches.
- Basis riskThe risk that a hedging instrument fails to track the asset it is meant to protect.
- Behavioural riskThe risk an investor creates for himself: stepping outside his own plan, trading on a headline, raising position sizes after a run of luck.
- BenchmarkThe reference against which a portfolio's result is measured.
- Best bid and offerThe highest price among buy orders and the lowest among sell orders standing in the book at this moment.
- BetaA measure of how closely a security moves with the market.
- Bid-offer spreadThe gap between the price at which currency is sold to a client and the price at which it is bought back.
- Big bath accountingThe practice of writing off as much as possible at once in a loss-making year: the year is bad anyway, and future charges have already been taken.
- Black Monday 1987The collapse of the US market in October 1987 — the largest single-session fall on record.
- Block tradeA trade in a large parcel whose terms are agreed away from the central order queue.
- Blocking sanctionsThe severest form of restriction: the target's assets are frozen and residents of the imposing country are barred from any dealings with it.
- Blocking stakeA holding large enough to prevent a decision that requires a supermajority of votes.
- Blue chipsThe largest, most liquid shares with broad analyst coverage.
- Board of directorsThe governing body that recommends the dividend and sets strategy.
- Bollinger BandsA channel around a moving average whose width follows volatility.
- Bond amortisationRepayment of the principal in instalments over the life of the bond rather than in one sum at the end.
- Bond arrangerThe bank or investment firm preparing a placement: it structures the issue, gathers demand and allocates the bonds.
- Bond collateralProperty or claims out of whose value holders are paid if the issuer stops paying.
- Bond fair priceThe sum of all future payments on the issue, discounted to today at the required yield.
- Bond fundA fund invested in debt securities. Unlike a single bond it has no maturity date: the term does not approach, it is maintained at a constant level.
- Bond ladderA portfolio of issues with maturities spread evenly across time.
- Bond programmeA framework document registered once, under which the issuer places individual series without repeating the full procedure.
- Bond put dateThe investor's right to present a bond to the issuer for redemption on a set date.
- Bond total returnThe outcome of holding over a period: coupons, the change in price and the income earned on the coupons received, taken together.
- Bondholder representativeA person acting in the interests of all holders of an issue: monitoring compliance with the terms and presenting claims to the issuer on their behalf.
- Bondholders meetingThe body through which holders of one issue take common decisions: agreeing to changed terms, waiving a right of claim, appointing a representative.
- Breakeven inflationThe gap between the yield of an ordinary government issue and that of an inflation-linked bond of the same maturity: the inflation rate at which both deliver the same outcome.
- BreakoutThe price leaving the boundary of the range it had been holding.
- Bretton Woods systemThe post-war architecture of world finance: currencies fixed to the dollar, and the dollar convertible into gold at an announced price.
- BrokerThe licensed intermediary through whom a private investor sends orders to the exchange.
- Broker commissionThe broker's charge for executing a trade, usually a share of its size.
- Broker statementA periodic document listing trades, cash and securities movements, fees withheld and closing balances.
- Brokerage accountAn account with a licensed market participant through which orders in securities are placed.
- Budget deficitGovernment spending in excess of revenue over a period; the opposite balance is called a surplus.
- Bullet portfolioA holding whose maturities are concentrated around a single date.
- Bullion coinA coin of precious metal whose price is set by the metal rather than by the rarity of the issue.
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