Investor's glossary: financial terms in plain English

Investing and market terms in plain words: stocks and bonds, financial statements, derivatives, risk and portfolios. Find a term by its first letter.

1973 oil shockThe abrupt rise in oil prices after the Arab exporters' embargo, which struck importing economies.
1997 Asian financial crisisA chain of devaluations and market crashes across Southeast Asia, set off when Thailand gave up defending the exchange rate of its currency.
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.
ATR (Average True Range)Average True Range — a measure of a price's daily range.

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Accelerated placementThe sale of a large block of shares to institutional buyers within hours, usually once the main session has closed.

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 interestAccrued coupon interest: the 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 managementAn approach in which a manager selects securities with the aim of outperforming 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 or entity able to influence a company's decisions, or connected to it through a stake in its capital or a role in its 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 that is actually filled in an oversubscribed placement.

Allocation in a placementThe share of an order that a participant actually receives: when a deal is oversubscribed, the arranger fills orders only partially and at its own discretion.

AlphaThe return earned over and above what the portfolio's market risk explains: what remains after subtracting the contribution of beta multiplied by the market's 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 optionAn option that the holder may exercise on any day up to and including 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 shareholders: it approves the financial statements and the distribution of profit, and elects the board of directors.

AnnualisationRestating a return earned over any period of time 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.

ArbitrageProfiting 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.

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 tokenisationThe issue of digital rights to a real asset — a stake in a business, a warehouse, a batch of metal — where the record of ownership is kept in a distributed ledger rather than in conventional depository or paper-based records.

Asset turnoverHow much revenue each unit of assets produces: the speed at which property turns into sales.

AssetsEverything a company owns: plants, inventories, cash and receivables.

AssociateA company over which a group has significant influence but no control; its results are 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 reportThe auditor's opinion on whether the financial statements are reliable.

Authorised participantA professional participant entitled to exchange a basket of assets for fund units and back. It does not serve private investors, yet it is what drives the price in the order book.

Authorised sharesThe maximum number of shares a company may place in addition to those already issued, should it decide to.

Automatic exercise of an optionThe automatic exercise of options that are in the money on the expiration date.

Availability heuristicJudging the probability of an event by how easily an example comes to mind.

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.

BacktestA test of trading rules on historical data: how a portfolio would have behaved if past decisions had been made according to those rules.

BackwardationA market condition in which a longer-dated futures contract trades below a nearer-dated 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 sheetA statement of what a company owns and the sources that financed it.

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 that prevent new players from entering an industry.

Base currencyThe first currency in a pair: the one whose single unit is priced by the quote.

Base effectA distortion in growth rates caused by an unusually low or high value in the comparison period.

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 price of a futures contract and the price of the same asset on the spot market.

Basis convergenceThe futures price closing in on the spot price as expiry approaches.

Basis riskThe risk that a hedging instrument will not track the price movement of 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.

BenchmarkA reference point against which the performance of a portfolio is compared.

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 together with the market.

Bid-ask spreadThe difference between the best bid price and the best ask price.

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 bathA practice in which a company in a loss-making year writes off as much as it can at once: the year is bad anyway, and future expenses have already been recognised.

Black Monday 1987The collapse of the US market in October 1987 — the largest single-session fall on record.

Block tradeA trade in a large block of securities whose terms are agreed outside the central order book.

Blocking sanctionsThe harshest type of restriction: the person's assets are frozen, and residents of the imposing country are barred from any dealings with them.

Blocking stakeA shareholding large enough to prevent the adoption of a resolution that requires a qualified majority 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 amortizationRepayment of the face value in instalments over the life of the bond rather than as a single sum at maturity.

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 optionThe investor's right to tender a bond back 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 framework of global finance: exchange rates were fixed against the dollar, and the dollar was convertible into gold at a declared price.

BrokerA licensed market professional through which a private investor places orders on the exchange.

Broker account maintenance feeA recurring charge for maintaining an account, levied regardless of whether a single trade was made during the period.

Broker statementA periodic document listing trades, cash and securities movements, fees withheld and closing balances.

Brokerage accountAn account held with a professional market participant, through which orders for securities transactions are placed.

Brokerage commissionA fee paid to the broker for executing a trade, usually a percentage of its value.