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.
- Fixed exchange rateA regime in which the state holds the rate at an announced level.
- Fixed fractional position sizingA way of sizing a trade so that the loss, if the protective order triggers, is the same share of capital whichever security is being traded.
- Fixed-coupon OFZA Russian government bond whose coupon is fixed for the entire life of the issue.
- FixingA rate or price recorded at a set moment under a procedure described in advance.
- Flag and pennantA short pause after a sharp move: in the first case the price runs in a narrow sloping channel, in the second it converges to a point.
- Floater durationNear-zero sensitivity of price to the level of rates: the coupon is reset in line with the base, so the bond is under no obligation to cheapen when rates rise.
- Floating exchange rateA regime in which the rate is set by supply and demand in the market.
- Floating-rate OFZA Russian government bond whose coupon is tied to a floating rate.
- Floating-rate noteA bond whose coupon floats with a money market rate.
- Food inflationThe rise in food prices — the most visible part of the consumer basket to a shopper and the most volatile part to a statistician.
- Forced liquidationThe broker closing a position when collateral falls short.
- Foreign direct investmentA non-resident's investment in a business large enough to carry a say in running it, rather than a claim on a security's income alone.
- Foreign exchange differencesChanges in the reported value of foreign-currency assets and liabilities caused by exchange rate moves.
- Foreign tax creditThe ability to reduce tax in the country of residence by an amount already withheld at source abroad, where a double taxation treaty between the two states is in force.
- Forward contractAn over-the-counter contract for future delivery at a price agreed in advance.
- Forward rateThe rate for a future stretch of time extracted from today's curve: what the market has priced in for a period that has not started yet.
- Free cash flowOperating cash flow less capital expenditure — the money that can actually be handed to shareholders.
- Free cash flow dividendA rule under which the payment is set as a portion of the cash flow left after capital expenditure.
- Free cash flow to equityThe cash flow left to shareholders after settling with lenders: interest, repayments and new borrowing.
- Free cash flow to the firmThe cash flow available to everyone financing the business, shareholders and lenders alike: before interest is paid and debt repaid.
- Free cash flow yieldFree cash flow divided by market capitalisation: how much flow falls to each unit invested in the shares.
- Free floatThe share of stock in free circulation — the part that actually trades on the exchange.
- Frontier marketsSmall markets with thin liquidity and restricted access that sit outside the main emerging-market indices.
- Fuel damperA Russian mechanism that smooths the gap between export and domestic fuel prices through payments from or to the budget.
- Full replicationTracking an index by buying every security in it.
- Functional currencyThe currency of the company's primary economic environment — the one it earns and spends in; books are kept in it before translation into the presentation currency.
- Fund flowsThe difference between money put into global funds and money taken out over a period.
- Fund of fundsA fund whose assets consist of units in other funds.
- Fund rulesA fund's founding document: what it may buy, what fees and surcharges it takes, on what timetable it accepts and settles orders, and on what conditions it is wound up.
- Fund tax efficiencyThe property whereby transactions inside a fund create no tax event for the unitholder: tax arises when the unit is redeemed or sold, not at every trade the fund makes.
- Funding rateThe periodic payment between holders of long and short positions in a perpetual contract.
- Futures contractA standardised contract obliging both sides to transact in the future at a price fixed today.
- G-spreadThe excess of a bond's yield over the yield of a government bond of the same maturity.
- GDP deflatorNominal GDP divided by real GDP: how much everything produced in the country has gone up in price.
- Gambler's fallacyThe belief that a run of identical outcomes changes the probability of the next one.
- GammaThe rate at which delta itself changes as the underlying moves.
- Gap smaller than the dividendThe ordinary state of trading after a record date: the price opens lower, but not by the full amount declared.
- Glide pathA schedule written in advance for gradually lowering the share of risky assets as the date the portfolio was built for approaches.
- Global depositary receiptA receipt over the shares of a foreign issuer placed outside the United States, most often on European venues.
- Global financial crisis of 2008The worldwide crisis that began with falling US house prices and the collapse in value of mortgage-backed securities.
- Global liquidityThe overall supply of money and credit available worldwide, which determines how easily risky assets can be financed.
- Golden shareA special state right to take part in governing a company: not a security, but powers vested in a government representative.
- GoodwillThe excess of an acquisition price over the fair value of the net assets acquired.
- Gordon growth modelA way to value an infinite stream of payments growing at a constant rate: next year's flow divided by the difference between the rate and the growth rate.
- Government debtThe total obligations of a state towards its creditors, domestic and foreign alike.
- Grace period defaultA missed payment that was made good within the cure period allowed by the documentation: the obligation was breached, but the issue is not yet in default.
- Grade differentialThe persistent price gap between crude grades, reflecting quality and the cost of getting the oil to market.
- Grain export dutyA floating Russian duty that takes part of the gap between export and domestic grain prices.
- GrainsWheat, corn and barley as exchange-traded commodities with a calendar of their own.
- Great DepressionThe prolonged global downturn of the 1930s, with mass unemployment, bank failures and falling prices.
- Green bondAn issue whose proceeds are directed, by the terms of the offering, to projects with a declared environmental effect.
- Greenshoe optionThe organiser's right to place additional shares beyond the announced size when demand proves strong.
- Gross domestic product (GDP)The total value of final goods and services produced in a country over a period.
- Gross marginGross profit divided by revenue.
- Gross profitRevenue less the cost of what was sold: what is left before selling and administrative costs, interest and tax.
- Growth capital expenditureThe part of capital spending aimed at adding capacity or entering new segments rather than at sustaining current operations.
- Growth investingBuying companies with a high rate of revenue and earnings growth.
- Growth stocksShares in companies expected to expand revenue and profit quickly.
- HammerA candle with a small body in the upper part and a long lower wick.
- Hang Seng IndexThe main index of the Hong Kong exchange, which also lists large mainland Chinese companies.
- Hard landingThe scenario in which the fight against inflation ends in falling production and rising unemployment.
- Head and shouldersA drawing of three consecutive peaks, the middle one higher than its neighbours, with a common line through their bases.
- Hedge accountingA special treatment that lets the result of a protective trade and the result of the item it protects meet in the same period, so profit does not jump.
- Hedge ratioThe share of a position covered by a protective trade.
- HedgingOpening a position that offsets a loss on the main one.
- Heikin-AshiA candle variant in which every value is averaged with the previous one, which makes the chart look smoother than the ordinary kind.
- Herd behaviourThe tendency to follow the majority against your own judgement.
- Hidden fund costsThe expenses that reduce a unitholder's result on top of the stated fee: payments to the depositary and registrar, trading inside the fund, and the spread when buying and selling the unit.
- High-risk segmentA separate trading regime to which the exchange moves issues of borrowers in default or in serious trouble.
- High-yield bondsIssues from low credit quality borrowers carrying an elevated coupon.
- Hindsight biasThe conviction that what happened was predictable: after an event, memory rebuilds earlier expectations around the outcome it now knows.
- Historical volatilityThe range of a price's swings measured on data that has already happened.
- Holding company discountA reduction against the sum of a holding's asset values: an investor pays less for the basket than for its contents separately.
- Holding periodThe time between acquiring a security and disposing of it: reliefs tied to long ownership depend on it.
- Home biasThe tendency to hold mainly assets of one's own country: the familiar feels more comprehensible and therefore safer, although familiarity and risk are unrelated.
- HyperinflationMoney losing value so fast that prices are reset within a single day and savings in the national currency simply disappear.
- I-spreadThe yield of an issue above the interest rate swap rate of the same maturity.
- IFRSInternational Financial Reporting Standards: the group reports as a single whole.
- IPO allocationThe portion of a submitted order that is actually filled in a placement.
- IPO price rangeThe bounds announced in advance within which the sale price of shares in a placement will be set.
- ISINThe international code that identifies a security unambiguously: every issue has its own.
- Iceberg orderAn order that displays only part of its volume in the book.
- Ichimoku cloudA set of lines, some shifted forwards and backwards in time, which together form a shaded area on the chart.
- Idiosyncratic riskRisk tied to a particular company and reduced by diversification.
- Illiquidity discountA reduction in value because the stake cannot be sold quickly at a fair price: no exchange, a narrow set of buyers, restrictions on exit.
- Illusion of controlThe sense of influencing an outcome where no influence exists.
- ImmunisationSelecting bonds so that portfolio duration matches the date the money is needed: losses on revaluation and gains on reinvestment cancel each other out.
- Impairment testA check of whether an asset's carrying value exceeds the amount that asset is capable of bringing in.
- Implementation shortfallThe difference between the result on paper and the actual one: commission, spread, the price move caused by one's own order, and the part of the size that never got filled.
- Implied volatilityThe volatility at which a model returns exactly the option price quoted by the market.
- In the moneyThe state in which exercising the option right now would leave the holder better off.
- Income deductionExemption of the account's income from tax when the holding period conditions are met.
- Income recognition dateThe moment income counts as received for tax: it is fixed by trade settlement and by the crediting of a payment, not by the date of your decision or of your order.
- Income statementThe statement of income and expenses over a period.
- Independent directorA board member unconnected with the company, its management and its large holders.
- Index fundA fund replicating the constituents of a given index.
- Index reviewA scheduled change to an index's constituents.
- Indicative quoteA price published for reference only: whoever published it is not obliged to deal at it.
- Indicator periodThe number of intervals over which an indicator computes its value.
- Indicator repaintingThe property whereby values already drawn change retrospectively once new data arrives.
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