MoneyWeek's financial glossary

All those financial terms you wished you knew but were too embarrassed to ask about.

Swipe to scroll horizontally
ADRADRs (American Depositary Receipts) allow US investors to get exposure to shares in foreign companies without the hassle of owning shares denominated in a foreign currency...
AIMThe Alternative Investment Market (Aim) was first established in 1995 by the London Stock Exchange as a way for newer firms to gain access to public funds...
AlphaAlpha (which is also known as the alpha coefficient) is a way of analysing the value that an active fund manager...
Altman Z ScoreDevised in the 1960s by Edward Altman, a Z score indicates the probability of a company entering bankruptcy within the next two years...
AmortisationAmortisation has two slightly different meanings, depending on whether you’re in America or Britain...
AnnuityAn annuity is a product that can provide you with a lifetime income, typically on retirement...
ArbitrageArbitrage is a technique used to take advantage of differences in price in substantially identical assets across different markets...
AuditorThe law requires an independent person to sign off that a firm's financial statements are "true and fair" and have been prepared using the relevant legislation...
BackwardationIf the current cash price for an asset slips above the price for forward delivery, that's known as 'backwardation'.
Balance of paymentsThe balance of payments refers to the accounts that sum up a country's financial position relative to other countries.
Baltic Dry IndexThe Baltic Dry Index is a key barometer of global freight activity – measuring the cost of ferrying raw materials around the planet.
Bank of EnglandThe Bank of England is the UK's central bank. It started life in 1694 as a private bank set up by London merchants as a vehicle to lend money to the government and to deal with the national debt.
B/C share schemeCompanies occasionally hand cash back to shareholders by issuing new types of shares, typically called B shares and C shares
Bernanke putThere is a widespread belief that the US central bank can always rescue the economy by decreasing interest rates. Since the current chairman is Ben Bernanke this is known as the 'Bernanke Put'
BetaBeta (or the 'beta coefficient') is a way to measure the relative riskiness of a share.
Bid-offer spreadThe bid-offer spread is simply the difference between the price at which you can buy a share and the price at which you can sell it.
Big BangThe 'Big Bang' refers to the deregulation of the London Stock Exchange, which took place on 27 October 1986.
BondA bond is a type of IOU issued by a government, local authority or company to raise money.
Bond auctionWhen governments want to raise money, they do so by issuing bills (typically short-term) and bonds (longer term – maturities can reach 30 years or more).
Bond durationDuration is a measure of how long it will take to reach a bond's mid point in cash-flow terms.
Bond ratingThe risk of default on bonds varies from issuer to issuer. Credit-rating agencies grade bonds to help you gauge their risks.
Bond vigilantes"If the fiscal and monetary authorities won't regulate the economy, the bond vigilantes will," says economist Ed Yardeni on Bloomberg...
Bond yieldsAn investor buying a bond needs to know what return to expect.
Bonus issueA bonus issue is common among British companies. In America the nearest equivalent is a stock split.
Book valueBook value is the total value of the net assets of a company attributable to - or owned by - shareholders.
Bottom-up investingBottom-up investing is a strategy that overlooks the significance of industry or economic factors and instead focuses on the analyses of individual stocks and companies.
BovespaThe Bovespa is the Brazilian stock market's benchmark index.
Break evenThe break-even point on an option is the price that the underlying asset has to hit in order to enable the option buyer (holder) to recover their premium.
Bullet repayment loanA 'bullet repayment loan' is one where the borrower repays the capital in one chunk at the end of the term of the loan.
Buyouts and buyinsA management buyout (MBO) occurs when the management of a company buys up a controlling interest (often by buying all outstanding shares).
CAC-40The CAC-40 is France’s benchmark stockmarket index.
Capital adequacyCentral banks impose capital adequacy ratios (also known as solvency ratios) that set the amount of its own money a bank needs to have relative to its total loan portfolio.
Capital asset pricing model (CAPM)The capital asset pricing model has been widely used for many years by the global financial services industry to try and predict the returns you should expect from a stock.
Capital expenditure (Capex)Capex is short for capital expenditure. This is simply the purchase of fixed assets such as land, buildings and equipment for a business and it is often one of the biggest uses for a company’s cash flow.
Capital ratioIn an attempt to prevent organisations such as banks from going bust too easily, regulators impose minimum capital requirements on them...
Carry tradeCarry trades seek to make money from the fact that the interest rates set by central banks around the world vary considerably.
Cash conversionMaking profits is one thing – but you want to know how well a company converts these profits into cash.
Cash flowAs well as publishing yearly profit and loss accounts, companies also have to produce a cash-flow statement...
Chapter 11Chapter 11 of the American bankruptcy protection laws effectively puts a protective ring around a company, winning it time to renegotiate its debts and stopping creditors from claiming assets...
Clearing houseA typical contract between two financial-market participants involves one agreeing to sell and later deliver a product (say, shares) and another agreeing to pay for it...
Closet tracker fundsAn active fund with a portfolio of stocks that is little different from the overall market is called a "closet tracker".
Coco bondsCould contingent convertible bonds, or Cocos, stop a bank failing? Some regulators believe so...
Cognitive biasWe use mental shortcuts (heuristics) to make decisions rapidly. These work in many circumstances, but when it comes to investing, they can be a major handicap, giving rise to “cognitive biases”.
Collateralised debt obligation (CDO)A collateralised debt obligation (CDO) is a type of financial product – a credit derivative – which is backed by an underlying pool of loans...
Commodity forwardsA 'forward' is a contract agreed between two parties whereby one agrees to deliver a specific quantity of an asset – say one ton of aluminium – on an agreed date and the other agrees to pay a fixed price for it on that date...
Compound interestWhen you invest money, you earn interest on your capital. The next year, you earn interest on both your original investment plus the interest from the year before...
ContagionWhen used in financial markets, contagion is a term associated with the kind of market turmoil seen in 2007 as well as previous crises such as those of 2001 and 1998...
ContangoThe price of an asset for forward delivery is usually above the price you would pay today...
Contingent liabilityIf a firm has received goods from a supplier, along with an invoice that remains unpaid when the balance sheet is drawn up at, say, 31 December...
Continuation voteAn investment company’s articles of association often provide for shareholders to vote on whether the company should continue to exist. This is known as a continuation vote.
Contracts for differenceEntering into a contract for difference, or CFD, involves making a bet on the movement of share prices...
Convertible bondsA convertible bond issued by a public company is one that starts as a bond but that can also be converted into ordinary shares in that company at any time before the bond matures, and at a previously specified price...
Convertible rightsAlso known as 'conversion rights', these give the buyer of a preference share or bond the right to convert it into a set number of ordinary shares for a pre-agreed 'strike' price at an agreed point in the future...
Coppock indicatorThe Coppock Breadth Indicator, originally known as Trendex's Timing Technique for Texas Traders, is used to identify buy signals from around the bottom of a bear market...
CorrelationCorrelation simply refers to a relationship between two events...
Cost of capitalMaking a business successful is simply down to ensuring you earn more than your costs...
Cost of equityA company's cost of equity is the annual rate of return that an investor expects from a firm in exchange for bearing the risk of owning its shares...
Cost/income ratioThe cost-to-income ratio is a key financial measure, particularly important in valuing banks...
Country's current accountA country's balance of payments - its financial situation relative to the world - is made up of the current account and the capital account...
Cov-lite'Cov-lite' is used to describe a loan where the lender, typically a bank, does not impose standard performance conditions on a borrower...
Covered bondsA bond is an IOU issued by a company, typically offering a fixed rate of interest and a fixed date for repayment by the issuer...
Credit default swapAnyone who owns a bond faces two main risks. The first is that the price drops and the second is that the issuer goes bust...
Credit eventMost bonds are allocated a credit rating to indicate to an investor the likelihood of a subsequent default...
Credit spreadWhen governments borrow - by selling 'gilts' in the UK and 'treasuries' in the US - they offer the buyer a low annual return or 'yield', as the risk of default is virtually non-existent...
Currency pegWhen a country tries to keep its currency trading at a certain exchange rate, or within a tight range against another currency, this is known as a “currency peg”.
Currency riskThis is the type of risk that comes from the change in price of one currency against another...
Current account surplus/deficitThis is a measure of the position of one country relative to the rest of the world in terms of imports and exports...
Cyclical stocksThe performance of cyclical stocks is heavily dependent on the economic cycle - they do well when the economy is booming but very badly when it falls off a cliff...
Cyclically adjusted p/e ratio (Cape)A classic price/earnings ratio is the relationship between the current share price and one year's earnings, usually the last year, or a forecast for the year ahead...
Daily repricingDaily repricing is a feature of exchange-traded funds (ETF) and can affect your expected performance, especially on inverse products.
Dark liquidity pools'Dark pools' covers any share trade conducted directly between investing institutions, such as banks and hedge funds, rather than via a regulated exchange
DAXThe DAX is Germany’s blue-chip index, the most cyclical of the major western indices, with almost 80% of it comprised of economically sensitive industries.
Deal-for-equity swapsIn a debt-for-equity swap, some of a firm's debt is cancelled and lenders are given shares.
Debt swapThere are several possible ways in which a debt swap can be done. However, the aim is usually the same – to refinance a borrower and strengthen its balance sheet.
Debt to equity ratioThe debt to equity ratio of a company is simply its level of debt (any type of borrowed money) divided by equity (the shareholders' money in the business).
Debtor and creditor daysInvestors looking for an indication of a firm's commercial power may look at how fast it pays customers and suppliers.
Defensive stocksDefensive stocks are those that don’t tend to depend heavily on what’s going on in the wider economy for their growth.
Defined benefit & defined contribution pensionsIn a defined benefit pension, you are guaranteed an income in retirement, calculated as a percentage of your final or average earnings.
DeflationDeflation is the word used to describe falling prices. These are not necessarily a bad thing.
DeleveragingBefore the credit crunch, firms and households expanded through 'leverage' - borrowing to buy assets. 'Deleveraging' is this process in reverse.
Delta OneDelta One refers to the way a bank hedges its long and short exposures across a portfolio of investments.
Depositary receiptA depository receipt allows investors to access overseas shares in their own market and currency.
DepreciationIf you buy an asset, it will wear out as it gets older and eventually need replacing. It is therefore 'depreciating' over time.
DerivativeA derivative is the collective term used for a wide variety of financial instruments whose price derives from or depends on the performance of other underlying investments.
DilutionIn the world of finance, dilution means something is being watered down, typically earnings per share.
Discount rateThe discount rate is used to calculate how much the expected future income from an investment over a given period of time is worth right now.
Discounted cash flowDiscounted cash flow is simply a method of working out how much a share is fundamentally worth based on the present or discounted value of expected future cash flows.
DiscountingDiscounting is expressing cash received in the future in today's money because inflation erodes the value of money over time.
Disposition effectInvestors have a tendency to hold onto losing positions long after we know in our heart of hearts, the stock is never going to recover, and to take profits on winning positions too early.
DiversificationDiversification is the process of dividing your wealth between different investments to avoid being too reliant on any single one doing well.
DividendA dividend is the part of a company's profits that are distributed to shareholders.
Dividend coverDividend cover measures the number of times greater the net profits available for distribution are than the dividend payout.
Dividend yieldThe dividend per share (total dividends paid out divided by total number of shares) expressed as a percentage is referred to as the dividend yield.
Dogs of the DowFans of this theory say that bargains can be spotted by looking for high dividend yields – the annual dividend as a proportion of the current share price.
Dow TheoryDow theory is often used as an indicator of when a bear market may be about to start.
DurationDuration is the point at which a bond reaches the mid-point of its cash flows.
Earnings per shareEarnings per share is seen as one of the best means of determining a share's true price, as it shows how much of a firm's profits (after tax) each shareholder owns.
Earnings yieldThe earnings yield is a firm's earnings per share for the most recent 12 months divided by the share price - effectively the opposite of the p/e ratio.
EbitdaEarnings before interest, tax, depreciation and amortisation (EBITDA) takes operating profit and adds back two subjective costs: depreciation and amortisation.
Economic indicatorsEconomic indicators are statistical measures that reveal general trends in the economy.
Economic moatWarren Buffett first coined the phrase ‘economic moat’ as a way of summing up how robust a firm is in the long term.
Elliott wave theoryAccording to Elliott wave theory, market movements conform to patterns - a series of waves reflecting the fact that people tend to think and behave in a herd-like way.
Emerging marketsAn emerging market is an economy that is becoming wealthier and more advanced, but is not yet classed as "developed".
Enterprise valueThis measure’s the total value of a business by combining the market value of equity and net debt as an estimate of what a predator would pay for it.
EquitiesEquities, shares and stocks are all names for the individual units that give you a financial interest in a company.
Equity free cash-flow yieldEquity free cash-flow is the cash generated each year for shareholders after certain 'non-discretionary' expenses have been paid.
Equity risk premiumWhen buying a security such as a share, every investor should have an expected return in mind.
ESG investingESG stands for environmental, social and corporate governance, the areas in which good behaviour is particularly sought.
EurobondThis describes any international corporate or government bond that is denominated in a currency held outside its country of origin.
EV/sales ratioEnterprise value is the sum of a firm's market capitalisation and its net debt (short- and long-term debt minus cash).
EV/Ebit ratioEnterprise value to earnings before interest and tax (EV/Ebit) is a way of deciding whether a share is cheap relative to its peers or the wider market.
EV/Ebita ratioEV/Ebita is a valuation method often used by analysts, sometimes used instead of the p/e ratio to compare growth between firms in heavy debt sectors
Exchange-traded fund (ETF)An exchange-traded fund (ETF) is an equity-based product combining the characteristics of an individual share with those of a collective fund.
FactorA factor is a characteristic that has been shown to contribute to market outperformance.
FCF yieldThe free cash flow (FCF) yield is a way to decide whether a firm is cheap or expensive based on its cash flows rather than, say, its earnings.
Fibonacci theorySome analysts use the Fibonacci sequence and its ratios to attempt to forecast and interpret the rhythms of markets.
Final salary and money purchase pensions(AKA defined benefits and defined contributions pensions) With a money purchase scheme, the size of your pension depends entirely on the value of your fund when you retire.
Fiscal cliffThe phrase ‘fiscal cliff’ was coined to capture the large and predicted reduction in the US budget deficit expected as specific laws kicked into effect from 2013.
Fiscal policyFiscal policy includes any measure that the national government takes to influence the economy by budgetary means.
Fixed assetsThe phrase 'fixed assets' covers all assets that the business intends to keep for more than a year.
FlippingFlipping is when you make an offer on a property and then either look to secure a new buyer at a higher price before you close on the deal, or wait for it to rise in value, then sell on.
Floating rate noteA floating rate note is a form of security that carries a variable interest rate which is adjusted regularly by a margin against a benchmark rate such as LIBOR.
Foreign exchange reservesForeign exchange reserves are stockpiles of foreign currencies held by governments.
Free cash flowFree cash flow is a pure measure of the cash a company has left once it has met all its operating obligations.
Free cash flow per shareFree cash flow per share takes the annual cash flow available to pay dividends and divides by the number of ordinary shares in issue.
Free cash flow yieldFree cash flow yield (FCFY) is a ratio used to work out the cash flow return on a share as a percentage.
Free floatFree float refers to the percentage of a company's total voting shares that are freely traded and could therefore be held by anyone.
FSCSThe Financial Services Compensation Scheme (FSCS) covers bank, building societies and investment accounts, and will pay compensation if the holding institution goes bust.
FTSE 100The FTSE 100 is Britain's 'blue-chip' stock index.But its makeup means it is more of a global index than a snapshot of UK plc.
FuturesA future is a tradeable contract that commits you to taking delivery (if you buy), or making delivery (if you sell), of an agreed amount of something at an agreed time.
GDPGross domestic product (GDP) is a measure of the total amount of goods and services produced by a country in a specific period of time, usually a year or a quarter.
GearingGearing (or leverage) is the relationship between the debt and the equity in a business - between borrowed money and shareholders' money.
GiltA gilt-edged security (gilt) is a government bond - a security or stock issued by the government paying a fixed rate of interest and redeemable on a set date for a set amount.
Gilt yieldGilt yields express the return on a gilt as an annual percentage.
Global depository receipt (GDR)Global depositary receipts (or GDRs) offer a solution for investors wanting to buy shares listed in countries where there are government restrictions on who can own and trade them.
Going concernA firm is seen as a 'going concern' if its auditors believe it will stay in business for the 'foreseeable future'.
GoodwillGoodwill is an intangible asset, which means it can be found on a company’s balance sheet in its annual accounts.
Gordon’s growth modelGordon’s growth model is a very simple but powerful way of valuing shares based on a company’s future dividends. It is sometimes called a “dividend discount” model.
Government-sponsored enterprises (GSEs)The term 'government-sponsored enterprises' (GSEs) refers to three US organisations – Freddie Mac, Fannie Mae and Ginnie Mae – which all play a crucial role in the US mortgage market.
Greenspan putA 'put' is a type of option contract that increases in value as the price of the underlying asset falls.
Gross marginThere are many ways to measure a firm's profitability. One of the more important ones is the gross margin.
Handle'Handle' is traders’ jargon for the whole-dollar amount of a security quote.
Hang Seng indexHang Seng is Hong Kong’s benchmark index of stocks.
Hedonic accountingWhen measuring inflation, some countries, such as the US, take into account changes in the quality of goods in a process known as 'hedonic' price adjustment.
Hostile takeoverA company’s directors may feel that a takeover bid undervalues the shares, and so do not recommend the offer to shareholders. The bidding company can instead approach the shareholders directly.
Index-linked giltsIndex-linked gilts are sterling bonds issued by the Bank of England and listed on the London Stock Exchange, introduced to act as a hedge against inflation for pension funds.
Index fundIndex funds (also known as passive funds or "trackers") aim to track the performance of a particular index, such as the FTSE 100 or S&P 500.
IndicesThere are indices for every sort of market, but retail investors are probably most familiar with those related to stockmarkets.
Index providerStockmarket indices such as the FTSE 100 play a huge role in investment. But where do they come from and who maintains them?
Individual savings account (Isa)Individual savings accounts (Isas) are a way of saving and investing without paying income tax or capital gains tax.
Individual voluntary arrangement (IVA)Individual Voluntary Arrangements are an alternative to bankruptcy, whereby a debtor in financial difficulty comes to an arrangement with his creditors on how the debt will be cleared.
InflationInflation is the rise in the general level of prices in an economy (or a sector of an economy) over a given period of time. It is also sometimes defined as the decline in the purchasing power of each unit of money.
Initial public offering (IPO)An initial public offering (IPO) is the process of launching a firm on to the stock exchange for the first time by inviting the general public and financial institutions to subscribe for shares.
Interest coverInterest cover is an affordability test. It compares the profit before tax (PBT) figure to interest charged in the profit and loss account.
Interest rate swapAn interest rate swap is a deal between two investors.
Internal rate of returnThe internal rate of return of a bond is essentially the rate of return implied by its total cash flows.
Inverted yield curveA yield curve shows the relationship between the yield on securities and their maturities (how long it is until they can be redeemed at their face value).
Investment trustsAn investment trust is a company whose business is to invest in other companies.
ISEQFew national indices changed as much as Ireland’s ISEQ after the credit bubble.
Junk bondsJunk bonds are also known as 'high yield', 'non-investment grade', or 'speculative' bonds.
Keynesian economicsNamed after economist John Maynard Keynes, who believed the best way to ensure economic growth and stability is via government intervention in the economy.
KospiThe Kospi is South Korea’s benchmark stockmarket index. It is typical of emerging markets, in that it is highly exposed to the global economic cycle.
Laffer CurveThe theory behind the Laffer Curve states that the higher you set tax rates, the more you will receive in tax revenues until you hit a certain point. Thereafter, tax revenues will dwindle as tax payers lose the will to work harder.
Leverage'Leverage' is a US term that is also known as 'gearing'. Both express the extent to which any transaction is financed by debt from lenders as opposed to capital provided by the investor.
Leveraged buyoutA leveraged buyout is where an investor group acquires a business using mainly borrowed money.
Libor and the OISThese are two of the most important interest rates in the world. Libor is the London Interbank offered rate. The overnight index swap (OIS) is a broadly comparable rate in the US.
Like-for-like salesOne way of making meaningful year-on-year comparisons, especially with retail stocks, is by looking at 'like-for-like' sales growth.
Limited companyA limited company is one in which the liability of the shareholders is limited to what they have put in to the company.
LiquidityLiquidity refers to how easy it is to buy or sell an investment.
Lloyd'sLloyd's of London is an international insurance market, which controls and regulates the activities of the groups offering insurance services
Loan-to-value ratioThe loan-to-value (LTV) ratio is one of the main risk assessment measures used by lenders to assess a person's suitability for a mortgage.
Long / short equityLong / short equity is becoming increasingly popular as a hedge fund strategy.
Long-term refinancing operations (LTRO)The Long-term refinancing operations (LTRO) of the European Central Bank (ECB) are designed to provide stability to Europe’s banking sector.
Low volatilityLow volatility – or “low vol” – investing means buying shares (or bonds) that tend to go up or down in price by less than the overall market (in other words, they’re less volatile).
M&A arbitrageM&A arbitrage is a way to profit from one company taking over another, or two firms deciding to merge.
MarginWhen buying a derivative like a spread bet, an investor will only have to pay a small initial deposit, or 'margin', of say 10% of the value of the shares.
Margin accountA margin account is one that an investor holds with a broker, effectively allowing him to buy securities on credit.
Margin of safetyThe margin of safety itself is the gap between the price you pay and what you think a stock might be worth.
Margin callWhen an investor borrows to bet on markets, they put down a deposit known as “margin”.
Margin tradingMargin trading is when, typically US, investors put up only a percentage of the cost of an asset they buy.
Mark to modelIn normal circumstances, securities such as shares or bonds are valued by using market prices: this valuation method is called 'mark to market'.
Market cap weightingIf an index is weighted by market cap (market capitalisation – the number of shares outstanding multiplied by the share price), it means the companies in the index are ranked by stockmarket value.
Market capitalisationMarket capitalisation, often abbreviated to market cap, is the total value of all outstanding shares in a company.
Market makersMarket makers are typically banks and brokers who commit to trade shares and bonds, often in larger quantities than most other investors.
Market neutral fundsMarket neutral funds aim to deliver above market rates of return with lower risk by hedging bullish stock picks (buys) with an equivalent number of short bets (sells).
Market timingMarket timing refers to any strategy that involves trying to predict future price movements and shifting between different investments to take advantage of them.
Marking to marketThis is the process of updating a portfolio to reflect the latest available prices.
Maturity transformationMaturity transformation is when banks take short-term sources of finance, such as deposits from savers, and turn them into long-term borrowings, such as mortgages.
Mean reversionMean reversion is the tendency for a number - say, the price of a house or a share - to return to its long-term average value after a period above or below it.
Mean, median and modeThere are several ways to calculate an average, the three most common being the mean, median and mode.
Mezzanine financeMezzanine refers to a layer that falls between two others. In the case of finance, it comes between debt and equity.
Minority interestThis is an accounting term for the amount of a balance sheet not owned by a firm’s shareholders.
Misery indexThe misery index is constructed by adding the unemployment rate to the inflation rate.
Modern monetary theory (MMT)Modern monetary theory, or MMT, has become popular on the left, both in the UK and abroad. (Wags say that it stands for "magic money tree".)
Modified Altman Z scoreAltman’s original five-ratio model was designed for manufacturers, or sectors with high capital intensity, such as mining...
Momentum investingMomentum investing focuses on growth in the share price, buying shares that have gone up the most in the recent past, or are making new 52-week highs.
Monetary policyMonetary policy is about exercising control over the money supply (the amount of money circulating in the economy) with the aim of influencing the economy.
MonetisationA government can create an IOU for £1,000 and sell it to a central bank, which pays for it by printing £1,000.
Money launderingMoney laundering is a catch-all term for any activity that tries to convert the proceeds of crime into legitimate money.
Money markets'Money markets' is a generic term covering the vast market for short-term cash loans and deposits.
Money multiplierThis is one of the key principles underpinning the entire banking system. That's because it's the basis of 'credit creation'.
Money supplyMoney supply is simply the amount of money available in the economy.
MonolineA monoline is any business that specialises in one particular financial services area, which could in theory be anything from mortgages to car insurance.
Moving averageA moving average of a share price is simply the average of the share prices of the last so many days.
Multiple compressionMultiple compression is when company's price/earnings multiple falls as investors become wary of a company's growth prospects. The share price may be static or falling, despite increasing earnings.
Naked option writingThere are two parties to an option contract – the buyer (holder) and the seller (writer). If you are an option writer, you can be covered or naked.
Naked shortingA 'naked' short involves shorting shares that are not available to borrow.
Nation's current accountA nation's current account measures the flows of actual goods and services in and out of the country.
NAVThe net asset value (NAV) of a firm is the amount of money that would be left if it closed, sold its assets and paid its debts.
Net working capitalNet working capital measures a firm’s ability to pay its way, or its liquidity. Subtract its current liabilities from its current assets.
Nikkei 225The Nikkei 225 is Japan’s major stockmarket index.
Nil-paid rightsNil-paid rights arise when a firm sells new shares for cash to existing shareholders via a rights issue.
Nominal value of a bondEach bond has a fixed nominal value, often £100 for a sterling bond.
Nominee accountUsually, a broker records shares bought on behalf of clients using a general 'nominee' account on the register with a name chosen by the broker.
OCF (ongoing charges figure)Fund managers publish their ongoing charges figure (OCF) – previously known as the total expense ratio (TER) – to give an indication of the cost of investing in their funds.
OptionAn option is simply the right to buy (a 'call' option) or sell (a 'put' option) a quantity of any asset by an agreed expiry date for a fixed ('strike') price.
Non-domicileNon-domicile status is given to people who were either not born here or whose parents spent most of their lives in another country.
Off Exchange (OFEX)The Off Exchange (OFEX) was started as a way for shareholders to deal in the shares of small companies that do not meet the requirements of Aim and the LSE’s official list.
Off-balance-sheet financeThis technique allows a borrower to legally raise finance (so improving its cash position) without showing any associated liability on the balance sheet.
Open & closed end fundsAn investment or 'closed end' trust is a public company whose business is to invest in other companies.
Open-ended investment company (OEIC)An open-ended investment company, or OEIC (pronounced 'oik'), is a modern and more flexible version of a unit trust.
Operating leverageHigh operating leverage (also known as operating gearing) means that fixed costs (predominantly property and staff) are a high proportion of total costs in the profit and loss account.
Operational gearingOperational gearing describes the relationship between a firm's fixed and variable costs.
Opportunity costThe opportunity cost of an investment is the return you could have got if you'd put your money elsewhere.
OptionalityAn option gives the right to buy ('call') or sell ('put') shares at a fixed 'strike' price, but only before an agreed date when the option expires.
Out of the moneyIf an option is 'out of the money' it is usually not worth exercising given the current market price of the underlying asset.
Output gapThe output gap is the difference between an economy's actual output, otherwise known as gross domestic product (GDP), and what it would be if that country's industries were working flat out.
Over the counter (OTC)Many transactions are done privately between counter parties and with no exchange involved.These are known as over the counter, or OTC.
Overweight and underweightThe terms overweight and underweight are used by brokers and fund managers to indicate their preference for stocks or markets relative to particular indices or benchmarks.
Pairs tradePairs traders aim to profit from the change in the price of, say, one share relative to another.
Payback periodThe payback period measures how long a project or investment takes to repay any initial outlay.
PIK noteA “payment-in-kind” (PIK) note (or loan) is a way for companies to borrow money.
Piotroski scoreThe Piotroski score is designed to identify high-quality firms by looking at nine separate criteria.
PlacingPlacing is where selected institutions are phoned by a firm’s advising investment bank and offered blocks of shares.
Plaza AccordThe Plaza Accord was an agreement signed between the US, Japan, West Germany, France and the UK at the Plaza Hotel in New York in 1985.
Ponzi schemePonzi schemes are a type of illegal 'rob Peter to pay Paul' operation named after Charles Ponzi who took deposits from 40,000 US investors on the promise of fabulous returns
Pound cost averagingPound cost averaging is when you drip feed money into shares or units on a regular basis rather than committing a single larger lump sum.
Preference sharePreference or preferred shares are shares in a company that have a fixed rather than a variable dividend.
Price elasticityIn general, the higher the price of a product the lower the demand for it. The extent to which this is true for each product is referred to as price elasticity.
Price/book ratioThe price to book ratio (p/b ratio) is calculated by dividing the current share price by its book value per share.
Price/cash flow ratioThe price to cash flow ratio (PCF) is a measure of the market's expectation of a firm's future health.
Price/earnings growth (PEG) ratioThis key ratio compares the price to earnings ratio to a firm’s earnings growth rate to see whether a share is cheap or expensive.
Price/sales ratioA company's market cap divided by the company's annual sales (or revenue) gives us the price to sales ratio.
Price/earnings (P/E) ratioThe price/earnings ratio is a quick way to establish a firm's relative value.
Prime brokerPrime brokers are typically investment banks which are able to sell clients, often hedge funds, a 'one-stop shop' service.
Private equityPrivate equity covers the many ways of raising finance 'off exchange'.
Private finance initiative (PFI) / public-private partnership (PPP)The private finance initiative (PFI) is a way of getting private sector involved in financing public sector projects like schools, hospitals and prisons.
Profit warningA profit warning is when a listed company announces that its profits are going to be significantly lower than the market currently expects.
Prop tradingProprietary ('prop') trading involves banks risking their own capital to make money.
Public sector net cash requirement (PSNCR)Government spending usually exceeds its income, and the difference is known as a 'public sector net cash requirement' (PSNCR).
Purchasing power parityPurchasing power parity (PPP) is a theory that tries to work out how over- or undervalued one currency is in relation to another.
Put optionA put option gives someone the right to sell something (often shares, but they can be used in connection with other financial assets) for an agreed price on or before a certain date.
Puts and callsA 'put' give you the right to sell a share at a pre-determined price, a 'call' gives you the right to buy them.
Picks and shovelsCanny investors cleaned up in the California gold rush not by prospecting for gold, but by selling picks and shovels to those who were.
Q ratioThe Q ratio, or Tobin's Q, can be a reliable measure of stockmarket value.
Quantitative easing (QE)Quantitative easing (QE) involves electronically expanding a central bank's balance sheet.
Real and nominalIn a monetary context, 'real' and 'nominal' are used to describe whether or not a price has been adjusted for inflation.
Real estate investment trust (REIT)A real estate investment trust (Reit) is an investment company that owns and leases out property.
Real interest rateA “real” interest rate accounts for the impact of inflation on a given rate of interest. It’s very important to your returns.
RecessionThe most common definition of a recession is a fall in real (inflation-adjusted) gross domestic product for two or more quarters in a row.
Redemption yieldWhen investors buy different securities, they want to be able to compare expected annual returns. For bonds this is the 'redemption yield' or 'yield to maturity'.
RepoA 'repo' is standard sale and repurchase agreement.
Resistance pointsShares can often trade in channels, rarely breaking below or above consistent minimum and maximum prices. Those are a stock's resistance points.
Resource curseThe term “resource curse” refers to the observation that countries with abundant natural resources also tend to be less economically developed than those with scarcer resources.
Return on capitalReturn on capital is one of the most useful ratios when it comes to measuring the performance of a company.
Return on capital employed (ROCE)This key ratio measures the profitability of a firm taking account of the amount of money it deploys.
Return on equityReturn on equity measures a year's worth of earnings against shareholders' equity (the difference between a group's assets and its liabilities).
Return on invested capital (ROIC)This is a ratio that can be used to assess how effectively a company squeezes profits from the assets it controls and owns.
Revenue ReserveInvestment trusts can hold back up to 15% of their dividends to build up a revenue reserve, which they can then draw on to maintain their own dividends in years when company payouts fall.
Rights issueA rights issue gives investors who already hold shares in a company the right to buy additional shares in a fixed proportion to their existing holding.
Risk-free rateOne way to think about the size of return you should be aiming for is to consider the return you could get if you took absolutely no risk at all – the “risk-free rate of return”.
Risk premiumThe risk premium is the difference between the highest risk-free return available and the rate of return investors expect from another asset over the same period
S&P 500 indexAmerica's S&P 500 index is among the Western world’s most cyclical indices.
Sale and leasebackA sale and leaseback arrangement can be a useful way for a company to generate cash from its property portfolio without having to vacate.
Secular trendA secular trend is a long-term phenomenon, whereas a cyclical trend is short-term and will eventually reverse.
SecuritisationA mortgage is secured on the borrower's home, which can be seized later and sold should things go wrong. By extension, the mortgage itself can be securitised.
Segregated fundA segregated fund is a managed pot of assets belonging to just one client, managed alongside - but separately from - other investments under a manager's control.
Shadow bankingShadow banking refers mainly to methods by which credit is created outside of the traditional banking system and beyond the oversight of regulators
Share buybackAs well as issuing new shares, companies sometimes buy back existing ones.
Share optionsShare options give you the right to buy (or to sell) shares in a given company at a previously set price regardless of the current market price.
Short squeezeWhen a large number of short sellers target the same stock, the price can rise in a self-perpetuating circle known as a 'short squeeze'.
Short sterling futureThe 'short term interest rate future' (or STIR) is also known as the 'short sterling' future. In essence, it facilitates bets on where interest rates will be.
Short sellingIf a trader believes that the price of an asset will not rise but fall, he can still make money on it by 'shorting' it.
SIPPA self invested personal pension, or SIPP, is a type of DIY pension.
SIV (structured investment vehicle)Structured investment vehicles (or SIVs) are typically created by investment banks and can be a way to raise capital without having to record an associated obligation to repay it.
Smart betaSmart beta funds aim to combine the best aspects of passive and active management, aiming to beat the index by eliminating any element of discretionary human judgement.
Sovereign wealth fundA sovereign wealth fund is a state-owned fund of the accumulated reserves that arise from running a trade surplus with other countries.
SPACSPAC stands for “special purpose acquisition company” – a company listed on the stock exchange like a normal business, but with no business operations of its own.
Special drawing rightsA special drawing right allows a member country of the IMF to obtain surplus currency held by another member country.
SpreadA spread is simply a gap, or difference; so the 'spread' between two and five is three.
Spread bettingSpread betting is a straightforward and tax-efficient way of leveraging the financial markets.
Stability and growth pactThe stability and growth pact, or SGP, played a key role in the establishment of the euro.
StagflationStagflation is a nasty mix of rising prices (based on high demand, production capacity constraints, or both) and falling growth.
Stamp dutyStamp duty is a re-registration tax. That means you pay it whenever you buy (but not sell) a registered asset.
Standard deviationStandard deviation is still the most widely used measure of dispersion, or in financial markets, risk.
Stock overhangStock overhang is a phrase used to describe a sizeable block of shares which, if it were to be released in the market in one go, would flood it, and so depress prices.
Stock splittingA stock split increases the number of a corporation's issued shares by dividing each existing share.
Stop-lossA stop-loss is an instruction given to a broker to by or sell a stock to limit losses if it moves beyond a certain level.
Subordinated debtHolders of subordinated debt rank below most other bondholders when it comes to paying them back if the company goes backrupt.
Swap rateA company has an existing ten-year loan from a bank on which it pays a floating rate of interest...
SwapsCompany A issues its fixed-interest bond and Company B issues a floating-rate loan. They then agree to swap their interest payment liabilities...
SyntheticsA synthetic is a combination of financial instruments – often two, sometimes more – designed to mimic another single security.
TAIEXThe TAIEX is Taiwan’s benchmark index, with technology companies accounting for just over a third of the market. Semiconductors are the main subsector.
Tangible common equityTangible common equity is a measure used to gauge how big a hit a bank can take before its shareholders’ equity is wiped out.
Tangible book value per shareBook value (also known as equity, shareholders’ funds, or net asset value) is the value of all a company’s assets, minus its liabilities.
Target 2Target is a payment system used by Europe’s central banks for urgent real-time electronic transfers.
Technical analysisTechnical analysts or 'chartists' attempt to predict future share price (or index) movements by looking at past movements.
Tier-one capitalBanks' capital can be split into tiers. Tier one represents capital of the highest quality.
Time value of moneyMoney has a time value. If you are owed £10, you would rather it was paid back now than in, say, one year's time.
Total expense ratioThe total expense ratio (TER), also known as the 'expense ratio' is a way to capture the annual costs associated with running a fund such as a unit trust.
Tracker fundTracker funds (also known as index funds or passive funds) aim to track the performance of a particular index, such as the FTSE 100 or S&P 500.
Tracking errorTracking error is defined as the standard deviation of the difference between the fund’s returns and the returns on the index.
Trade surplusWhen a country's exports exceed its imports, it is said to have a positive balance of trade, or trade surplus.
Trailing stop-lossA conventional stop-loss will ensure you get out of the market at a fixed price above or below your initial trading price. A trailing stop allows you to keep more of your profits.
TreasuriesA government bond is an IOU issued by the central bank, which it guarantees to repay at a given date. In the US, these are referred to as Treasuries.
Treasury stockTreasury stock are shares that have been issued by a firm, but are being kept ‘in treasury’ - ie they are being kept for possible subsequent reissue.
True and fair valueThere is quite a lot of misunderstanding about what auditors mean when they sign off accounts as "true and fair".
UtilitiesUtilities are companies involved in providing electricity, gas, water and similar services to consumers and businesses.
UnderwritingA common way to guarantee a minimum level of proceeds when a public company issues new shares is for the issuing firm to involve an underwriter.
Value at risk (VAR)VAR attempts to assess the odds of losing money on a portfolio of, say, shares.
Velocity of moneyThe health of an economy can be measured by capturing the speed at which the money available in it (the money supply) is being spent.
Vendor financeVendor finance is a creative way for a firm to fight falling sales. If a customer cannot afford to pay up front, it borrows the funds from the manufacturer.
Vertical integrationVertical integration is when two businesses at different stages of production join to form one bigger company.
Vix (volatility index)The Chicago Board Options Exchange (CBOE) Volatility index (Vix for short) reflects how volatile traders expect the market to be over the coming year.
VolatilityVolatility refers to the fluctuations in the price of a security, commodity, currency, or index.
WACCWACC stands for the weighted average cost of capital. It represents the rate of return a company must make on the money it has invested to stop investors putting their money elsewhere.
WarrantsWarrants are a type of security issued by companies and traded in the market, much in the way that shares are.
Wholesale money marketsThe term 'money market' covers the vast network of deals involving the lending and borrowing of cash in a range of currencies. 'Wholesale' means funds borrowed or lent in large quantities.
Withholding taxA withholding tax requires a person or company making a payment to someone else to withhold part of the payment and pay it to the government.
Working capitalAlso known as 'net current assets', working capital is the total of a firm's current, or short term, balance sheet assets minus all current liabilities.
Yield curveA yield curve shows the relationship between the yield on securities and their maturities (how long it is until they can be redeemed at their face value).
Yield curve controlYield-curve control is when a central bank aims to control long-term interest rates by pledging to buy (or sell) as many long-term bonds as needed to hold rates at a certain level.
Yield on costThe yield on cost tells you a company's dividend return as a percentage of the price that you paid for the shares.
Yield spreadBonds that are not government securities are evaluated by the market on the basis of the difference between their yield and the yield of a comparable government bond. That difference is called a spread
Z scoreThe Z score indicates the probability of a company entering bankruptcy within the next two years.
ZeroA zero is a type of share or bond. Its key feature is that it pays no annual dividend, or coupon.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up