Information

Top Trading Terms Every Trader Needs to Know

ADR

An ADR allows US investors easier access to ownership of foreign public companies. They are also beneficial for foreign companies as they enhance investor interest in their shares beyond their own domestic market.
Alpha

Alpha is a measure of the performance of an investment in relation to a benchmark index. Often specified as a percentage, an alpha of 1% means that the return on investment was 1% better than the benchmark.
Alternative Investment Market

The 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.
Altman Z-Score

Devised in the 1960s by Edward Altman, the Altman Z-Score indicates the probability of a company entering bankruptcy within the next two years.
Amortisation

Amortisation has two distinct meanings: (1) In one sense, it is the practice of reducing the value of assets to properly reflect their value over time. (2) In another, it can mean the servicing of debt in regular increments.
Annuity

An annuity is a product that can provide you with a lifetime income, typically on retirement. Annuities are viewed as a way to hedge against longevity risk, or the potential for one to outlive one’s invested assets. Social Security and/or defined pension benefits are prominent examples of annuities.
Arbitrage

Arbitrage is a technique used to take advantage of differences in price in substantially identical assets across different markets or in different types of instruments.
Auditor

The law requires an independent person (an ‘Auditor’) to sign off that a firm’s financial statements are “true and fair” and have been prepared using the relevant legislation.
B/C Share Scheme

Companies occasionally hand cash back to shareholders by issuing new types of shares, typically called B shares and C shares, and hence deemed a B/C share scheme. Each shareholder has the choice of which type of share they wish to receive.
Backwardation

If the current cash price for an asset slips above the price for forward delivery, that’s known as ‘backwardation’.
Balance of Payments

The balance of payments refers to the accounts that sum up a country’s financial position relative to other countries.
Baltic Dry Index

The Baltic Dry Index (BDI) is a key barometer of global freight activity – measuring the cost of ferrying raw materials around the planet.
Bank Of England

The 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.
Beta

Beta (or the ‘beta coefficient’) is a way to measure the relative riskiness of a share.
Bid-offer spread

The bid-offer spread, sometimes called the bid-ask 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 Bang

The Big Bang refers to the deregulation of the London Stock Exchange (LSE), which took place on 27 October 1986.
Bond Auction

When governments want to raise money, they do so through a bond auction by issuing bills (typically short-term) and bonds (longer term – maturities can reach 30 years or more).
Bond Duration

Bond duration is a measure of how long it will take to reach a bond’s mid point in cash-flow terms. For example, if a bond’s duration is 3.6 years, that specifies that one will receive one’s original investment back in that length of time through its coupon payments (assuming no default).
Bond Rating

The risk of default on bonds varies from issuer to issuer. Credit-rating agencies provide these securities with a bond rating to help you gauge their risks.
Bond Vigilantes

Bond vigilantes refer to market participants who effectively self-regulate interest rates via the buying and selling of bonds in accordance with their perceived intrinsic value.
Bond Yields

An investor buying a bond needs to know what return to expect. The most common form of bond yields – annual yield on a fixed income security – is determined by taking the annual coupon payouts and dividing them by the market price of the bond.
Bonds

A bond is a type of debt instrument issued and sold by a government, local authority or company to raise money. Investors who buy bonds are paid interest, which for bonds is called a “coupon”.
Bonus Issue

A bonus issue is common among British companies, wherein free additional shares are added to the positions of existing shareholders. Bonus issues are synonymous with scrip issues or capitalization issues.
Book Value

Book value is the total value of the net assets of a company attributable to – or owned by – shareholders. It is calculated as the net asset value of a company, defined as the total tangible asset base (i.e., total assets minus intangible assets) minus total liabilities.
Bottom-up investing

Bottom-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.
Commodity Forwards

Forward contracts are non-standardised agreements between two parties, concerning the future delivery of a commodity for a presently set price. Commodity forward contracts are customisable. They are not traded through centralised exchanges and are therefore considered to be OTC (over the counter) instruments.
Correlation

Correlation describes the mutual relationship between two independent values. The most basic use of correlation in trading is in finding out whether there’s a relationship between two variables and, if there is, what kind of relationship it is. The number is generally given as a figure between -1 and 1, where -1 implies a negative correlation, 0 represents no correlation whatsoever, and 1 implies a positive correlation.
Defensive Stocks

Defensive stocks are based on underlying assets which tend to be less prone to economic and credit cycles than others. Because of this, they’re generally invested in when traders see an economic slowdown approaching and want to hedge their portfolios.
Derivatives

A 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 assets, markets or investments.
ETF

Exchange-Traded Funds are baskets of securities, that act like securities themselves. They track an underlying index (comprised of all the securities covered by the ETF) and they are marketable. There is no limit on what an ETF can contain: stocks, bonds, commodities, various investment types, and soon: cyptocurrencies.
Fed Put

The “Fed Put” is the widespread belief that the US Federal Reserve (commonly referenced as “the Fed”) can always rescue the economy by decreasing interest rates.
Indices

Market indices are a hypothetical basket of securities, which provide a relevant snapshot of a given market segment. The value of an index reflects the values of its constituent securities. The index provider uses a well defined methodology to calculate this value.
Information Ratio

The information ratio, sometimes called the appraisal ratio, works to measure the risk-adjusted return of a financial asset portfolio (collection of assets).
Risk Reversal

A risk reversal is an options strategy designed to hedge directional strategies. For example, a long position will be hedged two-fold in a risk reversal scenario:
Sharpe Ratio

The Sharpe ratio is a way to determine how much return is achieved per each unit of risk. It is useful to, and can be computed by, all forms of capital market participants to evaluate their performance, from day traders to long-term buy-and-hold investors.
Sortino Ratio

The Sortino ratio is a means for traders and investors to gauge the risk-adjusted performance of their portfolios or strategies. Namely, they can determine how much return they generate per each unit of risk.
Treynor Ratio

The Treynor ratio, also commonly known as the reward-to-volatility ratio, is a measure that quantifies return per unit of risk. It is similar to the Sharpe and Sortino ratios.
VSTOXX

VSTOXX is a method of showing implied volatility across a basket of Eurozone stocks (Euro STOXX 50). The VSTOXX number provides a benchmark of market volatility in European markets.

Bovespa
The Bovespa (or Ibovespa) is the Brazilian stock market’s benchmark index.

Break even
The 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 loan
A ‘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 buyins
A management buyout (MBO) occurs when the management of a company buys up a controlling interest (often by buying all outstanding shares).

CAC-40
The CAC-40 is France’s benchmark stockmarket index.

Capital adequacy
Central 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 ratio
In an attempt to prevent organisations such as banks from going bust too easily, regulators impose minimum capital requirements on them…

Carry trade
Carry trades seek to make money from the fact that the interest rates set by central banks around the world vary considerably.

Cash conversion
Making profits is one thing – but you want to know how well a company converts these profits into cash.

Cash flow
As well as publishing yearly profit and loss accounts, companies also have to produce a cash-flow statement…

Chapter 11
Chapter 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 house
A 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 funds
An active fund with a portfolio of stocks that is little different from the overall market is called a “closet tracker”.

Coco bonds
Could contingent convertible bonds, or Cocos, stop a bank failing? Some regulators believe so…

Cognitive bias
We 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”.

Compound interest
When 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…

Contagion
When 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…

Contango
The price of an asset for forward delivery is usually above the price you would pay today…

Contingent liability
If 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 vote
An 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 difference
Entering into a contract for difference, or CFD, involves making a bet on the movement of share prices…

Convertible bonds
A 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 rights
Also 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 indicator
The 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…

Correlation
Correlation simply refers to a relationship between two events…

Cost of capital
Making a business successful is simply down to ensuring you earn more than your costs…

Cost of equity
A 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 ratio
The cost-to-income ratio is a key financial measure, particularly important in valuing banks…

Country’s current account
A 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 bonds
A 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 swap
Anyone 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 event
Credit events are a crucial aspect of a credit default swap, or CDS…

Credit rating
Most bonds are allocated a credit rating to indicate to an investor the likelihood of a subsequent default…

Credit spread
When 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 risk
This is the type of risk that comes from the change in price of one currency against another…

Current account surplus/deficit
This is a measure of the position of one country relative to the rest of the world in terms of imports and exports…

Cyclical stocks
The 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 repricing
Daily 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

DAX
The 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 swaps
In a debt-for-equity swap, some of a firm’s debt is cancelled and lenders are given shares.

Debt swap
There 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 ratio
The 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 days
Investors looking for an indication of a firm’s commercial power may look at how fast it pays customers and suppliers.

Defined benefit & defined contribution pensions
In a defined benefit pension, you are guaranteed an income in retirement, calculated as a percentage of your final or average earnings.

Deflation
Deflation is the word used to describe falling prices. These are not necessarily a bad thing.

Deleveraging
Before the credit crunch, firms and households expanded through ‘leverage’ – borrowing to buy assets. ‘Deleveraging’ is this process in reverse.

Delta One
Delta One refers to the way a bank hedges its long and short exposures across a portfolio of investments.

Depositary receipt
A depository receipt allows investors to access overseas shares in their own market and currency.

Depreciation
If you buy an asset, it will wear out as it gets older and eventually need replacing. It is therefore ‘depreciating’ over time.

Dilution
In the world of finance, dilution means something is being watered down, typically earnings per share.

Discount rate
The 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 flow
Discounted 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.

Discounting
Discounting is expressing cash received in the future in today’s money because inflation erodes the value of money over time.

Dividend
A dividend is the part of a company’s profits that are distributed to shareholders.

Dividend cover
Dividend cover measures the number of times greater the net profits available for distribution are than the dividend payout.

Dividend yield
The dividend per share (total dividends paid out divided by total number of shares) expressed as a percentage is referred to as the dividend yield.

Diversification
Diversification is the process of dividing your wealth between different investments to avoid being too reliant on any single one doing well.

Dogs of the Dow
Fans 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 Theory
Dow theory is often used as an indicator of when a bear market may be about to start.

Duration
Duration is the point at which a bond reaches the mid-point of its cash flows.

Earnings per share
Earnings 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 yield
The 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.

EBITDA and EBITA
Earnings before interest, tax, depreciation and amortisation (EBITDA) takes operating profit and adds back two subjective costs: depreciation and amortisation.

Economic indicators
Economic indicators are statistical measures that reveal general trends in the economy.

Economic moat
Warren Buffett first coined the phrase ‘economic moat’ as a way of summing up how robust a firm is in the long term.

Elliott wave theory
According 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.

Enterprise value
This 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.

Equity free cash-flow yield
Equity free cash-flow is the cash generated each year for shareholders after certain ‘non-discretionary’ expenses have been paid.

Equity risk premium
When buying a security such as a share, every investor should have an expected return in mind.

ESG investing
ESG stands for environmental, social and corporate governance, the areas in which good behaviour is particularly sought.

Eurobond
This describes any international corporate or government bond that is denominated in a currency held outside its country of origin.

EV to sales ratio
Enterprise value is the sum of a firm’s market capitalisation and its net debt (short- and long-term debt minus cash).

EV/Ebit ratio
Enterprise 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 ratio
EV/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.

FCF yield
The 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 theory
Some analysts use the Fibonacci sequence and its ratios to attempt to forecast and interpret the rhythms of markets.

Final salary and money purchase pensions
With a money purchase scheme, the size of your pension depends entirely on the value of your fund when you retire.

Fiscal cliff
The 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 policy
Fiscal policy includes any measure that the national government takes to influence the economy by budgetary means.

Fixed assets
The phrase ‘fixed assets’ covers all assets that the business intends to keep for more than a year.

Flipping
Flipping 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 note
A 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.

Flotation / IPO
A flotation is the process of launching a company on to the stock market for the first time by inviting the general public and investment institutions to subscribe for shares.

Foreign exchange reserves
Foreign exchange reserves are stockpiles of foreign currencies held by governments.

Free cash flow
Free 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 share
Free 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 yield
Free cash flow yield (FCFY) is a ratio used to work out the cash flow return on a share as a percentage.

Free float
Free float refers to the percentage of a company’s total voting shares that are freely traded and could therefore be held by anyone.

FTSE 100
The 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.

Futures
A 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.

GDP
Gross 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.

Gearing
Gearing (or leverage) is the relationship between the debt and the equity in a business – between borrowed money and shareholders’ money.

Gilt
A 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 yield
Gilt 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 concern
A firm is seen as a ‘going concern’ if its auditors believe it will stay in business for the ‘foreseeable future’.

Goodwill
The simplest way to describe goodwill is as a company’s reputation.

Gordon’s growth model
Gordon’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 put
A ‘put’ is a type of option contract that increases in value as the price of the underlying asset falls.

Gross margin
There 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 index
Hang Seng is Hong Kong’s benchmark index of stocks.

Hedonic accounting
When 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 takeover
A 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 gilts
Index-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 fund
Index 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.

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.

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 cover
Interest cover is an affordability test. It compares the profit before tax (PBT) figure to interest charged in the profit and loss account.

Interest rate swap
An interest rate swap is a deal between two investors.

Internal rate of return
The internal rate of return of a bond is essentially the rate of return implied by its total cash flows.

Inverted yield curve
A 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 trusts
An investment trust is a company whose business is to invest in other companies.

ISEQ
Few national indices have changed as much as Ireland’s ISEQ since the peak of the credit bubble.

Junk bonds
Junk bonds are also known as ‘high yield’, ‘non-investment grade’, or ‘speculative’ bonds.

Keynesian economics
Named after economist John Maynard Keynes, who believed the best way to ensure economic growth and stability is via government intervention in the economy.

Kospi
The 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.

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 buyout
A leveraged buyout is where an investor group acquires a business using mainly borrowed money.

Libor and the OIS
These 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 sales
One way of making meaningful year-on-year comparisons, especially with retail stocks, is by looking at ‘like-for-like’ sales growth.

Limited company
A limited company is one in which the liability of the shareholders is limited to what they have put in to the company.

Liquidity
Liquidity refers to how easy it is to buy or sell an investment.

Lloyd’s
Lloyd’s of London is an international insurance market, which controls and regulates the activities of the groups offering insurance services

Loan-to-value ratio
The 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 equity
Long / 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 volatility
Low 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 arbitrage
M&A arbitrage is a way to profit from one company taking over another, or two firms deciding to merge.

Margin
When 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 account
A margin account is one that an investor holds with a broker, effectively allowing him to buy securities on credit.

Margin of safety
The margin of safety itself is the gap between the price you pay and what you think a stock might be worth.

Margin trading
Margin trading is when, typically US, investors put up only a percentage of the cost of an asset they buy.

Mark to model
In normal circumstances, securities such as shares or bonds are valued by using market prices: this valuation method is called ‘mark to market’.

Market makers
Market makers are typically banks and brokers who commit to trade shares and bonds, often in larger quantities than most other investors.

Market neutral funds
Market 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).

Marking to market
This is the process of updating a portfolio to reflect the latest available prices.

Maturity transformation
Maturity 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 reversion
Mean 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 mode
There are several ways to calculate an average, the three most common being the mean, median and mode.

Mezzanine finance
Mezzanine refers to a layer that falls between two others. In the case of finance, it comes between debt and equity.

Minority interest
This is an accounting term for the amount of a balance sheet not owned by a firm’s shareholders.

Misery index
The misery index is constructed by adding the unemployment rate to the inflation rate.

Modified Altman Z score
Altman’s original five-ratio model was designed for manufacturers, or sectors with high capital intensity, such as mining…

Monetary policy
Monetary policy is about exercising control over the money supply (the amount of money circulating in the economy) with the aim of influencing the economy.

Monetisation
A government ca create an IOU for £1,000 and sell it to a central bank, which pays for it by printing £1,000.

Money laundering
Money 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 multiplier
This is one of the key principles underpinning the entire banking system. That’s because it’s the basis of ‘credit creation’.

Money supply
Money supply is simply the amount of money available in the economy.

Monoline
A monoline is any business that specialises in one particular financial services area, which could in theory be anything from mortgages to car insurance.

Moving average
A moving average of a share price is simply the average of the share prices of the last so many days.

Market cap weighting
If 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.

Multiple compression
Multiple 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 writing
There 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 shorting
A ‘naked’ short involves shorting shares that are not available to borrow.

Nation’s current account
A nation’s current account measures the flows of actual goods and services in and out of the country

NAV
The 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 capital
Net working capital measures a firm’s ability to pay its way, or its liquidity. Subtract its current liabilities from its current assets.

Nikkei 225
The Nikkei 225 isJapan’s major stockmarket index.

Nil-paid rights
Nil-paid rights arise when a firm sells new shares for cash to existing shareholders via a rights issue.

Nominal value of a bond
Each bond has a fixed nominal value, often £100 for a sterling bond.

Nominee account
Usually, 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.

Option
An 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-domicile
Non-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 finance
This 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 funds
An 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 leverage
High 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 gearing
Operational gearing describes the relationship between a firm’s fixed and variable costs.

Opportunity cost
The opportunity cost of an investment is the return you could have got if you’d put your money elsewhere.

Optionality
An 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 money
If an option is ‘out of the money’ it is usually not worth exercising given the current market price of the underlying asset.

Output gap
The 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 underweight
The 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 trade
Pairs traders aim to profit from the change in the price of, say, one share relative to another.

Payback period
The payback period measures how long a project or investment takes to repay any initial outlay.

PIK note
A “payment-in-kind” (PIK) note (or loan) is a way for companies to borrow money.

Piotroski score
The Piotroski score is designed to identify high-quality firms by looking at nine separate criteria.

Placing
Placing is where selected institutions are phoned by a firm’s advising investment bank and offered blocks of shares.

Plaza Accord
The 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 scheme
Ponzi 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 averaging
Pound 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 share
Preference or preferred shares are shares in a company that have a fixed rather than a variable dividend.

Price elasticity
In 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 to book ratio
Price-to-book value ratio (p/bv) is is calculated by dividing the current share price by its book value per share.

Price to cash flow ratio
The price to cash flow ratio (PCF) is a measure of the market’s expectation of a firm’s future health.

Price to earnings growth (PEG) ratio
This 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 to sales ratio
A company’s market cap divided by the company’s annual sales (or revenue) gives us the price to sales ratio.

Price/earnings (P/e) ratio
The price/earnings ratio is a quick way to establish a firm’s relative value.

Prime broker
Prime brokers are typically investment banks which are able to sell clients, often hedge funds, a ‘one-stop shop’ service.

Private equity
Private 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.

Prop trading
Proprietary (‘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 parity
Purchasing power parity (PPP) is a theory that tries to work out how over- or undervalued one currency is in relation to another.

Put option
A 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 calls
A ‘put’ give you the right to sell a share at a pre-determined price, a ‘call’ gives you the right to buy them.

Q ratio
The 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 nominal
In a monetary context, ‘real’ and ‘nominal’ are used to describe whether or not a price has been adjusted for inflation.

Real interest rate
A “real” interest rate accounts for the impact of inflation on a given rate of interest. It’s very important to your returns.

Recession
The 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 yield
When 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’.

Repo
A ‘repo’ is standard sale and repurchase agreement.

Resistance points
Shares can often trade in channels, rarely breaking below or above consistent minimum and maximum prices. Those are a stock’s resistance points.

Return on capital
Return 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 equity
Return 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.

Rights issue
A 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 premium
The 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 index
America’s S&P 500 index is among the Western world’s most cyclical indices.

Sale and leaseback
A sale and leaseback arrangement can be a useful way for a company to generate cash from its property portfolio without having to vacate.

Secular trend
A secular trend is a long-term phenomenon, whereas a cyclical trend is short-term and will eventually reverse.

Securitisation
A 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 fund
A 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.

Share buyback
As well as issuing new shares, companies sometimes buy back existing ones.

Share options
Share 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 squeeze
When 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 future
The ‘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.

Shorting
If a trader believes that the price of an asset will not rise but fall, he can still make money on it by ‘shorting’ it.

SIPP
A 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 beta
Smart 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 fund
A sovereign wealth fund is a state-owned fund of the accumulated reserves that arise from running a trade surplus with other countries.

Special drawing rights
A special drawing right allows a member country of the IMF to obtain surplus currency held by another member country.

Spread
A spread is simply a gap, or difference; so the ‘spread’ between two and five is three.

Spread betting
Spread betting is a straightforward and tax-efficient way of leveraging the financial markets.

Stability and growth pact
The stability and growth pact, or SGP, played a key role in the establishment of the euro.

Stagflation
Stagflation is a nasty mix of rising prices (based on high demand, production capacity constraints, or both) and falling growth.

Stamp duty
Stamp duty is a re-registration tax. That means you pay it whenever you buy (but not sell) a registered asset.

Standard deviation
Standard deviation is still the most widely used measure of dispersion, or in financial markets, risk.

Stock overhang
Stock 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 splitting
A stock split increases the number of a corporation’s issued shares by dividing each existing share.

Stop-loss
A 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 debt
Holders of subordinated debt rank below most other bondholders when it comes to paying them back if the company goes backrupt.

Swap rate
A company has an existing ten-year loan from a bank on which it pays a floating rate of interest…

Swaps
Company A issues its fixed-interest bond and Company B issues a floating-rate loan. They then agree to swap their interest payment liabilities…

Synthetics
A synthetic is a combination of financial instruments – often two, sometimes more – designed to mimic another single security.

Taiex
The 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 equity
Tangible 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 share
Book value (also known as equity, shareholders’ funds, or net asset value) is the value of all a company’s assets, minus its liabilities.

Target 2
Target is a payment system used by Europe’s central banks for urgent real-time electronic transfers.

Technical analysis
Technical analysts or ‘chartists’ attempt to predict future share price (or index) movements by looking at past movements.

Tier-one capital
Banks’ capital can be split into tiers. Tier one represents capital of the highest quality.

Time value of money
Money 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 ratio
The 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.

Tracking error
Tracking error is defined as the standard deviation of the difference between the fund’s returns and the returns on the index.

Trade surplus
When a country’s exports exceed its imports, it is said to have a positive balance of trade, or trade surplus.

Trailing stop-loss
A 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.

Treasuries
A 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 stock
Treasury 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 value
There is quite a lot of misunderstanding about what auditors mean when they sign off accounts as “true and fair”.

Utilities
Utilities are companies involved in providing electricity, gas, water and similar services to consumers and businesses.

Underwriting
A 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 money
The 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 finance
Vendor 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 integration
Vertical 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.

Volatility
Volatility refers to the fluctuations in the price of a security, commodity, currency, or index.

WACC
WACC 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.

Warrants
Warrants are a type of security issued by companies and traded in the market, much in the way that shares are.

Wholesale money markets
The 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 tax
A 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 capital
Also 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 curve
A 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 on cost
The yield on cost tells you a company’s dividend return as a percentage of the price that you paid for the shares.

Yield spread
Bonds 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 score
The Z score indicates the probability of a company entering bankruptcy within the next two years.

Zero
A zero is a type of share or bond. Its key feature is that it pays no annual dividend, or coupon.

Knowing your stock market terms will make you a better trader.

 

 

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