Financial Dictionary

Absolute Return: The return that an asset achieves over a certain period.
Accrued Interest: The interest that has accumulated on a bond since the last interest payment up to, but not including, the settlement date.
Actuary: A professional who analyzes the financial costs of risk and uncertainty, often using mathematics, statistics, and financial theory.
Alpha: A measure of performance, indicating excess return or the value added by the fund manager.
Alternative Investment: An investment in asset classes other than stocks, bonds, and cash.
Amortization: The process of gradually paying off a debt over a period of time through regular payments.
Annuity: A financial product that pays out a fixed stream of payments to an individual, typically used as an income stream for retirees.
Arbitrage: The simultaneous purchase and sale of an asset to profit from an imbalance in the price.
Asset Allocation: The process of dividing investments among different kinds of asset categories to balance risk and reward according to an individual’s goals and risk tolerance.
Asset Class: A group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations.
Audit: An examination of the financial statements of an individual or organization, usually by an independent third party.
Average Annual Growth Rate (AAGR): The average increase in the value of an investment over a specific period of time.

Back-End Load: A fee paid by investors when selling mutual fund shares, often used to discourage withdrawals.
Balance Sheet: A financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
Bear Market: A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment to be self-sustaining.
Benchmark: A standard or point of reference against which things may be compared or assessed.
Beta: A measure of a stock’s volatility in relation to the overall market.
Blue Chip Stock: Stock of a large, well-established, and financially sound company that has operated for many years.
Bond: A fixed income instrument that represents a loan made by an investor to a borrower.
Bond Rating: A grade given to bonds that indicates their credit quality.
Book Value: The net value of a company’s assets found on its balance sheet, and calculated as total assets minus intangible assets (patents, goodwill) and liabilities.
Broker: An individual or firm that acts as an intermediary between an investor and a securities exchange.
Brokerage Fee: A fee charged by a broker to execute transactions or provide specialized services.
Bull Market: A market condition in which the prices of securities are rising or are expected to rise.
Buy and Hold: A long-term investment strategy in which securities are purchased and held for a long period regardless of short-term market fluctuations.

Capital: Wealth in the form of money or assets, taken as a sign of the financial strength of an individual, organization, or nation.
Capital Gain: The profit realized on the sale of a non-inventory asset that was greater than the amount realized on the sale.
Capital Market: A market in which individuals and institutions trade financial securities.
Cash Flow: The total amount of money being transferred into and out of a business, especially as affecting liquidity.
Collateral: An asset that a borrower offers as a way for a lender to secure the loan.
Commercial Paper: An unsecured, short-term debt instrument issued by a corporation.
Commodities: Basic goods used in commerce that are interchangeable with other goods of the same type.
Compound Interest: Interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.
Convertible Bond: A type of bond that can be converted into a predetermined number of the company’s equity shares.
Cost of Capital: The cost of funds used for financing a business.
Coupon Rate: The yield paid by a fixed-income security.
Credit Default Swap (CDS): A financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default or other credit event.
Credit Rating: An evaluation of the credit risk of a prospective debtor.
Credit Risk: The risk of default on a debt that may arise from a borrower failing to make required payments.
Currency Risk: The potential for loss due to fluctuation in the exchange rate between two currencies.
Current Assets: Assets that are expected to be converted into cash within a year.
Current Liabilities: A company’s debts or obligations that are due within one year.
Current Ratio: A liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year.

Day Trading: The buying and selling of securities on the same day, often to capitalize on short-term movements.
Debt Instrument: A paper or electronic obligation that enables the issuing party to raise funds by promising to repay a lender in accordance with terms of a contract.
Debt Security: A financial instrument representing a contractual obligation to repay borrowed funds.
Default Risk: The risk that a borrower will not be able to make required payments on their debt obligation.
Deflation: A decrease in the general price level of goods and services.
Depreciation: The reduction in the value of an asset over time, due in particular to wear and tear.
Derivative: A financial security with a value that is reliant upon or derived from an underlying asset or group of assets.
Diversification: A risk management strategy that mixes a wide variety of investments within a portfolio.
Dividend: A portion of a company’s earnings that is paid to shareholders.
Dividend Yield: A financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
Dow Jones Industrial Average (DJIA): A stock market index that measures the stock performance of 30 large companies listed on stock exchanges in the United States.
Duration: A measure of the sensitivity of the price of a bond to a change in interest rates.

Earnings Per Share (EPS): A company’s profit divided by its number of outstanding shares of common stock.
EBITDA: Earnings Before Interest, Taxes, Depreciation, and Amortization; a measure of a company’s overall financial performance.
Efficient Market Hypothesis (EMH): A theory that states that asset prices fully reflect all available information.
Emerging Market: A market in an economy that is in the process of rapid growth and industrialization.
Equity: The value of the shares issued by a company.
Equity Fund: A mutual fund that invests principally in stocks.
Exchange Rate: The value of one currency for the purpose of conversion to another.
Exchange-Traded Fund (ETF): A type of investment fund that is traded on stock exchanges, much like stocks.
Expense Ratio: The annual fee that all funds or ETFs charge their shareholders.
Exposure: The amount of money invested in a particular type of security or market sector.

Face Value: The nominal or dollar value of a security stated by the issuer.
Federal Reserve (Fed): The central banking system of the United States.
Fiduciary: A person or organization that acts on behalf of another person or persons to manage assets.
Financial Advisor: A professional who provides financial services to clients based on their financial situation.
Financial Instrument: A monetary contract between parties that can be created, traded, modified, and settled.
Financial Statement: A formal record of the financial activities and position of a business, person, or other entity.
Fiscal Policy: The use of government revenue collection and expenditure to influence a country’s economy.
Fixed Asset: A long-term tangible piece of property or equipment that a firm owns and uses in its operations to generate income.
Fixed Income: A type of investment security that pays investors fixed interest or dividend payments until its maturity date.
Forward Contract: A customized contract between two parties to buy or sell an asset at a specified price on a future date.
Futures Contract: A legal agreement to buy or sell a particular commodity or asset at a predetermined price at a specified time in the future.

Gearing: The ratio of a company’s debt to its equity capital, used as a measure of a company’s financial leverage.
General Partner (GP): A partner in a partnership who has unlimited liability for the debts and obligations of the partnership.
Goodwill: An intangible asset that arises when a buyer acquires an existing business, representing the value of the company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology.
Gross Domestic Product (GDP): The total value of goods produced and services provided in a country during one year.
Gross Margin: The difference between revenue and cost of goods sold (COGS) divided by revenue, expressed as a percentage.
Growth Stock: A share in a company that is anticipated to grow at a rate significantly above the average for the market.
Guarantee: A promise to assume responsibility for another’s debt or obligation if the original party fails to pay or perform.

Hedge Fund: An alternative investment vehicle available only to sophisticated investors, such as institutions and individuals with significant assets, that seeks to earn high returns through various strategies including leveraging and short-selling.
Hedging: Making an investment to reduce the risk of adverse price movements in an asset.
High-Yield Bond: A bond that has a higher yield than investment-grade bonds, often because of its lower credit rating.
Holding Period: The amount of time an investment is held by an investor or the period between the purchase and sale of a security.
Hypothecation: The practice whereby a borrower pledges collateral to secure a debt or a financial instrument.

Index Fund: A type of mutual fund or ETF with a portfolio constructed to match or track the components of a financial market index.
Individual Retirement Account (IRA): A tax-advantaged investing tool that individuals use to earmark funds for retirement savings.
Inflation: The rate at which the general level of prices for goods and services is rising, and subsequently, purchasing power is falling.
Initial Public Offering (IPO): The process of offering shares of a private corporation to the public in a new stock issuance.
Insider Trading: The trading of a public company’s stock or other securities based on material, non-public information about the company.
Interest Rate: The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.
Investment Bank: A financial services company or corporate division that engages in advisory-based financial transactions on behalf of individuals, corporations, and governments.
Investment Grade: A rating that signifies a municipal or corporate bond presents a relatively low risk of default.
Investment Strategy: A set of principles, or strategies, designed to help an individual investor achieve their financial and investment goals.

Joint Venture: A business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task.
Junk Bond: A high-yield, high-risk security, typically issued by a company seeking to raise capital quickly to finance a takeover.

Key Performance Indicators (KPIs): A set of quantifiable measures that a company uses to gauge its performance over time.
Keynesian Economics: An economic theory stating that government intervention through fiscal and monetary policy is necessary to ensure economic growth and stability.
Know Your Customer (KYC): A standard in the investment industry that ensures investment advisors know detailed information about their clients’ risk tolerance, investment knowledge, and financial position.

Leverage: The use of various financial instruments or borrowed capital to increase the potential return of an investment.
Liability: A company’s legal debts or obligations that arise during the course of business operations.
Liquidity: The ease with which an asset can be converted into cash without affecting its market price.
Loan-to-Value Ratio (LTV): A financial term used by lenders to express the ratio of a loan to the value of an asset purchased.
Long Position: The buying of a security such as a stock, commodity, or currency with the expectation that the asset will rise in value.

Margin: Borrowed money that is used to purchase securities, creating a leverage effect.
Market Capitalization: The total value of a company’s outstanding shares of stock.
Market Order: A buy or sell order to be executed immediately at current market prices.
Merger: A transaction that results in the consolidation of two companies into one entity.
Monetary Policy: The process by which a central bank manages the supply and demand for money in an economy, primarily through interest rates.
Mutual Fund: An investment vehicle made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments, and other assets.

Net Asset Value (NAV): The value per share of a mutual fund or ETF on a specific date or time.
Net Income: A company’s total earnings (or profit), calculated by taking revenues and subtracting the costs of doing business such as depreciation, interest, taxes, and other expenses.
Net Worth: The value of the assets a person or corporation owns, minus the liabilities they owe.
Non-Performing Asset: A loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

Option: A financial derivative that represents a contract sold by one party (option writer) to another party (option holder). It offers the buyer the right, but not the obligation, to buy or sell a security or other financial asset at an agreed-upon price during a certain period or on a specific date.
Over-the-Counter (OTC): Securities that are traded via a broker-dealer network as opposed to on a centralized exchange.
Overweight: An analyst’s opinion regarding the relative attractiveness of a security to another security.

Par Value: The face value of a bond.
Passive Investing: An investment strategy that aims to maximize returns by minimizing buying and selling.
Portfolio: A range of investments held by a person or organization.
Preferred Stock: A class of ownership in a corporation that has a higher claim on its assets and earnings than common stock.
Price-to-Earnings Ratio (P/E): A valuation ratio of a company’s current share price compared to its per-share earnings.
Principal: The original sum of money borrowed or invested, excluding any interest or dividends.
Private Equity: Capital investment made into companies that are not publicly traded.
Prospectus: A formal legal document that provides details about an investment offering to the public.
Put Option: A financial contract that gives the owner the right, but not the obligation, to sell a specified amount of an underlying security at a specified price within a specified time.

Quantitative Easing (QE): An unconventional monetary policy in which a central bank purchases government securities or other securities from the market to lower interest rates and increase the money supply.
Quota: A government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period.

Rate of Return: The net gain or loss on an investment over a specified period, expressed as a percentage of the investment’s initial cost.
Real Estate Investment Trust (REIT): A company that owns, operates, or finances income-producing real estate.
Recession: A significant decline in economic activity spread across the economy, lasting more than a few months.
Return on Investment (ROI): A measure used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments.
Risk: The potential for losing something of value.
Risk Management: The process of identification, analysis, and acceptance or mitigation of uncertainty in investment decisions.

SEC: The Securities and Exchange Commission, a U.S. government oversight agency responsible for regulating the securities markets and protecting investors.
Securities: Financial instruments that hold some type of monetary value.
Shareholder: Any person, company, or institution that owns at least one share of a company’s stock.
Short Selling: The sale of a security that the seller has borrowed, intending to buy back later at a lower price.
Stock: A type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings.
Stock Exchange: A marketplace where securities, commodities, derivatives, and other financial instruments are traded.
Swap: A derivative contract through which two parties exchange financial instruments, such as interest rates, commodities, or foreign exchange.

Tax-Deferred: Investment earnings such as interest, dividends, or capital gains that accumulate tax-free until the investor withdraws and takes possession of them.
Technical Analysis: The evaluation of securities by analyzing statistics generated by market activity, such as past prices and volume.
Time Horizon: The length of time over which an investment is made or held before it is liquidated.
Treasury Bond: A government debt security that earns interest until maturity, at which point the owner is also paid a par amount equal to the principal.

Underwriting: The process by which investment bankers raise investment capital from investors on behalf of corporations and governments that are issuing securities.
Unsecured Debt: A loan that is not backed by the borrower’s assets.

Valuation: The process of determining the current worth of an asset or a company.
Venture Capital: A type of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies.
Volatility: A statistical measure of the dispersion of returns for a given security or market index.

Warrant: A derivative that gives the right, but not the obligation, to buy or sell a security—most commonly an equity—at a certain price before expiration.
Wealth Management: A professional service that combines financial and investment advice, accounting and tax services, retirement planning, and legal or estate planning for one fee.
Working Capital: A measure of a company’s operational efficiency and short-term financial health, calculated as current assets minus current liabilities.

Yield: The income return on an investment, such as the interest or dividends received from holding a particular security.
Yield Curve: A line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates.

Zero-Coupon Bond: A debt security that doesn’t pay interest but is traded at a deep discount, rendering profit at maturity when the bond is redeemed for its full face value.
Z-Score: A statistical measurement that describes a value’s relationship to the mean of a group of values.

Financial Dictionary

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