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Financial glossary
An approachable dictionary for econ, finance, and investment terms
A
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D
E
F
G
H
I
J
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M
N
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A
Asian Option
An Asian Option is a kind of option product where the resolution value is an average, not a specific value at a point in time (which is standard for European options).
Alpha
“Alpha” is a measure of “edge”, or “how much better is any investor in outperforming the market”. An investor with “alpha” generally has to have some strategy or knowledge that means they are able to see value where others cannot.
Arbitrage
Arbitrage is a form of “risk-free” trading where one identifies the same asset trading at different prices in two different locations.
B
Brier Score
The Brier Score is a major way of “scoring” predictive accuracy. The Brier Score is calculated as “predicted outcome - the actual outcome” squared, and then divided by the number of predictions. The more accurate the predictor, the lower the Brier score.
Black-Scholes Model
The Black-Scholes Model is a standard model for calculating the price of an option. It considers the expected price of the underlying asset and the expected volatility.
Binary Option
A binary option is a financial product that pays out all-or-nothing based on a pre-set list of criteria.
Bias
Bias, in statistics, is a measure of how an estimator systematically differs its true value. It is not merely a measure of accuracy, but rather about systematically “missing” in the same direction.
Beta
Beta is a statistic that measures how the value of an asset changes as the market overall changes.
Bayesian Statistics
Bayesian statistics is a branch of stats that contrasts with frequentist statistics. Unlike frequentism, a Bayesian starts with a prior (an initial estimate of the probability of an event occurring), and then iteratively updates that prior in response to new information coming in.
Bid and Ask
The “bid and ask” are the most common way that prices are quoted in financial exchanges.
C
Conservatism
Conservatism is a political ideology often associated with intellectuals such as Edmund Burke that places a greater emphasis on traditional social norms.
Current Ratio
The current ratio is the ratio of current assets to current liabilities.
Current Liabilities
Current liabilities is a mandatory balance sheet for corporations and represents the total amount that a corporation owes to other parties in the next 12 months, such as accounts payable, loans, and more.
Current Assets/Current Accounts
Current assets is a mandatory balance sheet item for corporations and represents the total amount of assets that can reasonably be converted into cash within one business year.
Commodity Futures Trading Commission
The Commodity Futures Trading Commission (CFTC) is one of the major federal financial regulators in the United States, along with the Securities and Exchange Commission (SEC), Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve Board (Fed, or FRB).
Covariance
Covariance is a statistical measure of how two different data series change with respect to each other.
Coupon
In finance, the coupon of a security is the payment made to the owner of the security for holding it.
Consumer Confidence
“Consumer confidence” is an oft-cited measure of economic optimism. A non-profit called the Conference Board releases the measure on the last Tuesday of each month after surveying consumers about their assessment of the strength of current and future (six-month) financial and employment situations.
Commodity
At first glance, a commodity is a product that is nearly-identical to others in its class and can be bought or sold from different buyers and sellers with an understanding that you are buying or selling the functionally the same product.
Cash, Money and Equivalents
Money is defined by its three principal characteristics: medium of exchange, store of value, and unit of account.
Capital Spending
Capital spending refers to investments made by businesses in certain “capital assets”, which generally refers to projects in physical buildings, lands or machinery that are designed to produce profit in the future.
Capital Gain
A capital gain is the increase in the value of a capital asset, such as a stock, bond or home.
Cash Collateralization
“Cash collateralization” is like a cash reserve requirement of a borrower to ensure that they will be able to repay the lender.
Call Option
A “call option” is a right to be able to purchase a security at a pre-agreed price at a pre-agreed date or date range. Calls can take many forms.
COLA
COLA is an acronym that refers to “cost of living adjustments” that are built into contracts or programs.
Capital Gains Tax
Capital gains tax is a tax assessed on capital gains for investments that are held for at least one year.
Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model a simplified model of how asset pricing works.
D
Discount Rate (Federal Reserve)
The “discount rate” is the interest rate the Federal Reserve charges to banks who borrow from them through their “discount window” program.
Derivatives
A derivative is a financial instrument whose value corresponds to the value of some other underlying asset (or some benchmark).
Depreciation
Depreciation is the decrease in value of some asset. A piece of complex machinery, for instance, becomes less valuable with the passage of time as wear and tear builds up.
Deficit Spending
The difference between a government’s spendings and its tax revenues is called deficit spending. When the government spends less than it received in taxes, that is called a surplus.
Default
A default is when a creditor fails to repay its debt on time.
Debt-to-Equity Ratio
Debt is what most consumers are most familiar with: a corporation takes out a loan (or issues a bond) which obligates the corporation to repay the amount they borrowed plus some interest to the lender over some period of time.
Discount Rate
The discount rate represents the rate by which money earned or held in the future is less valuable than money held today.
E
Exotic Option
An exotic option is a subset of options that have different structures to traditional option.
Exchange-Trade Fund (ETF)
An exchange-traded fund (ETF) is a financial instrument whose value mirrors a collection of underlying assets.
Equity
Equity (in finance) is a common method of financing.
Enterprise Value
Enterprise value is the total value of a corporation, which is equivalent to the total value of its equity plus net debt.
Elo Score
An Elo score is a measure of power-ranking different parties in games or other activities and estimating the probability of victory if those parties were to face off against each other.
F
Futarchy
Futarchy is a system of government first proposed by Professor Robin Hanson whereby prediction markets become central to policy-making.
Fundamental Analysis
Fundamental analysis is one of two methods to determine the fair market value of a company (along with “technical analysis”).
Float
The float is the money in the banking system that exists in the time between when a check or withdrawal is initiated and when it clears.
Fiscal Policy
Fiscal policy is the tax-and-spending portion of government economic policy (not to be confused with monetary policy, which is primarily conducted by the Federal Reserve and regards adjustments in the money supply).
Federal Reserve
The Federal Reserve is the central bank of the United States, responsible for executing monetary policy since 1913.
G
Growth Stock
A growth stock is an equity that market participants purchase because they believe the stock value will rise, not because they believe it will generate large amounts of dividends for the shareholder.
Gross Revenue
Gross revenue is the amount of money a company receives from selling a good or service.
Gross Profit
Gross profit is the difference between revenue and the cost of producing goods.
Gross Margin
Gross margin is the difference between revenue and the cost of producing goods, divided by the total revenue.
Good Judgment Project
Good Judgment Project is an organization dedicated to superforecasting.
Gross National Product (GNP)
The Gross National Product (“GNP”) refers to the sum of goods and services that are produced by nationals of a country.
GDP
Gross Domestic Product (“GDP”) is a measure of the total amount of goods and services produced within an area in a given time period. As a matter of accounting, GDP is the sum of all consumption, investment, government spending and net exports in the economy.
H
Hedging
Hedging is the act of reducing one’s financial exposure to an event or price movement.
I
Investment Grade
Investment Grade is a designation given to bonds to indicate that they are BBB or above.
Investment
Investment is spending that is designed to make money in the future.
Inventory
Inventory is a measure of goods that a corporation has on hand that have yet to be sold.
Index Fund
An index fund is a financial asset whose value is tied to a bundle of underlying securities.
Income Statement
The income statement is a required accounting document that all corporations must file where they declare how much money they received in a given period.
IRS
The Internal Revenue Service (IRS) is the government agency responsible for tax assessment and collection.
Inflation
Inflation measures the change in the general price level across the economy and is most commonly tabulated by the Bureau of Labor Statistics using a measure called the Consumer Price Index (“CPI”).
J
Junk Bond
Junk Bond is a designation given to bonds that indicate they are below BBB grade.
K
Knock-out option
A knock-out option is an option that settles to nothing if the price breaches some threshold (it is “knocked out”).
N
Net Asset Value (NAV)
Net asset value (NAV) is the value of a company’s assets after subtracting out its liabilities.
O
Orderbook
An orderbook is a popular way of organizing trades on a market.
Operating Income
Operating income is an accounting term that refers to revenue minus operating expenses, which includes personnel costs, direct input costs and machinery depreciation.
P
Put
A put is a right to sell an asset, commodity or security at a given price and a given time. It is the opposite of a call.
Prospectus
A prospectus is a mandatory document a company must file when making a security offering. A prospectus must clearly state the terms and conditions of the security as well as the known risks of purchasing that security.
Profitability
Profitability is a measure of how much profit a company is making.
Profit Margin
Profit margin is the ratio of a company’s profits to its revenue. For example, if a company spends $450 million and has $500 million in revenue, it has $50 million in profit against $500 million in revenue. In that case, its profit margin is 10%.
Productivity
Productivity is the measure of how many goods can be produced by a single person in a standardized unit of time. Productivity is one of two inputs into aggregate economic output (along with total population growth). Productivity is typically measured using total factor productivity, which measures how much can be produced with a fixed amount of labor and capital. The BLS measures productivity under two measures: multifactor productivity and labor productivity (which is just output per hour of l
Price-Basing
Price-basing is one of several popular justifications for event contracts. Price-basing refers to the concept that the information embedded in the price of a contract can be used to accurately price other commodities, assets or securities. For example, consider an event contract on whether the U.S. will raise the debt ceiling. Suppose the event contract implies there is a 40% chance of default–that could be used to help price a contract on Treasury bills.
Passive Investing
Passive investing is a style of investing where participants buy and hold a portfolio of stocks (generally a diversified bundle), instead of picking, choosing and trading hand-picked stocks regularly (which is called “active investing”). Passive investing has exploded in popularity in recent years. Academics have consistently found that most active managers are not able to outperform the overall market, which means that participants can earn equivalent (or higher) returns by passively buying an
Par Value
Par value is the face price of a bond. It is also known as “nominal value” or “face value”. If a $1,000 bond trades at $1,000, then it trades “at par”. There are two conditions that may make a bond trade not at par: First, bonds may trade below par (“discount”) if default risk rises. A junk bond for a company near bankruptcy may trade at pennies on the dollar in order to compensate buyers for taking on the risk of non-repayment. Second, changing interest rates can affect the demand for a bond.
PEG Ratio
The PEG Ratio relates the Price/Earnings ratio (“P/E Ratio”) with the projected growth rate of earnings in the next few years (1-3). For instance, consider two companies that both earn $100 million in profit/year. One of them, a hot young tech company, is rapidly growing and projects to earn $1 billion in profit in two years. The other, a mature insurance company, is stable and projects to earn $100 million in profit next year. Because of the growth potential, the tech company’s total market cap
P/S Ratio
The Price/Sales ratio, or P/S ratio, is a fraction with the share price in the numerator and revenue/share in the denominator. While similar to P/E ratio, P/E ratio has profit in the denominator instead of revenue.
P/E Ratio
The Price/Earnings ratio, or P/E Ratio, is a fraction with the share price in the numerator and the earnings (profit)/share in the denominator. Consider a company with one million total shares and profits of  $100 million. Their stock price trades at $1,600/share. Thus the P/E Ratio will be $1,600/(100,000,000/1,000,000)= 16. 16 is considered a standard P/E Ratio. Early stage growth stocks tend to have higher P/E ratios and mature companies tend to have lower P/E ratios.
Q
Quick Ratio
The quick ratio is the ratio of a company’s cash or cash-like assets (highly liquid assets) with its short-term liabilities. Suppose a company has $1 million in cash on hand, plus $2 million in highly liquid cash-like assets (e.g. Treasuries). Most of their money is tied up in long-term assets, such as $500 million in real estate holdings, which (while valuable) cannot be easily converted into cash on immediate notice. But they have $100 million in short-term liabilities. Then their Quick Ratio
Quick Order
A quick order is a synonym for a market order–it is an order to buy or sell an asset, commodity or security at the best currently available price. The advantage is that one can offload or acquire the asset without risking a major price movement, but with the tradeoff that one may not achieve as good a price as if one is willing to be patient.
R
Russell 3000
The Russell 3000 is an index that attempts to track the entire stock market. It is similar to the S&P 500, except it contains more firms.
Risk Tolerance
Risk tolerance is how much an individual or group prefers to avoid risk. Someone who abhors risk is called “risk-averse” and someone who likes risk is considered “risk-seeking”. The difference between one’s utility and expected value is considered someone’s risk tolerance. Consider a bet: heads you win $10 and tails you lose $10. On expectation, you expect to make $0. Most people are risk-averse, and therefore would not take that bet. However, suppose the odds change: heads you win $25, tails y
Return on Equity
Return on equity is a fraction with a company’s profits in the numerator and the total value of equity in the denominator. If a company has $1 billion in shareholder equity and $100 million in profits in a year, they have a 10% return on equity. It’s worth flagging that shareholder equity here is not measured as market capitalization–it is measured as the difference in value between a company’s assets and its liabilities. Industry standard is around 14%. Return on equity tends to be much higher
Revenue
Revenue is the amount of money a company receives in a given period.
Return on Assets
Return on assets is a fraction with a company’s profits in the numerator and a company’s total assets in the denominator. If a company has $1 billion in assets and $100 million in profits in a year, they have a 10% return on assets in that year.
Regulation
Regulation consists of government rules and requirements on public or private actors to take or avoid certain actions. At the federal level, regulations are generally authorized by an act of Congress, but the precise rules are written and enforced by specific regulatory agencies.
Regression
A regression is a statistical relation between an output variable and one or many input variables. The most common kind of regression is a linear regression, where one finds a linear relationship between a set of input variables and an output variable. Not all regressions have to be linear. There are various kinds of logistic regressions, for instance, that work better than linear regressions on estimating probabilities (since linear regressions are unbounded and can break through the 0 to 1 ra
R-Squared
R-squared measures how much a model output “explains” the variation in an underlying dataset. Formally, R-squared is measured as 1-RSS/TSS, where RSS stands for “residual sum of squares” and TSS stands for “total sum of squares”. RSS is calculated by the sum of the squares of the distances between the model predicted output and the actual values. TSS is calculated by the sum of the squares of the distances between the mean value of a dataset and the actual values. A model that just “predicts the
REPO
A ‘repo’ refers to a repurchase agreement, which banks use to finance themselves on a short-term basis, typically overnight.
Recession
A recession is a period of sustained negative economic growth.
S
Swap
A swap is a financial agreement between two parties where the parties agree to make payments between them based on agreed upon rules. They are primarily used for hedging purposes. Consider a foreign currency swap. Suppose Company A is a U.S.-based exporter that sells a lot in Thailand, and is thus paid a lot in Thai baht. They want to reduce the risk that the Thai baht will fall in value, so they go to a counterparty and agree to a swap contract whereupon the company will agree to pay the count
Standard Deviation
The standard deviation is the square root of the variance of a series. It is one of two core measures (along with mean) that help to describe normal distributions. Consider two NBA teams. Team A always scores 100 points/game. The other team takes 100 independent shots a game (all two-pointers, no free throws) and makes them at an exactly 50% clip. Both teams thus have a mean of 100 points per game, but while Team A has a standard deviation of 0, team B has a standard deviation of 5. If they wer
Spread
The bid-ask spread, or “spread”, is the gap between the bid and the ask (see section of Bid and Ask). The bid is the best price a seller can receive if they wish to sell immediately, and an ask is the best price a buyer can receive if they wish to buy immediately. Suppose someone places a limit order to purchase Security X for $44.52/share and that is the highest price on the order book. $44.52 is thus the bid, since if a seller wishes to sell, the most they could get is $44.52 a share. However,
Short-Term Debt
Short-term debt is debt with a scheduled maturity of less than a year. Businesses generally need to have a plan–either with sufficient cash on hand or the ability to quickly attain the sufficient cash–to be able to cover their short-term debt obligations.
Short
A short is a financial position that allows one to take a position anticipating that the value of the underlying security will decrease. However, there are some mechanics under the hood that give them some interesting properties. To short a stock, a person will “borrow” the stock from a counterparty, and promise to repay the counterparty the price of a stock at some specified later date. Consider a stock trading at $10. Person A borrows the stock from Person B and sells it on the open market, t
Securities and Exchange Commission
The Securities and Exchange Commission (SEC) is a regulatory body responsible for regulating securities. The SEC is one of two major financial regulatory bodies in the United States, along with the Commodity Futures Trading Commission. Some responsibilities of the SEC include regulating who is able to issue securities, what mandatory disclosures public companies must make, and other rules governing the structure of securities that are issued. The SEC is run by a Chair along with four other commi
Security
A security is a financial instrument regulated by the Securities and Exchanges Commission that includes stocks, bonds or security-based swap. The responsible regulatory body– SEC vs. CFTC –is the primary distinction between a security and a commodity (see Commodity entry for the definition of a commodity).
Sales Revenue
Sales revenue is money that is received from selling a good.
Sales Cost
The sales cost of an object is the total amount of money it takes to produce one unit of a good, including input costs and personnel to produce the good, but does not include marketing or administrative expenses.
S&P 500
The S&P 500 is an index that attempts to track the entire stock market. It contains fewer companies than the Russell 3000, as it tracks only the 500 largest. It is by far the most popular measure of tracking the entire stock market.
T
Treasury Note
A treasury note is a 10-year U.S. government bond. It is the most common kind of debt that the U.S. federal government issues.
Trade Deficit
The trade deficit is the value of a country’s imports minus its exports. A country has a trade surplus when the value of its exports exceeds the value of its imports. The United States has a large trade deficit (roughly half a trillion dollars in 2019), while countries like Germany and China have large trade surpluses. The trade deficit is a frequently misunderstood economic statistic due to currency effects. Suppose a country becomes more productive and thus able to export more. As a result, t
Trade Flow
Trade flow is the sum of a country’s total exports and imports.
Technical Analysis
Technical analysis, as contrasted with fundamental analysis, is a method of attempting to estimate the fair value of a stock by looking at its price movements and trading behavior. Fundamental analysis, by contrast, looks at indicators like corporate behavior and the macroeconomic environment.
U
Unemployment Rate
The unemployment rate is the share of individuals who are looking for work who cannot find a job.
V
Volatility
Volatility is a measure of how much a data series fluctuates over time. In finance, an asset like a Treasury has low volatility, while meme stocks are highly volatile. In general, investors prefer volatility in order to reduce risk. For example, it is harder to get margin to trade on highly volatile securities since you might have to place a large amount of money as collateral in case the price of the security plummets. In contrast, collateral requirements for highly stable assets will be lower.
Value Stock
A value stock is an equity whose price is low relative to its earnings and other financial indicators. Value investors invest in value stocks on the belief that the price will eventually rise to reflect its financial variables. They are in contrast to growth stocks, whose price is often a large multiple of their earnings on the belief that the company will be growing rapidly.
W
Wisdom of the Crowd
The wisdom of the crowd represents the idea that aggregations of individuals operating independently are better at estimating probabilities than an individual, even a highly informed one. Individuals may be subject to idiosyncratic psychological biases and selective information–the sum of a large number of individuals are likely to cancel out the idiosyncratic biases and result in a more accurate estimate. That’s not to say the “crowd” is always perfect, but groups of highly motivated individual
Weighted Average Cost of Capital
The weighted average cost of capital (WACC) is an accounting measure of the required rate of return necessary to pay back creditors and other providers of capital. It is not merely the average interest rate one has to pay on bonds or debts that one owns, since equity investors may also be expecting a rate of return to avoid pulling their money.
What is a Prediction Market?
Prediction markets allow investors to trade on the outcomes of real-world events. Learn their advantages over traditional financial markets.
Y
Yield to Maturity
Yield-to-maturity is the amount of money one receives if one holds an asset or security until it matures. Suppose one holds a $100 bond that pays out $105 if one holds it until maturity. Then the bond has a 5% yield to call. However, holding until maturity is not the only way to earn a return from a security–often one can sell the bond before it matures to a different seller for a smaller return.
Yield
Yield is the income one receives from holding an asset, security or investment. For example, if one earns $5 for holding a $100 bond for a year, that bond is said to have a 5% yield.
Yield Curve
The yield curve refers to the relationship between a bond’s different maturities and the interest paid on them.