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Glossary
44 terms from both desks, each defined in a sentence or two.
A
- APR Business
- Annual percentage rate: the yearly cost of borrowing expressed as a percentage, including the interest rate and, under most consumer-credit rules, compulsory fees. It is designed to let borrowers compare loans and credit cards on a consistent basis. The representative APR is the rate at least a majority of successful applicants receive.
B
- Balance sheet Business
- A financial statement showing what a company owns (assets), what it owes (liabilities) and the difference (shareholders’ equity) at a point in time. The two sides balance by definition: assets equal liabilities plus equity. It is one of the three core financial statements alongside the income statement and cash-flow statement.
- Basis point Markets
- One hundredth of a percentage point, or 0.01 per cent. Interest rates, bond yields and fees are quoted in basis points to avoid confusing a change in a rate with a percentage change of it: a rise from 4.00 per cent to 4.25 per cent is 25 basis points.
- Bear market Markets
- A sustained decline in prices, conventionally defined for equity indices as a fall of 20 per cent or more from a recent peak. The term is also used more loosely for any period of pessimism. The opposite is a bull market.
- Bid-ask spread Markets
- The difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller will accept (the ask or offer). It is the cost of trading immediately and a common measure of liquidity: narrow spreads indicate an active, liquid market.
- Bull market Markets
- A sustained rise in prices, often defined for equities as a gain of 20 per cent or more from a recent low. Bull markets are typically accompanied by economic growth, rising profits and investor optimism. The opposite is a bear market.
C
- Cash flow Business
- The movement of money into and out of a business over a period. The cash-flow statement divides it into operating, investing and financing activities. Free cash flow, operating cash flow minus capital expenditure, is the cash available to pay dividends, repay debt or buy back shares. Profit and cash flow can diverge substantially.
- Central bank Business
- The institution responsible for a country’s or currency area’s monetary policy, typically charged with keeping inflation at a target and often with supporting employment and financial stability. It sets the policy interest rate, supplies reserves to the banking system, acts as lender of last resort and often supervises banks.
- Chargeback Business
- The reversal of a card payment initiated by the cardholder’s bank after the cardholder disputes a transaction, for reasons such as fraud, non-delivery or a faulty product. The funds are taken back from the merchant’s acquirer, which debits the merchant. Merchants can contest chargebacks with evidence and face penalties if their chargeback rate is high.
- Compound interest Business
- Interest calculated on both the original principal and the interest already accumulated, so that the balance grows at an accelerating rate. Over long periods the effect is large: money doubling roughly every 72 divided by the annual rate in years. It works in a saver’s favour on deposits and against a borrower on debt.
- Credit score Business
- A number produced by a credit bureau or lender summarising a person’s history of borrowing and repayment, used to predict the likelihood of default. Higher scores generally give access to more credit at lower rates. Scoring models and ranges differ by country and bureau, and the same person can have different scores from different agencies.
D
- Dividend Markets
- A payment a company makes to its shareholders out of profits or reserves, usually in cash and usually quarterly or semi-annually. The dividend yield is the annual dividend divided by the share price. Companies are not obliged to pay dividends and can cut or suspend them.
- Duration Markets
- A measure of a bond’s sensitivity to changes in interest rates, expressed in years. A bond with a duration of seven will fall in price by roughly 7 per cent if yields rise by one percentage point. Longer maturities and lower coupons produce higher duration.
E
- Earnings per share Markets
- A company’s net profit divided by the number of shares outstanding. Diluted earnings per share also counts shares that could be created through options, convertible bonds and similar instruments. It is the figure most often compared with analyst forecasts when results are published.
- EBITDA Business
- Earnings before interest, tax, depreciation and amortisation: a measure of operating profit that excludes financing costs, tax and non-cash charges for the wearing-out of assets. It is used to compare companies with different capital structures and as the denominator in leverage ratios. It is not a substitute for cash flow, since it ignores capital spending.
- ETF Markets
- Exchange-traded fund: a pooled investment fund whose shares trade on a stock exchange throughout the day like an ordinary share. Most ETFs track an index. They are generally low-cost and transparent about their holdings, and their price stays close to the value of the underlying assets through a creation and redemption mechanism.
F
- Fiscal policy Business
- The use of government spending and taxation to influence the economy. Expansionary fiscal policy, higher spending or lower taxes, supports demand and typically increases the deficit; contractionary policy does the reverse. It is set by governments and legislatures, in contrast to monetary policy, which is set by central banks.
- Futures Markets
- Standardised contracts to buy or sell an asset at a set price on a set future date, traded on an exchange and guaranteed by a clearing house. Futures exist on commodities, indices, bonds, currencies and interest rates. They are used both to hedge price risk and to speculate, and require a margin deposit rather than full payment.
G
- GDP Business
- Gross domestic product: the total value of goods and services produced within a country over a period, usually a quarter or a year. Real GDP adjusts for inflation and is the standard measure of economic growth. A recession is commonly identified by two consecutive quarters of falling real GDP, though formal definitions vary.
- Guidance Business
- A company’s public forecast of its own future performance, typically covering revenue, profit margins or earnings for the coming quarter or year. Guidance shapes analyst forecasts and is often the main driver of the share-price reaction to results. Raising, lowering or withdrawing guidance is a significant signal.
H
- Hedge Markets
- A position taken to reduce the risk of an adverse price move in another position. An exporter expecting to receive foreign currency might sell that currency forward; an equity investor might buy put options on an index. A hedge limits losses but usually has a cost and also limits gains.
I
- Index Markets
- A statistical measure of the value of a group of securities, constructed by rules that determine which securities are included and how they are weighted. Indices serve as benchmarks for performance and as the basis for index funds and derivatives. Most equity indices weight constituents by market capitalisation.
- Inflation-linked bond Markets
- A bond whose principal and coupon payments are adjusted in line with a consumer price index, so that the investor’s return is protected against inflation. The yield on an inflation-linked bond is a real yield; the gap between it and the yield on a conventional bond of the same maturity is the breakeven inflation rate.
- Interest rate Business
- The cost of borrowing or the return on lending, expressed as a percentage of the amount per year. The policy rate set by a central bank anchors short-term rates across the economy; rates on loans, mortgages and bonds add margins for risk, term and profit. Real interest rates subtract inflation from nominal rates.
- IPO Business
- Initial public offering: the first sale of a company’s shares to the public, accompanied by a listing on a stock exchange. The company may raise new capital, existing shareholders may sell, or both. The process involves a prospectus, regulatory review, underwriting by investment banks and a bookbuilding exercise to set the price.
L
- Leverage Business
- The use of borrowed money to increase the size of a position or the assets of a business relative to the equity behind them. Leverage amplifies both gains and losses. For companies it is commonly measured as net debt divided by EBITDA or by equity; for investors, as the ratio of position size to margin deposited.
- Liquidity Markets
- The ease with which an asset can be bought or sold quickly without moving its price. Liquid markets have many participants, narrow bid-ask spreads and deep order books. The term is also used for the availability of cash and funding in the financial system as a whole.
M
- M&A Business
- Mergers and acquisitions: transactions in which companies combine or one buys another. Deals may be paid in cash, shares or a mix, and are often subject to shareholder votes and review by competition authorities. Acquirers typically pay a premium to the target’s market price and justify it with expected cost savings or revenue gains, known as synergies.
- Margin Markets
- In trading, the collateral an investor must deposit to open and maintain a leveraged position, such as a futures contract or a purchase of shares with borrowed money. If losses reduce the collateral below a required level, the broker issues a margin call for additional funds. In corporate finance, margin means profit as a share of revenue.
- Market cap Markets
- Market capitalisation: the total market value of a company’s outstanding shares, calculated as the share price multiplied by the number of shares. It is the standard measure of a listed company’s size and the basis for weighting in most equity indices.
- Monetary policy Business
- The actions of a central bank to influence the supply and cost of money, chiefly by setting the policy interest rate and, at times, by buying or selling assets. Its usual goal is stable inflation, often with a secondary aim of supporting employment. Its effects reach the economy with a lag of a year or more.
N
- Net interest margin Business
- A measure of a bank’s core profitability: the difference between the interest it earns on loans and securities and the interest it pays on deposits and borrowing, expressed as a percentage of its interest-earning assets. It tends to widen when rates rise and deposit rates lag, and narrow when the reverse happens.
O
- Options Markets
- Contracts that give the holder the right, but not the obligation, to buy (a call) or sell (a put) an asset at a set price on or before a set date. The buyer pays a premium for that right; the seller receives the premium and takes on the obligation. Options are used for hedging, income and speculation.
P
- P/E ratio Markets
- Price-to-earnings ratio: a company’s share price divided by its earnings per share, or equivalently its market capitalisation divided by net profit. It indicates how many years of current earnings the market is paying for. A trailing P/E uses the past year’s earnings; a forward P/E uses forecasts.
Q
- Quantitative easing Business
- A monetary policy in which a central bank buys large quantities of government bonds or other assets, paying with newly created reserves, in order to lower longer-term interest rates and support the economy when the policy rate is already near zero. Its reversal, allowing holdings to shrink, is called quantitative tightening.
R
- Recession Business
- A significant, broad-based decline in economic activity lasting more than a few months, usually visible in output, employment, income and sales. A common shorthand is two consecutive quarters of falling real GDP, but official arbiters in some countries use a wider set of indicators and date recessions after the fact.
- Revenue Business
- The total income a company earns from selling goods and services before any costs are deducted; also called sales or turnover. It is the top line of the income statement. Revenue growth is a key measure of a business’s expansion, but it says nothing about profitability on its own.
S
- Short selling Markets
- Selling a security the seller does not own, having borrowed it, with the intention of buying it back later at a lower price and returning it. The short seller profits if the price falls and loses if it rises, with potentially unlimited losses. Short interest, the share of a company’s stock sold short, is a widely watched indicator.
- Spread Markets
- The difference between two prices or yields. A credit spread is the extra yield a corporate bond pays over a government bond of similar maturity, reflecting default risk. A bid-ask spread is the gap between buying and selling prices. Spreads widening usually signals rising risk or falling liquidity.
- Stagflation Business
- A combination of stagnant or falling output, high unemployment and high inflation occurring at the same time. It is difficult for policymakers because the usual remedies conflict: raising rates to curb inflation weakens growth further, while cutting rates to support growth risks entrenching inflation.
V
- Volatility Markets
- The degree to which a price moves over time, usually measured as the annualised standard deviation of returns. Historical volatility is calculated from past prices; implied volatility is derived from option prices and reflects the market’s expectation of future movement. Higher volatility means larger swings in either direction.
W
- Working capital Business
- The difference between a company’s current assets, such as cash, inventory and money owed by customers, and its current liabilities, such as money owed to suppliers and short-term debt. It measures the resources available to run day-to-day operations. Rising working capital can absorb cash even when a business is profitable.
Y
- Yield Markets
- The income an investment returns as a percentage of its price. For a bond, the yield to maturity is the annualised return from buying at the current price and holding until repayment; it moves inversely to price. For a share, the dividend yield is the annual dividend divided by the share price.
- Yield curve Markets
- A chart of the yields on bonds of the same credit quality, usually government bonds, across different maturities. It normally slopes upward, with longer bonds yielding more. An inverted curve, where short yields exceed long yields, has historically preceded recessions, though the lag varies.