Financial jargon is full of ambiguous phrases, abbreviations and institutions’ names. We’ve made the list of terms that you might find handly while reading news or talking with professionals.
A
ADR (American Depositary Receipt) – a type of financial instrument based on shares of a company located outside the US. Such securities are listed on a regulated market and their purpose is to allow US investors to engage their capital in foreign markets.
ASK – the lowest price at which the sellers are willing to sell the instrument at a given moment (in reference to Equity market) and the price for LONG position (in reference to OTC/derivatives market).
B
BoE (Bank of England) – United Kingdom’s central bank. It oversees monetary policy, issues currency and regulates banks and the financial system. BoE consists of the Governor, the Court of Directors and subcommittees.
BoJ (Bank of Japan) – Japan’s central bank. It is responsible for determining monetary policy, setting interest rates and issuing and monitoring currency and treasury securities. BoJ consists of the Governor, the Deputy Governors, Members of the Policy Board, Directors and Counselors.
BID – a price of an asset, for which the investor can sell it on the stock exchange (in reference to Equity market) and the price for SHORT position (in reference to OTC/derivatives market).
Blue Chip – a large, listed company, characterized by a stable financial situation. It has a great reputation among investors, as it is considered trustworthy. Examples of Blue Chips stocks are Apple, Amazon and Microsoft.
Bull/Bear ratio – a market indicator that refers to the ratio of long to short positions for a given financial instrument.
Bond – a fixed-income securities that reflects loans from investors to borrowers (typically corporate or governmental). A bond can be compared to an agreement outlining the terms of the loan and the associated payments between the lender and borrower. Bonds are used by companies, municipalities, states and sovereign governments to finance projects and operations.
C
CAGR (Compound Annual Growth Rate) – an indicator specifying the rate of return on investment during its duration. It is used to compare investment strategies of different time periods, by comparing them to the common denominator in the form of average annual increases.
CAPM (Capital Asset Pricing Model) – a mathematical model that calculates the expected return of an investment based on how risky it is in comparison to others on the market.
Credit rating agency – an independent company whose task is to assess the creditworthiness of banks, funds, companies, organizations and governments. The rating constitutes the opinion of the agency to the financial stability of the rated entity, supported by relevant arguments.
CFD (Contract For Difference) – an agreement between two parties, in which its participants undertake to settle between themselves an amount equal to the difference between the opening and closing position value. It is a derivative instrument, which means that its price depends on the valuation of a given, underlying asset (eg. stock or currency pair). The specificity of this instrument allows to invest in both increases and decreases in prices.
Cryptocurrency – a cryptographic-secured crypto-asset based on a protected network distributed throughout a large number of so-called nodes (i.e. servers, computers or other devices).
CPI (Consumer Price Index) – also known as core inflation, one of the main measures of the level of inflation. The CPI illustrates the monthly change in price paid by consumers. It is usually used alongside another measure of inflation – the Production Price Index (PPI).
D
DAX – the most important index in the German Stock Exchange, which contains 40 companies with the largest market capitalization and serves as a benchmark of the current state of the German economy.
Derivative – an instrument whose value depends on the other, underlying instrument (eg. share price or the value of a stock index). It is not considered as security as it has no value per se. Common examples of derivative instruments are CFDs, Futures and options.
Dividend – a part of the company’s net income given to its shareholders, most often in the form of cash. It depends on the company’s dividend policy, whether to share the dividend with shareholders or not.
E
EBIT (Earnings Before Interest and Taxes) – a position in the P&L statement, which indicates a company’s profitability. It is calculated as revenue less expenses (excluding tax and interest).
ETF (Exchange Traded Fund) – a type of equity security that tracks a sector, index, commodity or other asset. The design of an ETF remains arbitrary and depends on the strategy of its creators. It can be traded continuously on stock exchanges, just like corporate stocks.
F
FED (Federal Reserve System) – central bank of the United States. It provides the country with a safe, flexible and stable monetary and financial system. FED consists of a seven member Board of Governors, elected for a 14-year term, and oversees12 district reserve banks, which are responsible for a given area of the USA.
Futures – a financial instrument concluded in the form of an agreement between the buyer (or seller) and a transaction broker (in the form of an exchange or a clearing house). In this contract the buyer (or seller) undertakes to buy (or sell) a specific underlying instrument for a strictly defined price and on a specified date.
G
GDR (Global Depository Receipts) – a financial instrument issued by a financial institution to certify shares deposited in a bank.
Galloping inflation – a situation in which prices are rising in an economy at an accelerated rate of at least 10% per year (as measured by the Consumer Price Index), and doing so in a highly volatile way.
GDP (Gross Domestic Product) – one of the basic measures in economics. It represents the total value of goods and services produced in a given country, most often presented for a given year. GDP is in practice the most frequently used measure of the size of an economy.
H
Hedge Fund – a partnership of private investors whose capital is managed by experienced managers. These managers use a variety of strategies, such as loveraging or trading non-traditional assets, to generate above-average returns. Investment in hedge funds is often considered as a risky alternative investment option and it typically requires a high minimum investment or net worth.
Hyperinflation – a period of very high inflation. It is assumed that hyperinflation occurs when the average monthly inflation in a given economy is higher than 50%, for a minimum of several months. The reasons behind this phenomenon are drastic collapse of the country’s financial system and significant budget deficit, resulting in a large amount of money printing.
I
IMF (International Monetary Fund) – an organization founded to reduce trade barriers between countries and stabilize exchange rates. Another important task of the IMF is the financial assistance provided to the indebted member states in return for carrying out economic stabilizing reforms. Currently 190 countries belong to the IMF (as of 2022).
IPO (Initial Public Offering) – a procedure in which stocks of a privately held company go public for the first time. Through an IPO, the company can raise equity capital from public investors.
IRR (Internal Rate of Return) – one of the methods of assessing and comparing the profitability of investment projects. It takes into account the change in the value of money over time, which means that it is the rate at which NPV = 0 (for a definition of NPV, see below). The IRR shows the real rate of investment income.
J
Joint-Stock Company – a company that is owned by its investors, where the size of the part of the company owned by each investor depends on the amount of stock purchased.
JV (Joint Venture) – a business agreement between two or more parties to combine their resources in order to accomplish a certain objective. It may be a new project or any other type of commercial activity. In a JV company each partner is accountable for its gains, losses and expenses.
K
Kicker – a feature being added to a debt instrument that gives the debt holder the prospective option to buy shares of the issuer in order to increase the instrument’s appeal to potential investors.
Kondratieff wave – also known as “K-wave” or “supercycle”, a technically innovative economic cycle, that results in a long time of prosperity.
L
Long position – a situation in which an investor buys a financial instrument (eg. stocks, options, futures etc.) in the expectation that its price will increase. The trade is profitable when the price of the underlying asset rises. Similarly, the trade is lossy when its price drops.
LIBOR (London Inter-Bank Offered Rate) – an interest rate on loans on the interbank market in London, determined on business days at 11:00 GMT. It is expressed in the American (USD), British (GBP), Swiss (CHF), Japanese (JPY) and Euro (EUR) currencies. LIBOR is calculated by the ICE Benchmark Administration (IBA) on the basis of the arithmetic average of the interest rate in the banks participating in the LIBOR panel (selected banks for each currency). This rate is not a transaction rate, however, it is an important parameter of financial transactions, where in many countries the interest rate on loans and deposits is based on LIBOR.
M
Market Depth – market’s ability to absorb a given number of stocks or other securities without causing significant changes in price.
Margin Call – a protective measure that helps to manage trading-related risks and prevent additional losses. It is a notification from the broker that open positions are in danger of the possibility of being forcibly closed or liquidated.
Market Capitalization (MCAP) – total value of the company (shares) of a given issuer, calculated on the basis of the current stock exchange price.
N
NASDAQ – the first electronic exchange in the world. It is an online global marketplace for purchasing and trading securities. It hosts most of the largest technological companies in the world.
NPV (Net Present Value) – a ratio that reflects the present value of future cash flows. It answers the question of what profit the planned investment can bring, in terms of the current value of money.
NYSE (New York Stock Exchange) – the largest equity-based stock exchange in the world. It hosts 2,584 listed companies, both domestic and foreign (as of 2022).
O
OECD (Organization for Economic Co-operation and Development) – an organization bringing together 38 (as of 2022) highly developed and democratic countries. Its aim is to support the member states in their efforts to achieve the highest possible standard of living for their citizens.
Oligopoly – a situation in which a given market is dominated by several, independent companies (most often in similar proportions).
OPEC (Organization of the Petroleum Exporting Countries) – an organization whose goal is to control the world’s oil production, as well as the level of prices and service charges. OPEC associates 13 countries (as of 2022) and the largest producers in its ranks include Saudi Arabia, UAE and Iran.
Over The Counter Market (OTC) – is a decentralized market, in which market participants trade stocks, commodities, currencies or other instruments directly between two parties and without a central exchange. Trading is conducted there around the clock (except on weekends). The FOREX market is an example of the OTC market.
P
PIP – the smallest amount by which an instrument may change in value.
P/E (Price to Earnings) – a company’s share price divided by earnings per share. It is one of the most widely used metrics for determining stock valuation, as it shows what the market is willing to pay for a stock, based on its past (trailing P/E) or future earnings (forward P/E).
PPI (Production Price Index) – one of the main measures of the level of inflation. The PPI illustrates the level of prices, set by producers, at different stages of the manufacturing process. It is usually used alongside another measure of inflation – the Consumer Price Index (CPI).
Ponzi Scheme – an investment scam that promises high return with little risk. Its operation is based on generating a return for earlier investors with money obtained from later investors. It is very similar to a financial pyramid scheme, as both of these scams are based on the use of funds from newly acquired investors to pay the former ones.
Penny stocks – a stock of a small company, that is being traded for less than 5 USD per share.
R
RoR (Rate of Return) – an indicator showing investment’s net gain or loss over a given time period, represented as a percentage of its initial cost.
ROA (Return On Assets) – an indicator showing how profitable (net profit) a company is in relation to all its assets .
ROE (Return On Equity) – an indicator used to assess the effectiveness of the used equity in the company. It determines the company’s net profit in relation to equity.
R/R ratio (Risk-Reward ratio) – a measure showing the level of risk associated with a given investment in relation to the potential profit that it may generate.
S
Share – a security that signifies ownership in a corporation and represents a claim on part of the company’s assets and earnings.
Short position – a situation in which an investor sells some marketable assets, expecting the financial instruments to lose value. The trade is profitable when the price of the underlying asset drops. Similarly, the trade is lossy when its price rises.
SEC (Securities and Exchange Commission) – an American, independent federal regulatory agency whose task is to promote the principle of full disclosure and protect investors from unfair practices in the securities market.
SWAP – a derivative contract through which two parties exchange the cash flows or liabilities from two different financial instruments.
S&P 500 Index – a prominent index in the US Stock Exchange, which contains 500 companies with the largest market capitalization and very often serves as a benchmark of the current state of the US economy.
T
Treasury Bill (T-Bill) – short-term debt security issued by the US government, with a maturity of one year or less.
Trust Fund – a tool intended to hold and manage assets on behalf of another person, with the assistance of a neutral third party. It can hold a range of assets, including money, real estates, stocks and bonds.
TER (Total Expense Ratio) – a measure of all expenses related to running and managing an investment fund, eg. mutual fund. It describes operating expenses in relation to its assets.
U
Underlying asset – a financial asset on which the price of the derivative instrument is based.
Unemployment rate – a statistical measure showing the amount of unemployment in a given country, expressed as a percentage of the unemployed in relation to economically active people.
USDX (U.S. Dollar Index) – a measure of the US dollar (USD) value in relation to the basket of six other currencies, which are: Euro (EUR), Swiss franc (CHF), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK).
V
Valuation – a set of procedures, analyzes and assessments that lead to the determination of the company’s value according to the state at a specific point in time.
Venture Capital – a form of financing enterprises consisting in supplying a given company (most often start-up or small business) with capital, by an external investor (in the form of a VC fund) in exchange for shares or stocks in a given company.
Volatility – a statistical measure of the dispersion of return for any given instrument, representing the amount of price changes over a given period on the financial markets.
Volume – a total number of securities that have been exchanged over a specific period of time (most often within a day).
W
Warrant – a type of security that gives its holder a priority to buy future share issues at a fixed price, with the holder accepting lower growth rate at the same time.
WTO (World Trade Organization) – an organization that regulates international trade between countries. Its primary function is to help exporters, importers and producers of goods and services in managing and protecting their businesses. WTO associates 164 countries (as of 2022).
Z
Zero-coupon bond – bond that offers no interest but is sold at lower price than redemption price.
Zone of resistance – a place on chart (price) where the supply is strong enough to stop or reverse an upward movement. At this point, the number of sell orders outweighs the buy orders, pushing the price down.