This is a glossary of financial terms often used in investing, portfolio construction, financial engineering and general finance.
- buy to open
- Buy to open is an order execution term used in trading and investing. This order instructs the brokerage to purchase or initiate a long position in the asset.
- cash budget
- Cash budget is a forecast of cash received and spent over a period of time. Sometimes, cash budgets are broken down by month and sometimes by year, or even more detailed into quarters.
- contributed capital
- The amount of cash plus other assets that have been paid to a company in exchange for stock. Also known as paid-in capital.
- A metric describing the amount you can expect to lose on an investment on your worst day in an average month. Equal to an asset’s 95% value-at-risk.
- fisher effect
- The Fisher effect is an economic theory postulated by economist Irving Fisher in 1907. It asserts that a rise in nominal interest rates, over time, will lead to a greater fall in inflation (a negative relationship). The theorem was derived from the observation that when interest rates were higher there tended to be less inflation.
- Refers to the movement in price of an asset between the close of one trading day and the beginning of the next. The movement may be in either direction.
- A statistical property of a data set that measures how much variation there is in the distribution of the residuals from a linear regression model. Such a data set will have more outliers than one with homoskedasticity.
- An lesser-used term for steadlily rising and low volatility market conditions, usually used to descirbe commodity or futures markets.
- idiosyncratic risk
- Is a type of risk that is also called unsystematic risk because it is specific to that particular business, company, industry, or sector and not to the market as a whole. It's the opposite of systematic risk, which is associated with the general economy or entire market.
- A statistical measure that describes the degree of peakedness or flatness of a distribution. A distribution with more data points near its center and fewer data points near its tails is called platykurtic, while a distribution with fewer data points near its center and more data points near its tails is called leptokurtic.
- Traditionally in financial markets, a laggard is any asset that underperforms it benchmark, sector or peers. “Laggard” can also refer to an investor who buys into an asset near the peak of its value, and is later forced to sell at a loss.
- A metric that provides the rate of change in the value of an asset over a given length of time. Momentum indictors describe how stong or weak any up or down move is. Investors who make buy or sell decisions based primarily on this metric are considered “momentum investors.”
- negative correlation
- A statistical measure of how the values of two investments in a given portfolio are related to one another. Those with strong negative correlation tend to move in opposite directions, either rising or falling in direct contrast to their counterparts.
- net loss
- An accounting term for when the total costs or expenses of a company are more than the total income, revenue, or amount taken in for a given period. This can is also called a net operating loss.
- purchase price
- The actual cash amount per share or contract that is paid when acquiring an asset.
- A statistical term that describes set of outcomes concentrated in the middle or neutral section of all possible outcomes. Platykurtic results contain fewer extremes (positive and/or negative) than would be expected in a "normal" distribution of results, represented by a bell curve. The term kurtosis refers to the distribution of results, and platykurtic is a specific type of kurtosis.
- protective put
- A protective put is a proactive risk-management strategy that uses option contracts to protect an associated asset. Put options are bought whose value will rise if the price of the stock or other underlying asset drops.
- plowback ratio
- The plowback ratio shows how much of the company’s earnings are put back into the company after distributing dividends. It is also known as the retention ratio.
- The initial stock ticker symbol for the Nasdaq 100 Trust, an Exchange Traded Fund (ETF) tracking a wide variety of companies in the tech sector. The ticker QQQQ was replaced by the shorter QQQ in 2011.
- Risk Efficiency
- A metric that tells you how well an asset is trading risk for reward. The number is closely related to the Sortino Ratio. Risk Efficiency can be calculated for any asset—a stock, an ETF, a portfolio, and more.
- reputational risk
- The potential damage that a company’s public perception could suffer in its reputation if they make a mistake, or if an employee acts inappropriately. Reputational risk can be minimized through effective crisis management.
- subjective probability
- A belief about the likelihood of an event’s occurrence, based on personal experience, intuition, or personal judgement rather than quantitative or computational methods.
- service charge
- A service charge is a fee assessed by a provider for services that are outside the main product or serivice purchased by consumers.
- Sortino Ratio
- An evaluation of volatility that prioritizes downside risk. A related metric, the Sharpe ratio, describes volatility on both upside and downside. Investors tend to track downside risk more closely than upside risk, however, making the Sortino ratio a more useful real-world metric for evaluating risk in investing.
- time horizon
- The amount of time one expects to hold an investment. It is most often used to describe the date target when an investor intends to pull a significant amount of money out of the markets, or get out of the market entirely.
- treynor ratio
- The Treynor ratio is a measure of the relationship between risk and reward that reflects the performance of a portfolio relative to the performance of a selected risk-free benchmark.
- A reversal pattern in technical analysis, commonly viewed as two successive candlesticks whose tops or bottoms are aligned. The pattern is referred to as a “tweezer” because the two candlesticks resemble the arms of a set of tweezers, whose ends meet perfectly.
- unrealized gain
- A unrealized gain is the the current profit that exists for an owned asset before it is sold or officially booked. Unrealized gains are also known as paper gains or paper profits.
- wealth effect
- The wealth effect refers to the increase in aggregate demand that occurs as a result of a rise in stock prices and other financial assets. The wealth effect has been studied extensively by John Maynard Keynes, and has been popularized by Thomas Sargent.