132 terms, A to Z
The Investing Glossary
Every term you will meet on this site and in a fund factsheet, explained in plain English with a worked example — from accumulating funds to yield to maturity.
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4% ruleA rule of thumb that withdrawing 4% of a portfolio in the first year of retirement, then adjusting for inflation, has historically lasted about 30 years.401(k)A US workplace retirement plan, named after a section of the tax code, that lets employees save from their pay with tax advantages and often an employer match.
A
Accumulating fundA fund, or share class, that automatically reinvests the dividends and interest it receives instead of paying them out to investors.Actively managed fundA fund whose manager chooses investments using research and judgement, aiming to beat a benchmark index rather than simply match it.AlphaThe part of an investment’s return that cannot be explained by its exposure to the market, often used as a measure of a manager’s skill.AnnuityA contract, usually with an insurance company, that turns a lump sum into a series of regular payments, often guaranteed for life.Asset allocationHow a portfolio is divided between broad types of asset, such as shares, bonds and cash, which largely determines its risk and return.
B
Balance sheetA financial statement listing what a company owns, what it owes and the shareholders' equity left over, at a single date.Bear marketA prolonged fall in share prices, conventionally defined as a decline of 20% or more from a recent peak, usually with widespread pessimism.BetaA measure of how sensitive an investment is to movements in the overall market; a beta of 1 means it has tended to move in line with it.Bid-ask spreadThe gap between the highest price a buyer will pay (the bid) and the lowest price a seller will accept (the ask or offer) at a given moment.BitcoinThe first cryptocurrency: a decentralised digital currency, launched in 2009, whose transactions are recorded on a public blockchain and whose supply is capped.BlockchainA shared digital ledger in which records are grouped into blocks linked by cryptography, making past entries very hard to alter without detection.Blue-chip stockA share in a large, well-established and financially sound company with a long record of reliable earnings, often paying regular dividends.BondA loan to a government or company that pays interest at set intervals and repays the original sum on a fixed date.Bond ladderA portfolio of bonds bought to mature in a sequence of years, so that money comes back at regular intervals.Bond yieldThe return a bond offers relative to its market price; because the payments are fixed, yields move in the opposite direction to bond prices.Brokerage accountAn account with an investment firm or platform that lets you buy, sell and hold securities such as shares, bonds and funds.Bull marketA prolonged period of rising share prices, often defined as a rise of at least 20% from a recent low, usually accompanied by investor optimism.
C
Call optionAn option giving its buyer the right, but not the obligation, to buy an asset at a fixed strike price on or before a set expiry date.Capital gains taxA tax on the profit made when you sell or otherwise dispose of an asset, such as shares or property, for more than it cost.Cash flow statementA financial statement showing the cash that actually came into and left a company over a period, grouped by source.Central bankThe public institution that issues a country's currency, sets its policy interest rate and oversees the stability of its banking system.CFD (contract for difference)A leveraged contract with a provider that pays the difference in an asset's price between opening and closing a position, without owning the asset.Citizenship by investmentA route by which a country grants citizenship, and therefore a passport, to foreign nationals in return for a donation or qualifying investment.Compound interestEarning returns not only on your original money but also on the returns it has already earned, so that growth accelerates over time.Consumer price index (CPI)An official index that tracks the average change in the prices households pay for a fixed basket of goods and services.ConvexityA measure of how a bond's sensitivity to interest rates itself changes as rates move, refining the estimate given by duration.Core inflationA measure of inflation that strips out volatile items, typically food and energy, to show the underlying trend in prices.CorrelationA statistic from −1 to +1 measuring how closely the returns of two investments move together, and a key input to diversification.CouponThe fixed interest a bond pays, stated as a percentage of its face value and usually paid once or twice a year.Credit ratingA rating agency's letter-grade opinion of how likely a borrower is to pay its debts in full and on time.Crypto walletSoftware or a device that stores the private keys needed to control crypto assets; the coins themselves stay recorded on the blockchain.CustodianA financial institution that holds and safeguards securities and cash on behalf of investors, keeping them separate from its own assets.
D
Day tradingBuying and selling investments within the same trading day to profit from short-term price moves, closing all positions before the market shuts.DefaultA borrower's failure to make an interest or principal payment on time, or otherwise to meet the terms of its debt.DeFi (decentralised finance)Financial services such as lending, borrowing and trading run by software on public blockchains, without a bank or broker in the middle.Distributing fundA fund, or share class, that pays out the dividends and interest it receives to investors as cash, typically quarterly or twice a year.DiversificationSpreading money across many investments that do not all move together, so that a loss on any one has a limited effect on the whole.DividendA payment a company makes to its shareholders out of its profits or accumulated reserves, usually in cash and quoted as an amount per share.Dividend yieldA company's annual dividends per share divided by its current share price, showing the income return as a percentage of the price.Dollar-cost averagingInvesting a fixed amount at regular intervals regardless of price, so that more units are bought when prices are low and fewer when high.DurationA measure, expressed in years, of how sensitive a bond's price is to changes in interest rates.
E
Earnings per share (EPS)A company's net profit attributable to ordinary shareholders divided by its number of shares, showing the profit behind each share.EBITDAEarnings before interest, taxes, depreciation and amortisation, a rough measure of the profit from a company's core operations.Economic moatA lasting competitive advantage that protects a company's profits from rivals, much as a moat protects a castle.Emergency fundCash set aside in an easily accessible account to cover unexpected costs or a loss of income, so you do not have to sell investments or borrow at a bad time.Emerging marketsCountries whose economies and financial markets are developing but are not yet classed as fully developed by the major index providers.ETF (exchange-traded fund)A fund whose shares trade on a stock exchange throughout the day, usually built to track an index at low cost.Ex-dividend dateThe first trading day on which a share is bought without the right to its next declared dividend; you must buy before it to receive the payment.Expense ratio (TER)The annual cost of running a fund, expressed as a percentage of its assets and deducted from the fund’s value rather than billed to you.
F
FIRE (financial independence, retire early)A savings strategy that aims to build enough invested wealth to live off it, making paid work optional well before a normal retirement age.Free cash flowThe cash a business generates from its operations after paying for the investment needed to maintain and grow it.FSCSThe UK’s Financial Services Compensation Scheme, which pays compensation, up to set limits, when an authorised financial firm fails.Fund domicileThe country where a fund is legally established and regulated, which shapes its rules, its tax treatment and who is allowed to buy it.Futures contractA standardised, exchange-traded agreement to buy or sell an asset at a price fixed today, for delivery or cash settlement on a set future date.
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GDP (gross domestic product)The total value of all final goods and services produced within a country over a period, the standard measure of economic output.Golden visaA residence permit granted to a foreign national in return for a qualifying investment in the host country, such as property, funds, bonds or a business.Government bondA bond issued by a national government to fund its spending, such as UK gilts, US Treasuries or German Bunds.
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I
Income statementA financial statement showing a company's revenue, costs and resulting profit or loss over a reporting period.Index fundA fund that aims to match the return of a market index by holding the securities in it, rather than trying to beat it.InflationThe rate at which the general level of prices rises over time, reducing what a given amount of money can buy.Inflation-linked bondA bond whose principal and interest payments rise with an official price index, protecting the holder's purchasing power.Intrinsic valueAn estimate of what a business or share is really worth, based on the cash it is expected to produce rather than on its market price.Inverted yield curveA yield curve on which short-term bonds yield more than long-term bonds, often read as a sign that markets expect slower growth.Investor compensation schemeA statutory safety net that compensates investors, up to a limit, when an investment firm fails and cannot return their money or securities.IPO (initial public offering)The first sale of a company's shares to the public, after which the shares are listed and can be traded on a stock exchange.IRA (individual retirement account)A US tax-advantaged retirement account that individuals open themselves, separate from any workplace plan, with an annual contribution limit.ISA (individual savings account)A UK tax wrapper in which savings and investments grow free of UK income tax and capital gains tax, up to an annual allowance set by the government.
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L
LeverageUsing borrowed money or derivatives to take a larger investment position than your own capital alone would allow, magnifying gains and losses.Limit orderAn instruction to buy at or below a set price, or sell at or above it, which controls the price you trade at but not whether the trade happens.LiquidityHow easily an asset can be bought or sold quickly, in reasonable size, without having to accept a noticeably worse price.Lump-sum investingInvesting a large sum all at once rather than spreading it out over time, putting the whole amount to work in the market immediately.
M
Margin callA demand from a broker to add money or securities to a leveraged account after losses push its equity below the required minimum.Margin of safetyThe gap between an investment's estimated intrinsic value and the price paid, providing a cushion against errors and bad luck.Margin tradingBuying investments partly with money borrowed from a broker, using the investments as collateral, which magnifies both gains and losses.Market capitalisationThe total stock market value of a company: the number of shares it has in issue multiplied by the current share price.Market correctionA fall of at least 10%, but less than 20%, from a recent peak in a share, index or market; deeper falls are usually called bear markets.Market makerA firm that stands ready to buy and sell a security continuously, quoting both a bid and an ask price and earning the spread between them.Market orderAn instruction to buy or sell immediately at the best price currently available, putting speed and certainty of execution ahead of price control.Money market fundA fund that invests in very short-term, high-quality debt such as treasury bills, aiming to preserve capital and pay a return close to cash rates.MSCI WorldA stock market index of large and mid-sized companies across developed countries, widely used as a benchmark for global shares.Mutual fundA pooled fund that issues and cancels its shares directly with investors, at a price set once a day from the value of its holdings.
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P/E ratioA company's share price divided by its earnings per share, showing how much investors pay for each unit of annual profit.Passive investingAn approach that buys and holds broad, low-cost index funds instead of trying to pick winning investments or time the market.PensionAn arrangement for saving during working life to provide income in retirement, from the state, an employer or a personal plan, usually with tax advantages.Permanent residenceAn immigration status allowing a foreign national to live in a country indefinitely, usually with the right to work, without becoming a citizen.Physical replicationA way of tracking an index by actually buying the securities in it, either all of them or a carefully chosen representative sample.Policy interest rateThe short-term interest rate a central bank sets to steer borrowing costs, spending and inflation across an economy.Price-to-book ratioA company's market value divided by the book value of its shareholders' equity, comparing its share price with its net assets.Put optionAn option giving its buyer the right, but not the obligation, to sell an asset at a fixed strike price on or before a set expiry date.
Q
Quantitative easingA policy in which a central bank creates new money to buy bonds on a large scale, aiming to lower longer-term interest rates.Quantitative tighteningThe reverse of quantitative easing: a central bank shrinks the bond holdings it built up, withdrawing money from the financial system.
R
Real returnAn investment's return after allowing for inflation, showing how much its purchasing power has actually grown.RebalancingPeriodically buying and selling assets to bring a portfolio back to its target mix after market movements have pushed it off course.RecessionA significant, broad-based decline in economic activity that lasts more than a few months, usually with falling output and rising unemployment.REIT (real estate investment trust)A company that owns or finances income-producing property and, in return for tax advantages, must pay out most of its profits to shareholders.Return on equity (ROE)A company's net profit as a percentage of its shareholders' equity, showing how much profit it earns on the owners' capital.Risk toleranceHow much uncertainty and loss an investor can accept, both financially and emotionally, in pursuit of higher expected returns.Roth IRAA US individual retirement account funded with after-tax money, in which investments grow and qualified withdrawals are free of federal income tax.
S
S&P 500A stock market index of around 500 large US companies, weighted by market value and widely used as the benchmark for the US stock market.Schengen AreaA group of European countries that have abolished passport checks at their shared internal borders and apply common rules to short-stay visitors.Sequence-of-returns riskThe risk that poor investment returns early in retirement, while you are withdrawing money, permanently reduce how long a portfolio lasts.Share buybackWhen a company uses its cash to buy back its own shares, reducing the number in issue and increasing each remaining shareholder's stake.Sharpe ratioA measure of risk-adjusted return: the return earned above a risk-free rate for each unit of volatility taken on.Short sellingSelling borrowed shares in the hope of buying them back later at a lower price; it profits from falls, and potential losses are unlimited.SIPCThe US Securities Investor Protection Corporation, which helps customers recover cash and securities, up to limits, when a member brokerage firm fails.SIPPA UK self-invested personal pension: a do-it-yourself pension account that receives tax relief on contributions and lets you choose the investments.Small-cap stocksShares in companies with a relatively small total market value, which tend to be more volatile and less widely researched than large companies.StablecoinA crypto token designed to hold a steady value, usually one unit of a currency such as the US dollar, by being backed by reserves or managed by an algorithm.Standard deviationA statistical measure of how widely returns are spread around their average; in investing it is the standard way to quantify volatility.Stock (share)A unit of ownership in a company, giving its holder a claim on part of the company's profits and assets and usually a vote at shareholder meetings.Stock exchangeA regulated marketplace where shares and other securities are listed and traded between buyers and sellers under a common set of rules.Stock market indexA single number that tracks the combined value of a defined basket of shares, used to measure how a market or part of a market is performing.Stock splitA change that divides each existing share into several new ones, lowering the price per share without changing the total value of a holding.Stop-loss orderAn order that automatically sells a holding if its price falls to a chosen trigger level, intended to limit further losses.Synthetic ETFAn ETF that delivers an index’s return through a swap agreement with a bank, rather than by owning the securities in the index.
T
Tax residencyThe status that determines which country treats you as resident for tax purposes, and so usually which country can tax your worldwide income and gains.Tax-loss harvestingSelling an investment at a loss to realise that loss for tax purposes, so it can offset taxable gains, usually while keeping similar market exposure.Time horizonThe length of time before you expect to need the money you are investing, which shapes how much risk it is sensible to take with it.Total returnThe full gain or loss from an investment over a period, combining price changes with income such as dividends or interest, usually assumed reinvested.Tracking differenceThe gap between a fund’s actual return and the return of the index it tracks over a given period, showing the real cost of tracking.Tracking errorA measure of how consistently a fund follows its benchmark: the volatility of the difference between the fund’s returns and the index’s.
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