Financial Glossary

This is a glossary of financial terms often used in investing, portfolio construction, financial engineering and general finance.


autonomous consumption
Autonomous consumption in economics is the level of consumption that does not depend on income. Conceptually, even with zero income people still need certain essentials, like food, and will buy them – either through borrowing or running down savings.
adhesion contract
An adhesion contract is typically a form of standardized contract where one party has significantly more bargaining power than the other, and the terms of the contract are heavily favored toward the stronger party. It is usually entirely prepared and offered by the stronger party and is common in consumer goods and services.
annuity due
An annuity due is an annuity where payments are made at the beginning of each period, rather than at the end. This means that the first payment is made immediately, rather than at the end of the first period. The net present value of an annuity due is typically higher than a regular annuity since the cash each annuity payment is received a period eariler.


boil the ocean
To "boil the ocean" is to attempt to do something that is impossible or impractical. This phrase is often used to describe an overly ambitious or unrealistic plan or goal. It is often used in a humorous or sarcastic way to mock someone's grandiose ideas or lack of practicality.
backward integration
Backward integration is a business strategy to take over more (or all) levels of the supply chain. This allows a company to gain control over its inputs and reduce its dependence on other parties and even decrease its costs over time.
bullish harami
A bullish harami is a two-candle reversal pattern where a large-bodied bearish candle in an established downtrend is followed by a small-bodied bullish candle that has a gap-up open and the open, high, low, and close are contained inside the body of the previous large-bodied bearish candle. This pattern indicates that selling pressure has been exhausted and the downtrend may be coming to an end.
buy to cover
Short sales involve selling borrowed shares that need to be returned. Buy to cover is a trade that closes out an existing short position.
bag holder
In current stock slang, a “bag holder” is one who hangs onto a stock as it drops, even all the way to zero. This investor may have bought a hot stock near the top and failed to acknowledge its demise. In a more traditional sense: Realizing that the thing you have (what’s in the “bag”) is not the valuable thing you that you thought you had.
bilateral contract
A contract is bilateral if it contains reciprocal promises. In a bilateral contract, both parties have legal obligations and rights, and they are both bound by the terms of the contract.
block trade
A block trade is a transaction in which an investment bank or any large buyer buys or sells a large number of shares at the same time. It differs from retail or indidividuals trading, where investors buy and sell smaller blocks of shares over time.
bear call spread
A bear call spread is an option strategy used to profit from an expected decrease in the price of the underlying security. Call options with a higher strike price are bought andcall options with a lower strike price are simultaneously sold, creating a net credit. A bear call spread has a capped profit potential which is offset by a strictly defined risk of loss.
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.


combined ratio
The combined ratio is a measure of the profitability of an insurance company. It is the sum the company's loss ratio (the ratio of claims paid to premiums earned) and the expense ratio (the ratio of non-loss related expenses to premiums earned) expressed as a percentage. A combined ratio below 100% indicates that the company is profitable - it is earning more in premiums than it is paying out in claims and expenses.
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.


dormant account
A dormant account is a financial account which has been inactive for a extended period of time. These accounts can occur in bank, brokerage, credit union, or other financial institututions.
diseconomies of scale
Diseconomies of scale occur when a business increases output of product or services and the expansion causes inefficieny or other added expenses and the cost per unit of output to rise instead of fall.
discrete distribution
(or discrete probability distribution) is a statistical term that describes the likelihood of all possible outcomes for a countable random variable.
Is the process of reducing the financial leverage or amount of money money borrowed to be used for investing (in securities or equipment). Deleveraging pays down the total debt of a company or individual by raising capital or selling assets.
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.


The Euromarket is the over-the-counter market for interbank deposits, loans, debt, equity, and derivative instruments denominated in a currency foreign to the bank, debtor or issuer of the instrument. With the advent of the euro as the currency of the Eurozone, the use of the prefix Euro- to refer to the Euromarket and the instruments that are traded in the market has caused great confusion for market practitioners, investors, and educators.
equation of exchange
The equation of exchange in economics describes the relationship between the money supply, the velocity of money, and the level of economic activity in an economy. Simply, the equation states that the total amount of money that changes hands in an economy equals the total value of goods and services that change hands.
equity multiplier
Equity multiplier is the ratio of a company's total assets to its shareholder equity. It is a balance sheet measure used to indicate the portion of corporate assets that are financed by equity rather than debt. It is also known as the financial leverage ratio.
economic value
Economic value is a term used in the field of economics to quantify the perceived benefit a company or individual would recieve from a good or service. Economic Value can also be the maximum price one is willing to pay. Note that “economic vlaue” is distinct from “market value” which is establishd by supply and demand.
expanded accounting equation
The expanded accounting equation adds equity sub-categories to the simple accounting equation. Typically, shareholders’ equity is divided into common stock, dividends, paid in capital, treasury stock, income and expenses that help show how the income statement interacts with the balance sheet.
extrinsic value
Extrinsic value is a term used in options pricing to describe the difference in price between an option's actual or market price and its own intrinsic value. This difference is largely made up of the time value of the option and the implied volatility of the option contract.


forward integration
Forward integration is a business strategy that a company uses to expand its operations to include activities that are closer to the end customer in the value chain.
form 4952
Form 4952 is an IRS tax form determining the investment interest expense that may be either deducted or carried forward to a future tax year.
falling knife
A "falling knife" is the term used to describe a rapid drop in the value of a security such as a stock or bond. Investing in a security while its value is still sharply dropping is referred to as "catching a falling knife.”
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.


gravestone doji
A gravestone doji is a candlestick pattern that is often seen as a bearish signal in technical analysis. It is a single candlestick that is formed when the open and close prices are both at or near the low of the period. The high of the day must be far from these three prices, to creates a long upper shadow and a small or nonexistent lower shadow, giving the candlestick the appearance of a gravestone. A gravestone doji indicates that the bears were able to push the price down to the low of the period at the close, after the bulls were able to drive prices up earlier. This suggests that there is a potential shift in market sentiment from bullish to bearish.
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.


Hypothecation, in finance and accounting, is the practice of a borrower pledging an asset as collateral for a loan. The lender has the right to sell an asset if the borrower does not repay the loan.
hard stop
When the security's price falls below the "hard stop" level, an order to sell it will be triggered.
An informal term used to describe a substantial sell-off in an individual asset, a sector or the broader market. It usually desscribes a heavy selling that results in a rapid drop in price.
hot issue
An upcoming Initial Public Offering (IPO) that draws significant interest among investors is referred to as a Hot Issue.
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.


indirect quote
An indirect quote expresses the foreign exchange (Forex) rate between the local and foreign currencies in terms of the foreign currency. It states the amoung of the foreign currency required to buy one unit of the domestic currency.
inflationary gap
In economics, an inflationary gap occurs when the demand for goods and services drives the actual output of an economy above its “potential output”. Potential output is the maximum level of output that an economy can sustain without causing inflationary pressures.
incumbency certificate
An incumbency certificate is a corporate document that lists the individuals who are authorized to enter into legally binding agreements and transactions on behalf of an entity.
interest rate parity
Interest rate parity is a theory to predict forward foreign currency exchange (Forex) rates. The Forex rates between two countries are predicted based on the assumption that the interest rate differential between those countries should offset the difference between the forward exchange rate and the spot exchange rate.
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.


lead bank
A lead bank is a bank that sells its services based on referrals from another institution. Lead banks get their name because the first bank to refer the customer gets to “lead” the business relationship with that customer, and earn the commissions for referring them.
ledger balance
A ledger balance is a term often used in banking to mean the closing balance of an account at the end of a day. It remains constant until recalculated at the close of the following day and differs from the available balance which is the amount of money available for immediate use.
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.


marginal profit
Marginal profit is the additional profit that a company earns by selling one additional unit of a product or service. Importantly, marginal profit only considers the incremental direct or tangible costs associated with producing and selling the additional unit, and does not take into account any allocated or fixed costs.
Micromarketing is a focused form of marketing that targets small, defined niche groups inside a company’s overall target audience. The approach involves the use of detailed customer data and analytics to identify and understand the specific needs and preferences of each customer segment. Tactics include personalized messaging, localized advertising, and customized offers
mean reversion
A statistical term that, when used in finance, describes the assumption that an asset’s price, volatility, or other characteristics will move back toward the long-term average price over time.
married put
A married put is an option strategy used to offset potential risk scrnarios against a stock which an investor already owns. Typically, the investor buys an at the money or modestly out of the money put option on the stock. This strategy provides the investor with downside protection.
mcclellan oscillator
A technical indicator used to find how broadly individual stocks are participating in market moves over time. It is calculated by subtracting the 39-day exponential moving average (EMA) of net advancers (the difference between the number of advancing and declining stocks on the NYSE) from the 19-day EMA of the same net advancers number. The resulting value is typically plotted as a histogram, with consistently positive values indicating bullish conditions and consistently negative values indicating bearish conditions.
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.”


nominal value
The stated value or price of an item. It's a way to express how much something is worth in monetary terms.
nonparametric statistics
A class of statistical techniques designed for data that doesn’t fit well-understood or even known distributions. Because of this defining characterstic, nonparametric tests are also knows as distribution-free tests.
naked call
A potentially high-risk options strategy used in anticipation that the price of the underlying asset (usually a stock or futures contract) will drop or stay in a narrow range until expiration. This is a strategy where a trader/investor receives cash (called the premium) to sell a call option contract and has an obligation to sell the underlying asset (stock, commodity, index, etc.) at a predetermined price (called the strike price) until the expiration date. The strategy is named a naked call because it is not accompanied by a protective position. Also known as a short call.
Non-negotiable denotes a term or condition that cannot be changed or altered in any way. It is a fixed and immutable requirement that must be accepted in its entirety in order for a deal or agreement to be considered valid.
normal profit
In accounting, normal profit refers to the minimum level of profit that is necessary to keep a business operating. It is the minimum return that an entrepreneur expects to earn for providing the capital and taking on the risks involved in running the business. It is different from accounting profit, (total revenue - total explicit Cost) and economic profit (total revenue minus - explicit and implicit costs).
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.


open listing
An open listing is a non-exclusive listing agreement in which more than one real estate agent or broker may be employed to sell a property, including the owners themselves. With this type of agreement, a property owner does not need to use a listing agent. Instead, the owner can reach out to several real estate agents who will then try to find a qualified buyer for the property. When the property sells, the owner only pays a commission to the agent who found the buyer.
open kimono
"Open kimono" is a controversial term of business jargon that refers to the act of being transparent and open about something.
outstanding check
An outstanding check is a check that has been written to draw from an account, but has not yet been cleared by the bank.
ordinary annuity
An ordinary annuity is a financial product that makes a series of fixed payments at regular intervals over a specified period of time. The payments are usually made at the end of each period, and the amount of each payment remains constant throughout the term of the annuity.
Is a person or entity that has a legal obligation to fulfill a contract or pay a debt. The obligor is the party that has the primary responsibility for fulfilling the terms of the contract or agreement, and they are typically required to provide some form of collateral or security to protect the other party's interests.
open outcry
Before the advent of computerized trading, traders would physically occupy the floor or “pit” of a stock exchange and engage in highly vocal trades, shouting buy and sell offers to each other, trying to get the best price at any given moment.
"Overwriting" is an options strategy that is an alternative to a covered call strategy. Overwriting is an income strategy to sell out-of-the-money call options against long-term (usually buy-and-hold) stock positions already in the portfolio.


proportional tax
Also known as a flat tax, proportional tax is a tax where all income levels are taxed at the same rate or percentage.
preemptive rights
Preemptive rights allow existing shareholders in a corporation to purchase new shares before they are offered to others. The right is meant to protect current shareholders from dilution in value or control. Preemptive rights are usually set forth in the corporate charter.
positive pay
In business banking, Positive Pay is a fraud and risk reduction service that automatically compares selected information on a check with information that the bank has already received from their banking client or the client’s account. The system can catch fraudulent or stolen checks before they are honored.
posterior probability
The revised chance of an event occurring after taking into account other factors, such as new information.
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.


quadruple witching
Is the simultaneous expiration of four different derivatives contracts and occurs on the third Fridays of March, June, September and December. Quadruple Witching occurs when futures contracts for heavily traded stock indexes ( such as Nasdaq and S&P 500), single stock options (for companies like Apple and Microsoft), options on stock index futures, and options on stock indices, all expire on the same day. Quadruple witching is considered a volatile day because it can cause large swings in market movements and can affect portfolio values.
quality of earnings
In investing, the quality of earnings refers to the sustainability and reliability of a company's reported earnings. In general, the fewer one-time charges and cyclical economic factors that are common in a company’s earnings, the higher the quality of earnings.
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.


ramp up
To "ramp up" means to increase or intensify somethin over time. In business, ramping up production or output involves increasing the number of goods or services being produced over a period of time to meet growing demand.
ratchet effect
The ratchet effect occurs occurs when a price or other variable increases as a result of temporary pressure but is not fully reversed when the pressure is removed. This can lead to a gradual accumulation of the variable over time, even in the absence of the initial cause.
restricted cash
Restricted cash, is an accounting term for money reserved by a company for a specific purpose and is not available for general use. Restricted cash may be required by a company's debt agreements, by government regulations, or by operating factors (large capital purchases, tax planning, acquisitions, etc.) that limit its use.
recessionary gap
In economics, a recessionary gap refers to a situation when an economy is operating below its Potential Output. Potential output is the maximum level of output that an economy can sustain without causing inflationary pressures.
risk premium
Risk premium is the higher rate of return that an investor expects to be compensated for taking on additional risk. The classic market example is the higher return expected from stocks versus a risk-free asset like government bonds.
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.
rule of 70
The rule of 70 is a heuristic (rule of thumb) used to used to estimate the number of years it will take for an investment to double in value. To use the rule of 70, divide the number 70 by the expected annualized growth rate of the investment expressed as a percentage. For example, if an investment is expected to grow at a rate of 7% per year, it will take approximately 70/7 = 10 years for the investment to double in value. The Rule of 72 and 69.3 are also used. All seek to mathematically approximate the effect of constant compound growth.
Recapitalization is a restructuring of a company's capital structure that involves changing the mix of equity and debt in its financing. This can be done for a variety of reasons, including to improve the company's financial performance, to raise additional capital, to reduce the cost of capital, or to meet regulatory requirements.
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.


switching costs
Switching costs are the additional expenses expected if a customer switches from one product or service to another. These can include direct costs, such as the fees for canceling a contract or closing an account. They can also be indirect costs, such as the time and effort required to learn a new product or service.
A shortfall occurs when the the amount of readily available cash is less than the amount of money needed to meet a financial obligation or liability. In financial performance, a shortfall refers to the amount by which an investment or a portfolio falls short of a target or a benchmark. For example, if an investor has a target return of 10% and their investment returns 8%, the shortfall would be 2%.
stochastic modeling
A mathematical approach now widely used in finance, economics and other disciplines that seeks to identify a broad range of future outcomes when the amount of uncertainty in input variables can vary widely . The term "stochastic" means "random" or "randomly varying.” Monte Carlo simulation is one type of stochastic modeling that is popular in the financial world.
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.


term structure of interest rates
The term structure of interest rates represents the market interest rates (i.e. spot rates) on bonds with different lengths of time to maturity but with the same or similar risk (equal risk in bonds can be seen by the same credit rating). Term strucutre therefore measures the relationship among yields on bonds that differ only in their term to maturity.
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.
tax base
A tax base is the total value of all taxable items.
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.


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.


vertical spread
A type of options trade where two options of the same type (call or put) and expiration date but differnt strike prices are bought and sold simultaneously. Vertical spreads can be either a debit spread where the trader pays a net premium for the two options or a credit spread, where the trader receives a net premium for the opening transaction.


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.


yellow sheets
Detail the bid and ask prices for corporate bonds that are sold over-the-counter (OTC). They are similar to stock “pink sheets”.

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