Glossary

The annual report a public company files with the SEC. It describes the business and its risks, and includes audited financial statements.

Used in Business Models and Revenue Streams.

The quarterly report a US public company files with the SEC for each of the first three quarters of its fiscal year. Its financial statements are unaudited.

Used in SEC Filings: 10-K, 10-Q, and 8-K.

An ongoing fee some mutual funds take from fund assets to pay for marketing and distribution. It's included in the expense ratio.

Used in Mutual Funds vs. ETFs.

A workplace retirement plan offered by many private employers. You put part of your pay into an account, and your employer may add money too.

Used in How Retirement Accounts Work.

A tax-advantaged account for education costs, sponsored by a state, a state agency, or an educational institution.

Used in 529 Education Savings Plans.

A current report a US public company files with the SEC to announce major events, such as an acquisition, a change of executives, or quarterly results, generally within four business days.

Used in SEC Filings: 10-K, 10-Q, and 8-K.

In a margin account, the value of your investments minus what you owe the broker.

Used in Margin and Short Selling.

When a criminal gains control of someone's online account, often with stolen login details.

Used in Keeping Your Account Safe.

Money a company owes its suppliers for goods or services it has already received.

Used in Accruals and Working Capital, The Balance Sheet.

Money customers owe a company for products or services already delivered but not yet paid for.

Used in Accruals and Working Capital, The Balance Sheet.

A person or organization that meets SEC tests for income, net worth, or certain professional licenses, and so may invest in many private offerings that others can't.

Used in Alternative Investments.

Describes a deal or buyback that raises earnings per share. The opposite is dilutive. It doesn't show whether value was created.

Used in Mergers and Acquisitions.

Recording sales and costs in the period they happen, whether or not the cash has moved yet. It's why a company's profit and its cash flow differ.

Used in Accruals and Working Capital.

The interest a bond has earned since its last coupon payment. A buyer pays it to the seller on top of the quoted price.

Used in How Bonds Are Quoted and Traded.

When one company buys another company, or a controlling stake in it.

Used in Where Growth Comes From.

An approach where managers choose investments to try to beat a benchmark, rather than simply match it.

Used in Index Funds, Passive vs. Active Investing.

When an information gap means the deals that actually happen are skewed toward the worst risks or lowest quality, as when only lemons are left for sale.

Used in Information, Incentives, and Moral Hazard.

The part of an investment's return that isn't explained by its exposure to the market or to another benchmark. Positive alpha is return beyond what the risk taken would predict.

Used in Alpha and Benchmark Selection.

Any investment outside stocks, bonds, and cash, such as private equity, hedge funds, private real estate, commodities, or collectibles.

Used in Alternative Investments.

An option that can be exercised at any time before it expires. A European-style option can be exercised only at expiration.

Used in Exercise and Assignment.

Spreading the cost of an asset with no physical form, such as a patent or an acquired customer list, over the years it's expected to be useful. It works like depreciation.

Used in Depreciation, Amortization, and Capital Spending.

Relying too heavily on a number you've already seen, such as the price you paid, when judging what something is worth.

Used in Loss Aversion, Anchoring, and Sunk Costs.

The yearly value of a company's subscriptions in force on a given date. It's a snapshot defined by each company, not a figure from the audited financial statements.

Used in Software and Subscription Metrics.

In financial math, a series of equal payments made at regular intervals for a set time, such as loan payments or bond coupons. The word is also used for an insurance product that pays an income.

Used in Present Value and Future Value Formulas.

Laws that prohibit agreements restraining competition, attempts to monopolize, and mergers likely to substantially lessen competition.

Annual percentage rate: the yearly cost of borrowing, shown as a percentage of the amount owed.

Used in Are You Ready to Invest?.

The ordinary average: add the values and divide by how many there are. For returns, it describes a typical single period.

Used in Arithmetic and Geometric Averages.

The lowest price a seller is currently willing to accept for a security. Also called the offer.

Used in Bid, Ask, and the Spread, Why Prices Move.

Something you own that has value, such as cash, shares of a company, a bond, or property.

Used in How Hyperion Entities Works, What Is Investing?.

How a portfolio is divided among asset classes, such as stocks, bonds, and cash.

Used in Asset Allocation.

A broad category of investments that tend to behave in similar ways, such as stocks, bonds, or cash.

Used in Asset Allocation.

Choosing which kind of account, taxable or tax-advantaged, to hold each investment in, to reduce the taxes you pay overall.

Used in Asset Location.

A bond repaid from the payments on a pool of loans or other debts, such as car loans or credit card balances.

Used in Mortgage-Backed and Asset-Backed Securities.

The total value of the money a fund manages. Often shortened to AUM.

Used in How to Read an ETF.

The notice to an option's writer that a holder has exercised, which obliges the writer to sell (for a call) or buy (for a put) the shares at the strike price.

A situation in which one side of a deal knows more than the other, such as a seller who knows a car's faults or a borrower who knows their own repayment prospects.

Used in Information, Incentives, and Moral Hazard.

A large financial firm that can create and redeem ETF shares directly with the fund, which helps keep the ETF's price close to the value of its holdings.

Used in Mutual Funds vs. ETFs.

Parts of the tax and spending system, such as income taxes and unemployment benefits, that cushion the economy without new decisions: revenue falls and support rises when the economy weakens.

Used in Fiscal Policy and Government Debt.

The total amount paid for all your shares of an investment, divided by the number of shares you own.

Used in Adding to Winners and Averaging Down, Scaling Into a Position.

Buying more of an investment after its price has fallen, which lowers your average cost per share.

Used in Adding to Winners and Averaging Down.

A trial of an investing rule on historical data, to see how it would have done. A rule chosen because it fitted the past will look good on the past, so a backtest is weak evidence without results on data that wasn't used to find it.

Used in Correlation Is Not Causation.

A futures market in which contracts for later delivery cost less than those for sooner delivery. Rolling a position forward then adds to returns.

Used in Commodity and Index Futures.

The financial statement that shows what a company owns (assets), what it owes (liabilities), and what's left for its owners (shareholders' equity) at a single moment.

Used in The Three Financial Statements.

When many depositors try to withdraw their money from a bank at once, usually because they fear it can't pay them all.

A bond portfolio split between short and long maturities with little in between. A bullet, by contrast, is concentrated around one maturity.

Used in The Yield Curve in Depth.

Anything that makes it hard for new competitors to enter a market, such as high startup costs, patents, licences, or customers' costs of switching.

Used in Competition and Market Structure.

How often something happens in general, before looking at the details of a particular case. The starting point for judging how likely it is this time.

Used in Probability and Expected Value.

One hundredth of a percentage point, or 0.01%. Interest rates, bond yields, and fund fees are often quoted in basis points.

Used in Percentages and Percentage Points.

A period of falling prices and pessimism, generally when a broad market index falls 20% or more over at least two months.

Used in Bull Markets, Bear Markets, and Recoveries.

The standard an investment is measured against, usually an index covering the same part of the market.

Used in Alpha and Benchmark Selection.

A periodic correction of a survey-based estimate to a fuller count. US payroll figures are benchmarked once a year to employment counts drawn mainly from unemployment insurance tax records.

Used in Reading Economic Data Releases.

A broker's duty to seek the most favorable terms reasonably available when filling customers' orders.

Used in Exchanges, Buyers, and Sellers.

A measure of how much a stock adds to the risk of the overall market. Above 1 means more than average; below 1 means less.

Used in Cost of Capital, Cost of Capital in Depth, Covariance, Correlation, and Beta.

The downward-sloping relationship between job openings and unemployment: when openings are plentiful, unemployment tends to be low, and the reverse.

Used in The Labor Market in Depth.

The highest price a buyer is currently willing to pay for a security.

Used in Bid, Ask, and the Spread, Why Prices Move.

The difference between the bid and the ask. It is a cost of trading, paid every time you buy at the ask and sell at the bid.

Used in Bid, Ask, and the Spread.

A shared digital record of transactions, kept by a network of computers rather than one company, and very hard to change once written.

Used in Crypto: What It Is and What Can Go Wrong.

A loan you make to a government or company. It usually pays you interest and repays the amount borrowed on a set date.

Used in What Is Investing?, What a Bond Is.

Another name for shareholders' equity: a company's assets minus its liabilities on the balance sheet.

Used in The Balance Sheet, Valuing Banks and Insurers.

The level of sales at which revenue exactly covers all costs, fixed and variable, so profit is zero.

Used in Costs, Scale, and Profit.

The yield on an ordinary Treasury minus the yield on TIPS of the same maturity. It's the average inflation rate at which the two would return the same.

Used in Real Yields and Breakeven Inflation, What Drives Inflation.

A firm that buys and sells securities on behalf of its customers. You trade through a broker rather than directly on an exchange.

Used in Brokerage Accounts, Exchanges, Buyers, and Sellers.

An account at a brokerage firm that holds your investments and cash and lets you buy and sell securities.

Used in Brokerage Accounts.

The amount by which a government's spending exceeds its revenue in a year. A surplus is the reverse.

Used in Fiscal Policy and Government Debt.

A period of rising prices and optimism, generally when a broad market index rises 20% or more over at least two months.

Used in Bull Markets, Bear Markets, and Recoveries.

The recurring pattern of economic expansion, peak, contraction, and trough.

Used in Business Cycles and Recessions.

How a company makes money: what it sells, who pays, and how that turns into profit.

Used in Business Models and Revenue Streams.

When a company uses its own money to buy back its shares, reducing the number of shares outstanding. Also called a share repurchase.

Used in Dividends and Buybacks.

An option that gives its buyer the right to buy the underlying asset at the strike price.

Used in Calls and Puts, Options: A First Look.

A bond the issuer has the right to redeem at a set price before its stated maturity.

Used in Yield Measures.

A system that fixes the total amount of a pollutant allowed and lets firms buy and sell permits within that total, so cuts happen where they're cheapest.

The share of a business's or an economy's possible output that's actually being produced.

Used in Costs, Scale, and Profit.

The cyclically adjusted price-to-earnings ratio: the level of a stock index divided by its average earnings over the past ten years, both adjusted for inflation. It smooths out booms and recessions.

Used in Valuing the Whole Market.

How a company decides to use its cash: reinvesting in the business, buying other companies, paying down debt, paying dividends, buying back shares, or holding it.

Used in Management and Capital Allocation.

Money a company spends on long-lasting assets such as buildings, factories, and equipment. Often shortened to capex.

Used in Depreciation, Amortization, and Capital Spending, Management and Capital Allocation.

The profit when you sell an investment for more than you paid for it, adjusted for certain costs. Selling for less gives a capital loss.

Used in Realized Gains, Unrealized Gains, and Cost Basis, Taxable vs. Tax-Advantaged Accounts.

A payment a fund makes to its shareholders from profits on investments it sold. In a taxable account, it's generally taxable even if you didn't sell anything.

Used in Asset Location, Mutual Funds vs. ETFs.

The mix of borrowed money and owners' money a company uses to fund itself. More debt raises returns to shareholders in good years and risk in bad ones.

Used in Capital Structure.

A property's yearly income after operating costs, divided by its value. A lower cap rate means buyers are paying more for each dollar of income.

Used in Valuing REITs.

A brokerage account where you pay for purchases in full with your own money.

Used in Brokerage Accounts.

The number of days between a company paying for what it sells and collecting from its customers: days of inventory plus days of receivables, minus days of payables.

Used in Accruals and Working Capital.

The financial statement that shows the cash coming into and going out of a company over a period, split into operating, investing, and financing activities.

Used in The Three Financial Statements.

Selling a put while setting aside enough cash to buy the shares at the strike price if assigned.

Used in Covered Calls and Protective Puts.

An extra amount that people aged 50 or older can put into a retirement account on top of the normal yearly limit.

Used in 401(k)s and Other Workplace Plans.

A bank deposit that pays a set interest rate for a fixed term, usually with a penalty for withdrawing early.

Used in Savings Accounts, CDs, and Money Market Funds.

Pushing more product onto distributors or retailers than they need, usually with discounts or easy payment terms, so the sales land in the current period instead of a later one.

Used in Revenue Recognition.

The part of US bankruptcy law under which a company keeps operating while it agrees a plan with its creditors to reorganize its debts.

Used in Bankruptcy and Restructuring.

The part of US bankruptcy law under which a trustee sells a company's assets and uses the proceeds to pay its creditors.

Used in Bankruptcy and Restructuring.

The share of customers or subscribers who cancel during a period.

Used in Business Models and Revenue Streams.

A policy under which a company takes back pay already awarded to executives, for example when the results it was based on are later restated.

Used in Management Incentives and Corporate Governance.

A bond's quoted price, without accrued interest. The price with accrued interest added, which is what the buyer actually pays, is called the dirty or full price.

Used in How Bonds Are Quoted and Traded.

The body that stands between the two sides of every exchange trade, acting as buyer to each seller and seller to each buyer, so neither depends on the other to perform.

Owning shares, buying a put below the current price, and selling a call above it. Losses and gains are both limited.

Used in Covered Calls and Protective Puts.

An insurer's claims and running costs as a percentage of the premiums it earned. Below 100% means it made a profit on underwriting before any investment income.

Used in Reading an Insurer's Financial Statements.

A fee a broker charges for executing a trade.

Used in Settlement, Fees, and Fractional Shares.

A basic good, such as oil, wheat, copper, or gold, where one unit of a standard grade is interchangeable with another.

Used in Commodities.

The standard kind of share. It usually carries voting rights and a claim on profits after everyone else is paid.

Used in What a Stock Is.

The risk of losses from events affecting one company, such as a failed product or a lawsuit. Diversification can greatly reduce it.

Used in Company, Sector, Market, and Liquidity Risk.

Being able to produce something at a lower cost in terms of what else you give up. Trade lets each side specialize in what it gives up least to make.

Used in Trade, Tariffs, and Currencies.

Something that lets a company keep earning high profits despite competition, such as a strong brand, a patent, or lower costs than its rivals.

Used in Competitive Advantages, Value, Growth, Quality, and GARP.

The steady yearly growth rate that would take a starting value to an ending value over several years.

Used in Arithmetic and Geometric Averages, Is It Growing?.

Earning returns on your earlier returns, not only on the money you originally put in. Over time it makes growth speed up.

Used in Compounding, What Is Investing?.

The risk that comes from having a large share of a portfolio in one investment, company, industry, or country.

Used in Concentration vs. Diversification.

The tendency to seek out and interpret evidence in ways that favor what you already believe.

Used in Fact, Interpretation, and Confirmation Bias.

The average of analysts' forecasts for a company's results, compiled by financial data providers.

Used in Earnings Reports and Earnings Calls.

A market where futures contracts for later delivery cost more than those for sooner delivery. Funds that keep rolling into later contracts tend to lose value on each roll.

Used in Commodities, Commodity and Index Futures.

The price of a unit minus its variable cost: what each sale contributes toward fixed costs and then profit.

Used in Costs, Scale, and Profit.

A measure of how a bond's duration changes as yields change. Because of it, a bond's price rises a little more when yields fall than it drops when they rise by the same amount.

Used in Duration and Convexity.

Inflation measured without food and energy prices, which swing more than most other prices.

Used in Reading Economic Data Releases.

A bond issued by a company to borrow money.

Used in Treasuries, Corporate Bonds, and Munis.

The arrangements that decide how a company is directed and overseen: its board, its shareholders' voting rights, and how its executives are paid and held to account.

Used in Management Incentives and Corporate Governance.

A measure from −1 to +1 of how closely two investments move together. +1 means in step, 0 means unrelated, −1 means opposite.

Used in Correlation, Plainly, Covariance, Correlation, and Beta.

What you paid for an investment, including costs such as commissions. Your gain or loss when you sell is the sale proceeds minus the basis.

Used in Realized Gains, Unrealized Gains, and Cost Basis.

The direct cost of making or buying the products a company sold during a period, such as materials and factory labor. Also called cost of sales.

Used in Costs, Margins, and Profitability.

How much of an increase in its own costs a company can recover by raising its prices.

Inflation caused by rising production costs, such as a jump in energy prices, which push prices up while holding output back.

Used in What Drives Inflation.

The risk that the other party to a contract fails to do what it promised, such as making a payment it owes.

Used in Forwards and Swaps: An Introduction.

The interest a bond pays, usually as a fixed yearly rate on its face value, paid in installments.

Used in What a Bond Is.

A measure of how two investments' returns move together. It's positive when they tend to be above or below their averages at the same time, and negative when they tend to move in opposite directions.

Used in Covariance, Correlation, and Beta.

A term in a loan or bond agreement that restricts what the borrower may do, such as how much more it may borrow or pay out to shareholders. Breaking one can put the borrower in default.

Used in Debt, Covenants, and Credit Ratings.

Selling a call option on shares you own. You collect the premium and give up any rise above the strike price.

Used in Covered Calls and Protective Puts.

The Consumer Price Index, published by the US Bureau of Labor Statistics. It tracks the prices of a broad basket of goods and services and is a common measure of inflation.

Used in Growth, Inflation, and Interest Rates, Inflation and Purchasing Power.

A contract in which one party pays regular fees to another, which agrees to pay out if a specified borrower or debt defaults. It works like insurance on a loan, without needing to own the loan.

Used in The Major Risks of Derivatives.

A rating agency's assessment of a borrower's ability to repay, expressed as a letter grade such as AAA or BB.

Used in Debt, Covenants, and Credit Ratings, Treasuries, Corporate Bonds, and Munis.

The risk that a borrower fails to make interest or principal payments in full and on time.

Used in What a Bond Is.

The part of a credit spread that's left after expected losses from default. It's the reward for bearing credit risk.

Used in Credit Spreads.

The difference between a bond's yield and the yield of a Treasury of the same maturity. It's the extra yield paid for the risk that the issuer doesn't pay.

Used in Credit Spreads.

How much demand for one product changes when the price of another changes. It is positive for substitutes and negative for complements.

Used in Elasticity in Depth.

A digital asset that exists only electronically, with transactions recorded on a blockchain. Most aren't backed by a government.

Used in Crypto: What It Is and What Can Go Wrong.

The risk that changes in exchange rates reduce the value of a foreign investment when converted back to your own currency.

Used in Interest Rate, Inflation, and Currency Risk.

Current assets divided by current liabilities: whether a company can cover the bills due within a year.

Used in Is It Financially Strong?.

A bond's yearly coupon payment divided by its current price. It ignores any gain or loss between the price paid and the face value repaid.

Used in Yield Measures.

What a company owes divided by its shareholders' equity. Some versions use total liabilities, others only borrowed money, so check which one you're reading.

Used in Is It Financially Strong?.

When a borrower fails to make a required interest or principal payment.

Used in Credit Analysis, What a Bond Is.

Money customers have paid in advance for products or services not yet delivered. It's a liability until the company delivers, when it becomes revenue.

Used in Accruals and Working Capital, Revenue Recognition, The Balance Sheet.

A future tax saving a company has already earned, often from past losses or from costs it has recorded but can't deduct yet. It's only worth something if there are future profits to use it against.

Used in Deferred Taxes.

Tax a company has recorded as an expense but hasn't yet had to pay, usually because tax rules let it take deductions sooner than its financial statements do.

Used in Deferred Taxes.

A workplace retirement plan that promises a set monthly benefit in retirement, often based on salary and years of service. Often called a pension.

Used in How Retirement Accounts Work, Pensions and Other Long-Term Liabilities.

A workplace retirement plan, such as a 401(k), where what you end up with depends on how much goes into your account and how the investments perform.

Used in How Retirement Accounts Work.

An estimate of how much an option's premium changes when the underlying share moves by $1. Calls have a delta between 0 and 1, and puts between 0 and −1.

Used in The Greeks.

Inflation caused by total spending in the economy outrunning what it can produce, so sellers can raise prices without losing customers.

Used in What Drives Inflation.

An expense that spreads the cost of a long-lasting asset, such as a machine or building, over the years it's used.

Used in Depreciation, Amortization, and Capital Spending, The Income Statement.

A contract whose value comes from something else, called the underlying asset. Options and futures are derivatives.

Used in Options: A First Look.

The reduction in each existing shareholder's percentage of ownership when a company issues new shares.

Used in Dilution and Stock Splits, Why Companies Issue Stock, Why Earnings and Cash Differ.

The tendency for each extra unit of one input, such as labor, to add less output when other inputs, such as equipment, stay fixed.

Used in Opportunity Cost and Thinking at the Margin.

The results of a major business a company has sold, spun off, or is holding for sale, shown separately on the income statement from the businesses it's keeping.

Used in Spin-Offs and Divestitures.

The yearly return used to convert future money into today's value. It reflects a safe return plus extra return for risk.

Used in Reverse DCF, Time Value of Money and Discount Rates.

The rate at which a Treasury bill is quoted: its discount from face value, as a percentage of face value, scaled to a 360-day year. It's lower than the bill's actual yield.

Used in Treasury Auctions and Bill Yields.

A way to estimate value by forecasting the cash a business will produce and converting it into today's dollars with a discount rate.

Used in Discounted Cash Flow, Step by Step.

The tendency to sell investments that have gained too soon and hold investments that have lost too long.

Used in Loss Aversion, Anchoring, and Sunk Costs.

Spreading money across many different investments so that one bad result has a smaller effect on the whole.

Used in Risk and Return.

The sale or other disposal of a business or a large asset by the company that owns it.

Used in Spin-Offs and Divestitures.

A payment a company makes to its shareholders, usually in cash, out of its profits. Dividends are decided by the company's board and aren't guaranteed.

Used in Dividends and Buybacks, What a Stock Is.

A stock's yearly dividends per share divided by its share price, shown as a percentage.

Used in Dividend and Income Investing, Dividends and Buybacks.

Investing equal amounts at regular intervals, such as every month, regardless of the price.

Used in Dollar-Cost Averaging, Lump Sum, or Scaling In?.

The fall in value from a peak to a later low, usually shown as a percentage. The largest one over a period is called the maximum drawdown.

Used in Drawdowns and the Math of Recovery, Risk and Return.

The two goals Congress has given the Federal Reserve for monetary policy: maximum employment and stable prices.

Used in Central Banks and Monetary Policy.

A structure with two or more classes of shares, one of which carries much more voting power than the other. It's typically used to keep control with founders or insiders.

Used in Management Incentives and Corporate Governance.

A measure of how sensitive a bond's price is to interest rate changes. A duration of 6 means a price change of roughly 6% for each 1-point move in rates.

Used in Duration and the Yield Curve.

An additional 10% tax on most withdrawals from retirement accounts before age 59½, on top of regular income tax, unless an exception applies.

Used in Early Withdrawals and Required Minimum Distributions.

A company's profit over a period. Often shown per share, as earnings per share.

A company's profit divided by its number of shares. Often shortened to EPS.

Used in Shares Outstanding and Market Capitalization, The Income Statement.

A company's announcement of its results for a quarter or year, usually a press release with headline numbers, condensed financial statements, and management's comments.

Used in Earnings Reports and Earnings Calls.

Earnings per share divided by the share price: the P/E ratio turned upside down.

Used in Earnings Yield and Free Cash Flow Yield, Valuing the Whole Market.

Earnings before interest, taxes, depreciation, and amortization. A non-GAAP measure, often calculated as operating income plus depreciation and amortization.

Used in Credit Analysis, Depreciation, Amortization, and Capital Spending, GAAP and Non-GAAP Numbers, Leases, Reading a Bank's Financial Statements.

Profit after subtracting the cost of the owners' capital: what they could have earned elsewhere at similar risk. A business can show an accounting profit and still have negative economic profit.

Used in Opportunity Cost and Thinking at the Margin.

Falling cost per unit as a business produces more, usually because fixed costs are spread over more units.

Used in Costs, Scale, and Profit.

A duration figure that allows for the chance a bond's payments will change when rates move, for example because the issuer calls it.

Used in Duration and Convexity.

Tariff revenue collected divided by the value of goods imported: the average tax actually paid on imports.

Used in Trade, Tariffs, and Currencies.

The share of its pre-tax income that a company actually pays in tax: income tax divided by income before taxes.

Used in The Income Statement.

The set of portfolios that offer the highest expected return for each level of risk, given a set of estimates. Portfolios below it take risk they aren't paid for.

Used in Modern Portfolio Theory and the Efficient Frontier.

Part of your pay that you choose to put into a workplace retirement plan, such as a 401(k), instead of receiving it as wages.

Used in 401(k)s and Other Workplace Plans.

Cash set aside for unexpected costs, like a job loss or a car repair, kept somewhere safe and easy to reach.

Used in Are You Ready to Invest?, What a Portfolio Is For.

Electronic Municipal Market Access: the MSRB's free website with trade prices and disclosure documents for municipal bonds.

Used in Municipal Bonds in Depth.

Money an employer adds to your workplace retirement account based on how much you contribute, up to a limit.

Used in Employer Matches and Vesting.

An estimate of what it would cost to buy a whole company: the value of its shares plus its debt, minus its cash.

Used in Comparable Companies and Precedent Transactions, Leases, Market Cap vs. Enterprise Value, Sum-of-the-Parts Valuation.

The price at which the quantity buyers want equals the quantity sellers offer, so there's neither a shortage nor a surplus.

Used in Supply and Demand.

The extra yearly return investors expect from stocks as a whole, above what safe government bonds pay.

Used in Cost of Capital, Cost of Capital in Depth.

Exchange-traded fund: a fund whose shares trade on a stock exchange throughout the day, like a stock.

Used in Mutual Funds vs. ETFs.

Exchange-traded note: unsecured debt issued by a financial institution that promises a return linked to an index. Unlike an ETF, it doesn't hold the underlying assets.

Used in Types of ETFs.

Enterprise value divided by EBITDA. A valuation multiple that isn't affected by how much a company has borrowed.

Used in Other Multiples: P/S, P/B, and EV/EBITDA.

The first day a stock trades without the right to the next dividend. Buy on or after it, and the seller gets that dividend.

Used in Dividend and Income Investing, Dividends and Buybacks.

Using the right an option carries: buying the shares at the strike price with a call, or selling them at the strike price with a put.

The probability that a borrower defaults multiplied by the share of the money lost if it does.

Used in Credit Analysis.

The average loss in the cases that fall beyond a value-at-risk threshold. It measures how bad the bad outcomes are.

Used in Value at Risk and Expected Shortfall.

The average outcome of an uncertain choice, with each possible result weighted by its probability. It describes what you'd average over many tries, not what any one try will give.

Used in Expected Return and Standard Deviation, Probability and Expected Value.

A fund's yearly operating costs, shown as a percentage of the money invested in it.

Used in 401(k)s and Other Workplace Plans, Mutual Funds vs. ETFs, Settlement, Fees, and Fractional Shares.

The risk that borrowers repay more slowly than expected, usually when rates have risen, leaving the investor holding a low-yielding security for longer.

Used in Mortgage-Backed and Asset-Backed Securities.

A cost or benefit that falls on someone outside a transaction, such as pollution from a factory or knowledge that spills over from research.

Used in Externalities and Regulation.

The amount a bond's issuer promises to repay at maturity. Also called par value or principal.

Used in What a Bond Is.

A characteristic shared by a group of securities, such as small size or a low price compared with book value, that's been associated with returns different from the market's.

Used in Factor Exposure.

How strongly a portfolio's returns move with a factor. Also called a loading. A fund with a value exposure of 0.5 has tended to gain half a point for each point value shares beat growth shares.

Used in Factor Exposure.

A bond or issuer that was rated investment grade and has been downgraded to high yield.

Used in Credit Analysis, High-Yield Bonds.

A feature of market returns: extreme gains and losses happen much more often than a bell curve predicts.

Used in Distributions, Standard Deviation, and Fat Tails.

The Federal Deposit Insurance Corporation, a US government agency that insures deposits at member banks up to a legal limit.

Used in Keeping Your Account Safe, What Is Investing?, Who Regulates the Markets.

The interest rate banks charge each other for overnight loans. The Federal Reserve sets a target range for it, and it influences many other interest rates.

Used in Central Banks and Monetary Policy, Growth, Inflation, and Interest Rates.

The Federal Reserve committee, with 12 voting members, that sets US monetary policy, including the target range for the federal funds rate.

Used in Central Banks and Monetary Policy, Reading Economic Data Releases.

Any place, physical or electronic, where buyers and sellers trade financial assets such as stocks, bonds, or currencies.

Used in What a Financial Market Is.

The Financial Industry Regulatory Authority, a self-regulatory organization that oversees brokerage firms in the US, under SEC oversight.

Used in Who Regulates the Markets.

Government decisions about spending and taxes, and so about how much it borrows.

Used in Fiscal Policy and Government Debt.

Costs that stay roughly the same whether sales rise or fall, such as rent and salaried staff.

Used in Costs, Margins, and Profitability, Costs, Scale, and Profit.

A bond whose interest rate resets as a reference rate changes. A Treasury FRN pays the latest 13-week bill rate plus a fixed spread.

Used in Treasury Auctions and Bill Yields.

A sale of new shares by a company that is already public, after its IPO.

Used in Why Companies Issue Stock.

Fear of missing out: the urge to buy something because others seem to be profiting from it.

Used in Fear, Greed, FOMO, and Herding, Your Own Behavior Is Part of the Risk.

A private agreement to buy or sell something at a set price on a future date. It's like a futures contract without an exchange or a clearing house.

The interest rate for a period that starts in the future, worked out from today's yields. It's the rate that would make a longer bond and a string of shorter ones come out even.

Used in The Yield Curve in Depth.

Less than one full share of a stock or fund, bought by amount rather than by whole share.

Used in Settlement, Fees, and Fractional Shares.

Free cash flow per share divided by the share price: the cash a business generates each year for every dollar paid for it.

Used in Earnings Yield and Free Cash Flow Yield.

A pool of money from many investors, used to buy a collection of investments that is managed as one.

Used in Mutual Funds vs. ETFs, What Is Investing?.

The gap between the investments a pension plan holds and the present value of what it has promised to pay. A shortfall is a liability on the company's balance sheet.

Used in Pensions and Other Long-Term Liabilities.

A profit measure for property companies: net income with depreciation on real estate added back and gains or losses from selling property taken out.

Used in Valuing REITs.

An agreement to buy or sell a set amount of something, such as a commodity, at a price fixed today for a date in the future.

Used in Commodities.

Generally accepted accounting principles: the official accounting rules US companies follow in their financial statements, set by the Financial Accounting Standards Board.

Used in GAAP and Non-GAAP Numbers.

An estimate of how much an option's delta changes when the underlying share moves by $1.

Used in The Greeks.

GDP measured from the income side: the wages, profits, and other income earned from producing it. In principle it equals GDP.

Used in GDP and How It Is Measured.

A municipal bond backed by the issuing government's full faith and credit, usually meaning its power to tax.

Used in Municipal Bonds in Depth.

The single steady rate that would turn a starting value into the ending value over several periods. For returns, it describes what an investor ended up with, and it's never higher than the arithmetic average.

Used in Arithmetic and Geometric Averages.

The schedule a target-date fund follows to shift its mix from mostly stocks toward more bonds and cash over time.

Used in Target-Date Funds.

A business expected to keep operating. A going-concern warning in the financial statements means there's substantial doubt that the company can meet its obligations over the next year.

Used in Bankruptcy and Restructuring.

The amount a company paid for another business above the value of the assets it could identify. It stays on the balance sheet and is written down if the acquired business loses value.

Used in Depreciation, Amortization, and Capital Spending, Mergers and Acquisitions.

The total value of the goods and services an economy produces. Real GDP adjusts for inflation, so its growth measures how much more is actually produced.

Used in Growth, Inflation, and Interest Rates.

Revenue minus the cost of goods sold: what's left after the direct cost of making or buying what was sold.

Used in Business Models and Revenue Streams, Costs, Margins, and Profitability.

A company's own forecast of its future results, such as next year's revenue or earnings per share.

Used in Earnings Reports and Earnings Calls.

An account for medical costs, open to people covered by a qualifying high-deductible health plan, with tax benefits when money goes in, grows, and comes out for qualified expenses.

Used in Health Savings Accounts.

A private pooled investment fund, generally open only to accredited investors, that can use leverage, short selling, and other strategies, and usually limits when investors can withdraw.

Used in Alternative Investments.

Taking a position that gains when something you already own or owe loses, in order to reduce a risk you already have.

Used in Hedging with Derivatives.

Following what many other people are doing, rather than your own analysis or plan.

Used in Fear, Greed, FOMO, and Herding, Your Own Behavior Is Part of the Risk.

A measure of how concentrated a market is: the sum of the squares of each firm's percentage market share. It runs from near zero to 10,000 for a single firm.

Used in Competition and Market Structure.

A health plan whose deductible and out-of-pocket costs meet IRS limits. Being covered by one is the main requirement for contributing to an HSA.

Used in Health Savings Accounts.

Borrowing that charges a high interest rate, such as an unpaid credit card balance. Its cost often exceeds what investments can reasonably be expected to earn.

A bond rated below investment grade. It pays higher interest to make up for a higher risk of default. Also called a junk bond.

Used in Treasuries, Corporate Bonds, and Munis.

The tendency, once you know how something turned out, to believe it was more predictable than it really was.

Used in Process vs. Outcome.

How much a share's price has actually fluctuated over a past period, usually stated as the annualized standard deviation of its daily changes.

Used in Implied Volatility.

The buyer of an option, who pays the premium and has the right to exercise it. Also described as being long the option.

How long you've owned an investment. Held more than one year, a gain or loss is long-term; one year or less, short-term.

Used in Short-Term vs. Long-Term Capital Gains.

The minimum return an investment must be expected to earn to be worth making, usually the company's cost of capital.

Used in Capital Allocation Decisions.

A US savings bond whose interest rate combines a fixed rate with an inflation rate that resets every six months.

Used in Inflation-Protected Bonds: TIPS and I Bonds.

A write-down recorded when an asset is worth less than the amount it's carried at on the balance sheet. It reduces profit in that year without any cash leaving.

Used in Capital Allocation Decisions, Depreciation, Amortization, and Capital Spending, Mergers and Acquisitions.

The volatility that makes a pricing model's value for an option equal its market price. It's the market's estimate, built into the premium, of how much the share will move.

Used in Implied Volatility.

How much spending on a product changes when income changes, in percentage terms. Between 0 and 1 marks a necessity; above 1, a luxury.

Used in Elasticity in Depth.

The financial statement that shows a company's revenue, costs, and profit over a period, such as a year or a quarter. Also called the statement of earnings or statement of operations.

Used in The Three Financial Statements.

A fund that tries to match the return of a particular market index, before fees, by holding the securities in that index or a sample of them.

Used in Index Funds, Passive vs. Active Investing.

A narrower group of companies that make similar products or services and compete for the same customers.

Used in Industries, Sectors, and Competition.

A general rise in prices over time. When prices rise, the same amount of money buys less.

Used in Growth, Inflation, and Interest Rates, Inflation and Purchasing Power, What Is Investing?.

The risk that rising prices erode what your money and your investment returns can buy.

Used in Interest Rate, Inflation, and Currency Risk.

Extra yield that buyers of ordinary bonds demand for bearing the risk that inflation turns out different from what they expect.

Used in Real Yields and Breakeven Inflation.

The deposit required to open a futures position, set by the exchange or clearing house. It's a performance bond, not a down payment.

Money paid for the use of money. A bank pays you interest on savings, and you pay interest on a loan.

Used in What Is Investing?.

Operating income divided by interest expense: how many times over a company's profits could pay its interest bill.

Used in Capital Structure, Credit Analysis, Is It Financially Strong?.

The risk that rising interest rates lower the price of bonds you already own. Longer-term bonds carry more of it.

Used in Interest Rate, Inflation, and Currency Risk, What a Bond Is.

A swap in which one party pays a fixed interest rate and the other a floating rate, both calculated on the same notional amount, which itself never changes hands.

Used in Forwards and Swaps: An Introduction.

The discount rate at which an investment's net present value is zero. It's the yearly return the cash flows work out to.

Used in Investing Math in a Spreadsheet.

What a business is worth to an owner, based on the cash it can produce over its life, adjusted for when that cash arrives and how uncertain it is. It can only be estimated, as a range.

Used in Price vs. Value.

Materials, unfinished products, and finished goods a company holds for making and selling.

Used in Accruals and Working Capital, The Balance Sheet.

An ETF designed to deliver the opposite of an index's return for a single day.

Used in Leveraged and Inverse ETFs.

When short-term interest rates are higher than long-term rates, the reverse of the usual pattern.

Used in Duration and the Yield Curve.

Putting money into assets you expect to produce income or grow in value over time, while accepting that their value can fall.

Bonds rated BBB or higher by S&P and Fitch, or Baa3 or higher by Moody's, considered more likely to be paid on time.

Used in Treasuries, Corporate Bonds, and Munis.

A short written plan setting out a portfolio's goals, time horizon, intended mix, and the rules for maintaining it.

A Treasury bill's return measured on the price paid and a 365-day year, so it can be compared with the yields of notes and bonds.

Used in Treasury Auctions and Bill Yields.

Initial public offering: the first time a company sells its shares to the general public.

Used in What a Financial Market Is, Why Companies Issue Stock.

An individual retirement arrangement: a retirement account you open yourself, separate from any employer, with tax advantages.

Used in How Retirement Accounts Work.

Everyone who is either employed or unemployed, meaning without a job but available and actively looking. People who aren't looking, such as retirees and full-time students, are outside it.

Used in The Labor Market in Depth.

Output per hour of work: the goods and services produced compared with the hours used to produce them.

Used in Productivity and Long-Run Growth.

An economic series that has tended to turn before the economy as a whole, such as building permits, jobless claims, or new orders. Coincident indicators move with the economy and lagging ones turn after it.

Used in Leading Indicators and Recession Signals.

What a company owes under a lease, measured as the present value of the payments it has committed to make.

Used in Leases.

Using borrowed money to increase the size of an investment. It magnifies both gains and losses.

Used in Capital Structure, Margin and Short Selling, What Investment Risk Really Means.

An ETF designed to deliver a multiple, such as two or three times, of an index's return for a single day.

Used in Leveraged and Inverse ETFs.

What a company owes to others, such as loans, bills from suppliers, wages, taxes, and goods or services it has been paid for but not yet delivered.

Used in The Three Financial Statements.

An order to buy or sell only at a set price or better. The price is controlled, but the order may never fill.

Used in Order Types: Market, Limit, and Stop, Scaling Into a Position.

The rule that a shareholder can't lose more than they invested in a company's stock, even if the company fails with large debts.

Used in What a Stock Is.

How easily something can be bought or sold quickly, at a fair price, without moving that price much.

Used in What a Financial Market Is.

The risk of not being able to buy or sell an investment quickly, or without accepting a much worse price.

Used in Company, Sector, Market, and Liquidity Risk.

An agreement that stops company insiders from selling their shares for a set period after an IPO.

Used in Why Companies Issue Stock.

A chart axis on which equal distances stand for equal percentage changes, so the gap from 1 to 10 is as tall as the gap from 100 to 1,000. Steady growth shows as a straight line.

Used in Reading Charts Honestly.

The tendency to feel a loss more strongly than a gain of the same size.

Used in Loss Aversion, Anchoring, and Sunk Costs, Your Own Behavior Is Part of the Risk.

Investing an entire available amount at once, instead of spreading it out over time.

A broad US measure of money: currency and readily available deposits (M1), plus small time deposits and retail money market fund balances.

Used in Money, Banking, and Credit.

The average time, in years, until a bond's payments arrive, with each payment weighted by its share of the bond's present value.

Used in Duration and Convexity.

The level a futures account must stay above. If losses take it below, the trader must add money to restore the initial margin.

A brokerage account that lets you borrow money from the firm to buy securities, using your investments as collateral.

Used in Brokerage Accounts, Margin and Short Selling.

A demand from your broker to add money or securities because your account has fallen below the required level of equity.

Used in Margin and Short Selling.

The gap between the price you pay and your estimate of value, kept as protection against errors and bad luck.

Used in Adding to Winners and Averaging Down, Margin of Safety and Valuation Ranges, Value, Growth, Quality, and GARP.

Comparing the extra benefit of one more unit or step with its extra cost, and taking the step only if the benefit is larger.

Used in Opportunity Cost and Thinking at the Margin.

The extra cost of producing one more unit.

Used in Costs, Scale, and Profit.

The rate of tax on your next dollar of income. Because of tax brackets, it's usually higher than the average rate you pay on all your income.

Used in Traditional vs. Roth.

A company's total market value: the share price multiplied by the number of shares outstanding. Often shortened to market cap.

Used in Shares Outstanding and Market Capitalization.

A number that tracks the combined performance of a defined group of securities, such as 500 large US companies.

Used in Market Indexes: What "The Market" Means.

A firm that stands ready to buy and sell a security at publicly quoted prices, helping keep trading continuous.

Used in Exchanges, Buyers, and Sellers.

An order to buy or sell immediately at the best available price. It will almost always fill, but the price isn't guaranteed.

Used in Order Types: Market, Limit, and Stop.

The risk that most investments fall together because of something affecting the whole market, such as a recession. Diversifying within stocks can't remove it.

Used in Company, Sector, Market, and Liquidity Risk.

The portion of all sales in a market that one company wins: its sales divided by the market's total sales.

Used in Industries, Sectors, and Competition.

An index design where larger companies, measured by total market value, have more influence on the index.

Used in Market Indexes: What "The Market" Means.

Valuing a position at the day's closing price and settling the gain or loss in cash, as futures accounts are every trading day.

The amount a dealer adds to a bond's price when selling it to a customer from its own holdings. A markdown is the amount taken off when buying from a customer.

Used in How Bonds Are Quoted and Traded.

The ratio of a product's price to the cost of producing one more unit of it. A higher markup means more pricing power.

The date when a bond ends and the issuer repays its face value.

Used in What a Bond Is.

What banks do when they fund long-term loans with deposits that can be withdrawn at any time. It's useful and it's the source of banks' liquidity risk.

Used in Money, Banking, and Credit.

The largest fall from a peak to a later low over a period, as a percentage of the peak.

Used in Sharpe, Sortino, and Maximum Drawdown.

The middle value of a set of numbers lined up in order. Half are above it and half below. Unlike the average, it isn't moved by a few extreme values.

Used in Distributions, Standard Deviation, and Fat Tails.

Investors' nickname for a durable competitive advantage that protects a company's profits from competitors.

Used in Competitive Advantages.

The risk of loss because a model used to price or manage positions is wrong, often because it assumes the future will resemble the data it was built on.

Your adjusted gross income with certain amounts added back. For IRAs, it decides whether you can contribute to a Roth or deduct a traditional contribution.

Used in IRAs.

The approximate percentage change in a bond's price for a one-percentage-point change in its yield. It's the Macaulay duration divided by one plus the yield per period.

Used in Duration and Convexity.

A bank account, insured by the FDIC up to legal limits, that typically pays interest at money market rates.

Used in Savings Accounts, CDs, and Money Market Funds.

A mutual fund that invests in very short-term, high-quality debt. It aims to be stable but isn't FDIC-insured and can lose money.

Used in Savings Accounts, CDs, and Money Market Funds.

The total amount of money in an economy, measured in the US by aggregates such as M1 and M2, which consist mostly of bank deposits.

Used in Money, Banking, and Credit.

A market with a single seller, or one dominant enough to set prices with little regard to competitors.

Used in Competition and Market Structure.

A way of exploring an uncertain outcome by generating thousands of random possible paths and looking at the spread of results. Its answers depend on the assumptions used to generate the paths.

Used in Simulating a Portfolio's Future.

The tendency to take more risk or less care when someone else bears the consequences, such as after buying full insurance.

Used in Information, Incentives, and Moral Hazard.

A bond backed by a pool of home loans. Investors receive the homeowners' payments of interest and principal, passed through each month.

Used in Mortgage-Backed and Asset-Backed Securities.

A bond issued by a state, city, or other local government. Its interest is often exempt from federal income tax.

Used in Treasuries, Corporate Bonds, and Munis.

A fund that pools investors' money and buys and sells its shares directly with investors, at a price set once each business day.

Used in Mutual Funds vs. ETFs.

A set of choices in a game in which no player can do better by changing their own choice while the others keep theirs. It need not be the best outcome for the players as a group.

Used in Game Theory and Strategic Rivals.

The total a government owes from past borrowing: the accumulation of its deficits, less its surpluses.

Used in Fiscal Policy and Government Debt.

When a bond's price rises less as yields fall than it drops as they rise. It's typical of bonds that can be repaid early, such as callable bonds and mortgage securities.

Used in Duration and Convexity, Mortgage-Backed and Asset-Backed Securities.

A fund's total assets minus its liabilities. Divided by the number of fund shares, it gives the value of one share.

Used in Mutual Funds vs. ETFs.

The profit left for shareholders after all costs, interest, and taxes. Also called net earnings, or the bottom line.

Used in Costs, Margins, and Profitability.

What a bank earns in interest on its loans and investments, less what it pays on deposits and other borrowing, as a percentage of its interest-earning assets.

Used in Reading a Bank's Financial Statements.

The present value of the cash an investment is expected to bring in, less what it costs today. Positive means it's expected to earn more than the discount rate.

Used in Investing Math in a Spreadsheet.

Recurring revenue from the customers a company had a year ago, including what they added and after what they cut or cancelled, as a percentage of what they were paying then.

Used in Software and Subscription Metrics.

When a product becomes more valuable to each user as more people use it, as with marketplaces and payment networks.

Used in Competitive Advantages.

When each additional user makes a product more valuable to other users. Direct network effects come from users on the same side; indirect ones from users on another side of a platform.

Used in Network Effects and Platforms.

The return in plain dollars, before accounting for inflation.

Used in Inflation and Purchasing Power, Real Yields and Breakeven Inflation.

A bid in a Treasury auction that names an amount and accepts whatever rate the auction sets. A competitive bid names the rate the bidder will accept.

Used in Treasury Auctions and Bill Yields.

A financial figure that doesn't follow the official accounting rules, usually a GAAP number with items added or removed, such as adjusted earnings or adjusted EBITDA.

Used in GAAP and Non-GAAP Numbers.

A REIT that reports to the SEC but whose shares don't trade on a stock exchange. Its shares can be hard to sell and hard to value.

Used in REITs.

The number of jobs on the payrolls of US businesses and government agencies outside farming, estimated each month by the Bureau of Labor Statistics from a survey of employers. Its monthly change is the headline figure of the jobs report.

Used in Reading Economic Data Releases.

The bell curve: a pattern in which most results fall near the average, fewer fall further away, and both sides look the same. About 68% of results fall within one standard deviation of the average and about 95% within two.

Used in Distributions, Standard Deviation, and Fat Tails.

The full value of what a derivative contract covers, such as the price times the quantity in a futures contract, as opposed to the money posted to hold it.

Nationally recognized statistical rating organization: a credit rating agency registered with the SEC.

Used in Credit Analysis.

A market dominated by a few large firms, each of which has to take the others' likely reactions into account.

Used in Competition and Market Structure.

The costs of running a company that aren't tied directly to making each product, such as research, marketing, and office salaries.

Used in Costs, Margins, and Profitability.

Gross profit minus operating expenses: the profit from a company's core business, before interest and taxes.

Used in Costs, Margins, and Profitability.

The way fixed costs make a company's profit rise and fall faster than its sales.

Used in Capital Structure, Costs, Margins, and Profitability, Energy and Commodity Producers.

What you give up by choosing one use of money over the next-best alternative.

Used in Opportunity Cost and Thinking at the Margin, Scaling Out and Reasons to Sell.

A contract that gives its buyer the right, but not the obligation, to buy or sell an asset at a set price on or before a set date.

Used in Options: A First Look.

A credit spread calculated after allowing for features such as the issuer's right to call the bond, so that bonds with and without those features can be compared.

Used in Credit Spreads.

A deep dive you can skip without missing anything that later core lessons depend on.

Used in How Hyperion Entities Works.

Growth from a company's existing business, not counting revenue added by buying other companies.

Used in Where Growth Comes From.

The amount by which a bond's price at issue is below what it repays at maturity. US tax rules treat it as interest earned gradually over the bond's life.

Used in Zero-Coupon Bonds and STRIPS.

Being more certain of your own judgment than the evidence supports. In investing, it often shows up as trading too much.

Used in Overconfidence, Recency, and Narrative Bias.

The CPI's measure of the cost of shelter for people who own their homes: the rent the home would fetch, estimated from rents of similar rental units. House prices themselves aren't in the CPI.

Used in Measuring Inflation: CPI and PCE.

The coupon rate a new bond of a given maturity would need for it to be priced exactly at face value. The Treasury's published yield curve is a curve of par yields.

Used in The Yield Curve in Depth.

An approach that aims to match a market index rather than beat it, usually with little trading.

Used in Index Funds, Passive vs. Active Investing.

A legal right, granted by the government for a limited time, that stops others from making, using, or selling an invention without permission.

Used in Competitive Advantages.

Money a market maker pays a broker for sending it customers' orders to fill.

Used in Exchanges, Buyers, and Sellers.

The share of a company's earnings paid out as dividends: dividends per share divided by earnings per share.

Used in Dividend Policy, Dividend and Income Investing.

The price index for personal consumption expenditures, published by the US Bureau of Economic Analysis. The Federal Reserve defines its 2% inflation goal using this index.

Used in Reading Economic Data Releases.

The P/E ratio divided by the expected yearly earnings growth rate in percent. A rough way to compare companies growing at different speeds.

Used in Earnings Multiples: P/E and PEG, Value, Growth, Quality, and GARP.

The unit for the plain difference between two percentages. A rate that goes from 4% to 5% has risen by one percentage point, which is a 25% increase.

Used in Percentages and Percentage Points.

A promise in a contract to hand over a distinct good or service to a customer. A company records revenue as each one is kept.

Used in Revenue Recognition.

Money that is lost for good, for example when a company fails. Different from a temporary drop in price that later recovers.

Used in Risk and Return, What Investment Risk Really Means.

A series of payments that continues forever. A level perpetuity is worth the payment divided by the discount rate.

Used in Present Value and Future Value Formulas.

A recommendation about what you specifically should do with your money, based on your own situation. Hyperion Entities doesn't provide it.

Used in How Hyperion Entities Works.

Income that's taxed in a year when no cash was received, such as the interest that builds up inside a zero-coupon bond.

Used in Zero-Coupon Bonds and STRIPS.

Messages that impersonate a trusted company to trick you into revealing passwords or personal information. Smishing uses text messages; vishing uses phone calls.

Used in Keeping Your Account Safe.

Everything you've invested, across all your accounts, considered together as one collection.

Used in What a Portfolio Is For.

The gradual change in a portfolio's mix as some holdings grow faster than others.

Used in Portfolio Drift and Rebalancing.

How much you own of a single investment, often described as a share of your whole portfolio.

Used in Position Sizing.

A class of shares that usually pays dividends before common stock and ranks ahead of it if the company is liquidated, but usually has no voting rights.

The price an option's buyer pays its seller. For a standard stock option, the quoted premium is per share and one contract covers 100 shares.

Used in Calls and Puts, Options: A First Look.

When an ETF trades above the value of its holdings per share, it's at a premium. Below, it's at a discount.

Used in Mutual Funds vs. ETFs.

The risk that borrowers repay their loans earlier than expected, usually when rates have fallen, so the investor gets money back at the worst time to reinvest it.

Used in Mortgage-Backed and Asset-Backed Securities.

The process by which buyers and sellers, through their trades, arrive at a market price.

Used in What a Financial Market Is.

How strongly the quantity people buy responds to a change in price: the percentage change in quantity divided by the percentage change in price.

Used in Elasticity in Depth, Supply and Demand.

An investment's return from price changes alone, ignoring any dividends or interest paid.

Used in Market Indexes: What "The Market" Means.

A company's share price divided by its earnings per share: how many dollars investors pay for each dollar of yearly profit.

Used in Earnings Multiples: P/E and PEG, Value, Growth, Quality, and GARP.

An index design where stocks with higher share prices have more influence, regardless of company size.

Used in Market Indexes: What "The Market" Means.

A company's ability to raise prices without losing many customers.

Used in Competitive Advantages.

A government's deficit before counting the interest it pays on its debt.

Used in Fiscal Policy and Government Debt.

Where newly created securities are sold to investors, and the issuer receives the money.

Used in What a Financial Market Is.

A game in which each player's best individual choice leads to an outcome worse for everyone than if they had cooperated, as when rival firms each cut prices.

Used in Game Theory and Strategic Rivals.

Investing in companies whose shares don't trade on a public exchange, often by buying whole companies or large stakes in them.

Used in Alternative Investments.

The secret code that controls a crypto wallet. Whoever has it can move the crypto, and if it's lost, access to the crypto can be lost for good.

Used in Crypto: What It Is and What Can Go Wrong.

A sale of securities that isn't registered with the SEC. Buyers get less information than in a public offering and often can't resell for a long time.

Used in Alternative Investments.

The document a company files and gives investors when it offers securities, describing the business, its finances, and the risks.

Used in Why Companies Issue Stock.

Buying a put option on shares you own. It sets a floor under their value until the put expires, at the cost of the premium.

Used in Covered Calls and Protective Puts.

The oil, gas, or minerals a producer can be reasonably certain of extracting at a profit under current conditions. The figure is an estimate and changes with prices.

Used in Energy and Commodity Producers.

A document a public company sends shareholders before its annual meeting. It covers the matters up for a vote, and details executive pay and the shares directors and officers own.

Used in Management and Capital Allocation.

A good that one person's use doesn't use up and from which it's hard to exclude anyone, such as national defense. Private markets tend to supply too little of it.

Used in Externalities and Regulation.

How much a given amount of money can actually buy. Inflation reduces it.

Used in Inflation and Purchasing Power, What Is Investing?.

An option that gives its buyer the right to sell the underlying asset at the strike price.

Used in Calls and Puts, Options: A First Look.

A dividend that meets IRS conditions, including a minimum holding period, and is taxed at the lower long-term capital gains rates.

Used in How Dividends and Interest Are Taxed.

How far a company's reported profit can be relied on: whether it's backed by cash, likely to repeat, and based on cautious estimates.

Used in Quality of Earnings.

A central bank buying large amounts of bonds or other assets to add money to the economy and push down longer-term interest rates.

Used in Money, Banking, and Credit, The Federal Reserve's Toolkit.

A central bank shrinking its balance sheet, usually by letting bonds it holds mature without replacing them. It is the reverse of quantitative easing.

Used in The Federal Reserve's Toolkit.

GDP adjusted for changes in prices, so that it measures changes in the quantity of goods and services produced.

Used in GDP and How It Is Measured.

The return after accounting for inflation. It shows how much more your money can actually buy.

Used in Inflation and Purchasing Power.

A bond's yield after inflation. The yield quoted on TIPS is a real yield: the return above whatever inflation turns out to be.

Used in Real Yields and Breakeven Inflation.

A gain you've locked in by selling. In a taxable account, realized gains are generally taxed for the year of the sale.

Used in Realized Gains, Unrealized Gains, and Cost Basis.

Bringing a portfolio back to its intended mix by selling some of what has grown and buying more of what has lagged, or by directing new money.

Used in Portfolio Drift and Rebalancing.

Giving too much weight to what happened recently and assuming it will continue.

Used in Overconfidence, Recency, and Narrative Bias, Your Own Behavior Is Part of the Risk.

A significant decline in economic activity, spread across the economy, that lasts more than a few months. US recessions are dated by the NBER.

Used in Business Cycles and Recessions.

The date by which you must be on a company's books as a shareholder to receive a declared dividend.

Used in Dividends and Buybacks.

The share of what they were owed that lenders get back after a default.

Used in Credit Analysis.

Revenue that repeats on a regular schedule, such as subscription payments, instead of coming from one-time sales.

Used in Business Models and Revenue Streams.

The risk that interest payments, or money returned early when a bond is called, can only be reinvested at a lower rate.

A real estate investment trust: a company that owns, and usually operates, income-producing real estate or related assets such as mortgages. To keep its special tax status, it must pay out at least 90% of its taxable income as dividends each year.

Used in REITs.

A component's weight in a price index, expressed as its share of total spending in the index. In the CPI, shelter's relative importance is over a third.

Used in Measuring Inflation: CPI and PCE.

The smallest amount you must withdraw each year from most retirement accounts once you reach a certain age.

Used in Early Withdrawals and Required Minimum Distributions.

All the profit a company has earned since it began, minus all the dividends it has paid. It's part of shareholders' equity, not a cash balance.

Used in The Balance Sheet.

What an investment gains or loses over a period, including any income it pays. Usually shown as a percentage of the amount invested.

Used in What Is Investing?.

Net income divided by average total assets: how much profit a company earns on everything it owns.

Used in Is It Profitable?.

Net income divided by average shareholders' equity: how much profit a company earns on its owners' stake. Debt can push it up without the business improving.

Used in Is It Profitable?.

After-tax operating income divided by the money supplied by lenders and shareholders together. Definitions vary; a common one is debt plus equity minus cash.

Used in Capital Structure, Is It Profitable?, Value, Growth, Quality, and GARP.

The money a company brings in from selling its products and services, before any costs are subtracted. Also called sales, or the top line.

Used in Business Models and Revenue Streams, Revenue Recognition.

A municipal bond repaid only from the income of the project or system it finances, such as tolls or water charges.

Used in Municipal Bonds in Depth.

One distinct source of a company's revenue, such as product sales, subscriptions, or fees.

Used in Business Models and Revenue Streams.

A reduction in the number of shares, with each share worth proportionally more. The total value doesn't change.

Used in Dilution and Stock Splits.

An estimate of how much an option's premium changes when interest rates change by one percentage point.

Used in The Greeks.

The asset a company records for its right to use a leased item, such as a store or an aircraft, over the term of the lease.

Used in Leases.

In investing, the chance that results turn out differently from what you expected, including the chance of losing money.

Used in Risk and Return.

How much loss your finances can actually absorb, based on factors like your time horizon, income, and savings.

Used in Time Horizon and Risk Tolerance, What a Portfolio Is For.

A way of building a portfolio so that each asset class contributes the same amount of risk, which means holding more of the less volatile ones.

Used in Risk Parity and Other Portfolio Approaches.

How much uncertainty and how large a drop in value you can live with emotionally without abandoning your plan.

Used in Time Horizon and Risk Tolerance, What a Portfolio Is For.

The gain or loss from closing an expiring futures contract and opening one with a later delivery date at a different price.

Used in Commodity and Index Futures.

The price gain a bond earns as it ages and moves to a lower-yielding point on an upward-sloping yield curve, if the curve itself doesn't change.

Used in The Yield Curve in Depth.

Moving money from one retirement account to another, such as from an old employer's 401(k) to an IRA, without it being taxed as a withdrawal.

Used in Rollovers and Changing Jobs.

A retirement account funded with money that has already been taxed, where qualified withdrawals can be tax-free.

Used in Taxable vs. Tax-Advantaged Accounts.

Moving money from a traditional retirement account into a Roth account. You pay income tax on the amount you convert.

Used in Traditional vs. Roth.

A shortcut for estimating how long money takes to double: divide 72 by the yearly growth rate. At 6% a year, about 12 years.

Used in Compounding.

A sales charge some mutual funds take when you buy or sell shares, typically to compensate the broker who sold them.

Used in Mutual Funds vs. ETFs.

The difference between an estimate based on a sample and the true figure for the whole population, which arises because only part of the population was surveyed.

Used in Reading Economic Data Releases.

An advisory vote in which shareholders approve or reject the pay of a company's top executives. The result isn't binding on the board.

Used in Management Incentives and Corporate Governance.

Building a position in several planned purchases, often with limit orders below the current price, instead of all at once.

Used in Scaling Into a Position.

A way for the less-informed side to sort the other side, such as an insurer offering a menu of deductibles and premiums.

Used in Information, Incentives, and Moral Hazard.

Removing the pattern that repeats at the same time each year, such as holiday hiring, so that changes from one month or quarter to the next can be compared.

Used in Reading Economic Data Releases.

The U.S. Securities and Exchange Commission, the federal agency that regulates securities markets.

Used in Who Regulates the Markets.

Where existing securities are traded between investors. The company that issued them doesn't receive the money.

Used in What a Financial Market Is.

A broad group of companies in related lines of business, such as energy, health care, or financials.

Used in Company, Sector, Market, and Liquidity Risk, Industries, Sectors, and Competition.

A fund that invests in a single part of the economy, such as technology, energy, or healthcare.

Used in Types of ETFs.

A non-government body that writes and enforces rules for its members, under government oversight. FINRA and the stock exchanges are examples.

Used in Who Regulates the Markets.

The risk that bad returns arrive at the wrong time, especially early in a period of regular withdrawals, doing lasting damage.

Used in Sequence Risk.

The final step of a trade, when the securities and money actually change hands.

Used in Settlement, Fees, and Fractional Shares.

Someone who owns shares of a company. Also called a stockholder.

A company's assets minus its liabilities: the owners' stake, as measured by the accounting rules. Also called book value.

Used in The Three Financial Statements.

The total number of a company's shares held by all its shareholders.

Used in Shares Outstanding and Market Capitalization.

An investment's return above a risk-free rate, divided by the standard deviation of that excess return. It measures return earned for each unit of risk.

Used in Sharpe, Sortino, and Maximum Drawdown.

Selling borrowed shares in the hope of buying them back later at a lower price. Losses are unlimited if the price keeps rising.

Used in Margin and Short Selling.

A costly action by the better-informed side of a deal to show its quality, such as offering a long warranty.

Used in Information, Incentives, and Moral Hazard.

The Securities Investor Protection Corporation. If a member brokerage firm fails, it helps return customers' missing cash and securities, up to limits. It does not protect against market losses.

Used in Keeping Your Account Safe, Who Regulates the Markets.

The Secured Overnight Financing Rate: a measure of the cost of borrowing cash overnight against Treasury securities, published daily by the Federal Reserve Bank of New York.

Used in Forwards and Swaps: An Introduction.

Like the Sharpe ratio, but dividing by downside deviation, which counts only results that fall short of a target.

Used in Sharpe, Sortino, and Maximum Drawdown.

A one-off dividend paid in addition to, or instead of, a company's regular dividend, with no commitment to repeat it.

Used in Dividend Policy.

Buying something mainly in the hope that someone will later pay a higher price for it, rather than for the income or value it produces.

Used in What Is Investing?.

When a parent company distributes shares of a subsidiary to its own shareholders, turning one company into two separately traded ones.

Used in Spin-Offs and Divestitures.

The price for buying something now, for immediate delivery, as opposed to a futures price for delivery later.

Used in Commodities.

The yield on a single payment due on one future date, with nothing paid in between. It's the yield of a zero-coupon bond of that maturity.

Used in The Yield Curve in Depth.

A measure of how spread out a set of returns is around its average. In investing, it is the most common measure of volatility.

Used in Arithmetic and Geometric Averages, Distributions, Standard Deviation, and Fat Tails, Expected Return and Standard Deviation, Risk and Return.

A share of ownership in a company. Also called a share or equity.

Used in What Is Investing?, What a Stock Is.

A regulated marketplace where buy and sell orders for listed securities are matched.

Used in Exchanges, Buyers, and Sellers.

A filter that narrows a large list of companies to those that meet chosen criteria, such as minimum growth or maximum debt.

Used in Finding Ideas Worth Researching.

An increase in the number of shares, with each share worth proportionally less. The total value doesn't change.

Used in Dilution and Stock Splits.

Pay given to employees in shares or options instead of cash. It's recorded as an expense and paid for by existing shareholders through dilution.

Used in Stock-Based Compensation.

An order that becomes a market order once the price reaches a set level, called the stop price. Often used to limit losses.

Used in Order Types: Market, Limit, and Stop.

An order that becomes a limit order once the stop price is reached, so it won't fill below (or above) the limit.

Used in Order Types: Market, Limit, and Stop.

The price at which an option's holder can buy (for a call) or sell (for a put) the underlying asset.

Used in Calls and Puts, Options: A First Look.

Separate Trading of Registered Interest and Principal of Securities: zero-coupon securities made by splitting a Treasury note or bond into its individual interest and principal payments.

Used in Zero-Coupon Bonds and STRIPS.

Money already spent that can't be recovered. It shouldn't affect decisions about the future, though it often does.

Used in Adding to Winners and Averaging Down, Loss Aversion, Anchoring, and Sunk Costs, Opportunity Cost and Thinking at the Margin.

The relationship between how much of something buyers want at each price and how much sellers offer at each price. Where the two meet sets the market price.

The difference between a released economic figure and the forecasts made before it. Since forecasts are already reflected in prices, markets respond mainly to the surprise.

Used in Reading Economic Data Releases.

A private contract in which two parties exchange streams of payments, such as fixed interest for floating interest, on an agreed amount for an agreed period.

Used in Forwards and Swaps: An Introduction.

The cost, effort, or risk a customer faces in changing to a competitor's product. High switching costs keep customers in place.

Used in Competitive Advantages.

The extra profit two companies are expected to earn together beyond what they earn apart, from cost savings or added sales.

Used in Mergers and Acquisitions.

The risk that the failure of one firm or market spreads to others and disrupts the financial system as a whole.

Used in The Major Risks of Derivatives.

A fund built around a planned retirement year that automatically becomes more conservative as that year approaches.

Used in Target-Date Funds.

A tax on imported goods, paid by the importer when the goods enter the country.

Used in Trade, Tariffs, and Currencies.

A range of taxable income taxed at one rate. Each rate applies only to the income within its range, not to all your income.

Used in Short-Term vs. Long-Term Capital Gains.

An account with special tax treatment, such as an IRA or 401(k), that can reduce or delay taxes on investment growth.

Used in Taxable vs. Tax-Advantaged Accounts.

Growth that is not taxed each year, with tax paid later, usually when money is withdrawn.

The yield a taxable bond would need for its after-tax income to match a tax-exempt bond's: the tax-exempt yield divided by one minus the investor's tax rate.

Used in Municipal Bonds in Depth.

Selling investments at a loss to realize capital losses that can offset gains, and up to a limit, other income.

Used in Capital Losses, Tax-Loss Harvesting, and Wash Sales.

An offer made directly to shareholders to buy their shares at a stated price within a set period. Companies use one to buy back their own shares in a single step, and buyers use one to gain control of another company.

Used in When Buybacks Create Value.

The extra return investors expect for holding a long-term bond in place of a series of short-term ones over the same period.

Used in The Yield Curve in Depth.

In a DCF, the value of all cash flows after the forecast years, usually estimated by assuming steady growth forever.

Used in Discounted Cash Flow, Step by Step.

A specific, observable development that would show your reason for owning an investment no longer holds.

Used in Adding to Winners and Averaging Down, Monitoring Positions and Revisiting a Thesis, Scaling Out and Reasons to Sell.

An estimate of how much an option's premium falls each day from the passing of time alone.

Used in The Greeks.

How long you expect to keep money invested before you need to use it.

Used in Are You Ready to Invest?, Time Horizon and Risk Tolerance, What Is Investing?, What a Portfolio Is For.

Treasury Inflation-Protected Securities: Treasury bonds whose principal rises and falls with inflation, as measured by the CPI.

Used in Inflation-Protected Bonds: TIPS and I Bonds.

Output compared with a broad combination of inputs, including labor and capital. Its growth is the part of output growth that more inputs don't explain, where improvements in technology and methods show up.

Used in Productivity and Long-Run Growth.

An investment's return including both price changes and income such as dividends, assuming the income is reinvested.

Used in Dividend and Income Investing, Market Indexes: What "The Market" Means, What a Stock Is.

The return from holding a share over a period: the change in its price plus the dividends paid.

Used in Management Incentives and Corporate Governance.

The Trade Reporting and Compliance Engine: FINRA's system to which broker-dealers must report over-the-counter trades in eligible bonds.

Used in How Bonds Are Quoted and Traded.

The gap between a fund's return and the return of the index it follows over a period. Fees usually make it slightly negative.

Used in How to Read an ETF.

The standard deviation of the difference between a portfolio's returns and its benchmark's. It measures how far the portfolio strays from the benchmark.

Used in Alpha and Benchmark Selection.

A country's exports minus its imports. A negative balance is a trade deficit.

Used in Trade, Tariffs, and Currencies.

A retirement account where contributions may reduce your taxes now, and withdrawals are generally taxed later.

Used in Taxable vs. Tax-Advantaged Accounts.

One of several classes of bonds issued against the same pool of loans, each with its own claim on the payments and its own level of risk.

Used in Mortgage-Backed and Asset-Backed Securities.

Bills, notes, and bonds issued by the US Treasury to borrow money for the federal government.

Used in Treasuries, Corporate Bonds, and Munis.

A login that requires a second proof of identity, such as a one-time code, in addition to your password.

Used in Keeping Your Account Safe.

The broadest US unemployment measure. It adds to the unemployed those who want work but have stopped looking recently and those working part time who want full-time work.

Used in The Labor Market in Depth.

An option sold by someone who doesn't hold the offsetting position, such as a call sold without owning the shares.

An investment bank that helps a company sell new securities, including setting the price and finding buyers.

Used in Why Companies Issue Stock.

The share of the labor force (people working or looking for work) who have no job and are available for and looking for one. In the US it comes from a monthly survey of households.

Used in Reading Economic Data Releases.

The labor cost of producing one unit of output. They rise with pay per hour and fall with output per hour.

Used in Productivity and Long-Run Growth.

An increase in value on an investment you still own. It isn't taxed until you sell. Also called a paper gain.

Used in Realized Gains, Unrealized Gains, and Cost Basis.

A reduction in a deferred tax asset, recorded when the company probably won't earn enough to use all of it.

Used in Deferred Taxes.

What a business adds to the value of its inputs: the value of its output minus the cost of the goods and services it bought to make it.

Used in GDP and How It Is Measured.

A loss that a portfolio is expected to exceed only on a stated share of days or years, such as 1 in 100. It marks where the worst outcomes begin and says nothing about how large they are.

Used in Value at Risk and Expected Shortfall.

A stock that looks cheap on its valuation multiples but stays cheap, or gets cheaper, because the low price reflects real problems.

Used in Why Cheap Isn't Always Undervalued.

Costs that rise and fall with how much a company sells, such as materials and shipping.

Used in Costs, Margins, and Profitability, Costs, Scale, and Profit.

The average squared distance of results from their average. Its square root is the standard deviation. Portfolio formulas use variance because variances can be added together.

Used in Expected Return and Standard Deviation.

An estimate of how much an option's premium changes when implied volatility changes by one percentage point.

Used in The Greeks.

Ownership of the money in a workplace retirement account. Your own contributions are always yours; employer contributions may become yours over several years of work.

Used in Employer Matches and Vesting.

The Cboe Volatility Index: a measure of the stock market's expected near-term volatility, calculated from the prices of options on the S&P 500.

Used in Implied Volatility.

How much and how quickly an investment's price moves up and down. Higher volatility means bigger swings in both directions.

Used in Risk and Return, Time Horizon and Risk Tolerance, What Investment Risk Really Means.

The number of shares traded over a period, such as a day.

Used in Bid, Ask, and the Spread.

Selling an investment at a loss and buying a substantially identical one within 30 days before or after. The loss can't be deducted at that time.

Used in Capital Losses, Tax-Loss Harvesting, and Wash Sales.

A company's costs of equity and after-tax debt, averaged according to how much of its funding comes from each.

Used in Building a DCF from a 10-K, Cost of Capital, Cost of Capital in Depth.

The tendency for the winner of an auction for something of uncertain value to have overpaid, because the highest bid usually comes from the most optimistic estimate.

Current assets minus current liabilities: a quick measure of a company's short-term financial room to maneuver.

Used in Accruals and Working Capital, The Balance Sheet.

The seller of an option, who receives the premium and must buy or sell the shares if assigned. Also described as being short the option.

The return a bond provides, expressed as a yearly percentage. It depends on the price paid, not just the coupon.

Used in Why Bond Prices and Yields Move in Opposite Directions.

A chart of interest rates on bonds of the same quality across different maturities, from short-term to long-term.

Used in Duration and the Yield Curve.

The yearly rate earned if a callable bond is bought at its market price and redeemed by the issuer on its call date at the call price.

Used in Yield Measures.

The yearly return you'd earn by buying a bond at today's price and holding it to maturity, assuming every payment is made.

Used in Why Bond Prices and Yields Move in Opposite Directions, Yield Measures.

The lower of a callable bond's yield to maturity and yield to call: the most conservative yield to assume.

Used in Yield Measures.

A bond that pays no interest along the way. It's bought below face value and repays the full face value at maturity.

Used in What a Bond Is.