Let’s face it, financial lingo can be overwhelming. Our glossary below breaks down some key financial terminology that you should be aware of. As you make your way through our posts, you’ll notice these terms being used throughout, so if you’re ever unclear on a term this page is your go to.
The definitions below are sourced from Investopedia.
Active Investing – Active investing refers to an investment strategy that involves ongoing buying and selling activity by the investor. Active investors purchase investments and continuously monitor their activity to exploit profitable conditions.
ASX (Australian Securities Exchange) – The ASX acts as a market operator, clearing house, and payments facilitator. It also provides educational materials to retail investors.
Asset Allocation – Asset allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to an individual’s goals, risk tolerance, and investment horizon.
Bear Market – A bear market is when a market experiences prolonged price declines. It typically describes a condition in which securities prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment.
Book Value Per Share – Book value per common share (or, simply book value per share – BVPS) is a method to calculate the per-share value of a company based on common shareholders’ equity in the company. Should the company dissolve, the book value per common share indicates the dollar value remaining for common shareholders after all assets are liquidated and all debtors are paid.
Bond – A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). A bond could be thought of as an I.O.U. between the lender and borrower that includes the details of the loan and its payments.
Bull Market – A bull market is the condition of a financial market in which prices are rising or are expected to rise.
Capital – Capital is a term for financial assets, such as funds held in deposit accounts and/or funds obtained from special financing sources.
Capital Appreciation – Capital appreciation is a rise in an investment’s market price. Capital appreciation is the difference between the purchase price and the selling price of an investment.
Cash Flow From Financing Activities – Cash flow from financing activities (CFF) is a section of a company’s cash flow statement, which shows the net flows of cash that are used to fund the company. Financing activities include transactions involving debt, equity, and dividends.
Cash Flow From Operating Activities – Cash flow from operating activities (CFO) is an accounting item that indicates the amount of money a company brings in from the ongoing regular business activities, such as manufacturing and selling goods or providing a service.
Closed-Ended Fund – A closed-end fund is a portfolio of pooled assets that raises a fixed amount of capital through an initial public offering (IPO) and then lists shares for trade on a stock exchange.
Compound Interest – Compound interest (or compounding interest) is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.
Credit Crunch – A Credit crunch refers to a decline in lending activity by financial institutions brought on by a sudden shortage of funds. Often an extension of a recession, a credit crunch makes it nearly impossible for companies to borrow because lenders are scared of bankruptcies or defaults resulting in higher rates.
Current Assets – Current assets represent all the assets of a company that are expected to be conveniently sold, consumed, utilized or exhausted through the standard business operations, which can lead to their conversion to a cash value over the next one year period.
Current Liabilities – Current liabilities are a company’s debts or obligations that are due within one year or within the normal operating cycle.
Current Ratio – The current ratio is a liquidity ratio that measures a company’s ability to pay short-term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables. Current Ratio = Current Assets/Current Liabilities.
Debt To Equity Ratio – The debt-to-equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. These numbers are available on the balance sheet of a company’s financial statements. Debt to Equity Ratio = Total Liabilities/Total Shareholder Equity (Book Value)
Dividend – A dividend is the distribution of reward from a portion of the company’s earnings and is paid to a class of its shareholders.
Dow Jones Industrial Average (DJIA) – The Dow Jones Industrial Average (DJIA) is an index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange (NYSE) and the NASDAQ.
Earnings Per Share (EPS) – Earnings per share (EPS) is calculated as a company’s profit divided by the outstanding shares of its common stock.
Exchange Traded Fund (ETF) – An exchange-traded fund (ETF) is a type of security that involves a collection of securities—such as stocks—that often tracks an underlying index, although they can invest in any number of industry sectors or use various strategies.
Free Cash Flow – Free cash flow represents the cash a company generates after cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non-cash expenses of the income statement and includes spending on equipment and assets as well as changes in working capital.
Globalisation – Globalisation is the spread of products, technology, information, and jobs across national borders and cultures. In economic terms, it describes an interdependence of nations around the globe fostered through free trade.
Initial Public Offering (IPO) – An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. Public share issuance allows a company to raise capital from public investors.
Interest Rate – The interest rate is the amount a lender charges for the use of assets expressed as a percentage of the principal.
Long Term Debt – Long-term debt consists of loans and financial obligations lasting over one year.
Market Capitalisation – Market capitalisation refers to the total dollar market value of a company’s outstanding share of stock. Commonly referred to as “market cap,” it is calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share.
Nasdaq Composite Index – The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange.
Net Tangible Assets – Net tangible assets is an accounting term calculated as the total assets of a company, minus any intangible assets such as goodwill, patents and trademarks, less all liabilities and the par value of preferred stock.
Open-Ended Fund – An open-end fund is a diversified portfolio of pooled investor money that can issue an unlimited number of shares. The fund sponsor sells shares directly to investors and redeems them as well. These shares are priced daily, based on their current net asset value (NAV)
Options Trading – Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to.
Passive Investing – Passive investing is an investment strategy to maximize returns by minimizing buying and selling. Index investing in one common passive investing strategy whereby investors purchase a representative benchmark, such as the S&P 500 index, and hold it over a long time horizon.
Price to Earnings Ratio – The price-to-earnings ratio (P/E ratio) is the ratio for valuing a company that measures its current share price relative to its per-share earnings (EPS)
Principal – The principal is a term that has several financial meanings. The most commonly used refers to the original sum of money borrowed in a loan or put into an investment.
Return on Invested Capital (ROIC) – Return on invested capital is a calculation used to assess a company’s efficiency at allocating the capital under its control to profitable investments. The return on invested capital ratio gives a sense of how well a company is using its money to generate returns.
S&P 500 – The S&P 500 or Standard & Poor’s 500 Index is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. The index is widely regarded as the best gauge of large-cap U.S. equities.
Short Selling – Short selling is an investment or trading strategy that speculates on the decline in a stock or other securities price. It is an advanced strategy that should only be undertaken by experienced traders and investors.
Stock Options – A stock option gives an investor the right, but not the obligation, to buy or sell a stock at an agreed upon price and date. There are two types of options: puts which is a bet that a stock will fall, or calls, which is a bet that a stock will rise.
Superannuation – A superannuation is an organizational pension program created by a company for the benefit of its employees.
Value Investing – Value investing is an investment strategy that involves picking stocks that appear to be trading for less than their intrinsic or book value.
Working Capital – Working capital, also known as net working capital (NWC), is the difference between a company’s current assets, such as cash, accounts receivable (customers’ unpaid bills) and inventories of raw materials and finished goods, and its current liabilities, such as accounts payable.