Investing glossary: 161 terms in plain English

A

Alpha Portfolio

Return above what the market exposure (beta) would predict. Positive alpha after fees is rare and hard to sustain.

American option Options

An option that can be exercised any time up to expiry. Most single-stock options in Australia and the US.

Annual report Fundamental

A company's yearly report with audited financial statements, management commentary and governance details.

Arbitrage Markets

Profiting from a price difference for the same thing in two places with no risk. Arbitrage keeps related prices in line.

Ask (offer) Markets

The lowest price a seller is currently willing to accept.

Asset allocation Portfolio

How money is split between asset classes such as shares, bonds, property and cash.

Assignment Options

When an option writer is required to fulfil the contract because a buyer exercised.

ATR (Average True Range) Technical

Average daily price range including gaps. Used to set stops and size positions.

B

Backwardation Futures

When futures prices are below the spot price, often a sign of current scarcity.

Balance sheet Fundamental

Snapshot of what a company owns (assets), owes (liabilities) and the owners' equity.

Basis Futures

Spot price minus futures price. It converges to zero at expiry.

Basis point (bp) Bonds

One hundredth of a percentage point. 25bp = 0.25%.

Bear market Markets

A fall of 20% or more from a recent peak.

Beta Portfolio

Sensitivity of a share to market moves. Beta 1.2 tends to move 20% more than the market.

Bid Markets

The highest price a buyer is currently willing to pay.

Black-Scholes model Options

The 1973 formula for pricing European options from price, strike, time, rate and volatility.

Blockchain Crypto

A shared, tamper-resistant ledger of transactions grouped into linked blocks.

Bollinger Bands Technical

A 20-day moving average with bands two standard deviations above and below.

Bond Bonds

A loan to a government or company that pays interest and returns face value at maturity.

Book value Fundamental

Shareholders' equity on the balance sheet: assets minus liabilities.

Breakeven Options

The price at which an options position neither makes nor loses money at expiry.

Buffett indicator Macro

Total stock market value divided by GDP, a broad valuation gauge.

Bull market Markets

A sustained rise, often defined as 20% or more from a low.

Buyback Fundamental

A company buying its own shares, reducing the share count.

C

Call option Options

The right to buy an asset at the strike price before or at expiry.

Candlestick Technical

A chart bar showing open, high, low and close for a period.

CAPE (Shiller P/E) Macro

Price divided by 10-year average inflation-adjusted earnings.

Capital gains tax (CGT) Tax

Tax on the profit from selling an asset. Individuals can get a 50% discount in Australia after 12 months.

CAPM Portfolio

Capital Asset Pricing Model: expected return = risk-free rate + beta x market risk premium.

Cash flow statement Fundamental

Shows cash moving in and out from operating, investing and financing activities.

CDS (credit default swap) Derivatives

Protection against a borrower defaulting, paid for with a regular premium.

CFD (contract for difference) Derivatives

A leveraged contract paying the price change of an asset. High risk; most retail clients lose money.

CHESS / HIN Markets

The ASX settlement system. A Holder Identification Number means shares are registered in your name.

Clearing house Markets

An entity that stands between buyers and sellers, guaranteeing trades.

Collar Options

Owning shares plus a protective put, paid for by selling a call.

Compounding Basics

Earning returns on previous returns, so growth accelerates over time.

Contango Futures

When futures prices are above spot and later months are higher.

Convertible bond Bonds

A bond that can be converted into shares at a set price.

Convexity Bonds

How a bond's duration changes as yields change.

Correlation Portfolio

How closely two assets move together, from -1 to +1.

Cost base Tax

What an asset cost you for tax, including brokerage and some other costs.

Coupon Bonds

The interest payment on a bond.

Covered call Options

Owning shares and selling a call against them for income.

Credit rating Bonds

An agency's opinion of a borrower's ability to repay (e.g. AAA to D).

Credit spread Bonds

Extra yield over government bonds, compensating for default risk.

D

DCF (discounted cash flow) Fundamental

Valuation as the present value of expected future cash flows.

Death cross Technical

The 50-day moving average crossing below the 200-day.

Debt-to-equity Fundamental

Total debt divided by shareholders' equity.

DeFi Crypto

Decentralised finance: lending, trading and derivatives run by smart contracts.

Delta Options

How much an option's price changes for a $1 move in the underlying.

Derivative Derivatives

A contract whose value depends on another asset, rate or event.

Diversification Basics

Spreading money across investments that do not all move together.

Dividend Basics

Cash paid from company profits to shareholders.

Dividend payout ratio Fundamental

Dividends divided by earnings.

Dividend yield Basics

Yearly dividends divided by share price.

Dollar-cost averaging Basics

Investing a fixed amount at regular intervals.

Drawdown Portfolio

The fall from a peak to a trough, as a percentage.

Duration Bonds

Sensitivity of a bond's price to interest rate changes, in years.

E

EBITDA Fundamental

Earnings before interest, tax, depreciation and amortisation.

Efficient frontier Portfolio

The portfolios with the highest expected return for each level of risk.

Efficient market hypothesis Markets

The idea that prices reflect available information, making it hard to beat the market.

EMA Technical

Exponential moving average, weighting recent prices more heavily.

Enterprise value (EV) Fundamental

Market cap plus debt minus cash: the value of the whole business.

EPS Fundamental

Earnings per share: net profit divided by shares outstanding.

ETF Basics

Exchange-traded fund: a fund bought and sold on the stock exchange.

European option Options

An option exercisable only at expiry. Index options such as XJO and SPX.

EV/EBITDA Fundamental

Enterprise value divided by EBITDA; compares companies regardless of debt.

Ex-dividend date Basics

The date from which a buyer no longer receives the next dividend.

Exercise Options

Using the right an option gives to buy or sell at the strike.

Expected shortfall Portfolio

The average loss in the worst cases beyond the Value at Risk level.

Expiry Options

The last day an option or futures contract exists.

F

Factor investing Portfolio

Tilting towards traits such as value, momentum, quality or low volatility.

Fibonacci retracement Technical

Levels such as 38.2%, 50% and 61.8% used to estimate pullback zones.

Forward contract Derivatives

A private agreement to trade at a fixed price on a future date.

Franking credit Tax

A credit for company tax already paid, attached to Australian dividends.

Free cash flow (FCF) Fundamental

Operating cash flow minus capital expenditure.

Futures contract Futures

A standardised, exchange-traded agreement to trade an asset at a set price on a future date.

G

Gamma Options

How fast an option's delta changes as the underlying moves.

Golden cross Technical

The 50-day moving average crossing above the 200-day.

Gordon growth model Fundamental

Value = next dividend / (required return - growth).

Gross margin Fundamental

Revenue minus direct costs, as a percentage of revenue.

Grossed-up yield Tax

Dividend yield including franking credits.

H

Halving Crypto

The roughly four-yearly halving of new bitcoin issued per block.

Hedge Derivatives

A position taken to reduce the risk of another position.

Hybrid security Bonds

A security with both debt and equity features, such as bank hybrids.

I

Implied volatility Options

The volatility that makes a pricing model match an option's market price.

Income statement Fundamental

Revenue, costs and profit over a period.

Index fund Basics

A fund that aims to match a market index.

Inflation Macro

The general rise in prices, measured by the CPI.

Interest cover Fundamental

EBIT divided by interest expense.

Interest rate swap Derivatives

Exchanging fixed for floating interest payments on a notional amount.

Intrinsic value (option) Options

What an option would be worth if exercised now.

Iron condor Options

A range-bound strategy combining a put credit spread and a call credit spread.

L

Leverage Markets

Using borrowed money or derivatives to increase exposure. Magnifies gains and losses.

Limit order Markets

An order to buy or sell only at a set price or better.

Liquidity Markets

How easily an asset can be traded without moving its price.

M

MACD Technical

The 12-period EMA minus the 26-period EMA, with a 9-period signal line.

Margin call Futures

A demand to deposit more money when losses reduce your margin.

Mark-to-market Futures

Daily revaluation of positions with gains and losses settled.

Market capitalisation Basics

Share price multiplied by shares outstanding.

Market order Markets

An order to trade immediately at the best available price.

Maximum drawdown Portfolio

The largest peak-to-trough fall over a period.

Moat Fundamental

A durable competitive advantage that protects profits.

Momentum Technical

The tendency for recent winners to keep outperforming for a while.

Moneyness Options

Whether an option is in, at or out of the money.

Moving average Technical

The average price over a set number of periods.

N

Net debt Fundamental

Total debt minus cash.

Notional value Derivatives

The face amount a derivative is based on, not the money at risk.

O

Open interest Futures

The number of contracts outstanding that have not been closed.

Operating margin Fundamental

Operating profit as a percentage of revenue.

Option premium Options

The price paid for an option.

Overbought / oversold Technical

Momentum readings suggesting a move has gone far, e.g. RSI above 70 or below 30.

P

P/B (price-to-book) Fundamental

Share price divided by book value per share.

P/E (price-to-earnings) Fundamental

Share price divided by earnings per share.

P/S (price-to-sales) Fundamental

Market cap divided by revenue.

Payoff diagram Options

A chart of profit or loss at expiry across possible prices.

PEG ratio Fundamental

P/E divided by expected earnings growth (%).

Perpetual swap Crypto

A crypto futures contract with no expiry, kept near spot by funding payments.

Position sizing Portfolio

Deciding how much to put into each investment based on risk.

Proof of stake Crypto

Securing a blockchain with staked coins as collateral.

Proof of work Crypto

Securing a blockchain with computing power (mining).

Protective put Options

Buying a put to insure shares you own.

Put option Options

The right to sell an asset at the strike price before or at expiry.

Put-call parity Options

C - P = S - PV(K): the link between call and put prices.

R

Rebalancing Portfolio

Trading back to target weights after markets move.

Resistance Technical

A price zone where selling has repeatedly stopped rises.

Rho Options

Option price sensitivity to interest rates.

Risk parity Portfolio

Weighting assets so each contributes equal risk.

ROE Fundamental

Return on equity: net profit / shareholders' equity.

ROIC Fundamental

Return on invested capital: operating profit after tax / (debt + equity).

Rolling Futures

Closing an expiring contract and opening a later one.

RSI Technical

Relative Strength Index, a 0-100 momentum oscillator.

S

Seed phrase Crypto

12 or 24 words that can restore a crypto wallet. Never share it.

Sequence risk Portfolio

The danger of poor returns early in retirement while withdrawing.

Sharpe ratio Portfolio

Excess return divided by volatility.

Short selling Markets

Selling borrowed shares, hoping to buy back cheaper. Losses can be unlimited.

SMA Technical

Simple moving average.

Smart contract Crypto

A program on a blockchain that executes automatically.

Sortino ratio Portfolio

Excess return divided by downside volatility.

Spread (bid-ask) Markets

The gap between the best bid and best ask.

Stablecoin Crypto

A token designed to hold a fixed value, usually US$1.

Stop-loss Technical

An order or rule to exit if the price falls to a set level.

Straddle Options

Buying a call and put at the same strike to profit from a big move.

Strangle Options

Buying an OTM call and OTM put; cheaper than a straddle, needs a bigger move.

Strike price Options

The price at which an option can be exercised.

Superannuation Tax

Australia's tax-advantaged retirement savings system.

Support Technical

A price zone where buying has repeatedly stopped falls.

Swap Derivatives

An agreement to exchange cash flows, such as fixed for floating interest.

T

Term deposit Bonds

A bank deposit at a fixed rate for a fixed term.

Theta Options

Daily time decay of an option's value.

Time value Options

The part of an option premium above intrinsic value.

Total return Basics

Price change plus income (dividends or interest).

V

Value at Risk (VaR) Portfolio

A loss level not expected to be exceeded at a given confidence over a period.

Vega Options

Option price sensitivity to a 1-point change in implied volatility.

VIX Options

The "fear gauge": 30-day implied volatility of S&P 500 options.

Volatility Portfolio

How much prices swing, usually measured as annualised standard deviation.

W

W-8BEN Tax

A US form that lets non-US investors claim treaty withholding rates (15% for Australians).

Warrant Derivatives

An option-like security issued by a company or bank and listed on an exchange.

Wash sale Tax

Selling and quickly rebuying mainly for a tax benefit; the ATO can disallow the loss.

Y

Yield curve Bonds

Government bond yields plotted against maturity.

Yield to maturity (YTM) Bonds

The total yearly return if a bond is held to maturity and all payments are made.