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Financial Glossary

A comprehensive guide to financial terminology used in advising, investing, and personal finance.

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A
Accredited Investor
An individual or entity meeting specific income or net worth requirements ($200k+ income or $1M+ net worth) allowing investment in unregistered securities.
Alpha
A measure of an investment's performance relative to a benchmark index; positive alpha indicates outperformance.
Alternative Minimum Tax (AMT)
A parallel tax system ensuring high-income taxpayers pay a minimum amount of tax regardless of deductions.
Amortization
The process of gradually paying off a debt through regular payments over time, with each payment covering both principal and interest.
Arbitrage
Simultaneously buying and selling an asset in different markets to profit from price discrepancies.
Annual Percentage Rate (APR)
The yearly cost of borrowing money, including interest and fees, expressed as a percentage.
Annual Percentage Yield (APY)
The actual rate of return earned on an investment or savings account over one year, accounting for compound interest.
Annuity
A financial product that provides regular payments over a specified period, often used for retirement income.
Asset
Anything of value owned by an individual or entity, including cash, investments, real estate, and personal property.
Asset Allocation
The strategy of dividing investments among different asset categories (stocks, bonds, cash) to balance risk and reward.
Appreciation
The increase in value of an asset over time.
B
Backtesting
Testing a trading strategy using historical data to evaluate its potential effectiveness before deploying real capital.
Balance Sheet
A financial statement showing assets, liabilities, and net worth at a specific point in time.
Basis Point
One-hundredth of a percentage point (0.01%); used to describe interest rate changes and investment returns.
Bear Market
A market condition where prices decline by 20% or more from recent highs, typically accompanied by pessimism.
Beneficiary
A person or entity designated to receive assets or benefits from a will, trust, insurance policy, or retirement account.
Beta
A measure of an asset's volatility relative to the overall market; beta of 1 means it moves with the market, >1 is more volatile, <1 is less volatile.
Blue Chip Stocks
Shares of large, well-established companies with a history of reliable performance and dividends.
Bond
A debt security where the issuer owes the holder a debt and is obligated to pay interest and repay principal at maturity.
Breakout Trading
A strategy of entering positions when price moves beyond defined support or resistance levels.
Budget
A financial plan that outlines expected income and expenses over a specific period.
Bull Market
A market condition characterized by rising prices and investor optimism, typically with gains of 20% or more.
Burn Rate
The rate at which a startup spends its capital before generating positive cash flow, typically measured monthly.
C
Call Option
A contract giving the buyer the right to purchase an asset at a specified strike price before expiration.
Cap Table (Capitalization Table)
A spreadsheet showing equity ownership in a company, including shares, options, warrants, and ownership percentages.
Capital Gains
The profit realized from selling an asset for more than its purchase price.
Carried Interest
A share of investment profits (typically 20%) paid to fund managers as performance compensation.
Cash Flow
The net amount of cash moving in and out of a business or personal finances during a specific period.
Certificate of Deposit (CD)
A savings product offered by banks that pays fixed interest over a specified term in exchange for leaving funds untouched.
Collateral
An asset pledged as security for a loan, which the lender can seize if the borrower defaults.
Compound Interest
Interest calculated on both the initial principal and accumulated interest from previous periods.
Convertible Note
Short-term debt that converts into equity during a future financing round, commonly used in startup fundraising.
Credit Score
A numerical representation (typically 300-850) of creditworthiness based on credit history and behavior.
Credit Utilization
The ratio of current credit card balances to total available credit, expressed as a percentage.
D
Day Trading
Buying and selling securities within the same trading day to profit from short-term price movements.
Debt-to-Income Ratio (DTI)
A measure comparing monthly debt payments to monthly gross income, used to assess borrowing capacity.
Deductible
The amount paid out-of-pocket before insurance coverage begins.
Depreciation
The decrease in value of an asset over time due to wear, age, or obsolescence.
Dilution
The reduction in existing shareholders' ownership percentage when new shares are issued.
Diversification
The practice of spreading investments across various assets to reduce risk.
Dividend
A portion of company profits distributed to shareholders, typically paid quarterly.
Dollar-Cost Averaging
An investment strategy of regularly investing fixed amounts regardless of market conditions.
Down Payment
An upfront payment made when purchasing an asset, typically expressed as a percentage of the total price.
Drawdown
The peak-to-trough decline in investment value during a specific period, measuring downside risk.
E
Earnings Per Share (EPS)
A company's net profit divided by the number of outstanding shares.
Emergency Fund
Savings set aside to cover unexpected expenses or financial emergencies, typically 3-6 months of living expenses.
Equity
Ownership interest in an asset after deducting liabilities; in real estate, the difference between market value and mortgage balance.
Estate Planning
The process of arranging management and distribution of assets after death.
Exchange-Traded Fund (ETF)
An investment fund traded on stock exchanges that typically tracks an index, commodity, or basket of assets.
Exit Strategy
A plan for how startup investors or founders will realize returns, typically through acquisition, IPO, or secondary sale.
Expense Ratio
The annual fee charged by mutual funds or ETFs, expressed as a percentage of invested assets.
F
FICO Score
A specific type of credit score created by Fair Isaac Corporation, widely used by lenders.
Fiduciary
A person or entity legally obligated to act in another's best financial interest.
Fixed Income
Investments that provide regular, predictable returns, such as bonds or CDs.
Foreclosure
The legal process by which a lender takes possession of property when the borrower fails to make mortgage payments.
Founder's Stock
Common shares issued to company founders at formation, typically with vesting schedules.
401(k)
An employer-sponsored retirement savings plan allowing pre-tax contributions with tax-deferred growth.
403(b)
A retirement plan similar to a 401(k) but designed for employees of non-profit organizations and public schools.
G
Greeks (Options)
Risk measures for options positions including Delta (price sensitivity), Gamma (delta change rate), Theta (time decay), and Vega (volatility sensitivity).
Gross Income
Total income before taxes and deductions.
Growth Stock
Stock of a company expected to grow at an above-average rate compared to the market.
Guaranteed Investment Certificate (GIC)
A Canadian investment that guarantees preservation of capital and a fixed or variable return.
H
Health Savings Account (HSA)
A tax-advantaged account for medical expenses, available to those with high-deductible health plans.
Hedge Fund
An alternative investment fund using pooled capital and various strategies to generate returns.
High-Frequency Trading (HFT)
Algorithmic trading using powerful computers to execute large numbers of orders at extremely high speeds.
Home Equity Line of Credit (HELOC)
A revolving credit line secured by home equity, allowing borrowing up to a set limit.
I
Incentive Stock Options (ISO)
Employee stock options with favorable tax treatment if held for required periods.
Income Statement
A financial report showing revenues, expenses, and profits over a specific period.
Index Fund
A mutual fund or ETF designed to track the performance of a specific market index.
Inflation
The rate at which the general level of prices for goods and services rises, eroding purchasing power.
Initial Public Offering (IPO)
The first sale of stock by a company to the public.
Interest Rate
The percentage charged for borrowing money or earned on savings and investments.
Investment Horizon
The length of time an investor expects to hold an investment before needing the funds.
IRA (Individual Retirement Account)
A tax-advantaged personal retirement savings account.
J
Junk Bond
A high-yield, high-risk bond issued by companies with lower credit ratings.
K
Keogh Plan
A tax-deferred retirement plan for self-employed individuals and unincorporated businesses.
L
Leverage
Using borrowed money to increase potential investment returns (also increases risk).
Liability
A financial obligation or debt owed to another party.
Liquidation Preference
The order and amount investors receive during a company exit event before common shareholders.
Liquidity
The ease with which an asset can be converted to cash without significant loss of value.
Liquidity Premium
Additional return demanded by investors for assets that cannot be easily converted to cash.
Loan-to-Value Ratio (LTV)
The ratio of a loan amount to the appraised value of the asset being purchased.
Long Position
Owning an asset with the expectation that its value will increase.
Long-Term Capital Gains
Profits from assets held for more than one year, typically taxed at lower rates than short-term gains.
M
Margin
Borrowing money from a broker to purchase securities, using existing investments as collateral.
Margin Call
A broker's demand for additional funds when account equity falls below required maintenance levels.
Market Capitalization
The total market value of a company's outstanding shares (share price × number of shares).
Market Maker
A firm or individual that quotes both buy and sell prices, profiting from the bid-ask spread while providing liquidity.
Maturity Date
The date when a bond or other debt instrument becomes due for repayment.
Mean Reversion
A trading strategy based on the theory that prices and returns eventually move back toward their historical average.
Momentum Trading
A strategy of buying securities showing upward price trends and selling those in downtrends.
Mortgage
A loan used to purchase real estate, secured by the property itself.
Municipal Bond
A debt security issued by a state, municipality, or county, often with tax-exempt interest.
Mutual Fund
An investment vehicle pooling money from multiple investors to purchase a diversified portfolio of securities.
N
Net Worth
The total value of assets minus liabilities; a measure of overall financial health.
Net Income
Income remaining after all expenses, taxes, and deductions are subtracted from gross income.
Non-Qualified Stock Options (NSO)
Employee stock options taxed as ordinary income upon exercise, without special tax treatment.
O
Opportunity Cost
The potential benefit lost when choosing one option over another.
Option
A financial derivative giving the right, but not obligation, to buy or sell an asset at a predetermined price.
Options Chain
A listing of all available option contracts for a security, showing strikes, premiums, and expiration dates.
Ordinary Income
Income taxed at standard federal rates including wages, interest, and short-term capital gains.
P
P/E Ratio (Price-to-Earnings)
A valuation metric comparing a company's stock price to its earnings per share.
Pairs Trading
A market-neutral strategy involving simultaneously buying and selling two correlated securities to profit from relative price movements.
Pattern Day Trader (PDT)
A regulatory designation for traders executing four or more day trades within five business days in a margin account, requiring $25,000 minimum equity.
Portfolio
A collection of investments held by an individual or institution.
Post-Money Valuation
A company's valuation after including new investment capital received in a funding round.
Power of Attorney
A legal document authorizing someone to act on another's behalf in financial or legal matters.
Preferred Stock
Equity with priority claims on assets and dividends over common stock, often with fixed dividends but limited voting rights.
Pre-Money Valuation
A company's valuation before receiving new investment capital in a funding round.
Premium
The price paid for an options contract; also the amount above face value or intrinsic value.
Pre-Tax
Income or contributions made before taxes are deducted.
Principal
The original amount of money borrowed, invested, or owed, excluding interest.
Private Equity
Investment in private companies not publicly traded on stock exchanges.
Proprietary Trading Firm (Prop Firm)
A firm that trades with its own capital, often providing traders with capital in exchange for profit splits.
Put Option
A contract giving the buyer the right to sell an asset at a specified strike price before expiration.
Q
Qualified Dividend
Dividends meeting specific IRS criteria and taxed at the lower capital gains rate.
Quantitative Analysis (Quant)
Using mathematical and statistical models to analyze securities and identify trading opportunities.
Quantitative Easing (QE)
A monetary policy where central banks purchase securities to increase money supply and lower interest rates.
Quarterly Report
A financial statement issued every three months by publicly traded companies.
R
Range Trading
A strategy identifying and trading within established support and resistance price levels.
Rate of Return
The gain or loss on an investment over a specified period, expressed as a percentage.
Real Estate Investment Trust (REIT)
A company owning, operating, or financing income-producing real estate.
Rebalancing
Adjusting portfolio holdings to maintain desired asset allocation percentages.
Recession
A significant decline in economic activity lasting more than a few months.
Refinancing
Replacing an existing loan with a new one, typically to secure better terms or lower interest rates.
Regression Analysis
A statistical method for modeling relationships between variables to predict outcomes and identify patterns.
Required Minimum Distribution (RMD)
The minimum amount that must be withdrawn annually from retirement accounts after age 73.
Risk-Adjusted Return
Investment return relative to the amount of risk taken, often measured using Sharpe ratio or similar metrics.
Risk Tolerance
An investor's ability and willingness to endure market volatility and potential losses.
Roth IRA
A retirement account funded with after-tax dollars, offering tax-free growth and withdrawals in retirement.
Runway
The amount of time a startup can operate before running out of cash, calculated by dividing cash reserves by burn rate.
S
SAFE (Simple Agreement for Future Equity)
An investment contract providing rights to future equity without determining specific price until a priced funding round occurs.
Scalping
A high-frequency trading strategy involving numerous small trades throughout the day to capture tiny price movements.
Securities
Tradable financial instruments including stocks, bonds, and derivatives.
Seed Round
The first official equity funding stage for startups, typically from angel investors or early-stage VCs.
Series A, B, C Funding
Progressive venture capital funding rounds as startups mature, each typically involving larger amounts and higher valuations.
Sharpe Ratio
A measure of risk-adjusted return calculated by dividing excess return by standard deviation of returns.
Short Position
Borrowing and selling an asset expecting to buy it back at a lower price.
Short Selling
Selling borrowed securities expecting to buy them back at a lower price for profit.
Short Squeeze
A rapid price increase when short sellers are forced to buy back shares to cover positions, driving prices higher.
Standard Deduction
A fixed dollar amount that reduces taxable income for taxpayers who don't itemize deductions.
Stock
A security representing ownership in a corporation and a claim on part of its assets and earnings.
Stock Split
When a company divides existing shares into multiple shares to lower the share price.
Stop-Loss Order
An order to automatically sell a security when it reaches a specified price, limiting potential losses.
Strike Price
The predetermined price at which an option holder can buy (call) or sell (put) the underlying asset.
Swing Trading
A strategy holding positions for several days to weeks to profit from expected price moves.
T
Tax Bracket
Income ranges taxed at specific rates under the progressive tax system.
Tax-Deferred
Investment growth not taxed until funds are withdrawn.
Tax Lien
A legal claim against property for unpaid taxes.
Tax Loss Harvesting
Selling securities at a loss to offset capital gains tax liability from winning positions.
Technical Analysis
Analyzing price patterns, volume, and indicators to predict future price movements.
Tender Offer
A public proposal to purchase shares from existing shareholders, typically at a premium to market price.
Term Life Insurance
Life insurance providing coverage for a specific period at a fixed premium.
Term Sheet
A non-binding document outlining key terms and conditions of an investment agreement.
Treasury Bond
A long-term debt security issued by the U.S. government with maturities of 20-30 years.
U
Underwriting
The process of evaluating risk and determining terms for insurance or loan approval.
Underwater Mortgage
A mortgage where the outstanding balance exceeds the property's current market value.
Unicorn
A privately-held startup company valued at over $1 billion.
V
Value at Risk (VaR)
A statistical measure estimating the maximum potential loss of an investment over a specified time period at a given confidence level.
Value Stock
Stock trading below its perceived intrinsic value based on fundamental analysis.
Venture Capital (VC)
Financing provided to early-stage, high-potential startups in exchange for equity ownership.
Vesting
The process by which an employee gains ownership rights to employer-provided benefits over time.
Vesting Cliff
A period before which no equity vests, followed by a significant vesting event (commonly one-year cliff with 25% vesting).
VIX (Volatility Index)
A real-time index representing the market's expectation of 30-day forward-looking volatility, often called the "fear gauge."
Volatility
The degree of variation in trading prices over time; a measure of investment risk.
W
W-2 Form
An IRS form employers provide showing annual wages and taxes withheld.
Warrant
A security giving the holder the right to purchase company stock at a specific price before expiration, often issued with other securities.
Wash Sale Rule
An IRS rule disallowing tax deductions on securities sold at a loss if substantially identical securities are purchased within 30 days before or after the sale.
Whole Life Insurance
Permanent life insurance with a cash value component that grows over time.
Will
A legal document specifying how assets should be distributed after death.
Withholding
The portion of wages withheld by employers for taxes.
Y
Yield
The income return on an investment, expressed as a percentage of the investment's cost or current value.
Yield Curve
A graph showing interest rates across different maturity dates for similar debt securities.
Z
Zero-Coupon Bond
A bond sold at a discount that pays no periodic interest but pays face value at maturity.

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