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Jargon to confuse you.

Jul 11, 2024

6 min read

finance pundits like to use terms that an average person doesn't understand, if you do you are the CHOSEN ONE. Not anymore, below is the list of terms regularly used in the industry on whose the application is pretty simple but the wordings are from Mars.



Alpha

Alpha is the measurement of an investment portfolio’s performance against a certain benchmark – usually a stock market index. In other words, it’s the degree to which a trader has managed to ‘beat’ the market over time. The alpha can be positive or negative, depending on its proximity to the market.


Delta

Delta is a measure used in options trading to assess how the price of an options contract changes as the price of the underlying asset moves. It can also sometimes be referred to as a hedge ratio


Amortization

Amortization is the process of spreading the repayment of a loan, or the cost of an intangible asset, over a specific timeframe. This is usually a set number of months or years, depending on the conditions banks or copyright agencies set. Amortization will often incur interest payments, set at the discretion of the lender.


Annual General Meeting (AGM)

AGM is a yearly gathering between the shareholders of a company and its board of directors. Generally, this is the only time that the directors and shareholders will meet throughout the year, so it is a chance for the directors to present the company’s annual report.


Arbitrage

Arbitrage in trading is the practice of simultaneously buying and selling an asset to take advantage of a price difference. The asset will usually be sold in a different market, form, or with a different financial product, depending on how the discrepancy in the price occurs.


At the money (ATM)

ATM is a term used to describe an options contract with a strike price that is identical to the underlying market price. At the money, options see a lot of trading activity because they are so close to becoming profitable.


Base rate

A base rate is the interest rate that a central bank – such as the Bank of England or Federal Reserve – will charge commercial banks for loans. The base rate is also known as the bank rate or the base interest rate.


Basis point

A basis point is a unit of measurement used to quantify the change between two percentages – it can also be referred to as ‘bp’, which is pronounced ‘bip’ or ‘beep’. A basis point is equal to one-hundredth of one percent, or 0.01%.


Book value

book value reflects what a business is worth according to its financials (its books), and market value is the worth of a company according to financial markets – also known as its market capitalization. The calculation for market value is the current market price per share multiplied by the total number of outstanding shares.


Convexity

Bond convexity is a measure of the relationship between a bond’s price and interest rates. It is used to assess the impact that a rise or fall in interest rates can have on a bond’s price – which highlights a bond holder’s exposure to risk.


Cost of carry

Cost of carry is the amount of additional money you might have to spend to maintain a position. This can come in the form of overnight funding charges, interest payments on margin accounts and forex transactions, or the costs of storing any commodities on the delivery of a futures contract.


Covered call

A covered call is a call option trading strategy. It involves holding an existing long position on a tradeable asset, and writing (selling) a call option against the same asset, to increase the overall profit that a trader will receive.


Crystallization

Crystallization means selling an asset to realize capital gains or losses. When an investor buys an asset, any increase or decrease in the market price will not automatically translate to profit or loss – this is only realized after the position has been closed.


Dark pools

Dark pools are networks – usually private exchanges or forums – that allow institutional investors to buy or sell large amounts of stock without the details of the trade being released to the wider market.


Debentures

In the UK, a debenture is an instrument used by a lender, such as a bank, when providing capital to companies and individuals. It enables the lender to secure loan repayments against the borrower’s assets – even if they default on the payment.


EBITDA

it is a way of evaluating a company’s performance without factoring in financial decisions or the tax environment. The literal meaning of EBITDA is ‘earnings before interest, taxes, depreciation, and amortization’.


EBITDAR

It is the abbreviation of ‘earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs. It is used to analyze a company’s financial performance and profit potential when the company is undergoing a restructuring or if its rent expenses are higher than average.


EDSP

It stands for exchange delivery settlement price and refers to the price at which exchange-traded derivative contracts are settled. Stock exchanges use EDSP to calculate the amount that each party to an options or futures contract owes at the time of that contract’s expiry.


Gearing ratio

A gearing ratio is a measure used by investors to establish a company’s financial leverage. In this context, leverage is the amount of funds acquired through creditor loans – or debt – compared to the funds acquired through equity capital.


Grey market

By taking a position on a grey market, you’re taking a position on a company’s potential market cap ahead of its initial public offering (IPO). The price of a grey market is a prediction of what the company’s total market capitalization will be at the end of its first trading day.


Hawks and doves

these terms are used by analysts and traders to categorize members of the Central Bank committee ahead of their votes on monetary policy.


Helicopter money

Helicopter money is the term used for a large sum of new money that is printed and distributed among the public, to stimulate the economy during a recession or when interest rates fall to zero. It is also referred to as a helicopter drop, a helicopter scattering supplies from the sky.


Liquidity

it is used in finance to describe how easily an asset can be bought or sold in the market without affecting its price – it can also be known as market liquidity. When there is a high demand for an asset, there is high liquidity, as it will be easier to find a buyer (or seller) for that asset.


M2 Money supply

M2 is a classification of money supply. It includes M1 – which is comprised of cash outside of the private banking system plus current account deposits – while also including capital in savings accounts, money market accounts retail mutual funds, and time deposits of under $100,000.


Multiplier effect

The multiplier effect is the term used to describe the impact that changes in monetary supply can have on economic activity. When an individual, government, or company spends money it has a trickle-down effect on businesses and individuals. The resulting impact can be much wider than the initial action.


OTC trading

OTC stands for over-the-counter and refers to a trade that is not made on a formal exchange. It is often also referred to as off-exchange trading.


Random walk theory

It is a financial model that assumes that the stock market moves in a completely unpredictable way. The hypothesis suggests that the future price of each stock is independent of its historical movement and the price of other securities.


RNS

The Regulatory News Service, or RNS, is responsible for disseminating regulatory and non-regulatory information on behalf of UK businesses and publicly listed companies. Operating as part of the London Stock Exchange (LSE), the RNS provides businesses with information that can help them comply with their disclosure obligations.


ROCE

Return on capital employed, or ROCE, is a long-term profitability ratio that measures how effectively a company uses its capital. The metric tells you the profit generated by each dollar (or other unit of currency) employed.


VAR

Value at risk is a market’s volatility is its likelihood of making major, unforeseen short-term price movements at any given time.


VWAP

volume-weighted average price, which is a technical analysis tool that shows the ratio of an asset's price to its total trade volume. It provides traders and investors with a measure of the average price at which a stock is traded over a given time.




Although the list is incomplete I feel these are the pretty common terms.













Jul 11, 2024

6 min read

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