Financial Terms Glossary

A

• Adjusted Present Value (APV) – NPV of a project plus the value of financing benefits like tax shields.

• Alpha – Investment return above the benchmark, adjusted for risk.

• Anchoring – Relying too heavily on an initial piece of information when making decisions.

• Annuity – A product that pays a fixed income for life or a defined period, often used in retirement.

• Asset – Anything of value that is owned, such as cash, property, or investments.

• Asset Allocation – Dividing investments across asset classes to balance risk and return.

• Automatic Enrolment – UK policy requiring employers to auto-enrol eligible workers into a pension.

B

• Behavioural Finance – Study of how psychology affects financial decisions.

• Beta – A measure of an asset’s volatility relative to the market.

• Bond – A fixed-income investment representing a loan from investor to issuer.

• Budget – A plan for managing income, spending, and savings.

C

• Capital Asset Pricing Model (CAPM) – Model relating expected return to risk via beta.

• Capital Gains – Profit from selling an asset at a higher price than its purchase.

• Capital Gains Tax (CGT) – Tax on profits from selling investments or property.

• Capital Loss – Loss from selling an asset for less than it cost.

• Capital Structure – The mix of debt and equity used to fund a business.

• Cash Flow – Movement of money in and out of a business or investment.

• Correlation – Degree to which two variables move together.

• Cost of Capital – The required return needed to justify an investment.

• Cost of Debt – Effective interest rate paid on borrowed funds.

• Cost of Equity – Expected return required by equity holders.

• Covariance – Measure of how two assets move together.

• Credit Score – A numerical representation of creditworthiness.

• CROCI (Cash Return on Capital Invested) – Cash-based return divided by invested capital.

• Current Ratio – Current assets divided by current liabilities; a measure of short-term liquidity.

D

• DCF (Discounted Cash Flow) – A method for valuing investments based on present value of expected future cash flows.

• DB (Defined Benefit) Pension – Scheme providing guaranteed retirement income based on earnings and service.

• DC (Defined Contribution) Pension – Pension dependent on contributions and investment performance.

• Debt – Money borrowed and owed to another party.

• Debt-to-Equity Ratio – Measures a company’s financial leverage: total debt ÷ shareholder equity.

• Deflation – A general fall in prices across the economy.

• Derivatives – Financial instruments whose value depends on an underlying asset.

• Discount Rate – Rate used to bring future cash flows to present value.

• Discounted Payback Period – Time it takes to recover an investment using discounted cash flows.

• Diversification – Investing in various assets to reduce risk.

• Dividend – Distribution of a company’s earnings to shareholders.

• Drawdown (Investment) – Drop in value from a peak to a trough.

• Drawdown (Pension) – Withdrawing income from a pension while leaving the rest invested.

E

• Earnings per Share (EPS) – Net profit divided by the number of outstanding shares.

• Economic Profit – Profit exceeding the opportunity cost of capital.

• Economic Value Added (EVA) – Measure of economic profit: NOPAT minus cost of capital.

• Efficiency Ratio – Operating expenses divided by total income (often used in banking).

• Efficient Frontier – Optimal portfolios offering the best return for a given level of risk.

• Enterprise Value (EV) – Market cap + debt − cash; the total value of a firm.

• Equity – Ownership interest in a company.

• ESG (Environmental, Social, Governance) – Standards used to assess corporate ethical and sustainability practices.

• Ethical Investing – Selecting investments based on moral or ethical principles, such as excluding tobacco or weapons.

• ETF (Exchange-Traded Fund) – A fund traded on a stock exchange that holds a basket of securities.

• EV/EBITDA – Enterprise value divided by earnings before interest, tax, depreciation and amortisation; a valuation ratio.

• Expenses – Costs incurred in running a business or personal budget.

F

• Free Cash Flow (FCF) – Cash generated by a business after capital expenditure.

• Futures – Contracts obligating parties to transact an asset at a future date and price.

G

• Growth Stock – Stock expected to grow earnings at an above-average rate.

• Gross Margin – Revenue minus cost of goods sold, divided by revenue.

H

• Hedge Fund – A pooled investment fund using advanced strategies to seek high returns.

• Herd Behaviour – When investors follow the majority rather than their own analysis.

• Home Bias – Tendency to invest primarily in domestic assets.

I

• IHT (Inheritance Tax) – Tax on the value of a deceased person’s estate.

• Impact Investing – Investing in projects or companies to generate positive social/environmental impact.

• Income – Money received from work, investments, or other sources.

• Inflation – General rise in prices across an economy.

• Information Ratio – Measures active return relative to tracking error.

• Interest – Cost of borrowing money or return on savings.

• Internal Rate of Return (IRR) – Discount rate that sets NPV to zero.

• Inventory Turnover – Cost of goods sold divided by average inventory; shows efficiency.

• Investment – Allocation of capital with the expectation of future return.

• ISA (Individual Savings Account) – UK account allowing tax-free savings and investments.

L

• Leverage – Use of borrowed money to amplify returns.

• Liability – Financial obligation or debt owed.

• Liquidity – Ease with which an asset can be converted to cash.

• Loan-to-Value Ratio (LTV) – Mortgage loan amount divided by appraised property value.

• Loss Aversion – Tendency to prefer avoiding losses over acquiring equivalent gains.

M

• Market Capitalisation – Total value of a company's outstanding shares.

• Mean-Variance Optimisation – A mathematical approach to building efficient portfolios.

• Mental Accounting – Treating money differently depending on its source or use.

• MIRR (Modified IRR) – Improved version of IRR that assumes reinvestment at cost of capital.

• Money-Weighted Return (MWR) – A performance measure accounting for cash flows; equivalent to IRR.

• Monte Carlo Simulation – Technique using random variables to model risk and uncertainty.

• Mortgage – A loan secured by property, repaid over time.

• Mutual Fund – An investment fund pooling money from many investors.

N

• Negative Screening – Avoiding investments in companies based on ESG criteria.

• Net Present Value (NPV) – Present value of future cash flows minus initial investment.

• Net Profit Margin – Net income divided by revenue; a profitability ratio.

• Net Worth – Total assets minus total liabilities.

O

• Operating Margin – Operating income divided by revenue.

• Options – Derivative contracts offering the right to buy or sell an asset at a set price.

• Overconfidence – Cognitive bias where investors overestimate their skill or knowledge.

P

• Payback Period – Time required to recover an initial investment.

• Pension – Financial product to provide income in retirement.

• Personal Allowance – Income you can earn before paying income tax (UK).

• P/E Ratio (Price-to-Earnings) – Share price divided by earnings per share; a valuation metric.

• Portfolio – Collection of investments owned by an individual or institution.

• Price-to-Book Ratio (P/B) – Share price divided by book value per share.

• Principal – Original amount invested or borrowed.

• Private Equity – Investments in privately held companies.

• Profit Margin – Net income as a percentage of revenue.

Q

• Quantitative Easing (QE) – Central bank policy of injecting money into the economy.

• Quick Ratio – A liquidity ratio measuring ability to meet short-term obligations with liquid assets.

R

• Real Options – Valuation approach that includes managerial flexibility.

• Recency Bias – Overweighting recent events or data when making decisions.

• Rebalancing – Adjusting a portfolio back to target asset allocations.

• Return – The gain or loss on an investment.

• Return on Assets (ROA) – Net income divided by total assets.

• Return on Equity (ROE) – Net income divided by shareholder equity.

• Return on Investment (ROI) – Gain from investment divided by its cost.

• Risk – The chance that outcomes differ from expectations.

• Risk-Adjusted Return – Return that considers the amount of risk taken.

S

• Scenario Analysis – Testing investment performance under different conditions.

• Self-Invested Personal Pension (SIPP) – UK pension scheme giving individuals control over investments.

• Sharpe Ratio – Excess return per unit of volatility.

• Solvency Ratio – Measures ability to meet long-term debt obligations.

• Stock – Ownership share in a company.

• Stochastic Modelling – Using probability distributions to model uncertain outcomes.

• Structured Product – Investment combining fixed income and derivatives.

• Swap – Derivative where two parties exchange cash flows.

• Sustainable Investing – Investing based on ESG principles and long-term impact.

T

• Tail Risk – Risk of rare but extreme investment losses.

• Tax Wrapper – An account that shelters investments from some forms of tax (e.g. ISA, SIPP).

• Terminal Value – Value of an asset beyond the forecast period in DCF analysis.

• Time Horizon – Period over which an investment is expected to be held.

• Time-Weighted Return (TWR) – Return excluding the impact of cash flows; reflects fund performance.

• Tracking Error – Difference in returns between a portfolio and its benchmark.

V

• Valuation – Estimating the present value of an asset.

• Value at Risk (VaR) – Estimated loss in value under normal conditions over a set time.

• Value Investing – Strategy of buying undervalued securities based on fundamentals.

• Volatility – The degree of variation in asset prices over time.

W

• WACC (Weighted Average Cost of Capital) – Average rate of return required by all capital providers.