Tuesday, October 10

Financial Term Glossary

My attempt to explain the terms in the most layman way.


  • Bad debt expense: bad debt is the amount of money meant to be received (e.g. from customers) but cannot be collected. It is treated as a cost by the company.
  • Basis point (bp): 1/100 of a percent, a unit often used in the movement of bond price.
  • Bond: a long-term loan made by the issuer (e.g. government of company) to the investors. A typical bond pays fixed interest payment at a regular internal until the bond matures (i.e. a fixed date when the issuer repays the principal).
  • Bond yield: see US Treasury
  • bp: see basis point


  • CD: see Certificates of deposit
  • Certificate of deposit (CD): also known as CDs and time deposit. It is a type of money deposit at a bank that cannot be drawn for a certain period of time. In return, the interest income is higher than a regular deposit. In general, the longer the term, the higher the interest income.
  • Commercial Paper: a financial instrument issued by banks or big corporations for short-term financial needs (e.g. cashflow management), similar to getting a line of credit from a bank. The four basic types of commercial paper are promissory notes, drafts, checks/cheques, and Certificate of deposit.
  • Consumer Confidence Index (CCI) measures how people feel about the US economy based on 5,000 households. According to the publisher, The Conference Board (an independent research organization), 2 consecutive quarters with the index level below 100 would indicate a recession. Another widely-used consumer confidence index is the University of Michigan Consumer Sentiment Index.
  • Contrarian: a person, typically an investor, who holds a view opposite to the mainstream. Warren Buffet is one of the most well-known contrarians.
  • CPI: consumer price index, used to measure the price movement of a wide variety of consumer goods. This is a key indicator for inflation. Core CPI is a type of CPI that excludes the goods with high price volatility e.g. food and energy.
  • Christmas Rally, or Santa Claus Rally, refers to a phenomenon of stock prices going up in the week between Christmas and New Year (or more generally, in the month of December). Numerous explanations abound, the most popular include: general happiness in the festive season, tax considerations, people investing the Christmas bonuses, and mutual fund managers “dressing up” their portfolio by pushing up the stocks right before the year end cut off date.


  • Dividend: a company pays a dividend to its shareholders as a way to distribute the profits earned. However, many high-growth (e.g. tech) companies choose not to pay dividends in order to retain cash for expansion. In this case, shareholders will have to count on the appreciation of share price instead of a stable dividend income stream as a reason to hold on to this investment.
  • DJIA: see Dow Jones Industrial Average
  • Dow Jones Industrial Average (DJIA or The Dow): a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The index, launched in 1896, is the oldest and the most widely-followed index in the world.


  • Earnings per share (EPS): mostly applicable to publicly-listed companies, EPS is the net income of a company divided by the number of shares outstanding. This info is most useful in calculating the P/E of the company.
  • ETF: a basket of securities that tracks the performance of a stock, bond, or commodity index. Similar to stock, each ETF has a ticker and is traded on stock exchange. >> more


  • Fiscal year: a 12-month period for the financial year, with the starting and ending month chosen by the entity. For example, governments in Japan and Hong Kong have a fiscal year ending March (e.g. April 2005 - March 2006). Most US/Global companies has a fiscal year ending December, same as Calendar year.
  • Foreign exchange (Forex, FX): trading of currencies, which is always done in pairs, i.e. buying one and selling the other simultaneously. Examples: EUR/USD, USD/JPY. >> more


  • Initial Public Offering (IPO): a process of taking a private company to public by offering the shares of the company to the public market via a stock exchange. See Publicly-listed companies for more info.
  • ISM survey (Manufacturing ISM Report on Business) is a purchasing survey of the manufacturing sector of the US, commonly used in monitoring and forecasting the overall economic trend.


  • Leverage: Leveraged trading (or trading on margin) means that you are not required to put up the full value of the position of the trade. It allows substantial gain or loss with a small amount of capital.


  • Money market fund: funds that comprise of high-quality, short-maturity debt instruments, giving a yield similar to CDs but can be traded once a day. >> more
  • Mutual fund: a portfolio of different securities (usually stocks and/or bonds in a particular industry or region) being divided into numerous units and then bought by investors. In other words, each investor gets a fraction of the many securities in the pool, thus diversifying risk. Mutual fund is actively managed by fund managers who actively pick and dump the securities within the portfolio in order to maximize returns.


  • NASDAQ (National Association of Securities Dealers Automated Quotations system) is the largest electronic screen-based equity securities market in the US. The NASDAQ Composite Index includes all US and non-US companies (~3,000) listed on this exchange. Many big technology companies e.g. Microsoft, Dell and Apple are traded on NASDAQ.
  • Non-farm payroll statistics is reported by the US Bureau of Labor Statistic Department and is accounted for ~80% of all workers in the US. Government policy makers and economists look at the change in non-farm payroll to predict future levels of economy activity.


  • Operating margin: operating income divided by revenue. This is a "business-oriented" measure of the profitability of a company because it excludes non-operational factors such as interest expense and taxes. For overall profitability, we look at Profit margin.


  • P/E: see Price/earning ratio
  • Price/earning ratio (P/E): Stock price divided by EPS. It is a measure of whether the value the public market assigns to the company (i.e. price) is relatively high or low when compared to its earnings. Generally, the higher the P/E, the more expensive the company is (i.e. not a bargain). However, different industries and regions have different average P/Es because of the difference in future earnings potential. It's both an art and a science!
  • Private equity firms: a firm that specializes in identifying and investing in non-public companies. They make money by fixing up the investees and then selling them to others (e.g. other corporations, or to the public via an initial public offering) at a higher price.
  • Profit margin: net income divided by revenue; a measure of the overall profitability of a company. For a "business-oriented" approach to measure profitability, we look at Operating margin.
  • Publicly-listed: a company is publicly-listed when its shares are traded on a stock exchange. In this case, shares of the company are available to anyone. The person who owns 1 or more shares becomes a shareholder and thus an owner of the company. >> more


  • q/q: quarter-on-quarter


  • Return on Equity (ROE): Net income divided by total equity (net asset). This is an important financial ratio to measure a company's efficiency in generating profit from its investments.


  • Santa Claus Rally: see Christmas Rally
  • Securities: stocks, bonds, and their hybrids in numerous forms.
  • S&P 500 Index: a list of 500 US companies that are representative of the US economy. The list is selected and maintained by Standard & Poor’s, a financial research and analysis agency, mainly based on their size and influence. This index, together with Dow Jones Industrial Average (DJIA), is among the most closely-watched indices in the world.


  • Time deposit: see Certificate of deposit


  • US treasury: Treasury bonds issued by the US Department of Treasury (responsible for revenue for government). Each bond is given a price of 100 as well as a coupon rate (rate of the interest payment) at the time of issue, and is then freely traded on the market. Generally, at time of economic growth, investors will prefer the higher-yielding stock market, and thus the bond price will decrease (<100).>


Anonymous Anonymous said...

A good compilation of financial terms explained well.

Tuesday, October 16, 2007  
Blogger kedar said...

simple and lucid explanation complicated terms

Tuesday, September 16, 2008  
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Wednesday, June 03, 2009  

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