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Financial Markets & Investing terms
Market analytics: equities, credit, derivatives, FX, crypto, portfolios, trading, macro and private markets.
Alpha The portion of an investment's return not explained by its exposure to a benchmark or risk factors. Beta A measure of how much an asset's returns move relative to a benchmark, most often the broad market. Discounted cash flow (DCF) A valuation method estimating an asset's worth as the present value of its expected future cash flows. Factor investing Building portfolios around specific, historically rewarded drivers of return, such as value or momentum. Fundamental analysis Valuing a security from the underlying business's financial health and economic conditions, not its price history. Price-to-earnings ratio (P/E ratio) A valuation ratio comparing a company's share price to its earnings per share. Technical analysis Forecasting future price movement from historical price and volume patterns rather than company fundamentals. Bond duration A measure of a bond's price sensitivity to changes in interest rates, expressed in years. Credit spread The extra yield a bond offers over a comparable risk-free benchmark, compensating for credit risk. Loss given default (LGD) The share of an exposure a lender expects to lose if a borrower actually defaults, after recoveries. Probability of default (PD) The estimated likelihood that a borrower fails to make required payments on a debt within a given time horizon. Yield curve A plot of bond yields across different maturities, most often for government debt of a single issuer. Black-Scholes model A mathematical model for pricing European-style options from the underlying's price, volatility, and time to expiry. Contango and backwardation The two shapes a futures curve can take, contango slopes upward with time to delivery, backwardation slopes downward. Crack spread The price gap between crude oil futures and refined product futures like gasoline, used to gauge refining profit margins. Forward points The difference between a currency's spot and forward exchange rate, driven by the interest rate gap between the two currencies. Futures curve The set of prices for futures contracts on the same underlying asset across different expiration dates, plotted together. Implied volatility (IV) The volatility level that, plugged into an options pricing model, reproduces the option's current market price. Option Greeks A set of measures showing how an option's price responds to changes in the underlying, volatility, time, and rates. Carry trade Borrowing in a low-interest-rate currency to invest in a higher-yielding one, profiting from the rate gap unless the exchange rate moves against it. Purchasing power parity (PPP) A theory that exchange rates should adjust so identical goods cost the same amount across countries once converted to a common currency. Real effective exchange rate (REER) A currency's exchange rate against a trade-weighted basket of other currencies, adjusted for relative inflation. Decentralized exchange (DEX) A crypto trading platform that executes trades directly between users' wallets via smart contracts, without a central custodian. Gas fees The transaction fees paid to a blockchain network to process and validate an operation, priced by network demand. MVRV ratio (market value to realized value) A crypto valuation metric comparing an asset's current market value to the value at which coins last moved on-chain. On-chain analytics Analyzing transaction and wallet data recorded directly on a public blockchain to study crypto asset activity. Stablecoin A cryptocurrency designed to hold a steady value, usually pegged one-to-one to a fiat currency such as the US dollar. Total value locked (TVL) The total value of crypto assets currently deposited in a decentralized finance protocol. Wallet clustering Grouping blockchain addresses believed to be controlled by the same person or entity, using transaction pattern heuristics. Asset allocation The decision of how to split an investment portfolio across asset classes such as stocks, bonds, and cash. Backtesting Testing a trading or investment strategy against historical data to see how it would have performed. Benchmark index A market index used as the reference point for judging whether a portfolio or fund's performance and risk are competitive. Climate value-at-risk (climate VaR) An estimate of how much climate change and the transition to low carbon could reduce the value of a portfolio. Expected shortfall (ES) The average loss in the worst-case scenarios that exceed a value-at-risk threshold. Internal rate of return (IRR) The discount rate at which an investment's projected cash flows have a net present value of zero. Maximum drawdown (MDD) The largest peak-to-trough decline in an investment's value before it reaches a new high. Money-weighted return (MWR) A return measure that accounts for the size and timing of an investor's own deposits and withdrawals, like an internal rate of return. Portfolio rebalancing Buying and selling holdings to bring a portfolio's asset weights back to its target allocation after they drift. Risk profiling Assessing an investor's ability and willingness to tolerate investment losses, used to guide asset allocation decisions. Sharpe ratio A measure of risk-adjusted return: excess return earned per unit of total volatility taken on. Sortino ratio A risk-adjusted return measure like the Sharpe ratio, but penalizing only downside volatility. Time-weighted return (TWR) A return measure that removes the effect of cash flows into or out of a portfolio, isolating the manager's investment performance. Tracking error The standard deviation of the difference between a portfolio's returns and its benchmark's returns. Value at risk (VaR) An estimate of the maximum loss a portfolio is expected to face over a given period at a set confidence level. Volatility The degree to which an asset's returns fluctuate over time, the standard proxy for investment risk. Algorithmic trading Using computer programs to automatically place and manage trade orders based on predefined rules. Alpha decay The tendency of a trading signal's predictive power and profitability to weaken over time as more traders exploit it. Alternative data Non-traditional data sources, such as satellite imagery or card transactions, used to generate an investing edge. Bid-ask spread The gap between the highest price buyers will pay and the lowest price sellers will accept for an asset. Order book A real-time list of all outstanding buy and sell orders for an asset, ranked by price. Point-in-time data Data reconstructed exactly as it appeared on a given historical date, including figures that were later revised. Quantitative trading Trading strategies built on mathematical models and statistical analysis rather than discretionary judgment. Transaction cost analysis (TCA) Measuring the real cost of executing a trade, including spread, market impact, and timing, versus a benchmark. Credit card panel data Anonymized, aggregated card transaction data used to estimate company revenue and consumer spending before official reports. Consumer price index (CPI) A measure of the average change in prices paid by consumers for a fixed basket of goods and services. Nowcasting Estimating the current or very near-term value of an economic indicator before official data is released. Purchasing managers' index (PMI) A survey-based index summarizing whether business activity in manufacturing or services is expanding. Capitalization rate (cap rate) The ratio of a property's annual net operating income to its current market value, used to compare income-property returns. Multiple on invested capital (MOIC) The total value a private investment has returned, divided by the total capital invested, without adjusting for the time it took. Public market equivalent (PME) A method comparing a private fund's returns to what the same cash flows would have earned invested in a public market index. Total value to paid-in (TVPI) A private fund performance ratio, total value returned plus unrealized value, divided by capital investors have actually paid in. Dollar-cost averaging (DCA) Investing a fixed amount at regular intervals regardless of price, buying more shares when prices are low and fewer when high. Expense ratio The annual percentage of fund assets deducted to cover a fund's operating costs, charged regardless of performance. Tax-loss harvesting Selling an investment at a loss to offset taxable gains elsewhere, then reinvesting in a similar but not identical asset.