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Finance, in plain English

345 terms you'll meet everywhere money is discussed — each defined without jargon on its own page. Want more than a definition? Every term links to the free Finicade game that teaches it properly, one level at a time.

Everyday Money 14

Assets and Liabilities: Assets are what you own that has value — cash, investments, a home; liabilities are what you owe — loans, credit-card balances, a mortgage.
Budget: A plan for where your money goes before it goes there.
Cash Flow: The timing of money in versus money out.
Emergency Fund: Cash set aside for the month life goes sideways — job loss, car repair, medical bill.
Expenses: Money going out — rent, food, subscriptions, that late-night delivery.
Income: Money coming in — salary, a side gig, interest, dividends.
Needs vs Wants: Needs keep your life running (rent, groceries, getting to work); wants make it nicer (streaming, eating out, the newer phone).
Net Worth: What you own minus what you owe.
Pay Yourself First: Move money to saving the day you're paid, before it can be spent, instead of hoping something's left at month-end.
Real Return: The return on an investment after subtracting inflation — what your money can actually buy more of, not just the bigger number.
Salary: A fixed amount an employer pays you over a year, usually split into monthly pay.
Savings Account: A bank account that keeps your money safe and pays a little interest, while staying instantly accessible.
Take-Home Pay: Your pay after tax and deductions — the number to budget from.
The 50/30/20 Rule: A starter budget that splits take-home pay 50% needs / 30% wants / 20% saving.

Borrowing & Credit 21

Amortization: Paying off a loan in equal instalments that each cover the interest due plus a slice of principal.
APR (Annual Percentage Rate): The yearly cost of borrowing money, expressed as a percentage.
APY (Annual Percentage Yield): The yearly return on savings once compounding is counted — the savings-side twin of APR.
Collateral: An asset pledged to back a loan or trade, which the lender can seize if you don't pay.
Compound Interest: Interest that earns interest.
Compounding Frequency: How often interest is added — yearly, monthly, daily or continuously.
Credit Card: A revolving line of credit: spend now, repay later.
Credit Score: A number lenders use to gauge how reliably you repay.
Debt: Money you owe and must repay, usually with interest.
Default: When a borrower fails to make a payment they legally owe.
EAR (Effective Annual Rate): The true yearly rate once compounding within the year is counted — so a card quoting 2% a month is really about 27% a year, not 24%.
Good Debt vs Bad Debt: Good debt is cheap and buys something that grows or earns — a mortgage, student loans, a business loan.
Interest Rate: The price of money: what you're paid to lend it (savings) or charged to borrow it (loans), as a percentage per year.
Leverage: Using borrowed money to increase the size of a position — magnifying both gains and losses.
Minimum Payment: The smallest amount a lender will accept on a credit card this month.
Mortgage: A long-term loan to buy property, secured on the home itself.
Overdraft: Spending more than your account holds, with the bank covering the gap — for a fee or steep interest.
Principal: The original sum borrowed or invested, before any interest.
Refinancing: Replacing an existing loan with a new one on better terms — usually a lower rate.
Secured vs Unsecured Loan: A secured loan is backed by collateral the lender can seize (a mortgage, a car loan); an unsecured one isn't (most credit cards).
Simple Interest: Interest charged only on the original amount, never on interest already added.

Saving & Investing 45

Annuity: A fixed series of payments over a set period — a mortgage, a pension, loan instalments.
Asset Allocation: How you split your money across broad buckets — stocks, bonds, cash, property.
Behavioral Biases: The systematic mental shortcuts that lead investors astray — overconfidence, herding, loss aversion, anchoring.
Bond: An IOU issued by a government or company: you lend them money, they pay you interest (the coupon) and return the principal at maturity.
Book Value: A company's net worth on paper — assets minus liabilities from the balance sheet.
Capital Budgeting: How firms decide which big, long-term investments to make — new factories, products, acquisitions — by weighing each project's future cash flows against its cost.
Capital Gain: The profit when you sell an asset for more than you paid.
Cost of Equity: The return shareholders demand for the risk of owning a company's stock — often estimated with CAPM.
Diversification: Not putting all your eggs in one basket.
Dividend: A slice of a company's profit paid out to shareholders, usually in cash every quarter.
Dividend Discount Model: A way to value a stock as the present value of all the dividends it will ever pay.
Dividend Reinvestment (DRIP): Automatically using the dividends a stock or fund pays to buy more shares, instead of taking the cash.
Dividend Yield: A stock's annual dividend divided by its share price — the cash income it throws off as a percentage.
Dollar-Cost Averaging: Investing a fixed amount on a set schedule regardless of price.
EBITDA: Earnings before interest, taxes, depreciation and amortisation — a rough proxy for the cash a business's core operations throw off.
Enterprise Value: What it would cost to buy a whole company — its market cap plus debt, minus cash.
EPS (Earnings Per Share): A company's profit divided by the number of shares — how much of the earnings each share represents.
Equity Valuation: Estimating what a share is really worth, rather than what it's trading at — usually by discounting the future cash it will generate.
ETF (Exchange-Traded Fund): A fund that holds a whole basket of investments — often an entire index like the S&P 500 — and trades on the exchange like a single share.
Expected Return: The return you'd earn on average from an investment, weighting each possible outcome by how likely it is.
Free Cash Flow: The cash a company has left after paying for its operations and investments — the money genuinely available to reward investors or pay down debt.
Future Value: What a sum today will grow into by some later date, given a rate of return.
Hedge Fund: A lightly regulated fund that chases returns with tools ordinary funds avoid — short selling, leverage, derivatives.
Holding-Period Return: The total return over the time you actually held an investment — price change plus any income — as a percentage of what you put in.
Index Fund: A fund that doesn't try to beat the market — it simply buys everything in an index and rides along.
IRR (Internal Rate of Return): The discount rate at which a project's NPV is exactly zero — effectively its built-in annualised return.
Liquidity: How quickly something converts to cash without losing value.
Market Efficiency: The idea that prices already reflect all available information, so consistently beating the market is very hard.
Mutual Fund: A pooled investment where many people's money is managed together in one basket.
NPV (Net Present Value): The value today of a project's future cash flows minus its upfront cost, all discounted for the time value of money.
P/E Ratio: A stock's price divided by its earnings per share — how many dollars investors pay for each dollar of profit.
Perpetuity: A stream of equal payments that continues forever.
Portfolio: Everything you own as an investor, viewed as one thing: your stocks, bonds, funds and cash together.
Present Value: What a future sum of money is worth today, once you discount it for the return you could have earned in the meantime.
Private Equity: Investing in companies that aren't listed on a public exchange — buying, improving and later selling them.
Real Estate: Property as an investment — homes, offices, land — held for rental income, price gains, or both.
Rebalancing: Periodically trimming what's grown and topping up what's lagged to restore your target mix.
Return on Equity (ROE): Net profit as a percentage of shareholders' equity — how efficiently a company turns owners' money into earnings.
Risk Tolerance: How much ups-and-downs you can stomach — financially and emotionally — before you'd panic-sell.
Rule of 72: A mental-math shortcut: divide 72 by an annual growth rate to get the rough number of years for money to double.
Stock (Equity): A slice of ownership in a company.
Time Value of Money: A dollar today is worth more than a dollar next year, because today's dollar can be invested to earn a return.
WACC: The weighted average cost of capital — the blended return a company must earn to satisfy both its lenders and its shareholders.
Working Capital: The short-term money running a business day to day — current assets minus current liabilities.
Yield: What an investment pays you per year as a percentage of its price: a bond's interest, a stock's dividends, a savings account's rate.

Markets & Instruments 40

Basis Point: One hundredth of a percentage point — so 25 basis points is 0.25%.
Bid-Ask Spread: The gap between the highest price buyers will pay (bid) and the lowest sellers will accept (ask).
Blue-Chip Stock: Shares in a large, established, financially solid company with a long track record.
Bull and Bear Market: A bull market is a sustained rise in prices and optimism; a bear market a sustained fall, conventionally 20%+ off the peak.
Commodities: Raw physical goods traded in bulk — oil, gold, wheat, copper.
Convexity: The curvature that duration alone misses: as rates move a lot, a bond's price responds in a curved, not straight-line, way.
Coupon: The fixed interest a bond pays its holder, usually twice a year, set as a percentage of face value.
Credit Default Swap (CDS): Insurance against a borrower defaulting: the buyer pays a regular premium and gets paid out if the borrower fails.
Credit Rating: A grade — from AAA down to junk — that agencies assign to a borrower's likelihood of repaying.
Credit Spread: The extra yield a risky borrower must pay over a safe government bond, compensation for the chance of default.
Current Yield: A bond's annual coupon divided by its current market price — a quick snapshot of the income it throws off right now.
Duration: How sensitive a bond's price is to interest-rate moves, quoted in years.
DV01: The dollar change in a bond or portfolio's value for a one-basis-point move in yield — 'dollar value of an 01'.
Face Value (Par): The amount a bond promises to repay at maturity — its par value, the base the coupon is calculated on.
Forward Rate Agreement (FRA): A contract to lock in an interest rate on a future loan or deposit.
High-Yield Bond: A bond from a riskier issuer, paying more to compensate for a real chance of default — bluntly, a 'junk' bond.
IPO (Initial Public Offering): The first time a private company sells shares to the public and lists on an exchange.
Limit Order: An order to trade only at a set price or better, rather than immediately at whatever's available (a market order).
Macaulay Duration: The weighted-average time until a bond's cash flows arrive, in years — the original meaning of 'duration'.
Margin: Collateral you post to back a leveraged or derivative position, covering potential losses.
Margin Call: A demand to top up your collateral when a leveraged position has lost value.
Mark to Market: Revaluing a position at today's market price rather than what you paid, so gains and losses show up daily.
Market Capitalization: A company's total stock-market value — share price times shares outstanding.
Market Maker: A firm that quotes both a buy and a sell price and stands ready to trade either side, earning the spread between them.
Maturity: The date a bond or loan comes due and the principal is repaid.
Modified Duration: The percentage a bond's price falls for a one-point rise in yield — duration turned into a direct price-sensitivity number.
Notional: The face amount a derivative is based on, used to scale its payments — even though that sum usually never changes hands.
Primary vs Secondary Market: The primary market is where securities are first sold and the company raises money (an IPO, a bond issue); the secondary market is where investors then trade them among themselves.
Repo (Repurchase Agreement): A short-term loan dressed as a sale: you sell a security and agree to buy it back tomorrow at a slightly higher price, the difference being the interest.
Securitization: Bundling many loans — mortgages, car loans, card debt — into a single security that's sold to investors, who receive the borrowers' repayments.
Short Selling: Betting a price will fall: borrow the asset, sell it now, and buy it back later — hopefully cheaper — to return it.
Short Squeeze: When a rising price forces short sellers to buy back to cut losses, and their buying drives the price higher still — a self-feeding spiral.
Spot Price: The price to buy or sell something for immediate delivery, right now — as opposed to a forward or futures price for later.
Stop-Loss Order: A standing instruction to sell if the price falls to a set level, capping your loss automatically.
Tranche: One slice of a securitized deal, ranked by who gets paid first and who absorbs losses first.
Treasury Bond: Debt issued by a national government, seen as the safest borrower in its own currency.
VIX: The market's 'fear gauge' — an index of the volatility investors expect in US stocks over the next month, read out of option prices.
Yield Curve: A plot of interest rates against how long you lend, from months to decades.
Yield to Maturity (YTM): The single rate that makes a bond's future coupons and repayment worth exactly its current price — its true annualised return if held to the end.
Zero-Coupon Bond: A bond that pays no interest along the way — you buy it below face value and it repays the full amount at maturity, with the gap being your return.

Derivatives & Options 65

Accumulator: A structured contract to buy an asset at a discount at regular intervals — as long as it stays above a barrier.
American Option: An option you can exercise any time up to expiry, not just on the final day.
Arbitrage: Earning a riskless profit by exploiting a price difference for the same thing in two places — buy where it's cheap, sell where it's dear.
Asian Option: An option whose payoff depends on the average price over its life, not just the price at expiry.
Autocallable: A structured product that automatically redeems early, paying a set coupon, if the underlying is above a level on a check date.
Backwardation: When futures prices sit below today's spot price, so the curve slopes down — often a sign of tight supply or strong demand for the asset right now.
Barrier Option: An option that switches on or off if the price touches a set level — a 'knock-in' comes alive, a 'knock-out' dies.
Basket Option: An option on a weighted group of assets rather than a single one — paying off on the basket's combined value.
Bermudan Option: An option you can exercise on several set dates, not just at expiry (European) or any time (American) — the halfway house, named for the island between the two.
Binary Option: An all-or-nothing option: it pays a fixed amount if a condition is met at expiry, and zero otherwise.
Black–Scholes Model: The Nobel-prize-winning formula that prices an option from five ingredients: today's price, the strike, time to expiry, interest rates and volatility.
Butterfly Spread: An options combination that profits if the price lands near a target and stays there — cheap to put on, with limited risk and reward.
Call Option: The right to buy an asset at a fixed strike price before expiry.
Chooser Option: An option that lets you decide later whether it's a call or a put.
Cliquet Option: A series of forward-starting options that lock in gains at set intervals, resetting the strike each time — a 'ratchet' that banks realised profits so they can't be given back.
Collar: Protecting a stock holding by buying a put and selling a call to help pay for it — capping both your downside and your upside.
Composite Option: An option on a foreign asset whose strike and payoff are converted at the live exchange rate — you're exposed to both the asset and the currency.
Compound Option: An option on an option — the right to buy or sell another option later, for a set premium.
Contango: When futures prices sit above today's spot price, so the curve slopes up — typical when it costs money to store an asset until delivery.
Cost of Carry: The net cost of holding an asset until a futures delivery date — storage and financing, minus any income it throws off.
Covered Call: Owning a stock and selling a call option against it to pocket the premium as income.
CPPI: Constant proportion portfolio insurance — a rule that shifts money between a risky asset and a safe one to keep a floor intact, buying more risk as the cushion grows.
Daily Settlement: The futures market's habit of tallying gains and losses every single day and moving cash between accounts — 'marking to market'.
Delta: How much an option's price moves for a $1 move in the underlying — the first and most-watched Greek.
Delta Hedging: Neutralising an option's directional risk by holding an offsetting amount of the underlying — delta-many shares per option — and topping it up as delta drifts.
Derivative: A contract whose value derives from something else — a stock, an interest rate, a barrel of oil.
Early Exercise: Exercising an American option before expiry.
Equity-Linked Note: A bond whose payoff is tied to a stock or index instead of a fixed coupon — a packaged bet dressed as a note.
European Option: An option that can only be exercised on its expiry date, not before.
Exchange Option: The right to swap one asset for another — say, give up stock A to receive stock B.
Exotic Option: Any option more complex than a plain call or put — barriers, Asians, digitals, lookbacks.
Expiration: The date an option or futures contract ends.
Forward Contract: A private agreement to trade an asset at a set price on a future date — like a futures contract but bespoke and off-exchange.
Futures Contract: A binding agreement to buy or sell something at a fixed price on a future date.
Gamma: How fast delta itself changes as the underlying moves — the Greek of a Greek.
Hedging: Taking one position to offset the risk of another, like insurance you build yourself.
Implied Volatility: The volatility figure that makes an option's model price match its actual market price — the market's forecast of future turbulence, read backwards out of prices.
Interest Rate Cap and Floor: A cap pays out when a floating rate rises above a set level, a floor when it falls below one — insurance on borrowing or lending costs.
Intrinsic Value: The part of an option's price you'd pocket if you exercised it right now — how far in-the-money it is.
Lookback Option: An option that pays off against the best price reached over its life, not the price at expiry — so a call settles against the lowest low, letting you 'buy at the bottom' in hindsight.
Moneyness: Where an option's strike sits versus the current price: in-the-money (worth exercising now), at-the-money (right at the price) or out-of-the-money (no intrinsic value yet).
Option: The right — but not the obligation — to buy (a call) or sell (a put) at a set price before a set date.
Option Premium: The price you pay to buy an option — its whole cost, and the most a buyer can lose.
Option Strategies: Combining calls and puts into a shaped bet — spreads, straddles, collars, butterflies — to profit from a specific view on direction or volatility.
Path Dependence: When a payoff depends not just on the final price but on the whole route it took to get there.
Principal Protection: A structured product that guarantees your original money back while giving some of the upside of a risky asset — built from a safe bond plus an option.
Protective Put: Holding a stock and buying a put on it as insurance — the put caps your downside while you keep all the upside.
Put Option: The right to sell an asset at a fixed strike price before expiry.
Put-Call Parity: A no-arbitrage identity tying a call, a put, the stock and a bond into one equation: hold the right combination and two portfolios must cost the same.
Quanto Option: An option on a foreign asset that pays out in your home currency at a fixed exchange rate — so you get the asset's move without the currency risk.
Reverse Convertible: A structured note paying a fat coupon, with a catch: if the linked stock falls past a barrier, you're repaid in the fallen shares instead of cash.
Rho: How much an option's price responds to a change in interest rates.
Shout Option: An option that lets you 'shout' once to lock in the current gain as a floor, while keeping the upside if the price climbs further.
Spread Option: An option on the difference between two prices — the gap between crude and refined oil, or two interest rates.
Straddle: Buying a call and a put at the same strike, betting on a big move in either direction.
Strike Price: The fixed price at which an option lets you buy or sell the underlying.
Swap: A contract to exchange two streams of cash flows — classically, swapping a floating interest rate for a fixed one.
Swaption: An option on a swap — the right, not the obligation, to enter an interest-rate swap on set terms later.
The Greeks: The sensitivities of an option's price, each named after a Greek letter: delta (to the underlying's price), gamma (to delta itself), vega (to volatility), theta (to time passing) and rho (to rates).
Theta: The rate an option loses value as a day passes, all else equal — time decay.
Time Value: The slice of an option's premium beyond its intrinsic value — what you pay for the chance the price moves further your way before expiry.
Underlying Asset: The thing a derivative derives its value from — the stock behind an option, the oil behind a futures contract.
Variance Swap: A contract that pays the difference between the volatility an asset actually realises and a level agreed up front — a pure, direct bet on volatility with no option-hedging needed.
Vega: How much an option's price moves when volatility changes by one percentage point.
Volatility Smile: The real-world pattern where options far from the money imply higher volatility than those at the money — plotting them curves like a smile or skew.

Quant & Pricing 23

Backward Induction: Pricing by starting at the payoff and working backwards step by step to today.
Binomial Tree: A pricing model that chops time into steps where the price can only go up or down, then works backwards from the payoff to today.
Black–Scholes PDE: The partial differential equation every option price must satisfy, derived by hedging away all the risk.
Brownian Motion: The random, jittery path used to model how prices wander through time — borrowed from the physics of particles in a fluid.
Change of Numéraire: Choosing what to measure prices in — cash, a bond, a stock — to make a hard pricing problem simple.
Copula: A mathematical tool for stitching individual distributions into a joint one, capturing how variables move together in the tails.
Discount Factor: The number you multiply a future cash flow by to get its value today — always less than one, and smaller the further out or the higher the rate.
Fundamental Theorem of Asset Pricing: The result tying it all together: no arbitrage exists if and only if there's a risk-neutral probability measure that prices everything.
Geometric Brownian Motion: The standard model for a stock price: random Brownian shocks applied to percentage changes, so the price wanders but never goes negative.
Girsanov's Theorem: The mathematical licence to switch from the real world to the risk-neutral one by changing the drift of a random process.
Itô's Lemma: The chain rule for random processes — how to find the change in a function of a wandering price.
Jump Diffusion: A pricing model that adds sudden jumps to the smooth wandering of Brownian motion — capturing crashes and gap moves that a pure diffusion misses.
Local Volatility: A model where volatility isn't one number but varies with price and time, calibrated to match every option's market price at once.
Martingale: A process whose best guess for tomorrow is exactly today's value — no drift, a mathematically 'fair game'.
Monte Carlo Simulation: Pricing something by simulating thousands of random future paths and averaging the payoff.
No-Arbitrage: The master assumption of pricing theory: you can't make a riskless profit from nothing, because any such gap would be traded away instantly.
Random Walk: A path where each step is random and independent of the last, so the best forecast of tomorrow is simply today.
Replication: Building a portfolio of simpler assets that exactly reproduces a derivative's payoff.
Risk-Neutral Pricing: The quant's trick for pricing derivatives: instead of arguing about how the asset will really behave, construct a pretend world where everything earns the risk-free rate, price the payoff there, and no-arbitrage guarantees the answer is right in the real world too.
Stochastic Process: A quantity that evolves randomly through time — a stock price, an interest rate.
Stochastic Volatility: Modelling volatility as itself random and mean-reverting, rather than fixed.
Structured Product: A pre-packaged investment engineered from bonds and derivatives — for example, 'your money back plus half the market's upside'.
Volatility Surface: The full map of implied volatility across every strike and maturity — the smile in one direction, the term structure in the other.

Risk & Portfolio 48

Alpha: The return a manager delivers beyond what their market risk (beta) would explain — genuine skill, if it's real and repeatable.
Backtesting: Checking a model or strategy against history — did the losses that actually happened line up with what the model predicted?
Basel Rules: The global bank-regulation framework setting how much capital banks must hold against their risks.
Basis Risk: The risk that a hedge and the thing it's hedging don't move perfectly together, leaving a residual loss.
Beta: How much a stock tends to move relative to the whole market.
CAPM (Capital Asset Pricing Model): The classic model for the return an asset should offer: the risk-free rate plus its beta times the market's risk premium.
Coherent Risk Measure: A risk measure that behaves sensibly — most importantly, that says a diversified portfolio is never riskier than its parts (subadditivity).
Correlation: How closely two assets move together, on a scale from +1 (in lockstep) through 0 (unrelated) to −1 (opposite).
Counterparty Risk: The risk the other side of a trade won't honour their end — a live worry in bespoke, off-exchange contracts like forwards and swaps.
Covariance: The raw measure of whether two assets move together, before it's scaled into a tidy −1-to-+1 correlation.
Credit Risk: The risk a borrower fails to pay you back.
Default: When a borrower fails to make a payment they owe.
Drawdown: The drop from a portfolio's peak to its subsequent trough — how deep the hole got before recovery.
Economic Capital: The cushion of capital a firm decides it needs to survive severe losses at a chosen confidence — its own internal, risk-based answer to 'how much is enough?'.
Efficient Frontier: The set of portfolios that squeeze the most expected return out of each level of risk.
Efficient-Market vs Factors: Factor models explain returns by exposure to broad drivers — the market, size, value, momentum — rather than luck.
EWMA: Exponentially weighted moving average — a volatility estimate that weights recent returns more heavily than old ones, so it reacts quickly when markets turn.
Expected Shortfall (CVaR): The average loss in the bad cases beyond the Value-at-Risk cutoff — it answers 'if things go worse than VaR, how bad on average?'.
Fat Tails: The tendency for extreme moves — crashes and spikes — to happen far more often than a bell curve predicts.
Gap Risk: The danger that a price jumps straight through your stop or hedge level without trading there — leaving losses bigger than the model assumed.
GARCH: A model that captures volatility clustering — the way calm and stormy periods bunch together — by letting today's variance depend on yesterday's.
Historical Volatility: How much an asset actually moved in the past, measured as the standard deviation of its returns.
Information Ratio: A manager's excess return over a benchmark divided by their tracking error — reward per unit of active risk.
Liquidity Risk: The risk you can't sell fast enough without crashing the price, or can't fund your positions when cash dries up.
Model Risk: The risk that your model is simply wrong — bad assumptions, bad calibration, used outside its limits.
Operational Risk: The risk of loss from failed processes, systems, people or outright fraud — rogue traders, botched trades, cyber-attacks.
Portfolio Variance: The total risk of a portfolio, built from each holding's variance plus every pair's covariance.
RAROC: Risk-adjusted return on capital — profit measured against the economic capital a business ties up to cover its risks.
Recovery Rate: The fraction of a defaulted loan or bond that creditors actually get back.
Risk Budgeting: Deciding in advance how much risk each desk, strategy or asset is allowed to consume, then allocating within that limit.
Risk Premium: The extra return investors demand for holding something risky instead of a safe asset.
Risk Taxonomy: The standard filing system for risk — market, credit, liquidity, operational and the rest.
Scenario Analysis: Asking 'what happens to my portfolio if…' — a rate shock, a currency crisis, a 2008 rerun — and pricing the answer.
Sharpe Ratio: Return earned per unit of risk taken: an investment's excess return over cash, divided by its volatility.
Skewness: Whether a distribution leans one way — a long tail of big losses (negative skew) or big gains (positive skew).
Sortino Ratio: A twist on the Sharpe ratio that only counts downside volatility, not the harmless upside kind.
Standard Deviation: How spread out a set of numbers is around their average — in finance, the standard measure of volatility.
Stress Testing: Deliberately running a portfolio through brutal hypothetical scenarios — a 2008 rerun, a rate spike — to see what would break.
Systematic Risk: The market-wide risk you can't diversify away — recessions, rate shocks, crises that drag almost everything down together.
Tail Risk: The risk of rare, extreme losses out in the far tail of the distribution — the crashes that ordinary models treat as almost impossible but that keep happening.
Tracking Error: How far a portfolio's returns stray from its benchmark, measured as the standard deviation of the difference.
Unsystematic Risk: The risk specific to one company or sector — a scandal, a failed product, a factory fire.
Value at Risk (VaR): A single number summarising downside: the most you'd expect to lose over a set period at a given confidence, say '1% chance of losing more than $1m in a day'.
VaR Decomposition: Breaking a portfolio's Value at Risk into where it comes from — which positions add risk (component and marginal VaR) and which offset it.
Variance: The average of the squared distances from the mean — standard deviation before you take the square root.
Volatility: How much an asset's price swings, usually quoted as an annualised percentage.
Wrong-Way Risk: When your exposure to a counterparty grows at exactly the moment they're most likely to default — the two risks moving together, badly.
Z-Score: How many standard deviations a value sits from the average.

Macro & Economy 39

Balance of Payments: The full ledger of a country's transactions with the rest of the world — trade, income and financial flows.
Bank Leverage: How much a bank lends and invests relative to its own capital.
Budget Deficit: When a government spends more than it collects in a year, borrowing to cover the gap.
Business Cycle: The economy's recurring rhythm of expansion and contraction — boom, slowdown, recession, recovery, repeat.
Central Bank: The institution that runs a country's money — setting the base interest rate, managing the money supply and backstopping the banking system.
Comparative Advantage: The idea that everyone gains from trade if each specialises in what they give up least to produce — even a country that's worse at everything.
Consumer Price Index (CPI): The most-watched inflation gauge: the price of a fixed basket of everyday goods and services, tracked over time.
Core Inflation: Inflation excluding volatile food and energy prices — a steadier read on the underlying trend central banks actually target.
Current Account: A country's trade balance plus its net income from abroad — broadly, whether it earns more from the world than it spends.
Deflation: Falling prices across the economy — the opposite of inflation, and often more dangerous.
Devaluation: A fall in a currency's value against others — deliberate under a fixed regime, or market-driven under a floating one.
Exchange Rate: The price of one currency in terms of another — how many dollars a euro buys today.
Fiscal Policy: The government's side of the steering wheel: taxing and spending to speed up or slow down the economy.
Forward Guidance: A central bank steering the economy with words — signalling where rates are headed — so markets adjust today.
GDP (Gross Domestic Product): The total value of everything an economy produces in a year — the standard scorecard for its size and growth.
Government Debt: The total a government owes from years of borrowing — usually judged against the size of its economy (debt-to-GDP).
Hyperinflation: Inflation gone out of control — prices doubling in days, money worthless by the week.
Inflation: The general rise in prices that quietly shrinks what your money buys.
Interest Rate Parity: The no-arbitrage link between two countries' interest rates and their exchange rates: the currency with higher rates must be expected to weaken, or traders would pile in risk-free.
Liquidity Trap: When interest rates are near zero and cutting them further does nothing — people hoard cash instead of spending.
Monetary Policy: How a central bank steers the economy by moving interest rates and the money supply — cutting rates to stimulate, raising them to cool inflation.
Money Demand: How much cash people and firms want to hold rather than invest — rising when they value liquidity, falling when interest rates make holding cash costly.
Money Supply: The total money circulating in an economy — cash plus deposits.
NAIRU: The non-accelerating-inflation rate of unemployment — the lowest joblessness can go before inflation starts climbing.
Neutral Rate: The interest rate that neither heats up nor cools down the economy — the resting level policy gravitates toward.
Okun's Law: The rough rule that when output grows faster than usual, unemployment falls — and vice versa.
Output Gap: The gap between what an economy is producing and what it could produce at full stretch.
Paradox of Thrift: The twist where everyone saving more at once shrinks the economy — less spending means less income, so total saving may not even rise.
Phillips Curve: The observed trade-off between unemployment and inflation: push unemployment very low and inflation tends to rise.
Purchasing Power Parity (PPP): The idea that exchange rates should drift toward levels where a basket of goods costs the same everywhere — the theory behind the Big Mac index.
Quantitative Easing: A central bank creating new money to buy bonds, pushing rates down and cash into the system when normal rate cuts have hit zero.
Real vs Nominal: Nominal figures are in today's money; real figures strip out inflation to compare across time.
Recession: A broad, sustained fall in economic activity — output, jobs and spending all shrinking together, loosely two quarters of falling GDP.
Ricardian Equivalence: The theory that people see today's deficit as tomorrow's tax bill, so they save the windfall and government stimulus has no effect.
Seigniorage: The profit a government makes from creating money — the gap between a note's face value and the near-zero cost of issuing it.
Stagflation: The nasty combination of stagnant growth and high inflation — the Phillips-curve trade-off breaking down so both problems hit at once.
Supply and Demand: The tug-of-war that sets prices: buyers want more when it's cheap, sellers offer more when it's dear, and the price settles where the two balance.
Taylor Rule: A formula for where a central bank should set interest rates, given inflation and the output gap.
Unemployment Rate: The share of people who want work and are looking but can't find it.

Math & Statistics 28

Central Limit Theorem: The reason the bell curve is everywhere: add up enough independent random bits and their total tends to a normal distribution, whatever the pieces looked like.
Chain Rule: The rule for differentiating a function of a function — multiply the outer slope by the inner one.
Confidence Interval: A range that likely contains the true value, with a stated level of confidence — say, '95% sure the mean is between 4 and 6'.
Confidence Level: How sure you want to be — 95%, 99% — when quoting a risk figure or a statistical estimate.
Continuous Compounding: Compounding not yearly or monthly but in infinitely small instants — the mathematical limit, powered by the number e.
Derivative (Calculus): The rate at which something changes — the slope of a curve at a point.
Dot Product: Multiplying two lists of numbers pairwise and adding the results — the workhorse of portfolio maths.
e (Euler's Number): The constant ≈2.718 that shows up whenever growth compounds continuously.
Expected Value: The long-run average of a random outcome — each result weighted by its probability.
Exponential Growth: Growth that feeds on itself, so the bigger it gets the faster it grows — the maths behind compound interest and the reason small rates become huge sums over decades.
Geometric Series: A sum where each term is a fixed multiple of the last.
Hypothesis Test: A procedure for deciding whether data supports a claim — comparing what you observed against what pure chance would produce.
Integral: The area under a curve — adding up infinitely many tiny slices.
Logarithm: The inverse of exponentiation — it answers 'what power turns this base into that number?'.
Lognormal Distribution: The distribution you get when the logarithm of a quantity is normal — skewed, never negative, with a long right tail.
Mean Reversion: The tendency of a quantity to drift back toward its long-run average after straying.
Mean, Median and Mode: Three ways to name the 'typical' value: the mean (average), the median (middle) and the mode (most common).
Normal Distribution: The bell curve — the symmetric spread where most outcomes cluster near the average and extremes are rare.
P-Value: The probability of seeing data as extreme as yours if nothing real were going on.
Partial Derivative: The rate of change of a multi-input function as you nudge just one input, holding the rest fixed.
Probability: How likely something is, on a scale from 0 (never) to 1 (certain).
Probability Distribution: A description of how likely each possible value of a random quantity is — the bell curve is the famous one.
Random Variable: A quantity whose value is set by chance — a coin flip, tomorrow's return.
Regression: Fitting a line (or curve) through data to describe how one thing moves with another — the workhorse behind estimating a stock's beta.
Sampling: Studying a manageable subset to learn about a whole population you can't measure directly.
Standard Error: How much a sample estimate — like an average — would wobble if you redrew the sample.
Taylor Series: Approximating a curvy function by a polynomial built from its slopes at a point.
Vector and Matrix: A vector is an ordered list of numbers (portfolio weights, asset returns); a matrix is a grid of them (a covariance matrix).

Professional & Ethics 22

Accrual Accounting: Recording revenue and costs when they're earned or incurred, not when cash actually moves.
Agency Problem: The conflict when the people running a firm (managers) don't share the interests of its owners (shareholders).
Balance Sheet: A snapshot of what a company owns and owes at a moment in time — assets on one side, liabilities and equity on the other, always balancing.
Cash Flow Statement: The report tracking actual cash moving in and out — from operations, investing and financing.
Code of Ethics: The shared principles a profession commits to — acting with integrity, putting clients first, being honest with the market.
Conflict of Interest: When your own interests clash with a duty you owe a client — a hidden commission, a personal stake.
Corporate Finance: How companies raise money and decide where to invest it — funding, capital structure, and which projects clear the bar.
Depreciation: Spreading the cost of a long-lived asset over the years it's used, instead of expensing it all at once.
Disclosure: Telling clients and markets what they need to know — fees, conflicts of interest, risks — openly and up front.
Due Diligence: The homework an investor or adviser must do before acting — checking facts, risks and suitability rather than taking claims on trust.
DuPont Analysis: Breaking return on equity into its drivers — profit margin, asset turnover and leverage — to see why a company's ROE is high or low.
ESG: Judging investments on environmental, social and governance factors alongside financial ones.
Fiduciary Duty: The legal and ethical obligation to act in someone else's best interest ahead of your own — the standard a financial adviser or trustee is held to.
Financial Ratios: Standard ratios — liquidity, profitability, leverage, valuation — that turn raw statements into comparable signals about a company's health.
Financial Statements: The three core reports that tell a company's financial story — the balance sheet, income statement and cash-flow statement.
GIPS: Global Investment Performance Standards — the voluntary rulebook for reporting investment returns honestly and comparably, so managers can't cherry-pick their track record.
Goodwill: The premium a buyer pays for a company above the fair value of its identifiable assets — brand, reputation, customer loyalty.
IFRS vs GAAP: The two main accounting rulebooks — international (IFRS) and US (GAAP).
Income Statement: The report of a company's revenues, costs and resulting profit over a period.
Investment Policy Statement (IPS): The written plan setting a client's goals, risk tolerance, time horizon and constraints — the contract that keeps investing disciplined instead of reactive.
Management Fee: The annual charge a fund takes for running your money, quoted as a percentage of assets.
Material Nonpublic Information: Price-moving information the public doesn't yet have.