Finance Glossary
Every term that has been an answer in Guess Macro, defined. 78 entries so far, written and reviewed by Ryan Hogan, a licensed CPA — plain-language definitions of the vocabulary that actually turns up in market coverage.
A
ACCRUAL
Recognising revenue when earned and expenses when incurred, regardless of when cash moves.
The basis of standard financial reporting, and the reason a profitable company can still run out of cash - profit and cash flow answer different questions.
ANNUITY
A contract, usually with an insurer, that converts a lump sum into a stream of payments over time - often for the remainder of the holder's life.
The pricing turns on longevity risk. The insurer is effectively betting on average lifespans, which is why annuity rates move with both interest rates and mortality assumptions.
ARBITRAGE
Profiting from a price difference for the same asset in two markets by buying in one and selling in the other, in principle without taking risk.
True riskless arbitrage is rare and short-lived. Most strategies called arbitrage carry real risk - the trade can widen against you before it converges.
B
BACKWARDATION
A futures market where contracts for later delivery trade below nearer ones, so the curve slopes downward - the opposite of contango.
Typically signals immediate scarcity: buyers are paying a premium for delivery now rather than later.
BANKRUPTCY
A legal process for an insolvent debtor, either reorganising obligations while continuing to operate or liquidating assets to repay creditors in order of priority.
In the US, Chapter 11 is reorganisation and Chapter 7 is liquidation. Equity holders sit last in the queue and are frequently wiped out entirely.
BEAR
A market in sustained decline, conventionally a fall of 20% or more from a recent peak; a bear is an investor expecting prices to fall.
The 20% threshold is convention rather than a definition with any analytical basis.
BETA
A measure of how much an asset moves relative to the overall market. A beta of 1.0 moves in line with the market; above 1.0 amplifies its swings.
Beta captures only the risk that cannot be diversified away. It says nothing about company-specific risk, which is the part diversification removes.
BREAKEVEN
The point at which revenues exactly cover costs, so profit is zero. In bond markets, the inflation rate at which an inflation-linked bond and a nominal bond return the same.
The bond sense is watched as a market-implied inflation forecast, since it reflects what buyers are actually willing to pay for protection.
BUBBLE
A period in which asset prices rise far above any plausible estimate of fundamental value, driven by expectations of further price rises rather than by income the asset produces.
Notoriously hard to call in advance. The honest position is that bubbles are obvious mainly in hindsight, which is why the label stays contested while one is inflating.
BUYBACK
A company repurchasing its own shares on the market, reducing the count outstanding and so raising earnings per share even if total earnings are unchanged.
An alternative to dividends for returning cash. Critics argue buybacks can flatter the per-share metrics that executive pay is tied to.
BUYOUT
The acquisition of a controlling stake in a company, often taking it private. A leveraged buyout funds most of the purchase with debt secured against the target itself.
The debt sits on the acquired company's balance sheet, so the target ends up carrying the borrowing used to buy it.
C
CBDC
A central bank digital currency - a digital form of sovereign money issued directly by the central bank, unlike commercial bank deposits.
The design question is disintermediation: if households can hold central bank money directly, deposits may drain from commercial banks in a stress.
CLAWBACK
A contractual right to reclaim money already paid - typically executive bonuses after a restatement, or fund distributions returned to investors.
US listed companies must maintain clawback policies covering incentive pay awarded on financial results that are later restated.
CLEARING
The process between a trade being agreed and settled, in which obligations are confirmed, netted and guaranteed - usually by a central counterparty standing between buyer and seller.
Central clearing was extended to most standardised derivatives after 2008, replacing a web of bilateral exposures with a single guarantor.
CONTANGO
A futures market where contracts for later delivery trade above nearer ones, so the curve slopes upward.
Costly for funds that must keep rolling positions forward, since each roll sells a cheaper contract to buy a dearer one. The opposite is backwardation.
CONVEXITY
The curvature in a bond's price-yield relationship - how much its duration itself changes as yields move.
Positive convexity is desirable: prices rise more when yields fall than they drop when yields rise by the same amount. Duration alone understates this.
CORRELATION
A statistical measure, between -1 and +1, of how two variables move together.
The uncomfortable pattern in crises is that correlations converge toward 1 exactly when diversification is most needed - assets that normally diverge fall together.
COVENANT
A condition in a loan agreement requiring the borrower to maintain certain financial ratios or refrain from certain actions. Breaching one can trigger default.
Covenant-lite lending strips most maintenance tests out, leaving lenders far less early warning that a borrower is deteriorating.
CRYPTO
Digital assets recorded on a blockchain and secured by cryptography rather than issued by a central bank.
Regulatory treatment differs sharply by jurisdiction and by asset, and whether a given token is a security remains actively litigated in the US.
D
DEBENTURE
A debt instrument backed only by the issuer's general creditworthiness rather than by specific pledged collateral.
Because nothing secures it, a debenture ranks behind secured debt in a liquidation and carries a correspondingly higher yield.
DEBT
Money borrowed that must be repaid, normally with interest, under terms agreed in advance.
Ranks ahead of equity in a liquidation. That seniority is why debt is cheaper for the borrower and lower-returning for the lender.
DEFAULT
Failure to meet a debt obligation - missing a payment, or breaching a term that makes the debt immediately repayable.
A technical default from a covenant breach can occur while payments are still being made on time, which is why the term needs care.
DEFLATION
A sustained fall in the general price level - inflation below zero. Money gains purchasing power over time.
Feared more than mild inflation because it encourages households to delay spending and raises the real burden of existing debt, which can deepen a downturn.
DELEVERAGING
Reducing debt relative to equity or assets, by repaying borrowings, raising capital, or selling assets.
Painful in aggregate: when many parties deleverage at once, the asset sales depress prices and worsen the ratios everyone is trying to repair.
DEPRECIATION
The accounting allocation of a tangible asset's cost across its useful life. Separately, a fall in a currency's value against others.
As an expense it reduces reported profit without any cash leaving the business, which is why cash flow statements add it back.
DILUTION
The reduction in existing shareholders' proportional ownership when a company issues new shares.
Not automatically bad - if the capital raised earns more than its cost, existing holders can be better off owning a smaller share of a larger business.
DISCOUNT
A reduction from a reference price; in valuation, the rate used to convert future cash flows into present value.
The discount rate is where most of the disagreement in a valuation hides - small changes move the answer far more than the cash-flow forecast does.
DURATION
A bond's price sensitivity to interest rates, expressed in years. A duration of 7 implies roughly a 7% price fall if yields rise one percentage point.
Not the same as maturity - it accounts for the timing of every cash flow, so a bond paying large coupons early has shorter duration than its maturity suggests.
E
EASING
Loosening monetary policy to support activity - cutting rates, or buying assets once rates are already near zero.
Quantitative easing works on longer-term yields by purchasing bonds directly, when cutting short rates further is no longer available.
EQUITY
An ownership stake. In a company, the residual claim on assets after all liabilities are settled; on a balance sheet, assets minus liabilities.
Equity holders are paid last in a liquidation, which is precisely why they hold the upside if the business succeeds.
F
FIDUCIARY
A person or institution legally obliged to act in another's interest ahead of their own.
A stricter standard than suitability. A fiduciary must recommend what is best for the client, not merely something defensible.
FLOAT
The portion of a company's shares actually available for public trading, excluding closely held blocks. In insurance, premiums held before claims are paid.
A small float makes a stock easier to move on modest volume, which is why float size features in short-squeeze episodes.
FOMC
The Federal Open Market Committee - the body within the US Federal Reserve that sets monetary policy.
Meets roughly eight times a year. Minutes are published three weeks later and are parsed closely for dissent.
FRONTRUNNING
Trading ahead of a known incoming order to profit from the price move it will cause.
Illegal when it exploits a client's order. The harder cases involve inferring order flow from public market data rather than misusing confidential information.
FUTURES
A standardised exchange-traded contract to buy or sell an asset at a set price on a set future date.
Unlike options, both sides are obliged to perform. Daily margining means gains and losses settle continuously rather than at expiry.
G
GAMMA
The rate at which an option's delta changes as the underlying price moves - the second derivative of option value with respect to price.
Dealers hedging large gamma positions must trade the underlying as it moves, which can amplify the very move they are hedging.
GOODWILL
The premium an acquirer pays for a business above the fair value of its identifiable net assets, recorded as an intangible asset.
Not amortised under US GAAP but tested for impairment. A large write-down is effectively an admission that an acquisition was overpaid for.
GREENSHOE
An over-allotment option letting underwriters issue additional shares above the planned size of an offering, typically up to 15%.
Used to stabilise the price after listing: underwriters can cover a short position by exercising the option or by buying in the market.
GUIDANCE
A company's own forecast of its future results, issued alongside reported figures.
Shares often react more to a change in guidance than to the results themselves, since guidance is the forward-looking part.
H
HAIRCUT
The discount applied to an asset's market value when it is pledged as collateral, protecting the lender against price falls.
Haircuts widen under stress, so a borrower must post more collateral for the same loan precisely when funding is hardest to obtain.
HARVESTING
Realising losses deliberately to offset taxable gains elsewhere, then reinvesting to maintain exposure - tax-loss harvesting.
US rules disallow the loss if a substantially identical security is repurchased within 30 days, which is what the wash-sale rule polices.
HAWKISH
Describing a policymaker or stance that prioritises controlling inflation, and so favours higher interest rates or tighter policy.
Markets parse central bank language for shifts in tone. A statement read as more hawkish than expected typically lifts short-term yields immediately.
HIKE
An increase in a central bank's policy interest rate.
What matters to markets is usually the path implied for future meetings rather than the single move being announced.
I
IMPAIRMENT
A write-down recognising that an asset's carrying value on the balance sheet exceeds what it can now recover.
Non-cash, but informative - a large goodwill impairment is an accounting admission that an acquisition did not deliver.
INFLATION
The rate at which the general price level rises, so each unit of currency buys less than it did. Usually quoted as a year-over-year percentage change in a price index such as CPI.
Central banks in most developed economies target around 2% a year. The target is not zero because mild inflation gives policymakers room to cut real interest rates in a downturn.
L
LIBOR
The London Interbank Offered Rate, a former benchmark for the rate at which banks lend to one another, once referenced by trillions in contracts.
Discontinued after a rate-rigging scandal exposed that it rested on estimates rather than transactions. Replaced by transaction-based rates such as SOFR.
LIQUIDITY
How quickly an asset can be converted to cash without materially moving its price.
Liquidity is a property of conditions, not just of the asset. Instruments that trade freely in calm markets can become effectively unsellable in a panic, which is how funding crises spread.
LOCKUP
A period after a listing during which insiders are contractually barred from selling their shares, commonly 90 to 180 days.
Expiry is watched closely, since a wave of newly sellable stock can weigh on the price.
M
MONOPSONY
A market with a single dominant buyer, mirroring monopoly on the selling side.
Most often discussed in labour markets, where a dominant local employer can suppress wages below the competitive level.
MORTGAGES
Loans secured against real property, where the lender can foreclose if the borrower fails to pay.
Bundling them into securities spread US housing risk through the global financial system, which is how a domestic downturn became a worldwide crisis.
O
OLIGOPOLY
A market dominated by a small number of sellers, each large enough that its decisions affect the others.
Firms may reach parallel pricing without any agreement, which makes oligopoly hard to police under laws aimed at explicit collusion.
P
PAYROLLS
The count of jobs added or lost across an economy in a month, taken from employer surveys. In the US, non-farm payrolls.
Among the most market-moving releases, because employment feeds directly into the growth-versus-inflation judgement central banks are making.
PONZI
A fraud paying existing investors with money from new ones rather than from genuine returns, requiring perpetual new inflows to survive.
Collapse is arithmetic rather than bad luck: redemptions eventually exceed new money, which is why these schemes fail in downturns.
PROVISION
An amount set aside in accounts for a liability that is probable but uncertain in timing or size - loan losses, warranties, litigation.
Provisioning involves judgement, so the level a bank sets is read as a signal of how it expects credit to perform.
R
REBALANCING
Restoring a portfolio to its target allocation by selling what has grown beyond its weight and buying what has fallen below.
Mechanically contrarian - it sells strength and buys weakness, which is what keeps the risk profile from drifting with the market.
ROLLOVER
Replacing a maturing obligation with a new one - refinancing debt, or moving a futures position into a later contract.
Rollover risk is the danger that refinancing proves unavailable or far more expensive when the obligation falls due.
S
SEASONALITY
A recurring pattern tied to the time of year rather than to the underlying trend.
Official statistics are usually seasonally adjusted so that a normal December retail surge is not mistaken for genuine growth.
SEIGNIORAGE
The profit a government earns from issuing currency - the difference between a unit of money's face value and what it costs to produce.
For physical notes the margin is large. It also describes revenue a state raises by creating money, which at the extreme becomes an inflation tax.
SENTIMENT
The prevailing attitude of investors or consumers toward conditions, measured by surveys or inferred from positioning.
Often read contrarily: extreme optimism implies most buying has already happened, leaving little marginal demand.
SLIPPAGE
The difference between the price expected when an order is placed and the price at which it actually executes.
Grows with order size and thin liquidity, and is a large part of why paper strategies outperform live ones.
SOVEREIGN
Relating to a national government - most often its debt, or the risk that a state fails to meet its obligations.
A government borrowing in its own currency can always print to repay; borrowing in a foreign currency removes that escape, and is where sovereign crises concentrate.
SPAC
A special purpose acquisition company - a shell that raises money in a listing and then seeks a private business to merge with, taking it public.
Offers a faster route to listing than a traditional IPO, with different disclosure obligations. Investors can usually redeem before a deal completes.
SPINOFF
A company separating a division into an independent entity, typically by distributing shares in it to existing shareholders.
The argument is that the parts attract more appropriate investors and sharper management focus apart than combined.
SPOOFING
Entering orders with no intention of executing them, to create a false impression of supply or demand and move the price.
Explicitly illegal in the US under Dodd-Frank. Detection relies on cancellation patterns - orders placed and pulled faster than genuine interest would explain.
SPREAD
The difference between two prices or rates - between a bond's yield and a government benchmark, or between the bid and ask in a quoted market.
Credit spreads widen when investors demand more compensation for default risk, which makes them one of the more honest real-time gauges of financial stress.
STAGFLATION
The combination of stagnant growth, high unemployment and high inflation at the same time.
Awkward for central banks because the usual tools conflict: raising rates fights the inflation but worsens the stagnation. The 1970s oil shocks are the standard example.
SUBPRIME
Lending to borrowers with weak credit histories, priced at higher rates to compensate for elevated default risk.
Subprime mortgage losses triggered the 2008 crisis, though the amplification came from how those loans were packaged and leveraged.
SWAP
A contract to exchange one stream of payments for another - most commonly fixed interest for floating on a notional amount that is never itself exchanged.
The notional overstates the economics enormously: only the difference between the payments actually changes hands.
T
THRIFT
A savings institution focused on taking deposits and making home loans, distinct from a commercial bank.
The US savings and loan crisis of the 1980s remains the standard case study in how deposit insurance plus deregulation can distort incentives.
TIGHTENING
Central bank policy that restrains activity - raising rates or shrinking the balance sheet - usually to bring inflation down.
Acts with a lag often estimated at a year or more, which is why policymakers must act on forecasts rather than on current data.
TREASURY
A debt security issued by a national government - in the United States, by the Department of the Treasury. Bills mature in a year or less, notes in two to ten years, bonds beyond that.
US Treasuries are treated as the benchmark risk-free asset, so their yields anchor the pricing of nearly everything else.
TROUGH
The low point of a business cycle, where contraction ends and recovery begins.
Like the peak, dated only in retrospect once enough data confirms the turn.
U
UNEMPLOYMENT
The share of the labour force without work but actively seeking it.
Can fall for a bad reason - people giving up the search leave the labour force entirely, which is why participation is read alongside it.
UNICORN
A privately held startup valued at more than one billion dollars.
Coined in 2013 when such companies were rare. The valuation is set by the last funding round rather than by a liquid market, so it can be stale.
V
VIX
An index of expected 30-day volatility in the S&P 500, derived from option prices.
Nicknamed the fear gauge. It measures the size of expected moves, not their direction, so it can spike on sharp rallies too.
VOLATILITY
The degree to which a price fluctuates over time, usually measured as the standard deviation of returns and quoted annualised.
Implied volatility - what option prices suggest the market expects - is watched more closely than realised volatility, because it is forward-looking.
W
WHISPER
An informal expectation for a company's results circulating among traders, distinct from the published analyst consensus.
Explains shares falling on results that beat the official consensus - they missed what the market was actually positioned for.
WITCHING
An expiry date when several classes of derivative contract expire together - triple witching when index futures, index options and stock options coincide.
Volume and volatility spike as positions are closed or rolled, usually without lasting directional meaning.