Money words, in plain language
What each word means, with an example in numbers.
60 words
No word matches. Try a shorter one.
- Amortisation
Paying back a loan bit by bit, each payment part interest and part debt.
Example: A €100,000 loan at 3% over 25 years costs about €474 a month.
Formula:
Payment = loan × r ÷ (1 − (1 + r)^−months), r = monthly rate- APR / APY (yearly rate)
The yearly rate that includes costs and how often interest is added, so offers can be compared.
Example: 1% a month added monthly is 12.68% a year, not 12%.
Formula:
Yearly rate = (1 + rate per period)^periods − 1- Asset allocation
How your money is split between kinds of assets, such as shares, bonds and cash.
Example: A 60/40 mix of €10,000 is €6,000 in shares and €4,000 in bonds.
- Bear market
A long fall in prices, usually 20% or more from the last high.
Example: An index that drops from 4,000 to 3,000 has fallen 25%: a bear market.
- Benchmark
What an investment is measured against to see if it did well.
Example: A fund gained 6% while its benchmark gained 8%: it fell 2 points short.
- Beta
How much an asset tends to move when the whole market moves.
Example: A share with a beta of 1.5 tends to rise 15% when the market rises 10%.
- Bid-ask spread
The gap between the price buyers offer and the price sellers ask.
Example: Buy at €10.02, sell at €10.00: the spread is €0.02, 0.2% of the price.
Formula:
Spread = ask price − bid price- Bond
A loan to a government or a company that pays interest and returns the money on a set date.
Example: A 10-year bond of €1,000 at 3% pays €30 a year and returns €1,000 at the end.
- Bond yield
What a bond pays a year as a share of what it costs today, not of its face value.
Example: A €1,000 bond paying €30 a year costs €900 today: its yield is about 3.3%.
Formula:
Current yield = yearly coupon ÷ price- Bull market
A long rise in prices, usually 20% or more from the last low.
Example: An index that climbs from 3,000 to 3,900 has risen 30%: a bull market.
- CAC (customer acquisition cost)
What a business spends, on average, to win one new customer.
Example: €5,000 of advertising brings 100 customers: CAC = 5,000 ÷ 100 = €50.
Formula:
CAC = sales and marketing cost ÷ new customers- CAGR (compound annual growth rate)
The steady yearly growth that would turn a start value into an end value over some years.
Example: €1,000 that became €2,000 in 10 years grew at a CAGR of about 7.2%.
Formula:
CAGR = (end ÷ start)^(1 ÷ years) − 1- Capital gain
The profit from selling something for more than you paid.
Example: Shares bought for €2,000 and sold for €2,600: a capital gain of €600.
Formula:
Gain = selling price − buying price- Cash flow
The money that comes in minus the money that goes out over a period.
Example: €2,400 in and €2,100 out in a month: a cash flow of €300.
Formula:
Cash flow = money in − money out- Central bank
The public institution that issues a currency and sets the base interest rate.
Example: If the European Central Bank raises its rate from 3% to 3.25%, loans tend to cost more.
- Compound interest
Interest earned on earlier interest as well as on the money put in.
Example: €1,000 at 5% a year becomes €1,050 after one year and €1,629 after ten.
Formula:
Final value = start × (1 + rate)^years- Correlation
A number from −1 to 1 for how much two things move together.
Example: A correlation of 0.9 means they nearly always move together; −0.3 means they lean the other way.
- Coupon
The fixed interest a bond pays each year, as a share of its face value.
Example: A €1,000 bond with a 2.5% coupon pays €25 a year.
Formula:
Yearly payment = face value × coupon- CPI (consumer price index)
An index of the prices of a fixed basket of what households buy.
Example: The CPI goes from 120 to 123.6: prices rose 3% over the year.
Formula:
Inflation = new CPI ÷ old CPI − 1- Diversification
Spreading money over many different assets, so one bad result weighs less.
Example: With 1 company, a 50% fall halves the money; spread over 100 companies, one such fall costs 0.5%.
- Dividend
Part of a company's profit paid out to the people who own its shares.
Example: A dividend of €0.50 per share pays €50 to someone with 100 shares.
- Dividend yield
A year's dividends as a share of the share price.
Example: A share costs €40 and pays €1.20 a year: dividend yield = 3%.
Formula:
Dividend yield = yearly dividend ÷ share price- Drawdown
The fall from a highest value to the lowest point that follows, before a new high.
Example: A portfolio goes from €10,000 to €6,000 and then recovers: its drawdown was 40%.
Formula:
Drawdown = (lowest − highest) ÷ highest- Duration
How much a bond's price moves when interest rates change by one point.
Example: A bond with a duration of 8 loses about 8% if rates rise from 2% to 3%.
Formula:
Price change ≈ −duration × rate change- Emergency fund
Money kept apart and easy to reach for unexpected costs.
Example: With costs of €1,500 a month, six months is €9,000.
Formula:
Fund = monthly costs × months- EPS (earnings per share)
A company's yearly profit divided by its number of shares.
Example: €30 million of profit and 10 million shares: EPS = €3.
Formula:
EPS = net profit ÷ number of shares- ETF (exchange-traded fund)
A fund that holds many assets at once and is bought and sold on the stock exchange like a share.
Example: One share of an ETF that tracks 500 companies gives you a small part of all 500.
- Exchange rate
How much of one currency you get for one unit of another.
Example: At 1.10 dollars per euro, €500 becomes $550.
Formula:
Amount in B = amount in A × rate- GDP (gross domestic product)
The value of everything a country produces in a year.
Example: A country with a GDP of €500 billion and 10 million people has €50,000 per person.
Formula:
GDP per person = GDP ÷ population- HICP (harmonised index of consumer prices)
The EU's price index, measured the same way in every member country.
Example: An HICP that rose 2.4% in Spain and 2.4% in the Netherlands means the same rise, measured alike.
- Index fund
A fund that buys the shares of an index, to get what the index gets.
Example: If the index rises 8% in a year and the fund costs 0.1%, the fund gives about 7.9%.
- Inflation
The rise in prices over time, so the same money buys less.
Example: With 3% inflation, what costs €100 today costs €103 in a year.
Formula:
Inflation = (prices this year ÷ prices last year) − 1- Interest rate
The price of borrowing money, as a share of the amount per year.
Example: Borrowing €10,000 at 4% costs €400 in interest in the first year.
- Leverage
Using borrowed money to invest more than you have, which makes gains and losses larger.
Example: €10,000 of yours plus €10,000 borrowed: a 10% fall loses €2,000, 20% of your money.
Formula:
Leverage = total invested ÷ own money- Liquidity
How quickly something can become cash without losing value.
Example: A savings account can be used today; selling a flat can take 3 months and costs fees.
- Market capitalisation
What all of a company's shares are worth together at today's price.
Example: 100 million shares at €25 each: market capitalisation = €2.5 billion.
Formula:
Market cap = share price × number of shares- Mortgage
A loan to buy a home, with the home as the guarantee.
Example: A €250,000 home with €50,000 paid in cash needs a €200,000 mortgage: 80% of the price.
- Net worth
Everything you own minus everything you owe.
Example: A €250,000 home, €30,000 saved and a €180,000 mortgage: net worth = €100,000.
Formula:
Net worth = assets − debts- Nominal return
What an investment grew in money, before taking away the rise in prices.
Example: €1,000 that becomes €1,070 in a year had a nominal return of 7%.
- Opportunity cost
What you give up by choosing one option instead of the next best one.
Example: Keeping €10,000 at 0% instead of 3% costs €300 in the first year.
- P/E ratio (price to earnings)
A share's price divided by the company's yearly profit per share.
Example: A share costs €60 and earns €3 a year: P/E = 60 ÷ 3 = 20 years of profits.
Formula:
P/E = price per share ÷ earnings per share- Percentile
The value below which a given share of all results fall.
Example: If the 10th percentile is €80,000, 1 in 10 results end below €80,000.
- PPP (purchasing power parity)
A conversion between currencies that makes the same basket cost the same in every country.
Example: A basket costs €100 in Spain and 1,800 pesos in Mexico: the PPP rate is 18 pesos per euro.
Formula:
PPP rate = price in country B ÷ price in country A- Purchasing power
How much a sum of money can buy.
Example: After 10 years of 3% inflation, €100 buys what about €74 bought before.
Formula:
Power = amount ÷ (1 + inflation)^years- Real return
What an investment grew after taking away the rise in prices.
Example: Growing 7% with 2% inflation is a real return of about 4.9%.
Formula:
Real = (1 + nominal) ÷ (1 + inflation) − 1- Rebalancing
Buying and selling to bring a mix back to the shares you chose.
Example: A 60/40 mix that drifted to 70/30 moves 10 points from shares back to bonds.
- Recession
A broad fall in a country's economic activity that lasts months.
Example: A common rule of thumb: GDP falls in two quarters in a row, for instance −0.3% and −0.5%.
- Regular investing (dollar-cost averaging)
Investing the same amount at regular times, whatever the price.
Example: €200 a month buys 10 units at €20 and 20 units at €10: 30 units for €400.
- ROI (return on investment)
What an investment earned, as a share of what it cost.
Example: You pay €1,000 and later get €1,200: ROI = 200 ÷ 1,000 = 20%.
Formula:
ROI = (final value − cost) ÷ cost- Share (stock)
A small part of a company that you can own.
Example: A company with 1,000,000 shares: owning 1,000 of them is owning 0.1% of it.
- Sharpe ratio
Return above a safe rate for each unit of volatility taken.
Example: 8% return, 2% safe rate, 15% volatility: Sharpe = (8 − 2) ÷ 15 = 0.4.
Formula:
Sharpe = (return − safe rate) ÷ volatility- Standard deviation
A measure of how far values usually are from their average.
Example: Returns of 2%, 10% and 18% have an average of 10% and a standard deviation of about 6.5 points.
Formula:
σ = √(average of (value − average)²)- Stock index
One number that follows the prices of a group of shares, such as the S&P 500.
Example: The S&P 500 follows 500 large US companies; if it goes from 5,000 to 5,250, the group rose 5%.
- TER (total expense ratio)
The yearly cost of a fund, as a share of the money in it.
Example: With €10,000 in a fund with a TER of 0.2%, you pay about €20 a year.
Formula:
Yearly cost = money in the fund × TER- Time horizon
How long you plan to keep money invested before you need it.
Example: Saving at 30 for a goal at 60 is a time horizon of 30 years.
- VIX
An index of how much the S&P 500 is expected to move in the next 30 days, read from option prices.
Example: A VIX of 20 means a yearly swing of about 20%, roughly 5.8% over the next month.
Formula:
Monthly move ≈ VIX ÷ √12- Volatility
How much a price moves up and down around its average.
Example: An average of 7% with a volatility of 16% means most years land between −9% and 23%.
Formula:
Volatility = standard deviation of the returns- Withdrawal rate
The share of your savings you take out each year to live on.
Example: Taking out 3.5% of €300,000 is €10,500 a year, €875 a month.
Formula:
Yearly income = savings × withdrawal rate- Yield curve
The interest that government bonds pay, from the shortest to the longest terms.
Example: A 3-month bill pays 3.5% and a 10-year bond 2.8%: the spread is −0.7 points, so the curve is inverted.
Formula:
Spread = 10-year yield − 3-month yield