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Horalis Glossary

Money words, in plain language

What each word means, with an example in numbers.

60 words

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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.

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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.

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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.

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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

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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

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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

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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%.

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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

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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

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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.

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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

Try it in Horalis Inflation

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.

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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

Try it in Horalis Cost of Living

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

Try it in Horalis Inflation

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

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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.

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Risk premium

The extra return investors ask for taking more risk than a safe asset.

Example: A bond pays 4.5% where the safe German bond pays 2.5%: a premium of 2 points, 200 basis points.

Formula: Premium = return asked − safe return

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%.

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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.

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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

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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

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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