Financial glossary
for new-age investors

Discover financial terms and learn new concepts.

Credit Rating

There are a handful of major “credit rating agencies” (e.g. Moody’s and S&P) who rate the ability of a country or company to pay back its debt. The best rating is AAA; anything at or above BBB- is referred to as “investment grade.” Many investors aren’t allowed to buy the debt of companies (e.g. bonds) ranked below “investment grade” and hence that is an important classification that companies often seek to maintain. Anything below “investment grade” is termed “high-yield” or “junk”.

Credit Spread

How much extra interest a company has to pay versus a government. So, Exxon might be able to borrow money at 2% interest while a government bond for the same amount of time (e.g. 10 yrs) would pay 1% interest. That means Exxon’s “credit spread” is 1% (or 100bps). It is used to measure the creditworthiness of a borrower: they higher their “credit spread,” the riskier it is to lend them money.

Crowdfunding

The process of raising money from individuals, usually in small amounts from each one, for a business, project or cause. This is in contrast to traditional methods of fundraising that largely rely on banks, investment funds and angel investors. Crowdfunding is typically done on online platforms like Seedrs, Crowdcube and Kickstarter.

Cryptocurrency

A currency that only exists digitally and which uses encryption software to determine and track ownership (known as “blockchain” technology). Bitcoin is the most well-known cryptocurrency. Cryptocurrencies are not backed by any singular authority, like a central bank.

Currency Peg

It’s when the value of one country’s currency is directly tied to the value of another country (or a basket of other currencies). So, for example, 3.75 Saudi Riyal is always worth 1 US dollar. That’s a hard peg. A “soft peg” is when a currency is allowed to trade within a set level of the peg. For example, China’s renminbi works as soft peg: each day the Chinese government sets a price point relative the US dollar and the renminbi is allowed to trade to trade within 2% of that price point. The Chinese yuan peg that is set each day against the dollar is, however, based on the value of a basket of currencies that includes the US dollar but also uses the value of the Yen, Euro and Pound. Both hard and soft pegs often require the country setting the peg to do foreign currency trading in order to protect the peg. That means that if lots of investors are selling the Riyal, then the Saudi government will buy the Riyal and sell its holdings of US dollars so that the peg remains the true exchange rate.

Debt (Corporate)

Just like an individual, debt is created when a company borrows money. Its debt can take various forms, for example, a loan from a bank or a bond issued to investors.

Deflation

Very simply, it’s when prices in an economy start falling. It is the opposite of inflation. And it is, typically, a bad sign: if an economy is healthy, people should be able to afford to pay a little bit more for things each year. But if they can’t do that, and sellers need to reduce prices, it suggests demand is too low (effectively, the economy is too weak). And that can lead to a downward spiral as people and businesses stop buying things from each other – which further hurts economic growth. In almost every scenario, deflation is something to be avoided.

Derivatives

A derivative is a financial instrument whose value is determined by the price (or fluctuations in the price) of an underlying asset (stocks, bonds, currencies, commodities, and so on). Derivative contracts, which can be traded on exchanges or over-the-counter (OTC), are used to hedge against risk and by investors betting on price moves (i.e. speculation). They allow traders to gain exposure to financial assets without owning them directly, offering the potential to increase returns but also carrying a higher level of risk.

Discounted Cash Flow (DCF)

Discounted cash flow (DCF) analysis is a valuation method that uses forecasts of an investment’s future cash flows to value an asset, based on prevailing “discount” or interest rates. The principle behind DCF is that a dollar today isn't worth the same as a dollar tomorrow, and so aims to reflect that risk by adjusting tomorrow’s today to its “present value”.

Dividend

A company’s profits can either be re-invested in the business (e.g. by building a new factory) or paid out to shareholders. The amount paid out to shareholders is called a dividend. If you own $100 of Nike stock, you might have received a $2 dividend last year. That means your dividend yield was 2% ($2/$100 = 2%).