VelphaDocs
Reference

Glossary

The terms appearing across the learning chapters, organised so you can look them up by chapter and category

Scope shows where a term appears. Category is the broad shelf for finding a term. Splitting too finely makes terms harder to find, so we keep to Foundations Products Equities Funds Portfolio Metrics & formulas Models Accounts.

Term list

Terms appearing in the learning chapters and reference pages
151 / 151
Meaning
Capital gain
Chapter 1Foundations
The appreciation you earn by selling at a higher price than you bought.
Deadline
Chapter 1Foundations
When you plan to use the money. The shorter the deadline, the more you avoid large price movement.
Dividend
Chapter 1Foundations
Money an equity investor receives as part of a company's profit. Covered in detail in Chapter 2.
Emergency fund
Chapter 1Foundations
Money kept in an immediately withdrawable form against job loss, illness, and similar.
Horizon
Chapter 1Foundations
How long the money can stay invested. Money needed in a few years and money twenty years out suit different products.
Income gain
Chapter 1Foundations
Income received while holding, such as dividends, interest, and distributions.
Interest
Chapter 1Foundations
Income received in return for depositing or lending money, as with deposits and bonds.
Investing
Chapter 1Foundations
Managing money by separating products that protect it from products that grow it, according to when and why you will use it.
Money you grow long term
Chapter 1Foundations
Money you will not use for ten or twenty years, which can be a candidate for growth while accepting price movement.
Money you need soon
Chapter 1Foundations
Money already earmarked for use within a few years, such as a house deposit or school fees.
Price movement
Chapter 1Foundations
Prices and valuations moving up and down. The visible form risk takes.
Purpose
Chapter 1Foundations
The premise of what the money is for. Confirm it before choosing products.
Return
Chapter 1Foundations
The reward from investing, combining appreciation, dividends, interest, and so on.
Risk
Chapter 1Foundations
In investing, not plain danger but the range of movement in future outcomes and prices.
Target amount
Chapter 1Foundations
A rough basis for how much you are likely to need, or want to grow to.
Bonds
Chapter 1Products
Products centred on lending to governments or companies and receiving interest and repayment.
Commodities
Chapter 1Products
Assets tracking commodity markets such as gold, oil, and agricultural products. Price movement itself is the main source of return.
Corporate bonds
Chapter 1Products
Bonds issued by a company. Centred on lending to the company and receiving interest and repayment.
Crypto
Chapter 1Products
Digital assets with large price movement. Without deciding why you hold it, the movement easily pushes you around.
Deposits
Chapter 1Products
Money placed with a bank or similar. Movement is small, and the role is mainly protective.
Equities
Chapter 1Products
Products where you own part of a company and expect appreciation and shareholder return such as dividends. Covered in detail in Chapter 2.
ETF
Chapter 1Products
A fund traded on an exchange. If the contents are equity-centred, it moves much like equities.
Financial product
Chapter 1Products
Products for holding or investing money — deposits, bonds, equities, funds, ETFs, REITs, and so on.
Gold
Chapter 1Products
A product where price movement matters more than interest or dividends. Sometimes held expecting movement different from equities and bonds.
Government bonds
Chapter 1Products
Bonds issued by a government. Held on the premise of receiving interest and repayment at maturity.
Mutual funds
Chapter 1Products
Products that make it easier to hold many equities and bonds together. Covered in detail in Chapter 3.
REIT
Chapter 1Products
A product making it easier to invest in property collectively. Rental income and distributions are easier to expect, but it responds to rates and the property market.
Savings account
Chapter 1Products
A bank deposit you can withdraw at any time. An easy place to keep an emergency fund.
Time deposit
Chapter 1Products
A bank deposit held for a set period. A candidate for money you need soon and do not want moving much.
Diversification
Chapter 1Portfolio
The idea of not concentrating in one product or one moment, so as to lighten the burden of price movement.
Spreading across assets
Chapter 1Portfolio
Combining several assets such as equities, bonds, and deposits, so one asset's movement affects the whole less.
Spreading over time
Chapter 1Portfolio
Buying at intervals rather than all at once, limiting the effect of buying heavily at a high point.
Appreciation
Chapter 2Equities
The gain you make when a share sells above the price you paid.
Balance-sheet strength
Chapter 2Equities
Keeping debt and cash on hand at a comfortable level. Sometimes prioritised over dividends.
Company-specific news
Chapter 2Equities
News and events specific to one company: earnings, guidance, a product launch, a scandal.
Current figures
Chapter 2Equities
A company's already-visible record — recent revenue, profit, and earnings.
Dividends
Chapter 2Equities
A company paying part of its profit to shareholders. One of a share's returns, but not guaranteed interest.
Earnings announcement
Chapter 2Equities
Announcing results and financial position for a period. The price can move on the gap against market expectations.
External conditions
Chapter 2Equities
Conditions affecting the price and results from outside the company — rates, the economy, FX, policy.
Future expectations
Chapter 2Equities
The market's view of how growth, profit, and shareholder return are likely to develop.
Group factors
Chapter 2Equities
The reasons a group of shares sharing traits — sector, theme, size, whether they look cheap — move together.
Growth investment
Chapter 2Equities
Using profit for business expansion, R&D, and future growth rather than sending it out as dividends.
Owning part of a company
Chapter 2Equities
A way of framing a share as participation in a company rather than as mere price movement.
Prior expectations
Chapter 2Equities
The benchmark of how strong a result the market had priced in before an announcement or news.
Results
Chapter 2Equities
Figures expressing the outcome of a company's business, such as revenue and profit. One input to the share price.
Returning capital to shareholders
Chapter 2Equities
The idea of a company returning profit or capital to shareholders, through dividends, buybacks, and so on.
Share
Chapter 2Equities
A product for owning part of a company. Held while considering whether the company can create value.
Share buyback
Chapter 2Equities
A company buying back its own shares, reducing the shares outstanding and so raising the value per share.
Share price
Chapter 2Equities
The market price of a share. It moves not only on current results but on future expectations and supply and demand.
Shareholder
Chapter 2Equities
Someone holding shares, receiving the company's results as appreciation or shareholder return.
Shareholder return
Chapter 2Equities
A company returning profit or capital to shareholders. Dividends and buybacks are the main forms.
Short-term supply and demand
Chapter 2Equities
The balance of buyers and sellers over a short period. It can move the price independently of the company's substance.
The whole market
Chapter 2Equities
The part where many shares move in the same direction on the general mood, rates, or the growth outlook.
Dividend per share
Chapter 2Metrics & formulas
The dividend paid on one share. Used to calculate dividend yield and yield on cost.
Dividend yield
Chapter 2Metrics & formulas
How much annual dividend per share there is relative to the current share price.
DPS
Chapter 2Metrics & formulas
Short for Dividends Per Share — the dividend per share.
EPS
Chapter 2Metrics & formulas
Short for Earnings Per Share — the profit per share. Used to see whether profit supports the dividend.
FCF
Chapter 2Metrics & formulas
Short for free cash flow — the cash remaining from what the business generated after necessary investment.
Momentum
Chapter 2Metrics & formulas
A measure of which way and how far a price moved over a set period.
P/B
Chapter 2Metrics & formulas
A measure of how many times net assets per share the shares are being bought at.
P/E
Chapter 2Metrics & formulas
A measure of how many times earnings per share the shares are being bought at.
Payout ratio
Chapter 2Metrics & formulas
What share of profit is going to dividends.
Total dividends
Chapter 2Metrics & formulas
The company-wide total paid to shareholders as dividends. Comparing it with FCF shows the cash headroom.
Value
Chapter 2Metrics & formulas
A way of identifying groups of shares that look cheap against profit or net assets.
Yield on cost
Chapter 2Metrics & formulas
How much dividend you are now receiving relative to your own average purchase price.
CAPM
Chapter 2Models
A model framing return by how sensitive an asset is when the whole market moves.
Factor model
Chapter 2Models
An approach that splits price and return movement across several factors such as market, size, value, and momentum.
Market factor
Chapter 2Models
The part of an individual asset's or share's return that comes from the market rising or falling.
Size
Chapter 2Models
The company-scale factor of large cap versus small cap. Used when looking at phases where small caps are strong together.
Accounting date
Chapter 3Funds
The point at which a fund closes off a period of management and decides whether to pay a distribution.
Active
Chapter 3Funds
A management approach where a manager selects holdings and weights, aiming to beat the market average.
Active fund
Chapter 3Funds
A fund aiming for a result above the market average through the manager's research and judgement.
Contents
Chapter 3Funds
The countries, assets, holdings, and sectors a fund actually holds. Check these before the product name.
Cost
Chapter 3Funds
The expense of holding a fund. A secondary line for comparing products with similar contents.
Developed markets
Chapter 3Funds
The classification of countries with more established economies and markets. Grouped together in indices such as MSCI World.
Distribution
Chapter 3Funds
Money paid to investors out of a fund's assets. It is not money newly added from outside.
Early redemption
Chapter 3Funds
A fund ending its management earlier than planned. It can happen when net assets shrink too far.
Emerging markets
Chapter 3Funds
The classification of countries with more room to grow but also greater political and currency risk.
Expense ratio
Chapter 3Funds
The ongoing cost incurred while holding a fund.
Fund
Chapter 3Funds
The vehicle that pools money from investors and runs it together. Used interchangeably with mutual fund in the main text.
Fund manager
Chapter 3Funds
The person or organisation deciding holdings and weights in an active fund, based on company research and a read on the economy.
Global equities
Chapter 3Funds
Funds and indices aiming to hold the world's equity markets broadly. The US weight can be large.
Index
Chapter 3Funds
Something expressing the combined movement of a particular market or group of shares. The benchmark for an index fund.
Index (approach)
Chapter 3Funds
A management approach tracking an index such as TOPIX or the S&P 500, aiming for a return close to the market average.
Index fund
Chapter 3Funds
A fund aiming to track a particular index. Often low cost with contents that are easy to see.
Market average
Chapter 3Funds
The average movement of a whole market or a particular market segment. Index management tries to track it.
Monthly-distributing fund
Chapter 3Funds
A fund paying a distribution roughly every month. You need to check whether the payout pace is sustainable.
MSCI ACWI
Chapter 3Funds
An index covering global equity movement, adding emerging markets to developed.
MSCI Emerging Markets
Chapter 3Funds
An index bringing together emerging-market equities.
MSCI World
Chapter 3Funds
An index bringing together developed-market equities broadly.
NAV
Chapter 3Funds
The value of a fund's contents expressed per unit.
Nikkei 225
Chapter 3Funds
A Japanese share price index based on 225 representative names.
Non-distributing fund
Chapter 3Funds
A fund designed to keep income inside rather than sending distributions out, making continued investment easier.
Ordinary distribution
Chapter 3Funds
The part of a fund distribution treated as paid out of profit. It may be taxed in a taxable account.
Overlap
Chapter 3Funds
The state where several products contain the same holdings, countries, or sectors. Many funds can still mean little diversification.
Real cost
Chapter 3Funds
A way of keeping the whole actual cost in view, including other expenses alongside the expense ratio.
Reinvestment
Chapter 3Funds
Putting income received back to work rather than spending it. Easier to continue inside a non-distributing fund.
S&P 500
Chapter 3Funds
An index taking a broad view of 500 representative US large caps. It overlaps in places with global equity indices.
Shareholder perks
Chapter 3Funds
A scheme where companies offer goods or services to shareholders. Holding through a fund, an investor does not receive these directly.
The mix inside
Chapter 3Funds
The composition of equities, bonds, regions, and sectors held inside a fund. Unlike an individual share, you are not looking at one company.
TOPIX
Chapter 3Funds
A Japanese equity index covering TSE Prime listings broadly.
Total net assets
Chapter 3Funds
The combined total of all assets inside a fund. It falls by the amount of any distribution.
Total return
Chapter 3Funds
Reading a fund's result by combining the change in NAV with the distributions received.
Trade execution
Chapter 3Funds
An order being filled. A fund trade normally executes only after the value of that day's holdings is fixed.
Units
Chapter 3Funds
The measure of how much of a fund you hold. Total net assets divided by units gives the NAV.
Voting rights
Chapter 3Funds
The right to vote for or against resolutions at a shareholder meeting. Holding through a fund, an investor does not exercise these directly.
Diversified investing
Chapter 3Portfolio
Splitting investment across several holdings, assets, and countries so as not to lean too far on one factor.
Regular contributions
Chapter 3Accounts
Buying a set amount at regular intervals. A common way to buy when holding funds for the long term.
Tax-advantaged account
Chapter 3Accounts
An account where investment gains are tax-free within limits. It appears as an entry point for regular fund contributions.
Taxable account
Chapter 3Accounts
An account where investment gains and ordinary distributions are taxed. Tax treatment differs from a tax-advantaged account.
Diversification benefit
Chapter 4Portfolio
Holding several holdings or assets so that one asset's movement affects the whole less.
Diversification by country/region
Chapter 4Portfolio
Diversifying so as not to lean too far into one country or region such as the US, Japan, developed, or emerging markets.
Diversification by product type
Chapter 4Portfolio
Diversifying by combining products of different character — equities, bonds, REITs, deposits.
Diversification by sector
Chapter 4Portfolio
Diversifying so as not to lean too far into one sector such as information technology, healthcare, financials, or consumer staples.
Downside
Chapter 4Portfolio
An outcome worse than assumed. Used when looking at how far your assets might fall.
Life event
Chapter 4Portfolio
An event in life that changes your purpose or horizon: a job change, marriage, buying a home, school fees, retirement.
Number of holdings
Chapter 4Portfolio
How many individual shares or investments you hold. You need to look at whether the contents are spread, not just the count.
Overall allocation
Chapter 4Portfolio
Looking at what you hold and how much across your whole assets, rather than product by product.
Periodic check
Chapter 4Portfolio
Reviewing the portfolio at a frequency decided in advance, such as every six or twelve months.
Portfolio
Chapter 4Portfolio
The design of what proportions to combine your whole set of holdings in.
Rebalancing
Chapter 4Portfolio
The work of correcting drifted weights against a target allocation and tolerance band.
Review
Chapter 4Portfolio
Checking products, allocation, overlap, cost, and changes in your circumstances, and changing the design if needed.
Risk tolerance
Chapter 4Portfolio
Your sense of how much movement you can keep holding through. The centre of deciding an allocation.
Target allocation
Chapter 4Portfolio
The allocation you decide in advance for what percentage to hold in equities, bonds, deposits, and so on.
Tolerance band
Chapter 4Portfolio
The range of drift from the target allocation you allow. Used to judge when to rebalance.
Upside
Chapter 4Portfolio
An outcome better than assumed. Used to express the chance of growing more than expected.
US large caps
Chapter 4Portfolio
The group of larger US companies. Central to S&P 500-type products, and prone to overlapping with other products.
Weights
Chapter 4Portfolio
The percentages of your whole assets held in equities, bonds, deposits, and so on.
Correlation
Chapter 4Metrics & formulas
A figure expressing how much two assets tend to move in the same direction.
Covariance
Chapter 4Metrics & formulas
A figure expressing how much two assets move together. Used in calculating whole-portfolio risk.
Expected return
Chapter 4Metrics & formulas
The premise of how much income you expect from that allocation in future.
Expected value
Chapter 4Metrics & formulas
The average view of the possible outcomes. An entry point for thinking about a one-year range.
Standard deviation
Chapter 4Metrics & formulas
A figure expressing how widely outcomes scatter. Also used in the basic calculation of volatility.
Black-Litterman
Chapter 4Models
A development making mean-variance optimisation easier to use in practice, so weights are less likely to go to extremes.
Efficient frontier
Chapter 4Models
The line joining the combinations with the highest expected return achievable at each level of risk.
Mean-variance optimisation
Chapter 4Models
The basic model for finding efficient allocations from the balance of expected return and risk.
Modern portfolio theory
Chapter 4Models
The foundation of the theory for building portfolios from the relationship between return, risk, and diversification.
CVaR
AdvancedMetrics & formulas
An approach to how deep the loss is likely to be on average in the still-worse cases beyond VaR.
Drawdown
AdvancedMetrics & formulas
A measure of how far below a past peak the price now sits. Used to check the depth of a fall and the extent of recovery.
Market equilibrium return
AdvancedMetrics & formulas
The expected return used in Black-Litterman, reverse-engineered from the market-cap weighted portfolio.
Risk-free rate
AdvancedMetrics & formulas
The rate considered obtainable with almost no risk. The benchmark in calculations such as the Sharpe ratio.
ROE
AdvancedMetrics & formulas
A measure of how much profit is generated on shareholders' equity.
ROIC
AdvancedMetrics & formulas
A measure of how efficiently profit is generated on the capital put into the business.
Sharpe ratio
AdvancedMetrics & formulas
A measure of how efficiently return is earned for the risk being taken.
VaR
AdvancedMetrics & formulas
A guide to how large a loss might be on a bad day, at a given probability.
Volatility
AdvancedMetrics & formulas
A measure of how choppy price movement is and how widely it swings. Direction is checked with a different measure.
DDM
AdvancedModels
The dividend discount model, for judging whether today's share price is reasonable from future dividends.
Four-factor model
AdvancedModels
A model organising excess return through four factors: market, size, value, and momentum.
HMM
AdvancedModels
Short for Hidden Markov Model — a model that probabilistically infers states not visible on the surface.
Regime analysis
AdvancedModels
An approach that reads markets as a set of distinct phases, looking at direction, choppiness, and depth of falls together.
Transition matrix
AdvancedModels
A table of the probabilities of moving from one state to the next. Used to see whether the current market state is likely to persist.

What Are Portfolio Optimisation Models?

A column on how mean-variance optimisation and Black-Litterman approach the question of allocation weights

Formula Reference

The formulas that appear in Investing Fundamentals, ordered by equities, funds, portfolios, and advanced topics

On this page

Term listRelated pages