Financial Glossary

Plain-English definitions for every metric the InvestSkill frameworks emit. Each entry gives the formula, a rough “good vs. bad” range, and which skill surfaces it. Ranges are rules of thumb, not absolute rules — context (industry, growth stage, rates) always matters.

Jump to: A · B · C · D · E · F · G · I · L · M · O · P · Q · R · S · T · U · V · W · Y

A

Alpha

Return earned above what the market (or a benchmark) would predict for a given level of risk. Positive alpha = skill or edge; zero alpha = you just matched the market.

Surfaced by: portfolio-review.

Altman Z-Score

Bankruptcy-risk score combining five weighted ratios (working capital, retained earnings, EBIT, equity, sales — all relative to assets).

Good / bad: > 3.0 safe · 1.8–3.0 grey zone · < 1.8 distress.
Surfaced by: financial-report-analyst, result-validator.

Anchoring

The bias of judging a stock by a reference price — usually what you paid — instead of what it is worth today. Antidote: “would I buy it at this price today?”

Good / bad: A behavioral trap, not a metric. The written thesis and its triggers are the cure.
Surfaced by: thesis-tracker, position-ladder, learning-coach.

Asset Turnover

How efficiently a company converts assets into revenue. Revenue ÷ Total Assets.

Good / bad: higher is better, but it’s industry-specific (retail runs high, utilities low).
Surfaced by: fundamental-analysis.

AUM (Assets Under Management)

Total market value of the assets a fund holds. For an ETF, the first liquidity and viability check.

Good / bad: > $1B comfortable · $100M–1B fine · < $100M closure risk and wider spreads.
Surfaced by: etf-analysis.

B

Beat and Drop

A stock that beats consensus on the headline numbers yet falls after the print — because expectations were higher than consensus, guidance was cut, or the beat was low quality.

Good / bad: Common in stocks that ran into earnings. The guide, not the print, moves the stock.
Surfaced by: earnings-preview, earnings-call-analysis.

Beta (β)

How much a stock moves relative to the market. β = 1 moves with the market; β > 1 is more volatile; β < 1 is calmer; negative β moves opposite.

Good / bad: not good or bad — it sizes risk. High beta amplifies both gains and losses.
Surfaced by: dcf-valuation (feeds WACC), technical-analysis, portfolio-review.

Bid-Ask Spread

The gap between the highest price a buyer will pay and the lowest a seller will accept. A round-trip cost you pay on every trade.

Good / bad: ≤ 0.05% of price for a liquid large cap or broad ETF · > 0.25% thin — use limit orders.
Surfaced by: etf-analysis, technical-analysis.

Book Value

Net assets on the balance sheet: Total Assets − Total Liabilities. The accounting “breakup” value of equity.

Surfaced by: stock-valuation, fundamental-analysis.

Burn Rate

How fast a company spends cash in excess of revenue, usually for pre-profit firms. Paired with runway (months of cash left).

Good / bad: lower burn + longer runway is safer. Negative free cash flow with short runway is a red flag.
Surfaced by: financial-report-analyst.

C

CAGR (Compound Annual Growth Rate)

The smoothed annual growth rate over a multi-year period. (End ÷ Start)^(1/years) − 1.

Surfaced by: dividend-analysis, fundamental-analysis.

Consensus Estimate

The average of published analyst forecasts for revenue, EPS, or guidance. The bar a company is measured against on earnings day.

Good / bad: Not good or bad — the question is whether the price already assumes more than consensus.
Surfaced by: earnings-preview, stock-valuation.

Correlation

How closely two holdings move together, from −1 to +1. Diversification only works when correlations are low — and they rise toward 1 in a crash.

Good / bad: < 0.5 between core holdings is real diversification · > 0.8 is the same bet twice.
Surfaced by: portfolio-review, risk-stress-test.

Current Ratio

Short-term liquidity: Current Assets ÷ Current Liabilities. Can the company cover the next 12 months of bills?

Good / bad: > 1.5 comfortable · 1.0–1.5 adequate · < 1.0 potential strain.
Surfaced by: fundamental-analysis, financial-report-analyst.

D

Days-to-Cover (Short Interest Ratio)

Days of normal trading volume it would take short sellers to buy back (cover) all shorted shares. Shares Short ÷ Average Daily Volume.

Good / bad: higher = more squeeze fuel. > 5 days is notable; > 10 is high.
Surfaced by: short-interest.

DCF (Discounted Cash Flow)

Valuation method that projects future free cash flows and discounts them back to today’s value using a discount rate (WACC). The output is an intrinsic value per share.

Surfaced by: dcf-valuation, stock-valuation. See Concepts → How intrinsic value works.

Debt-to-Equity (D/E)

Leverage: Total Debt ÷ Shareholders' Equity. How much the company funds itself with debt vs. owner capital.

Good / bad: < 1.0 conservative · 1.0–2.0 moderate · > 2.0 leveraged (industry-dependent — banks and utilities run high).
Surfaced by: fundamental-analysis, dividend-analysis.

Disposition Effect

The tendency to sell winners too early and hold losers too long, because realizing a loss hurts more than realizing a gain feels good.

Good / bad: The most expensive bias for individual investors. Pre-committed exit rules are the antidote.
Surfaced by: thesis-tracker, position-ladder, learning-coach.

Dividend Coverage Ratio

How many times earnings (or free cash flow) cover the dividend. EPS ÷ Dividend per Share, or the FCF version.

Good / bad: > 2x healthy · 1.5–2x adequate · < 1.2x fragile.
Surfaced by: dividend-analysis.

Dividend Payout Ratio

Share of earnings paid out as dividends. Dividends ÷ Net Income.

Good / bad: < 60% generally sustainable · 60–80% watch · > 100% paying more than it earns (yield-trap warning).
Surfaced by: dividend-analysis.

Dividend Yield

Annual dividend as a percent of price. Annual Dividend ÷ Price.

Good / bad: a very high yield (e.g., > 7%) is often a warning, not a gift — the market may expect a cut. See yield trap.
Surfaced by: dividend-analysis.

Drawdown / Max Drawdown

The fall from a peak to the following trough, as a percentage. Max drawdown is the worst such fall over a period — the number that decides whether you can hold on.

Good / bad: Know it before you own it: a 50% drawdown needs a 100% gain to recover.
Surfaced by: risk-stress-test, portfolio-review.

E

EBITDA

Earnings Before Interest, Taxes, Depreciation & Amortization — a proxy for operating cash generation that strips out capital structure and accounting choices.

Caution: ignores real capital costs; “EBITDA is not cash flow.”
Surfaced by: stock-valuation, fundamental-analysis.

Net income attributable to each share. Net Income ÷ Shares Outstanding. “Diluted EPS” includes options/convertibles.

Surfaced by: nearly every fundamental skill.

Estate Tax (Non-Resident)

US federal estate tax on US-situs assets — US-domiciled stocks and ETFs — held by a non-resident alien at death, above an exemption of only $60,000, at rates up to 40%, unless an estate-tax treaty applies.

Good / bad: Treasuries, bank deposits, and non-US-domiciled funds (e.g. Irish UCITS) are outside the net. Not tax advice.
Surfaced by: tax-lens --non-us.

EV (Enterprise Value)

The whole-company price a buyer pays: Market Cap + Total Debt − Cash. Used instead of market cap so debt-heavy and cash-rich firms compare fairly.

Surfaced by: stock-valuation.

EV/EBITDA

Enterprise value relative to operating earnings — a capital-structure-neutral valuation multiple.

Good / bad: < 10x often cheap · 10–15x fair · > 15x rich (sector-dependent).
Surfaced by: stock-valuation.

Ex-Dividend Date

The first day a stock trades without the right to the next dividend. Buy before it to receive the payment; the price typically drops by roughly the dividend on that day.

Good / bad: Matters for the qualified-dividend holding-period test and for timing sales.
Surfaced by: dividend-analysis, tax-lens, catalyst-calendar.

Expense Ratio

A fund’s annual fee as a percentage of assets, deducted from returns automatically. Annual fund costs ÷ Average assets.

Good / bad: ≤ 0.10% for a broad index fund · 0.20–0.50% for specialty · > 0.75% needs a reason.
Surfaced by: etf-analysis.

F

FCF (Free Cash Flow)

Cash left after operating expenses and capital spending. Operating Cash Flow − CapEx. The cash an owner could actually take out.

Good / bad: consistently positive and growing is the gold standard. Negative FCF needs a growth story to justify it.
Surfaced by: dcf-valuation, fundamental-analysis, dividend-analysis.

FCF Yield

Free cash flow relative to market cap. FCF ÷ Market Cap. The cash-return version of an earnings yield.

Good / bad: > 5% attractive · 3–5% fair · < 3% expensive.
Surfaced by: stock-valuation.

G

Greeks (Options)

Sensitivities of an option’s price: Delta (vs. underlying price), Gamma (rate of delta change), Theta (time decay), Vega (vs. volatility), Rho (vs. interest rates).

Surfaced by: options-analysis.

Gross Margin

Profit after the direct cost of goods. (Revenue − COGS) ÷ Revenue. A first read on pricing power.

Good / bad: higher and stable signals a moat; falling margins signal competition.
Surfaced by: fundamental-analysis, competitor-analysis.

Guidance

Management’s own forecast for the coming quarter or year, given with the earnings release. The stock reacts more to the guide than to the reported quarter.

Good / bad: “Beat and raise” is the bullish case; “beat and lower” is the classic beat-and-drop.
Surfaced by: earnings-preview, earnings-call-analysis.

I

Implied Move

The size of the earnings-day move the options market is pricing: roughly the at-the-money straddle price ÷ stock price for the first expiry after the print. Magnitude only — it says nothing about direction.

Good / bad: Compare with the realized median move of past prints: implied ÷ realized > 1.2 means the event is expensively insured.
Surfaced by: earnings-preview, options-analysis.

Implied Volatility (IV)

The market’s expected future volatility, baked into option prices. Higher IV = pricier options = bigger expected swings.

Surfaced by: options-analysis.

Interest Coverage Ratio

How easily operating earnings pay interest. EBIT ÷ Interest Expense.

Good / bad: > 5x safe · 2–5x adequate · < 1.5x danger.
Surfaced by: financial-report-analyst, dividend-analysis.

Investment Policy Statement (IPS)

A one-page written contract with yourself: goal, horizon, target allocation with bands, contribution schedule, rebalancing rule, position limits, and the list of things you will not do.

Good / bad: Exists and is reviewed on a date — or does not exist. portfolio-review grades a portfolio against it.
Surfaced by: portfolio-review, thesis-tracker.

IV Rank / IV Percentile

Where current implied volatility sits versus its own past year (0–100). Tells you if options are “expensive” or “cheap” relative to their own history.

Good / bad: high IV rank favors selling premium; low favors buying it.
Surfaced by: options-analysis.

L

Limit Order

An order to buy or sell only at a stated price or better. The default order type for an investor: it caps what you pay and cannot fill 2% away in a thin market.

Good / bad: Use limit orders; reserve market orders for the most liquid names during regular hours, if at all.
Surfaced by: position-ladder (rungs are resting limit orders).

M

Margin of Safety

The discount between a stock’s price and its estimated intrinsic value. The buffer that protects you if your estimate is wrong.

Good / bad: value investors often want 20–40%+ before buying.
Surfaced by: dcf-valuation, stock-eval. See Concepts → Margin of safety.

Market Order

An order to buy or sell immediately at the best available price. Fast, but the fill price is whatever the book offers — costly on illiquid tickers, at the open, or in extended hours.

Good / bad: Avoid unless the stock is deeply liquid and the market is open. See Limit Order.
Surfaced by: —

Moat

A durable competitive advantage that protects long-term profits — brand, network effects, switching costs, scale, or patents.

Good / bad: wide > narrow > none. Shows up as persistently high ROIC and stable margins.
Surfaced by: competitor-analysis, stock-eval. See Concepts → Reading a moat.

O

Overlap (Holdings Overlap)

The share of an ETF that duplicates what you already own, computed as Σ min(weight in ETF, weight in your portfolio) over shared holdings.

Good / bad: < 25% complementary · 25–60% partial · > 60% the same bet in a second wrapper.
Surfaced by: etf-analysis, portfolio-review.

P

P/B (Price-to-Book)

Price relative to accounting net worth. Price ÷ Book Value per Share.

Good / bad: most useful for asset-heavy/financial firms; < 1.0 can mean cheap or troubled.
Surfaced by: stock-valuation.

P/E (Price-to-Earnings)

Price per dollar of earnings. Price ÷ EPS. The most-quoted multiple; compare to the company’s own history and peers, not in isolation.

Good / bad: there is no universal “good” P/E — a 40x grower can be cheaper than a 10x decliner. Pair with growth (see PEG).
Surfaced by: stock-valuation, stock-eval.

P/S (Price-to-Sales)

Price per dollar of revenue. Market Cap ÷ Revenue. Useful for unprofitable or early-stage firms where P/E is meaningless.

Surfaced by: stock-valuation.

PEG Ratio

P/E adjusted for growth. P/E ÷ Earnings Growth Rate (%). Puts fast and slow growers on the same footing.

Good / bad: ~1.0 fairly priced · < 1.0 potentially cheap · > 2.0 expensive.
Surfaced by: stock-valuation, stock-eval.

Piotroski F-Score

A 0–9 checklist of fundamental health across profitability, leverage/liquidity, and operating efficiency. Each “yes” scores a point.

Good / bad: 7–9 strong · 4–6 middling · 0–3 weak.
Surfaced by: stock-eval, fundamental-analysis.

Porter’s Five Forces

A framework rating industry attractiveness across five pressures: competitive rivalry, supplier power, buyer power, threat of substitutes, threat of new entrants.

Surfaced by: competitor-analysis.

Pre-Mortem

Writing, before you buy, the paragraph that begins “It is twelve months later and this position lost 40% because…”. Forces the most likely failure path into the open while it can still become an invalidation trigger.

Good / bad: Every thesis file should have one.
Surfaced by: thesis-tracker, bear-case.

Process vs. Outcome

The 2×2 that separates a good decision from a good result: good decision / good outcome, good decision / bad outcome (bad luck — keep the process), bad decision / good outcome (the dangerous one — you learn the wrong lesson), bad decision / bad outcome.

Good / bad: Judge yourself on the process column; the market decides the outcome column.
Surfaced by: thesis-tracker (decision log), learning-coach.

Q

Qualified Dividend

A dividend taxed at the lower long-term capital-gains rates instead of ordinary rates. Requires an eligible payer and holding the stock more than 60 days in the 121-day window around the ex-dividend date. REIT dividends are generally not qualified.

Good / bad: Qualified → lower tax; non-qualified → ordinary income. US rules; not tax advice.
Surfaced by: tax-lens, dividend-analysis.

Quick Ratio (Acid Test)

Stricter liquidity than current ratio — excludes inventory. (Current Assets − Inventory) ÷ Current Liabilities.

Good / bad: > 1.0 comfortable.
Surfaced by: fundamental-analysis.

R

Residual Income

Earnings above the cost of the equity capital used to produce them. Value is created only when returns exceed the cost of capital.

Surfaced by: stock-valuation.

ROA (Return on Assets)

Profit per dollar of assets. Net Income ÷ Total Assets. How well management uses the asset base.

Good / bad: > 5% solid (industry-dependent).
Surfaced by: fundamental-analysis.

ROE (Return on Equity)

Profit per dollar of shareholder equity. Net Income ÷ Equity. Watch for ROE inflated by heavy debt.

Good / bad: > 15% strong · 10–15% decent · < 10% weak.
Surfaced by: fundamental-analysis, stock-eval.

ROIC (Return on Invested Capital)

The cleanest profitability measure: returns on all capital (debt + equity) put to work. NOPAT ÷ Invested Capital. Compare to WACC — value is created only when ROIC > WACC.

Good / bad: > 15% excellent · 10–15% good · below WACC = destroying value.
Surfaced by: stock-eval, fundamental-analysis, competitor-analysis.

S

Settlement (T+1)

US stock trades settle one business day after the trade date: that is when shares are delivered and cash is final. Selling and immediately re-spending the proceeds can run into settlement rules in cash accounts.

Good / bad: Know when your cash is actually available before placing the next order.
Surfaced by: —

Sharpe Ratio

Risk-adjusted return: excess return per unit of volatility. (Return − Risk-free Rate) ÷ Std Dev.

Good / bad: > 1 good · > 2 very good · < 1 weak.
Surfaced by: portfolio-review.

Short Float (Short Interest %)

Percent of freely tradable shares sold short. Shares Short ÷ Float.

Good / bad: > 10% elevated · > 20% high (crowded short, squeeze potential).
Surfaced by: short-interest.

Sortino Ratio

Like the Sharpe ratio, but penalizes only downside volatility: (Return − Risk-free) ÷ Downside deviation. Rewards portfolios whose swings are mostly upward.

Good / bad: > 1 acceptable · > 2 strong. Compare against a benchmark over the same period.
Surfaced by: portfolio-review, risk-stress-test.

Specific Identification (Lot Selection)

Choosing which shares (tax lot) you sell — instead of the broker’s default, usually FIFO. Must be designated at or before the trade. Lets you pick the lot that produces the gain or loss you want.

Good / bad: Almost always better than FIFO for a partial sale of a long-held winner. US rules; not tax advice.
Surfaced by: tax-lens, position-ladder.

Support & Resistance

Price levels where buying (support) or selling (resistance) has historically clustered. Breaks of these levels are technical signals.

Surfaced by: technical-analysis.

T

Tax-Loss Harvesting

Selling a position at a loss to offset realized gains (and up to a small amount of ordinary income), then holding a similar but not substantially identical replacement for 31 days to avoid a wash sale.

Good / bad: Defers tax, does not eliminate it — the replacement’s basis is lower. US rules; not tax advice.
Surfaced by: tax-lens, portfolio-review.

Terminal Value

In a DCF, the value of all cash flows beyond the explicit forecast period — often 60–80% of the total. Highly sensitive to the assumed perpetual growth rate.

Surfaced by: dcf-valuation. See Concepts → How intrinsic value works.

Tracking Difference

A fund’s actual return minus its index’s return over a period. For a well-run index fund it is roughly −(expense ratio); anything worse is a gap to explain.

Good / bad: ≈ −ER is fine · a gap beyond −(ER + 0.10%)/yr is a flag. Not the same as tracking error.
Surfaced by: etf-analysis.

Tracking Error

The volatility of the difference between a fund’s returns and its index’s returns — how consistently it tracks, not how much it lags. Low tracking error with a large tracking difference means a fund that reliably underperforms.

Good / bad: < 0.10% annualized for a physical broad-market ETF is tight.
Surfaced by: etf-analysis.

U

UCITS ETF

An ETF domiciled in the EU (most often Ireland) under the UCITS framework. For non-US investors it typically means 15% fund-level US withholding under the US–Ireland treaty, accumulating share classes, and no US estate-tax exposure — at a slightly higher fee and wider spreads. US persons should not buy them (PFIC rules).

Good / bad: Often wins after tax for a no-treaty investor despite the higher TER. Not tax advice.
Surfaced by: tax-lens --non-us, etf-analysis.

V

VaR / CVaR (Value at Risk / Conditional VaR)

VaR: the loss you would not expect to exceed over a horizon at a confidence level (e.g. 95%, one month). CVaR (expected shortfall): the average loss in the cases beyond VaR — the tail VaR ignores.

Good / bad: Parametric VaR assumes normal returns and understates crashes; trust the historical scenario replay when they disagree.
Surfaced by: risk-stress-test.

W

W-8BEN

The IRS form a non-US individual gives a broker to certify non-US status and claim any treaty rate on US-source income. Generally valid through the end of the third calendar year after signing; an expired form means statutory withholding.

Good / bad: On file and current — or 30% (and possibly backup withholding). Not tax advice.
Surfaced by: tax-lens --non-us.

WACC (Weighted Average Cost of Capital)

The blended required return on a company’s debt and equity — the discount rate in a DCF. (E/V × Cost of Equity) + (D/V × Cost of Debt × (1−tax)).

Good / bad: not good/bad — it’s the hurdle. A small WACC change swings intrinsic value a lot.
Surfaced by: dcf-valuation.

Wash Sale

A loss that is disallowed for US tax because the same or a substantially identical security was bought within 30 days before or after the sale (a 61-day window) — in any of your accounts, including DRIP purchases and IRAs. The loss is added to the replacement shares’ basis, not lost.

Good / bad: Check the window before every loss sale. US rules; not tax advice.
Surfaced by: tax-lens, position-ladder.

Whisper Number

The unofficial, buy-side expectation for a company’s results — usually above the published consensus for a stock that has been running. The bar the stock actually trades against. Always an estimate; label its source.

Good / bad: A large whisper gap over consensus is how a headline “beat” becomes a drop.
Surfaced by: earnings-preview.

Withholding Tax

Tax taken out of a dividend before it reaches the investor. For a non-US holder of US stocks the statutory rate is 30%, reduced only by an income-tax treaty claimed on a W-8BEN (Taiwan, Hong Kong, and Singapore have no US treaty). A 3.0% gross yield is 2.1% net at 30%.

Good / bad: The single largest tax cost for most non-US dividend investors. Not tax advice.
Surfaced by: tax-lens --non-us, dividend-analysis.

Y

Yield Trap

A stock with a tempting dividend yield that is unsustainable — the market has priced in a coming cut. Spotted via payout ratio > 100%, falling FCF, or rising debt.

Surfaced by: dividend-analysis. See Use Cases → The dividend investor.

See also: Concepts for the mental models behind these metrics · Choose a Skill to find the right framework · Data & Accuracy for how to trust the numbers.

Educational reference only. Not financial advice.

Glossary