Liquidity
How easily an asset can be traded without materially moving its price.
Bid-ask spreadTrading volume
Explain it →FINANCE GLOSSARY
The language of markets
What does a falling inflation rate mean? Why is a bond's coupon different from its yield? Find the definitions, examples and distinctions behind the numbers.
Find a termCONNECTED CONCEPT
Liquidity
How easily an asset can be traded without materially moving its price.
Read the clear explanation →Bid-ask spread
The gap between the best available bid and ask prices.
LiquiditySlippage
Explain it →Volatility
The magnitude and speed of price changes over a period.
Implied volatilityMaximum drawdown
Explain it →Trading volume
The number of shares, contracts or value traded during a period.
LiquidityMarket depth
Explain it →Market depth
The distribution of resting buy and sell orders across price levels.
LiquidityBid-ask spread
Explain it →Slippage
The difference between the expected trade price and the average execution price.
Bid-ask spreadLiquidity
Explain it →Inflation
A sustained rise in the general price level, not merely an increase in one product.
Core inflationReal interest rate
Explain it →Core inflation
A measure designed to track underlying price pressure by excluding selected volatile or administered items.
InflationPolicy rate
Explain it →Policy rate
The key interest rate a central bank uses to communicate and implement monetary policy.
Real interest rateYield curve
Explain it →Real interest rate
The return left after adjusting a nominal interest rate for expected or realized inflation.
Policy rateInflation
Explain it →Yield curve
A line showing yields across maturities for bonds of similar credit quality.
Policy rateDuration
Explain it →Risk premium
The extra return demanded for holding a riskier asset over a low-risk benchmark.
Yield curveDiscount rate
Explain it →EBITDA
Earnings before interest, taxes, depreciation and amortization, a pre-financing operating measure.
EBITDA marginFree cash flow
Explain it →EBITDA margin
EBITDA divided by revenue, showing how sales convert into operating earnings.
EBITDAGross margin
Explain it →Free cash flow
Cash left after operating cash generation and capital expenditure.
EBITDANet debt
Explain it →Net debt
Interest-bearing debt less cash and cash equivalents.
EBITDAFree cash flow
Explain it →Price-to-earnings ratio
Share price divided by earnings per share.
Earnings per shareEV/EBITDA
Explain it →EV/EBITDA
A multiple comparing enterprise value, including equity and net debt, with EBITDA.
EBITDANet debt
Explain it →Return on equity
Net income divided by average shareholders' equity.
Net debtPrice-to-earnings ratio
Explain it →Bond
A security representing an issuer's borrowing under specified terms.
DurationYield curve
Explain it →Duration
A measure of the weighted timing of bond cash flows and price sensitivity to interest rates.
BondYield curve
Explain it →Exchange-traded fund (ETF)
A fund traded on an exchange that tracks an index, asset basket or strategy.
Net asset valueTracking difference
Explain it →Net asset value
A fund's assets minus liabilities, divided by units outstanding.
Exchange-traded fund (ETF)Tracking difference
Explain it →Dividend yield
Annual dividend per share divided by share price.
Free cash flowDividend payout ratio
Explain it →Futures contract
A standardized contract obliging parties to buy or sell an asset later under specified terms.
LeverageMargin call
Explain it →Option
A contract giving the buyer the right, but not the obligation, to buy or sell an asset at a set price.
Implied volatilityLeverage
Explain it →Implied volatility
Volatility inferred from option prices, reflecting the market's priced magnitude of future moves.
OptionVolatility
Explain it →Leverage
Using limited equity or margin to control a larger economic exposure.
Margin callFutures contract
Explain it →Margin call
A request for additional collateral after losses or a change in margin requirements.
LeverageFutures contract
Explain it →Hedging
Reducing the impact of an adverse move in one exposure through another instrument or transaction.
CorrelationFutures contract
Explain it →Correlation
A measure from -1 to +1 summarizing the direction and strength of co-movement between two variables.
VolatilityHedging
Explain it →Maximum drawdown
The largest percentage fall from a peak to a subsequent trough over a selected period.
VolatilityCorrelation
Explain it →Discount rate
The rate used to translate future cash flows into present value.
Risk premiumFree cash flow
Explain it →Gross margin
Gross profit after direct cost of sales divided by revenue.
EBITDA marginNet margin
Explain it →Net margin
Net income divided by revenue.
Gross marginEBITDA margin
Explain it →Working capital
The difference between short-term operating assets and liabilities.
Free cash flowGross margin
Explain it →Debt-to-equity ratio
Debt divided by equity; the chosen debt definition should be stated.
Net debtReturn on equity
Explain it →Earnings per share
Net income attributable to common shareholders divided by weighted-average shares.
Price-to-earnings ratioReturn on equity
Explain it →Tracking difference
The realized return gap between an index fund and its benchmark.
Exchange-traded fund (ETF)Net asset value
Explain it →Dividend payout ratio
Dividends paid as a share of earnings or free cash flow.
Dividend yieldFree cash flow
Explain it →Base effect
The influence of the prior comparison level on a year-over-year growth rate.
InflationCore inflation
Explain it →Compound return
Return earned on principal plus prior-period gains.
Real interest rateNet asset value
Explain it →Currency risk
Exposure of an asset, liability or cash flow to movements between currencies.
HedgingRisk premium
Explain it →Market capitalization
Share price multiplied by total shares outstanding.
EV/EBITDANet debt
Explain it →Limit order
An order that sets the highest purchase price or lowest sale price the investor will accept.
Market depthLiquidity
Explain it →Market order
An order designed to execute quickly against the best available opposite-side prices.
Limit orderBid-ask spread
Explain it →Market breadth
The distribution of advancing and declining securities showing how widely a market move is shared.
Trading volumeMarket capitalization
Explain it →Circuit breaker
A market mechanism that temporarily pauses trading or shifts to an auction after an unusually fast move.
VolatilityLiquidity
Explain it →Current account balance
The net result of trade in goods and services, primary income and transfers with the rest of the world.
Currency riskReal interest rate
Explain it →Fiscal balance
The difference between government revenue and expenditure over a period.
BondYield curve
Explain it →Purchasing Managers' Index
A diffusion index summarizing company surveys on orders, output, employment and delivery conditions.
InflationBase effect
Explain it →Forward guidance
A central bank's conditional communication about its future policy approach.
Policy rateReal interest rate
Explain it →Dilution
The reduction in an existing share's proportional claim after new shares or convertible instruments are issued.
Earnings per shareMarket capitalization
Explain it →Share buyback
A company's purchase of its own shares using cash.
Earnings per shareFree cash flow
Explain it →Company guidance
Management's outlook for future revenue, margins, investment or other performance measures.
Gross marginEBITDA margin
Explain it →Free float
The share of a company's equity that is freely tradable in the public market.
LiquidityMarket capitalization
Explain it →Coupon rate
The contractual rate used to calculate periodic interest payments on a bond's face value.
BondDuration
Explain it →Credit risk
The risk that a borrower fails to pay interest or principal in full and on time.
Risk premiumNet debt
Explain it →Beta
A historical coefficient measuring an asset's return sensitivity to a chosen market benchmark.
CorrelationVolatility
Explain it →Value at Risk
A historical or model-based estimate of a loss threshold over a chosen horizon and confidence level.
Maximum drawdownVolatility
Explain it →Market Structure
Liquidity
How easily an asset can be traded without materially moving its price.
Higher liquidity usually supports lower trading costs and more reliable price discovery. Read volume, bid-ask spread and order-book depth together.
Example: A heavily traded index stock may absorb a large order with less price impact than a small-cap stock.
Watch out: Assuming high daily volume always means deep liquidity.
Bid-ask spread
The gap between the best available bid and ask prices.
A wider spread raises the hidden cost of entering and exiting a position. Compare it as a percentage of price and note the session and liquidity conditions.
Example: A 100.00 bid and 100.20 ask imply a 0.20, or roughly 0.20%, spread.
Watch out: Treating the last traded price as the price available to every investor.
Trading volume
The number of shares, contracts or value traded during a period.
Volume helps reveal participation and intensity behind a price move. Compare volume with its own history, free float and session length.
Example: Price gains accompanied by above-average volume may indicate broader participation.
Watch out: Treating a volume increase as a bullish signal by itself.
Market depth
The distribution of resting buy and sell orders across price levels.
Depth gives a live indication of how much a large order may move price. Observe how levels change over time alongside actual trades.
Example: A thin offer side can cause a medium-sized market order to sweep several price levels.
Watch out: Assuming every displayed order will remain and execute.
Limit order
An order that sets the highest purchase price or lowest sale price the investor will accept.
It gives price control, but the order may not execute if the market never reaches the limit. Check the order book, liquidity, queue priority and time in force together.
Example: A buy limit at 100 can execute at 100 or lower when matching liquidity is available.
Watch out: Assuming the limit price guarantees execution.
Market order
An order designed to execute quickly against the best available opposite-side prices.
It raises execution probability but creates price uncertainty in thin or fast markets. Review order size, spread and visible depth before using it.
Example: A large market order can consume several price levels and worsen the average fill.
Watch out: Assuming the last traded price is guaranteed for the entire order.
Market breadth
The distribution of advancing and declining securities showing how widely a market move is shared.
It helps distinguish a move led by a few heavyweights from broad participation. Read advances versus declines, new highs and lows, sector participation and volume together.
Example: If the index rises while most stocks fall, leadership may be unusually narrow.
Watch out: Assuming most stocks are rising whenever the index is up.
Circuit breaker
A market mechanism that temporarily pauses trading or shifts to an auction after an unusually fast move.
It gives price discovery time during stress but does not remove price risk. Check the trigger, pause length, reopening method and exchange rule.
Example: After a single-stock pause, trading can reopen at a materially different equilibrium price.
Watch out: Treating a circuit breaker as an automatic loss guarantee.
Macroeconomics
Inflation
A sustained rise in the general price level, not merely an increase in one product.
It affects purchasing power, interest rates, company costs and asset valuations. Read headline, core, monthly and annual changes together with base effects and weights.
Example: Annual inflation can fall from 50% to 40% while the price level continues rising each month.
Watch out: Confusing a lower annual inflation rate with falling prices, or deflation.
Core inflation
A measure designed to track underlying price pressure by excluding selected volatile or administered items.
Central banks use it to assess persistent price pressure and the policy outlook. Check which components are excluded and compare services with goods.
Example: If energy falls while services inflation stays high, core inflation may prove stickier than headline inflation.
Watch out: Assuming every country defines core inflation identically.
Policy rate
The key interest rate a central bank uses to communicate and implement monetary policy.
It can influence credit, deposits, bonds, currencies and expectations. Read the statement, liquidity tools and market pricing, not just the rate decision.
Example: Even with no rate change, hawkish guidance may lift short-term market rates.
Watch out: Assuming a policy-rate move passes to every market rate immediately and equally.
Real interest rate
The return left after adjusting a nominal interest rate for expected or realized inflation.
It helps assess saving incentives, currency demand and the tightness of financial conditions. State clearly which nominal rate and inflation measure are paired.
Example: A 40% nominal return with 32% expected inflation implies roughly a 6.1% compound expected real return.
Watch out: Treating the policy rate minus past inflation as the only definitive real rate.
Yield curve
A line showing yields across maturities for bonds of similar credit quality.
It reflects market pricing of growth, inflation, policy and maturity risk. Track the level and movement of the full curve, not only its slope.
Example: When the two-year yield rises above the ten-year yield, that segment is inverted.
Watch out: Treating an inverted curve as a precisely timed recession forecast.
Base effect
The influence of the prior comparison level on a year-over-year growth rate.
It is essential for interpreting acceleration or slowdown in inflation and growth. Read the annual rate with monthly change, index level and the prior-year month.
Example: Annual inflation can fall when an unusually large prior-year monthly increase drops out.
Watch out: Treating it alone as proof that prices actually fell or rose.
Current account balance
The net result of trade in goods and services, primary income and transfers with the rest of the world.
It is central to external financing needs, currency demand and vulnerability to external shocks. Separate energy and gold effects, seasonality, financing quality and reserve movements.
Example: If tourism receipts and energy imports both rise, the headline balance nets two strong effects.
Watch out: Treating one monthly surplus or deficit as a lasting trend.
Fiscal balance
The difference between government revenue and expenditure over a period.
It can affect borrowing needs, domestic demand, bond supply and monetary transmission. Review the primary balance, one-off revenue, inflation effects and financing mix separately.
Example: The same nominal deficit can be a larger burden in a smaller economy.
Watch out: Comparing nominal deficits without scaling them to the economy.
Purchasing Managers' Index
A diffusion index summarizing company surveys on orders, output, employment and delivery conditions.
It can provide an early signal of economic momentum before official output data. Read the headline with new orders, input prices and the survey's country-specific threshold.
Example: A reading of 52 suggests broader improvement but does not directly measure its size.
Watch out: Treating a reading above 50 as proof of a precise output increase.
Forward guidance
A central bank's conditional communication about its future policy approach.
It can influence expected rates, bond yields, currencies and financial conditions before the next decision. Separate date-based promises from data-dependent conditions and compare wording with the prior decision.
Example: A stance tied to the inflation outlook allows policy to change when the data change.
Watch out: Reading guidance as an irrevocable promise.
Company Analysis
EBITDA
Earnings before interest, taxes, depreciation and amortization, a pre-financing operating measure.
It helps compare operating profitability and debt-carrying capacity. Check adjustments, accounting policy and conversion into cash flow.
Example: Operating cash may lag EBITDA growth when working-capital needs rise.
Watch out: Treating EBITDA as cash flow or net income.
EBITDA margin
EBITDA divided by revenue, showing how sales convert into operating earnings.
It supports operating-efficiency comparisons across periods and peers. Consider product mix, inflation accounting and one-off adjustments.
Example: Revenue of 100 million and EBITDA of 18 million imply an 18% EBITDA margin.
Watch out: Comparing margins across structurally different industries without context.
Free cash flow
Cash left after operating cash generation and capital expenditure.
It indicates capacity to reduce debt, pay dividends, repurchase shares or fund growth. Check definitions for operating cash, capex, leases and one-off items.
Example: Operating cash of 120 million and capex of 45 million yield about 75 million of free cash flow.
Watch out: Assuming one strong quarter of cash flow is sustainable.
Net debt
Interest-bearing debt less cash and cash equivalents.
It is a key input for assessing leverage and repayment capacity. Review leases, restricted cash, financial investments and currency composition.
Example: Debt of 500 million and available cash of 140 million imply net debt of 360 million.
Watch out: Assuming every unit of cash is freely available for debt repayment.
Price-to-earnings ratio
Share price divided by earnings per share.
It compares how much the market pays for each unit of current or expected earnings. Check trailing versus forward periods, one-offs and sector differences.
Example: A 100 price and 10 of annual earnings per share imply a 10x P/E.
Watch out: Treating a low P/E as automatic proof of cheapness.
EV/EBITDA
A multiple comparing enterprise value, including equity and net debt, with EBITDA.
It helps compare operating valuations across different capital structures. Check period alignment, leases, minorities and adjusted EBITDA definitions.
Example: Enterprise value of 1 billion and EBITDA of 100 million imply a 10x multiple.
Watch out: Using the multiple uncritically when EBITDA is negative or cyclical.
Return on equity
Net income divided by average shareholders' equity.
It shows how efficiently equity is used, but is influenced by leverage. Read it with margins, asset turnover, leverage and equity movements.
Example: Net income of 20 million on average equity of 100 million gives a 20% ROE.
Watch out: Calling a high ROE superior quality without examining leverage or a thin equity base.
Discount rate
The rate used to translate future cash flows into present value.
It strongly affects asset and company values as rates, risk premia and capital structure change. Check that the rate matches the cash flow's currency, horizon and risks.
Example: A higher discount rate produces a lower present value for the same cash flow.
Watch out: Treating it as a fixed assumption whose small changes do not affect value.
Gross margin
Gross profit after direct cost of sales divided by revenue.
It helps reveal pricing power, product mix and changes in input costs. Review promotions, currency effects and accounting classifications.
Example: Revenue of 100 less cost of sales of 65 gives a 35% gross margin.
Watch out: Comparing gross margins across unlike business models without context.
Net margin
Net income divided by revenue.
It shows the final result of operations, financing, tax and one-offs relative to sales. Separate continuing operations, minority interests and one-off items.
Example: Net income of 10 on revenue of 200 implies a 5% net margin.
Watch out: Assuming every increase reflects operating improvement.
Working capital
The difference between short-term operating assets and liabilities.
Movements in inventory, receivables and payables can materially change cash conversion. Read balances with sales growth, collection days and payment days.
Example: Operating cash may weaken when receivables and inventory grow faster than payables.
Watch out: Assuming any increase automatically improves liquidity.
Debt-to-equity ratio
Debt divided by equity; the chosen debt definition should be stated.
It helps compare financial leverage and balance-sheet resilience. Also review net debt, maturity, interest cost, currency and equity quality.
Example: Debt of 300 and equity of 200 imply a ratio of about 1.5x.
Watch out: Applying one threshold without considering sector or asset structure.
Earnings per share
Net income attributable to common shareholders divided by weighted-average shares.
It translates profit to a per-share basis and underpins ratios such as P/E. Check diluted shares, capital actions and one-off earnings.
Example: Profit of 100 million over 50 million weighted shares gives EPS of 2.
Watch out: Assuming new share issuance cannot dilute per-share results when total profit grows.
Dividend payout ratio
Dividends paid as a share of earnings or free cash flow.
It helps assess how well distributions are covered by profit and cash generation. Separate earnings-based and cash-based ratios, special dividends and cyclicality.
Example: Dividends of 20 on net income of 50 imply a 40% earnings payout ratio.
Watch out: Treating the historical ratio as a guaranteed future policy.
Market capitalization
Share price multiplied by total shares outstanding.
It represents listed equity value and supports comparisons such as index weight. Check share classes, capital changes and price date.
Example: Fifty million shares at 40 imply a market cap of 2 billion.
Watch out: Treating market capitalization as enterprise value or a guaranteed sale price.
Dilution
The reduction in an existing share's proportional claim after new shares or convertible instruments are issued.
It can change earnings per share, voting power and valuation even if the company grows. Review new share count, issue price, use of proceeds and diluted EPS.
Example: If share count rises 20% while profit is unchanged, EPS falls about 16.7%.
Watch out: Assuming dilution has no cost because the company receives cash.
Share buyback
A company's purchase of its own shares using cash.
It can change share count and capital allocation, but value creation depends on price paid and funding quality. Assess purchase price, cancellation or treasury-share treatment, debt impact and alternative investment needs.
Example: A debt-funded buyback at an excessive price can reduce share count while increasing balance-sheet risk.
Watch out: Assuming every buyback automatically increases per-share value.
Company guidance
Management's outlook for future revenue, margins, investment or other performance measures.
Markets often react more to changes in the outlook than to the reported historical result. Check the range, assumptions, FX effects, organic growth and changes from prior guidance.
Example: Unchanged revenue guidance with a lower margin range can indicate cost pressure.
Watch out: Treating management guidance as a guaranteed outcome.
Free float
The share of a company's equity that is freely tradable in the public market.
It can affect liquidity, index weight and the price impact of large orders. Check strategic, insider, locked-up and treasury holdings and the index provider's definition.
Example: For two equally valued companies, lower free float can leave the order book thinner.
Watch out: Assuming high free float always guarantees high trading volume.
Funds & Bonds
Bond
A security representing an issuer's borrowing under specified terms.
Coupon, maturity, credit risk and market rates shape total return. Focus on price, yield to maturity, duration and issuer risk, not only face value.
Example: When market rates rise, an existing fixed-coupon bond generally falls in price.
Watch out: Mistaking the coupon rate for the investor's guaranteed annual return.
Exchange-traded fund (ETF)
A fund traded on an exchange that tracks an index, asset basket or strategy.
It can provide diversification in one trade; cost, tracking difference and liquidity affect outcomes. Review index methodology, total expenses, holdings and price versus NAV.
Example: During stress, an ETF may temporarily trade at a premium or discount to NAV.
Watch out: Assuming an ETF always trades exactly at net asset value.
Net asset value
A fund's assets minus liabilities, divided by units outstanding.
It anchors fund performance and premium/discount analysis for exchange-traded products. Check valuation time, methodology and whether the figure is intraday or end-of-day.
Example: If NAV is 100 and the ETF trades at 101, it carries about a 1% premium.
Watch out: Treating NAV as identical to an ETF's live market price.
Dividend yield
Annual dividend per share divided by share price.
It compares cash distributions with the current market price. Check gross versus net amount, sustainability, special dividends and price date.
Example: Annual dividends of 5 on a price of 100 imply a 5% gross dividend yield.
Watch out: Treating a high yield as risk-free or a guaranteed future payment.
Tracking difference
The realized return gap between an index fund and its benchmark.
It captures fees, tax, trading costs, cash and sampling effects. Compare using the same total-return definition and period.
Example: If the index returns 10% and the fund 9.6%, tracking difference is minus 0.4 points.
Watch out: Looking only at the stated fee while ignoring the realized gap.
Compound return
Return earned on principal plus prior-period gains.
It helps compare maturities and reinvestment choices on a common basis. State period count, reinvestment rate, tax and fee assumptions.
Example: A 2% monthly return reinvested for 12 months compounds to about 26.8% gross.
Watch out: Treating a simple annual rate as identical to a compounded outcome.
Coupon rate
The contractual rate used to calculate periodic interest payments on a bond's face value.
It determines cash payments but is not the same as the investor's yield at the market price. Read face value, payment frequency, market price, maturity and issuer risk together.
Example: A 10% coupon bond trading above par can have a yield to maturity below 10%.
Watch out: Assuming a high coupon automatically means a high total return.
Risk & Derivatives
Volatility
The magnitude and speed of price changes over a period.
Position size, margin and risk limits are sensitive to volatility. Compare series calculated with the same window, currency and data frequency.
Example: Larger daily moves raise realized volatility even if the overall direction is unchanged.
Watch out: Equating volatility only with downside; sharp gains also raise it.
Slippage
The difference between the expected trade price and the average execution price.
Slippage affects realized returns, especially in fast, thin or news-driven markets. Measure it alongside order type, size, spread and depth.
Example: If a large buy order in an asset quoted at 10.00 executes at 10.04 on average, slippage is 0.04.
Watch out: Accounting for commission while ignoring execution slippage.
Risk premium
The extra return demanded for holding a riskier asset over a low-risk benchmark.
It is a core input into funding costs, discount rates and asset pricing. Match maturity, currency and the type of risk being compared.
Example: A corporate bond yielding 250 basis points over government debt may embed credit and liquidity premia.
Watch out: Using every risk premium as a synonym for CDS.
Duration
A measure of the weighted timing of bond cash flows and price sensitivity to interest rates.
It helps estimate the impact of a rate shock on a bond or bond fund. Distinguish Macaulay from modified duration and use effective duration for option-embedded instruments.
Example: With modified duration of 5, a one-point rate rise may reduce price by roughly 5%; this is a linear estimate.
Watch out: Treating duration as identical to remaining maturity.
Futures contract
A standardized contract obliging parties to buy or sell an asset later under specified terms.
It supports hedging and price discovery while leverage and daily settlement can amplify risk. Review contract size, expiry, settlement, margin and basis.
Example: For a 100-unit contract, a two-unit move creates a 200-unit gain or loss regardless of margin posted.
Watch out: Mistaking posted margin for the maximum possible loss.
Option
A contract giving the buyer the right, but not the obligation, to buy or sell an asset at a set price.
It creates nonlinear payoffs; time, volatility and strike affect value. Read intrinsic value, time value, expiry and implied volatility together.
Example: A call may lose money even when the underlying rises if the move does not offset premium and time decay.
Watch out: Assuming the option buyer only needs to get direction right to profit.
Implied volatility
Volatility inferred from option prices, reflecting the market's priced magnitude of future moves.
It is a core input into option premium and expected-move estimates. Compare like maturities and strikes, and remember it is not a directional forecast.
Example: Implied volatility may rise before earnings and fall afterward regardless of price direction.
Watch out: Treating high implied volatility as a certain bearish forecast.
Leverage
Using limited equity or margin to control a larger economic exposure.
It magnifies gains and losses, so small market moves can cause large equity changes. Divide notional exposure by net equity and separately review liquidation and margin rules.
Example: Controlling a 50,000 position with 10,000 of equity is about 5x leverage.
Watch out: Assuming leverage exists only when cash is borrowed.
Margin call
A request for additional collateral after losses or a change in margin requirements.
Failure to meet it may trigger forced liquidation and accelerate losses. Review initial, maintenance and intraday margin rules together with broker terms.
Example: If equity falls below maintenance margin, the broker may demand cash or close the position.
Watch out: Assuming the position will remain open until the market recovers.
Hedging
Reducing the impact of an adverse move in one exposure through another instrument or transaction.
It can limit cash-flow and balance-sheet uncertainty but introduces cost and basis risk. Measure the match in amount, maturity, currency and underlying exposure.
Example: A company with foreign-currency debt may use forward purchases to partly hedge currency appreciation.
Watch out: Assuming a hedge removes all risk and opportunity cost.
Correlation
A measure from -1 to +1 summarizing the direction and strength of co-movement between two variables.
It is used to understand diversification, hedging and portfolio risk. Specify the window, frequency, currency and exceptional regime changes.
Example: A +0.8 correlation means two series mostly moved together historically; it does not guarantee the future.
Watch out: Mistaking correlation for causation or a stable future relationship.
Maximum drawdown
The largest percentage fall from a peak to a subsequent trough over a selected period.
It shows the depth of historical loss an investor could have faced. State the period, currency, reinvestment assumption and data frequency.
Example: A fall from 100 to 65 is a 35% drawdown if no new peak intervenes.
Watch out: Treating historical maximum drawdown as a cap on future losses.
Currency risk
Exposure of an asset, liability or cash flow to movements between currencies.
It can change company profit, debt capacity and investment returns in local currency. Match revenue, cost, debt, cash and hedges by currency.
Example: A company with dollar revenue and euro costs is exposed to both USD/TRY and EUR/USD.
Watch out: Assuming every exporter benefits equally from currency depreciation.
Credit risk
The risk that a borrower fails to pay interest or principal in full and on time.
It directly affects bond yields, borrowing cost, collateral needs and portfolio losses. Review cash flow, maturities, collateral, seniority, covenants and credit spread.
Example: The yield gap between similar-maturity bonds can reflect credit risk as well as liquidity.
Watch out: Assuming sovereign or highly rated debt has zero risk.
Beta
A historical coefficient measuring an asset's return sensitivity to a chosen market benchmark.
It summarizes co-movement magnitude but does not show company-specific risk or maximum loss. Check period, frequency, benchmark, currency and stability of the estimate.
Example: An asset with long-run beta of 1.2 can still move opposite the market on individual days.
Watch out: Assuming beta of 1.5 means the stock moves exactly 1.5 times the index every day.
Value at Risk
A historical or model-based estimate of a loss threshold over a chosen horizon and confidence level.
It helps monitor portfolio risk on a common scale but does not describe losses beyond the threshold. State horizon, confidence level, data window, distribution assumptions and stress tests together.
Example: A one-day 99% VaR of TRY 100,000 means larger losses may be rare, not impossible or capped.
Watch out: Treating 99% VaR as the worst possible loss or a guaranteed cap.