Capital Markets Glossary E to N: Plain-English Definitions

About this page

Finance is full of terms that sound simple until you have to use them. This page is a plain-English glossary for Capital Markets, covering entries such as Earn-out, Earnings quality, Earnings yield, EBID, Economic moat, each with a short definition and a pointer to the part of the volume where it is explained.

Keep it open while you read, or use it to settle an argument about what a term really means. Every entry is written to stand on its own, with no jargon left undefined, and the part number beside it tells you where to read more. Use it as a quick reference whenever a term trips you up.

A sample of the entries (102 terms on the full page)

Earn-out — Part of an acquisition price paid later, only if the acquired business meets agreed targets such as revenue or EBITDA. Its value is the probability-weighted present value of the payments, and US GAAP remeasures it each period through earnings (Part 2.1).

Economic moat — A durable competitive advantage that keeps a company’s return on invested capital above its cost of capital (Part 1.12).

Efficient frontier — The set of portfolios offering the highest expected return for each level of volatility; any mix below it is beaten by another mix of the same assets (Part 5.2).

Equity risk premium (ERP) — The extra return investors expect from stocks over the risk-free rate, (Rm − Rf) in CAPM (Part 1.5).

Expected shortfall — The average loss in the tail beyond a confidence threshold, such as the worst 2.5% of outcomes; also called conditional VaR (Part 5.5).

Fat tails — A property of distributions that produce extreme outcomes far more often than the normal distribution predicts; observed in market returns since at least Mandelbrot’s 1963 study.

Five-step model — The revenue framework shared by ASC 606 and IFRS 15: identify the contract, the performance obligations, the price, allocate the price, and recognize revenue as each obligation is met (Part 6.2).

Forensic triage — The first pass on an accounting allegation: using ratios such as DSO, reserve levels and profit versus operating cash flow to size the problem before any valuation.

Gas — The unit measuring the computation an Ethereum transaction uses; the fee is gas used × (base fee + priority fee), paid in ether (Part 11.3).

Growing perpetuity — A payment that grows at a constant rate forever, worth CF₁ ÷ (r − g) when r exceeds g; the basis of the Gordon Growth Model (Part 1.2).

Hash — A fixed-length fingerprint of data produced by a function that is easy to compute and practically impossible to reverse; changing one character of the input changes the output completely (Part 11.1).

Hedge ratio — The size of a hedge per unit of exposure; the variance-minimizing ratio is the correlation times the exposure’s volatility divided by the hedge instrument’s volatility. (Part 4.8)

Idiosyncratic risk — Company-specific volatility that averages away as more independent holdings are added; it earns no premium in CAPM (Part 5.1).

Information coefficient (IC) — The correlation between a manager’s forecasts and actual outcomes; in Grinold’s fundamental law, information ratio ≈ IC × √breadth (Part 8.4).

Interest coverage — EBIT divided by interest expense; the main input to a synthetic rating (Part 1.4).

Internal rate of return (IRR) — The discount rate at which a project’s NPV equals zero (Part 1.11).

Key risk indicator — A metric chosen to warn that risk is building before losses or performance metrics move, such as aged breaks or limit excesses (Part 9.6).

LIFO reserve — FIFO inventory minus LIFO inventory, disclosed by LIFO users so analysts can restate inventory and cost of goods sold to a FIFO basis (Part 6.6).

Macaulay duration — The present-value-weighted average time, in years, until a bond’s cash flows are received; 2.82 years for Part 3’s 3-year, 5% semiannual-coupon bond priced to yield 6% (Part 3.2).

Management-defined performance measures — IFRS 18’s term for company-defined subtotals such as adjusted operating profit, which must be explained and reconciled in the audited notes from 2027 (Part 6.1).

Mid-year convention — Discounting each year’s cash flow by t − 0.5 years because cash arrives through the year; Gordon terminal value then uses N − 0.5 years, an exit multiple N years (Part 1.3).

Modified internal rate of return (MIRR) — A return measure that discounts outflows and compounds inflows at the cost of capital, giving one answer when cash flows change sign more than once (Part 1.11).

Multiple expansion — The part of an investment’s gain that comes from selling at a higher valuation multiple than the purchase multiple, rather than from earnings growth or debt paydown (Part 2.7).