Blockchain technology

Check out the meaning of hundreds of trading terms in our trading glossary.

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A (credit rating)

An A credit rating is given to borrowers that are considered to have a strong ability to meet their financial commitments. However, they might be more affected by changes in circumstances or economic conditions than borrowers with higher ratings.

AA (credit rating)

An AA credit rating signals a very strong capacity to meet financial commitments. It's one notch below the highest AAA rating, showing high creditworthiness. While highly reliable, borrowers with an AA rating face slightly more risk than those rated AAA, especially in challenging economic conditions.Learn more

AAA (credit rating)

An AAA credit rating represents the highest level of creditworthiness. It indicates an exceptional ability to meet financial commitments, making it the safest investment grade. Borrowers with AAA ratings are considered to have the strongest capacity to withstand economic challenges and maintain their obligations.

Abnormal return

An abnormal return is the difference between an investment's expected return and the actual return. It indicates how much better or worse the investment did compared to what was anticipated, revealing its performance relative to market expectations.

Absolute return funds

Absolute return funds are investment funds designed to make money in all market conditions. They focus on returns rather than trying to outperform the market, and employ a range of strategies - like short selling - in an aim to profit regardless of market direction.

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Accelerated monitoring fees

Accelerated monitoring fees are charges a company pays in advance to private equity advisors for ongoing services, typically triggered when the company is sold or goes public. This upfront payment covers future services that were supposed to be provided over several years.

Accelerated Return Note

An accelerated return note is a financial product that offers potentially higher returns than a specific asset's performance. If the asset does well, investors get increased gains quickly. However, there's a risk of losing money if the asset performs poorly, making it a high-reward but risky investment.

Accounting Currency

Accounting currency is the currency that a company uses in its bookkeeping. While accounting currency may differ from operational currency - i.e. the currency in which a company transacts day-to-day business - it is the main currency for recording transactions and reporting results.

Accounting Insolvency

Accounting insolvency occurs when a company's liabilities exceed its assets on the balance sheet, indicating it owes more than it owns. It's a financial condition in which the company can't cover its debts with its current assets, suggesting potential financial trouble.

Accounting liquidity

Accounting liquidity measures how quickly a company can pay off its short-term debts using available assets. High liquidity means that a company can easily meet its financial obligations, indicating good financial health. Accounting liquidity is crucial for managing cash flow and ensuring operational stability.

Accounting Rate of Return

The accounting rate of return calculates the potential profitability of investments based on their expected net income relative to the initial investment cost and serves to evaluate the financial viability of new projects.

Accounting Ratio

An accounting ratio is a financial metric derived from two or more numerical values found in a company's financial statements. It's used to assess a firm's financial health, operational efficiency, and profitability.

Accretive

Accretive refers to any process or transaction, such as a merger or acquisition, that positively influences the value or earnings of a company or financial asset.

Accretive acquisition

An accretive acquisition is when a company purchases another company, and the resulting merger increases the acquiring company's earnings per share, enhancing shareholder value.

Accrual accounting

Accrual accounting is an accounting method where revenue and expenses are recorded when they are earned or incurred, regardless of when the cash transactions occur. This approach can help provide a more accurate picture of a company’s financial position.

Accrue

In finance, to accrue means to accumulate or receive payments or benefits over time, especially with reference to accruing interest or expenses that are recognised in the accounts before being paid.

Acid-test ratio

The acid test ratio, also known as the quick ratio, measures a company's ability to cover its short-term liabilities with its most liquid assets, excluding inventory, and is recognised as a stringent indicator of financial stability.

Acquisition structure

Acquisition structure refers to the financial and legal framework of a deal when a company acquisition happens. This includes the arrangement of payments, asset transfers, and integration strategies.

Active Investing

Active investing involves the frequent buying and selling of assets to exploit short-term market movements in an attempt to profit.

Active Order

An active order is a trading order that has been placed but not yet been executed, and remains active until either being filled or cancelled. An active order could be a limit order, stop order or conditional order, and can help traders manage positions by specifying the price they are willing to pay or accept for an asset.Learn more

Active trading

Active trading refers to frequent buying and selling of assets in an attempt to profit from short-term market movements, rather than long-term 'buy and hold' type investments.

Activist shareholder

An activist shareholder is someone who purchases a large quantity of a company's shares in an attempt to effect significant change within the company, often seeking to improve financial returns and shareholder value.

Adams Express Company

The Adams Express Company definition is of a diversified equity fund that operates as a closed-end fund, investing primarily in US shares. The company was originally established as a freight and cargo business.

Adjusted Present Value (APV)

Adjusted present value (APV) is a valuation method that separates the value of an investment project from the value of its financing side effects, like tax shields, calculating net present value using the unlevered cost of capital.

Advanced Computerized Execution System

The Advanced Computerised Execution System refers to an electronic platform used in trading that uses advanced algorithms and automation to execute large volumes of securities transactions.

AEX index

The AEX Index is a major stock market index tracking the performance of the top stocks traded on the Amsterdam Exchange. It is often seen as a proxy for the general health of the Dutch stock market and overall economy.

After-Hours Trading (AHT)

After hours trading refers to the buying and selling of assets outside the standard trading hours of major exchanges such as the New York Stock Exchange. It might be used in an attempt to capitalise on price movements following key news events, to hedge, or to avoid price gapping. After hours trading can potentially be more volatile, and therefore risky.

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Agency security

An agency security is a form of debt security issued or guaranteed by US government-sponsored enterprises or federal agencies, excluding US Treasury securities, often used for funding specific governmental activities.

Agricultural Bank of China

The Agricultural Bank of China is a major Chinese bank that provides financial services to agricultural, rural, and farmer communities, with the aim of enhancing China's agricultural economy and rural development.

Alaska Permanent Fund Dividend

The Alaska Permanent Fund Dividend is an annual payment made to Alaska residents that meets eligibility criteria, funded by the profits from the state's oil revenue to distribute wealth from natural resources.

Alberta Heritage Savings Trust Fund

The Alberta Heritage Savings Trust Fund is a sovereign wealth fund established by the Alberta government to manage and invest the surplus revenues from the province's oil and gas resources for future generations.

Alerts

In finance, alerts are notifications sent to traders or investors about significant events or changes in their portfolio or market conditions, helping them make timely decisions based on the latest information.

Algorithmic trading

Algorithmic trading is a method of executing trades using computer algorithms based on predefined criteria, without human intervention. It capitalises on speed and precision, handling vast amounts of data and executing orders quickly in an attempt to exploit market opportunities across asset classes like shares and forex.Learn more

All in method

The all-in method in finance considers all possible costs and revenues in the analysis or evaluation of a project to ensure all factors are accounted for in decision-making.

Alpha generation platform

An alpha generation platform in finance refers to tools or systems used by traders and investment managers to identify potential investment opportunities that are expected to yield market-beating returns.

Altcoins

Altcoins are cryptocurrencies that propose improvements or differing features and technologies to bitcoin, aiming to address perceived limitations of the most prominent coin.

Alternative asset

An alternative asset is an investment in non-traditional categories such as real estate, commodities, and hedge funds, and can be used to diversify investment portfolios beyond conventional shares.

Alternative display facility

The Alternative Display Facility is an electronic system used in trading to provide exchange services like quote dissemination and trade reporting without providing a full trading venue.

Alternative Investment Fund Managers (AIFM) Directive 2011

AIFM stands for Alternative Investment Fund Managers, referring to managers who handle funds investing in assets including real estate, hedge funds, and private equity.

Alternative public offering

An alternative public offering (APO) is a method for private companies to become publicly traded by merging with an existing public shell company, an alternative to traditional initial public offerings.

Alternative trading system

Alternative Trading Systems (ATS) are trading venues that match buyers and sellers to find counterparties for transactions, alternative to traditional exchanges, often used for trading stocks or bonds.

Alternext

Alternext is a subsidiary market by the stock exchange Euronext designed for small and mid-sized companies that do not meet the regulatory listing requirements of the main stock exchange, providing a potentially easier access point to capital markets.

Altman Z-score

The Altman Z Score is a formula used to predict the likelihood of a company entering bankruptcy within two years, based on various corporate income and balance sheet values.

American depositary receipts (ADRs)

American Depositary Receipts (ADRs) are certificates issued by US banks representing shares in foreign companies, allowing these shares to be traded on US stock exchanges.

American National Standards Institute (ANSI)

The American National Standards Institute (ANSI) is an organisation that oversees the development of standards for products, services, processes, and systems in the US.

Amex Composite Index

The Amex Index refers to a series of stock market indices on the NYSE American, which lists small to medium-sized US and international companies, providing a benchmark for their performance.

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Amex Gold Miners Index

The Amex Gold Miners Index is a stock market index that tracks the performance of major companies involved in the gold mining industry, traded on the NYSE American exchange.

AMX index (Midcap)

The AMX Index is a Dutch stock market index that tracks the performance of mid-cap stocks on the Euronext Amsterdam, providing a benchmark for their economic health.

Ancillary Revenue

Ancillary revenue refers to the income derived from goods and services that complement primary business operations, such as baggage fees for airlines or maintenance services for equipment manufacturers.

Angel Investor

An angel investor is an affluent individual who provides capital for a business start-up, usually in exchange for convertible debt or ownership equity, typically focusing on early-stage ventures.

Animal spirits

In finance, animal spirits refer to the emotional and psychological factors that drive traders’ decisions, leading to fluctuations in financial markets beyond what would be expected from rational behaviour.

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Annual equivalent rate (AER)

The annual equivalent rate (AER) is a re-calculation of the rate of interest on a loan or other debt product to give the figure as it would be if it were calculated annually. This is valuable for consumers with debts where interest is worked out monthly or quarterly.

Annual general meeting (AGM)

An annual general meeting (AGM) is a yearly gathering of a company's interested shareholders that allows stakeholders to receive updates on the company's health and ask questions to the board of directors.

Annual percentage rate (APR)

The annual percentage rate (APR) is a detailed measure of the cost of borrowing on an annual basis. It includes interest and any additional fees or charges, making it a key indicator for comparing different loans and credit terms.

Annual Percentage Yield

The annual percentage yield (APY) measures the total amount of interest paid on an account, based on the interest rate and the frequency of compounding. It shows how much a deposit will earn in a year.

Annual total return

Annual total return represents a percentage that shows the total gain or loss of an investment over a one-year period, incorporating all sources of investment income including dividends, interest, and capital gains.

Annualized loss expectancy

Annualised loss expectancy, or ALE, is a risk-management metric used to estimate the monetary loss that an organisation can expect within a year due to risks identified in its operations.

Annuities

Annuities are financial products structured to provide a steady income stream, and are typically used as part of retirement strategies. Payments from annuities can be scheduled over a fixed period or for the recipient's lifetime.

Arab Monetary Fund (AMF)

The Arab Monetary Fund is an Abu-Dhabi based regional financial organisation focused on fostering monetary cooperation and financial stability among its member countries in the Arab world.

Arbitrage

Arbitrage refers to when an asset is simultaneously purchased and sold in different markets in an attempt to profit from price discrepancies, exploiting these differences to earn potentially risk-free returns.

Arbitrage betting

Arbitrage betting is a strategy where bets are placed on all possible outcomes of an event at odds that guarantee a profit regardless of the result, often exploiting differences in bookmaker odds.

Arbitrage pricing theory

Arbitrage pricing theory (APT) describes an asset pricing model that predicts the returns of a financial asset based on its exposure to multiple risk factors, and serves as an alternative to the capital asset pricing model, or CAPM.

Articles of incorporation

Articles of incorporation are legal documents filed with a governmental body to legally document the creation of a corporation. They outline the primary purposes, structure, and other essential details of the company.

AScX index (Small Cap)

The ASCX Index tracks the performance of small market cap companies listed on the Euronext Amsterdam, offering a benchmark for the smaller company segment of the Netherlands stock market.

Ask Price

The ask price is the minimum price a seller is willing to accept for an asset. In trading, it's the lowest price you can buy a security, such as a stock or currency.

Asset

An asset refers to any resource with economic value that an individual, company, or institution owns or controls with the expectation that it will provide future financial benefit. Assets can include shares, commodities, real estate, and currencies, many of which can be traded with derivative products such as CFDs.

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Asset allocation

Asset allocation refers to an investment strategy that aims to balance risk and reward by segmenting a portfolio's assets according to an individual's goals, risk tolerance, and investment horizon.

Asset Classes

An asset class is a group of securities that behave similarly in the marketplace, are subject to the same laws and regulations, and are typically used together as part of an investment strategy, such as shares, commodities, or indices.

Asset purchase

An asset purchase involves acquiring specific assets of a company rather than its stock. This method allows the buyer to obtain only the parts of the business they want, avoiding unwanted liabilities.

Asset stripping

Asset stripping describes the practice of buying a company and then selling its individual assets separately for a profit, often disregarding the long-term health or viability of the original company.

Asset Valuation

Asset valuation is the process of determining the current worth of a financial asset or company. It might involve methods such as discounted cash flow analysis, comparable company analysis, or using market values for assets like stocks and bonds to establish their fair market value.

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Asset-backed commercial paper program

An asset-backed commercial paper program involves issuing short-term securities, backed by a pool of assets, typically used by companies to meet immediate cash flow needs.

Asset-based approach

An asset-based approach is a method of business valuation that focuses on the value of a company's tangible and intangible assets, rather than its earnings or market position.

Assets under management (AUM)

Assets under management refers to the total market value of the investments that a financial institution or asset manager manages on behalf of clients. AUM can include money, real estate, and other assets that are being actively managed.

Association of the Luxembourg Fund Industry

The Association of the Luxembourg Fund Industry (ALFI) is a professional organisation that represents the interests of the Luxembourg investment fund community, promoting its development while ensuring its members operate within the legal and regulatory framework of the market.

Assurance contract

An assurance contract is a financial arrangement, typically related to insurance, where coverage is provided against certain events in exchange for premiums paid by the policyholder. The term is also used in economics to describe a scenario where a project is funded after a set amount of pledges are secured to ensure its viability.

Athex 20

The ATHEX 20 is a stock market index of the twenty largest companies by market capitalisation listed on the Athens Stock Exchange in Greece. It serves as a benchmark for the performance of the Greek equities market.

Attitude to Risk

Attitude to risk refers to the willingness of a trader to take positions that represent a higher chance of losing their capital. More risk-averse traders prefer lower risk assets that may have less upside but also less downside, while risk-seeking traders accept the higher chance of losing money for more potential upside.

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Auction process

The auction process definition explains a method of buying and selling goods or services by offering them up for bid, taking bids, and then selling the item to the highest bidder. It’s conducted in a public setting where multiple potential buyers place competitive bids.

Audited account

An audited account is a financial statement that has been examined and verified by an independent auditor. The audit process ensures that the accounts accurately represent the entity’s financial position and comply with relevant accounting standards and regulations. This provides assurance to stakeholders about the accuracy of financial reporting.

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Auditor

An auditor is someone qualified to produce a set of audited company accounts, and is usually an accountant by profession. They have the duty to scrutinise the numbers presented by management and raise questions where there are concerns.

Australian Securities Exchange

The Australia Securities Exchange is the primary securities exchange in Australia, located in Sydney. It hosts the trading of shares and other securities. The related index market, which lists the leading blue-chip Australian companies, can be traded on Capital.com as the Australia 200.

Automated Market-Making (AMM)

Automated market making (AMM) is a type of trading system that uses algorithms to set buy and sell prices, providing continuous liquidity to markets. AMMs determine prices based on trading volume and demand, functioning without traditional human market makers.

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Automated Trading

Automated trading involves the use of computer programs and algorithms to enter and exit trades based on pre-defined criteria and without human intervention, often used to execute orders rapidly and at optimal prices.Learn more

Automated Valuation Model (AVM)

An automated valuation model, or AVM, describes a service that uses mathematical modelling to value properties by analysing various data points, commonly used by real estate industries and lenders for quick property appraisals.

Average accounting return

The average accounting return is a financial ratio that reflects the average profits earned by an investment relative to its initial cost or average book value.

Average accounts receivable

Used by businesses, average accounts receivable is a measure used to determine the average amount of money being owed by customers over a period, typically calculated by averaging the opening and closing balances of receivables over a fiscal period.

Average Daily Trading Volume

Average daily trading volume refers to the average number of shares or contracts traded for a specific security or in a market during a specific period, typically calculated over a day. This figure helps investors gauge the liquidity and activity level of the trading asset, influencing decisions regarding the ease of entering or exiting positions.Learn more

Average Price

Average price is the mean price of a good or service over a specific time period, often used to smooth out price data to see underlying price trends more clearly.Learn more

Average propensity to consume

The average propensity to consume is an economic measure that shows the proportion of total income or total expenditure spent on consumption. It indicates how spending levels change with income levels.

Average propensity to save

The average propensity to save represents the fraction of total income that a person saves rather than uses for consumption. It is calculated as savings divided by total net income.

Averaging Down

Averaging down is an investment strategy that involves buying additional shares of a stock that one already owns after the price has dropped, decreasing the average price per share.

What is blockchain technology?

A blockchain in simple terms is an immutable (unchangeable) digital ledger which is managed by a decentralised network.

The blockchain is a type of database in which transactions are not governed by a single party and the entire transaction history is recorded. The first blockchain usage example is bitcoin (BTC), which was created in 2009.

How the blockchain works

A simple blockchain explanation is to imagine a long series of connected data, organised into blocks that form a chain. Each block is capable of holding a predetermined amount of data; as it is filled, it is forged into the chain and a new block is formed.

As the chain progresses all previous blocks are impossible to change. All data entering the new block must be verified by a majority of the computational power from a decentralised network. This decentralised network consists of nodes – devices connected to maintain the network’s integrity, which base their decision on the accuracy of the current transaction and on all the data previously confirmed to be accurate in the closed blocks.

In this way the blockchain is nearly impossible to be corrupted by any single user. Nodes, validating new blocks that are being added to the blockchain, are rewarded for their efforts, typically in the form of the digital asset they are verifying.

Blockchain usage example:

Someone wants to transfer a certain number of bitcoins from one address to another.
A transaction is requested in the network.
The transaction is sent to a peer-to-peer network consisting of computers known as nodes.
Bitcoin’s validation process is performed by miners who are rewarded for their participation in securing the network.
The Bitcoin network of nodes validates the transaction using cryptographic algorithms.
After the transaction is verified it is added to other transactions to build a new block of data for the ledger.
The new block is then recorded to the end of the existing blockchain.
The transaction is complete.

How does blockchain work?

What is blockchain used for?

While bitcoin and other cryptocurrencies are by far the most prevalent users of blockchain technology, it does have other application areas.

A fast-growing area for blockchain is non-fungible tokens (NFTs), which give the purchaser digital asset ownership of things such as music and video. It is also being used to secure ownership rights in physical assets, such as precious metals and land. Even the traditional fiat banking system started utilising blockchain to allow for more secure and efficient transfers of money and credit products.

Businesses are using blockchain to enter into smart contracts whereby the execution of the contract is only possible when all parties have fulfilled their obligations, reducing the risk of fraud. Large companies are also using the technology to solve complex production, inventory and supply chain issues across the globe.

Governments are even looking at using blockchain to prevent voter fraud in future elections.

Pros and cons of blockchain

As blockchain must be verified through a series of nodes it is very difficult to corrupt. In a system such as Bitcoin, even if one node was successful in corrupting the file, the consensus requirement would soon render such efforts pointless.

This is because the blockchain in its entirety is stored on each node and as soon as the error was detected the rest of the network would eject the offending node and continue along with the correct version.

The disadvantages of blockchain technology are largely caused by the functions which make it secure. Bottlenecks in transaction speed can be detrimental to its usage in many applications. As you can imagine, the chain is constantly increasing in size and requires increasing amounts of computational power to confirm each additional block.

Energy consumption is another major disadvantage of blockchains using proof-of-work consensus mechanisms, such as bitcoin. However, this issue was addressed in a proof-of-stake protocol, which requires less power to keep the blockchain running.