Stock Market Terms
br Terms that are underlined are linked to a more extensive discussion in this website. Financial ratios and terms in addition to those contained in this value investing glossary may be sourced from ... Investors searching for stock market terms relating specifically to stock trading are referred to Investopedia's list of active trading terms.
A absolute valuation: An 'absolute' measure of stock fair value that is based on the ecomomics of the company itself, and not on its current share price. all-ordinaries stock index (all-ords): A stock index comprised of over 300 common (ordinary) shares from the Australian Stock Exchange (ASX). The All-Ordinaries Index is the most quoted benchmark for Australian equities. The ASX is responsible for calculating and distributing the index and its returns. amortisation: The deduction of capital expenses over a specific period of time. This method measures the reduction in the value of intangible assets, such as a patent or a copyright. Amortization refers to intangible assets and depreciation refers to tangible assets. asset allocation: A portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal. B
balance sheet: A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. The balance sheet gives the value investor an idea as to what the company owns and owes, as well as the amount invested by the shareholders. The balance sheet must follow the following formula: Assets = Liabilities + Shareholders' Equity bottom-up approach: An investment approach used by value investors that focusses on the analysis of individual stocks. In bottom-up investing the focus is on a specific company rather than on the industry in which that company operates, or on the economy as a whole. breakup value: The amount of money that could be realized when a company is broken up into individual parts and sold separately. Certain companies at critical times are worth more dead than alive. If the market price of the common stock falls below the breakup value of the company, the company becomes attractive as a takeover target. BRIC: An acronym standing for Brazil, Russia, India and China. Mexico is often considered as the 'fifth BRIC'. Buffett: Known as "the Oracle of Omaha", Warren Buffett is Chairman of Berkshire Hathaway and considered to be the greatest (value) investor of all time. He is the second richest man in the world. C
capital appreciation: Is the rise in the market price of an asset. Capital appreciation is one of two major ways for value investors to profit from an investment in a company. The other is through dividend income. capital asset pricing model (CAPM): A model that describes the relationship between risk and expected return that is used in the pricing of risky stocks. Not a model favoured by value investors as the focus is on price, not value. cash cow: A company that provides a consistent cash flow. It usually requires limited investment capital. The company may use their money to buy back shares on the market or pay good dividends to shareholders. cash flow: Refers to the statement of cash flows - that shows the amount of cash generated and used by a company in a given period. Calculated by adding non-cash charges (such as depreciation) to net income after taxes. Cash flow is used by value investors as an important indication of a company's financial strength. circle of competence: A term used by Warren Buffett to indicate that value investors should only invest in stocks that they either understand or know something about. common stock: Any shares that are not preferred shares and do not have any predetermined dividend amounts. Also called ordinary shares, they represents equity ownership in a company and entitles the owner to a vote in matters put before shareholders in proportion to their percentage ownership in the company. contract for difference (CFD): A highly leveraged derivative product that allows speculators to bet on the movement in the price of an underlying share. Like other derivatives, CFDs do not entitle you to physical ownership of the underlying share. This is not a financial product that value investors would be interested in. contrarian: A style of investment characterized by acting opposite to the crowd, and therefore exhibiting independent critical thinking. Value investors may sometimes be contrarian when the intrinsic value of a stock falls below its market price. couch potato investing: A strategy that involves searching for a a stock index fund with a low expense ratio, as well as a Treasury portfolio of fixed Income Securities, and put 50% of your money in each. The only activity required is to re-balance to 50% each year. a good strategy for those with little knowledge of the stock market. cum dividend: Means that the shares carry the entitlement to the dividend and if purchased 'cum-dividend', the buyer will receive the dividend. current assets: A balance sheet item that includes all assets that can be converted into cash (if necessary) within one year. It is a measure of liquidity. current ratio: A measure of liquidity that allows a check to see if a company is likely to have a problem taking care of current liabilities that come due. Calculated by dividing total current assets by total current liabilities. A result greater than 1.5 for the last 3 -5 years is desirable. D
DAX: A stock index that represents 30 of the largest and most liquid German companies that trade on the Frankfurt Exchange. DCF model: Used for the appraisal of the true, intrinsic economic value of companies. Beta and market timing are not involved. It is true because it is based on economic value rather than so-called accounting value (book value) or market value. There are many versions of the DCF Model, each designed to simplify the data requirements. The DCF Model could be called the Capital Asset Valuation Model (CAVM) to emphasize its radical difference from the Capital Asset Pricing Model (CAPM). debt/equity ratio: Measures the amount of long-term debt the company has as a percentage of the equity of the business. It is calculated by dividing the long-term debt obligations by the total common shareholders equity and converting to a percentage. A result less than 50% is desirable depending on the company's historical ability to handle debt. depreciation: An accounting expense recorded to allocate a tangible asset's cost over its useful life. Because depreciation is a non-cash expense, it increases free cash flow while decreasing reported earnings. derivative: An instrument with underlying assets based on shares. A stock derivative's value will fluctuate with changes in its share price. Investors can use equity (stock) derivatives to hedge the risk associated with taking a position in stock by setting limits to the losses incurred by either a short or long position in a company's shares. Options are the most common equity derivatives because they directly grant the holder the right to buy or sell equity at a predetermined value. discounted cash flow (DCF): A class of appraisal models based on discounting at an appropriate interest rate the net cash flows attributable to an investment opportunity; the best known DCF model is the so-called dividend discount model (DDM). discount rate: The investor's reward for delayed gratification. At a minimum, it is the lowest risk rate of return on an alternative investment available to the investor with a time horizon comparable to that of the investor. diversification: A risk management technique that mixes a variety of investments within a portfolio. The idea is that a portfolio of different kinds of investments will, on average, yield higher returns and pose a lower risk than any individual investment found within the portfolio. dividend discount model (DDM): A more descriptive name is "cash distributions discount model" because this model includes either dividends in perpetuity, or equivalently, distributions from not only dividends but also future selling price as estimated by either book value/price, price/earnings, or dividend/price ratio. See also DCF model. dividend investing: Refers to concentrating the investment in stocks to those with high dividend yield and whose earnings are passed on to shareholders as an interim payment after a half-year report, and as a final payment after the annual report. Stocks whose dividends are 100% franked are favoured. dividend yield: Is measured by dividing the dividend by the share price and expressing it as a percentage. The yield commonly varies from one or two percent to nine or ten percent. dollar cost averaging: The strategy works on the principle that you invest sums of money on a regular basis into share market-related funds, or directly into one or more shares – say $1,000 each month or two, or whatever. The idea is that when the share price is high, the regular amount buys fewer shares and when the share price happens to be low, the regular amount buys more shares. Dow Jones Industrial Average (DJIA): 'The Dow' is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the Nasdaq. The DJIA is the oldest and single most watched index in the world. E
earnings stability: Measures how consistent the earnings per share growth of a company is. The more stable the earnings per share growth of a company, the more accurately one can forecast future earnings, and to a lesser extent future P/E ratios. earnings yield: The inverse of the price/earnings ratio. It allows you to compare the potential yield on a particular stock investment with that for other stocks, or for other asset classes, for example property. EBITA: The Earnings Before Interest, Tax and Amortisation. economic moat: A way of describing the competitive edge of a company. This protection against competition can be in the form of a strong brand, the inability of customers to switch to a competitor, a cost advantage e.g., through economies of scale, or protection through such things as patents or government regulation. economic value: One of three concepts of stock value. It includes intrinsic value and appraised value. See intrinsic value, appraised value, and value. efficient market hypothesis (EMH): An investment theory that states that it is impossible to 'beat the market' because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. The EMH is highly controversial and often disputed. emerging markets: Stock markets in countries that have recently industrialised or become free markets. equity: (i) The amount of the funds contributed by the owners (the stockholders)of a company plus the retained earnings (or losses). It is also referred to as shareholders' equity. (ii) In the context of margin lending, the value of stocks (securities) in a margin account minus what has been borrowed from the brokerage. (iii) Equity (stocks) is also referred to as one of the principal asset classes. ex-dividend: It means without the dividend. Therefore if you see a company’s share price quoted 'ex-dividend', the dividend is earmarked for the seller, not the buyer. The market price will reflect whether the shares are 'cum' or 'ex' the dividend entitlement. F
filter: A set of criteria used to help an investor narrow down which financial instruments or conditions of financial instruments are the most profitable. See also 'stock screener'. footsie: A slang term for the FTSE 100 stock index. The Footsie consists of 100 blue chip stocks that trade on the London Stock Exchange. forecast: A prediction of a future financial ratio or profit value. Usually made by stock market analysts. Some online brokers provide analyst forecasts of earnings per share and P/E ratios. fundamental analysis: A method of appraising operating companies that uses data in public accounting reports to stockholders, such as those filed by U.S. companies with the U.S. Securities and Exchange Commission, rather than market-generated data. G
Green Shoots: A term used to refer to those economic indicators that are suggesting that the current global financial crisis is showing signs of easing. growth investing: Is investing in companies whose earnings are expected to grow at a rate that is above average for its industry or the overall market. While value investors tend to focus more on current intrinsic worth, growth seekers are more concerned with future intrinsic worth and whether it is likely to exceed current valuations. guaranteed stop loss: A stop-loss order which the broking house guarantees to sell even if the stock price gaps below the stop-loss price. That is, no buyers were available at the stop-loss price because the price dropped too quickly. See stop loss. This type of stop loss obviously costs more. H
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initial public offering (IPO): An IPO is a company that is applying to list on the stockmarket. Investors are being offered shares at a start-up price. IPOs can be a risky investment. It is not easy for the value investor to predict what the stock will perform over time because there is often little historical data with which to analyze the company. internal rate of return (IRR): The Internal rate of return (IRR) or IRR formula is the best way to be able to accurately track your stock market share and portfolio performance. This is because share investing occurs over time and usually involves purchases and sales at irregular intervals. The measure of share performance needs to handle both the time value of money and the irregular buying and selling events. intrinsic value: Described as the economic value of a company or its common stock based on internally-generated cash returns. The primary objective in using the adjective "intrinsic" is to emphasize the distinction between value and current market price. The concept can be helpful without a corresponding formula to reduce it to computational simplicity. It may also be called other names such as 'fair value', 'appraised value' and 'calculated value'. investment risk: A general term used to cover a variety of risks that are inherent in stock value investing. Value investors attempt to minimise risk by incorporating a margin of safety. investment style: The method used to achieve a given investment objective such as asset allocation, stock selection and other means. Styles can be changed like fashions and can be mixed or hybrid. Value investing is not a style, neither can it be mixed nor hybrid. It is a pure long-term permanent commitment to the method of valuation only. investment value: A term used to designate the estimated worth of an investment opportunity that is equal to the intrinsic value bracketed by the replacement value ceiling and the liquidation value floor. L
listed investment company (LIC): Listed investment companies (LICs) may be described as a listed managed investments that can be traded on the stock market. Others in this category include listed property trusts (LPTs), infrastructure funds, hedge funds and exchange-traded funds. LICs invest in a portfolio of assets such as shares, private equity and infrastructure funds. liquidation value: A balance sheet concept that represents the amount of money that could be realized by breaking up a company, selling its assets, repaying its debt, and distributing the remainder to its stockowners. See also 'breakup value'. liquidity: The degree to which a stock can be bought or sold in the market without affecting the stock price. Liquidity is characterized by a high level of trading activity such as with 'blue chip' shares. It is also known as 'marketability'. It is safer for the value investor to invest in liquid stock than illiquid ones because it is easier to get the money out of the investment. long term: for a value investor long term means years, usually at least five to ten years or more, rather that hours, days or weeks. M
margin of safety: the difference between the price of a stock and its calculated value. market capitalisation or market cap: Is the current share price of a company multiplied by the number of shares issued by the company. It is an indicator of the size of a company. market timing: Stock market traders typically use a stock market timing strategy in an attempt to predict the future direction of a market or individual stock, usually by using technical indicators or economic data. market value: See market capitalisation. micro-cap stock: Companies with market capitalizations between $50 million and $300 million. A micro-cap stock isn't the smallest classification - nano cap is even smaller. These terms change in value over time and place. mid-cap stock: A company with a market capitalization between $2 to $10 billion, which is calculated by multiplying the number of a company's shares outstanding by its stock price. Mid cap is an abbreviation for the term 'middle capitalization'. The term may vary in size over place and time. momentum investing: An investment strategy that aims to capitalize on the continuance of existing trends in the market. mutual fund:Stock mutual funds or managed share funds are investments where individual investors pool their money with other investors. N
net profit margin: The amount a company earns after all expenses including taxes, divided by the sales or revenue, and then expressed as a percentage. Value investors look for businesses with high net profit margins. nikkei stock index: Japan's Nikkei 225 Stock Average, the leading index of Japanese stocks. It is a price-weighted index comprised of Japan's top 225 blue-chip companies on the Tokyo Stock Exchange. O
option: A financial derivative that represents a contract sold by one person, an option writer to another, the option holder. The contract offers the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price called the strike price during a certain period of time or on a specific date called the exercise date. P
penny stocks: A stock that trades at a relatively low price and market capitalization, usually outside of the major market exchanges. These types of stocks are generally considered to be highly speculative and high risk because of their lack of liquidity, large bid-ask spreads, small capitalization and limited following and disclosure. portfolio: A group of stocks held directly by an investors and/or managed by financial professionals. price to book value(P/B): The P/B ratio is calculated by dividing the current closing price of the stock by the latest reported book value per share. It is also known as the price-equity ratio. price earnings ratio (P/E): Is the current price divided by the earnings per share. It is one of the most commonly used relative valuation measures. The earnings per share value used may be the latest reported in the annual report, a forecast for the following year, or some variation on the two. Q
quantitative analysis:Stock analysis that uses numerical information and numerical techniques such as DCF analysis to determine value. Value investors use it in conjunction with qualitative analysis. R
relative valuation: Means relative to the stock price or to the sector or to the stock market at this point in time. P/E and P/B ratios are examples of two commonly used relative valuation measures. See also 'absolute valuation'. replacement cost: The price that will have to be paid to replace an existing asset with a similar asset. The replacement cost will most likely be different than fair market value or net realisable value. return on equity (ROE): Return on equity (ROE) is a measure of how well a company is being managed. It is calculated by dividing the net (tax-paid) profit by the sum of shareholders' ordinary equity and expressing this as a percentage. return on capital (ROC): Includes the combined return on both earnings and borrowings. ROC would be expected to be less than ROE as borrowings involve interest payments. It indicates how well the company is making use of its borrowings. risk-free rate: The theoretical rate of return of an investment with zero risk. The risk-free rate represents the interest an investor would expect from an absolutely risk-free investment over a specified period of time. The interest rate on a three-month U.S. Treasury bill is often used as the (approximate) risk-free rate. In Australia, the ten-year treasury bond rate is commonly used. risk premium: The return in excess of the risk-free rate of return that a stock investment is expected to yield. A stock's risk premium is a form of compensation for investors who tolerate the extra risk. For example a stock should provide the return of a longer-term treasury bond plus a risk premium, usually another 3-5%. S
SBI!: The web hosting company used to build this site. SBI! makes available extensive and valuable back-up tools and information to website authors. Check out this link to discover what over-delivering is all about when it comes to web hosting. Screen: A stock screening tool a value investor may use to do searches on target comapnies with desirable characteristics using particular search criteria such as return on equity, market capitalisation and the like. separately managed account (SMA): Are share portfolios managed by an investment manager on behalf of an investor who retains individual ownership of each stock in the portfolio in their own name. small-cap stock: Refers to stocks with a relatively small market capitalization. The definition of small cap can vary over place and time, but generally it is a company with a market capitalization of between $300 million and $2 billion. speculating: The process of selecting stocks with higher risk in order to profit from an anticipated price movement. Stock traders are viewed by value investors as speculators. stock exchange: Companies that manage the buying and selling of shares as well as other financial instruments. Other activities include providing online stock price information, company announcements and stock market education They are regulated by government and impose regulation on listed companies. stock trading: Commonly connotes short-term buying and selling of stock (by a stock trader) but is also used in the general sense of the act of buying and selling shares. stop loss: An order placed with a broker to sell a stock when it reaches a certain price. It is designed to limit an investor's loss on a security position. Also known as a 'stop order' or 'stop-market order'. Setting a stop-loss order for 10% below the price you paid for the stock would limit your loss to 10%. T
TERP: An acronym for Theoretical Ex-Rights Price, the diluted share price resulting from a company rights issue. top-down approach: An investment approach that involves looking at the 'big picture' in the economy and financial world and then breaking those components down in order to look at stocks of specific companies. These are further analyzed and those that are believed to be successful are chosen as investments. trading: A term that is sometimes seen as an opposite approach to investing and more aligned to speculating on short-term outcomes of stock price movements, V
value: The process of determining the current worth of a company. There are many techniques that can be used to determine value, some are qualitative and others are quantitative; some are relative to other stocks or the market, some are absolute - related to economic performance rather than the share price. value investing approach: An approach that combines both a unique philosophy and a corresponding method of valuation. The philosophy emphasizes the valuation of individual companies as going-concerns and seeks long-term total return on equity investment subject to preserving the purchasing power of invested capital. The method of investment valuation is the estimation of absolute intrinsic economic value based on the discounted cash flow of expected dividends or free cash flow to equity owners. value investing style: An ambiguous term that generally refers to the use of fundamental analysis with an emphasis on absolute book value and on comparative market value using price ratios rather than on forecasts of earnings growth rates. The method is often mechanical screening and sorting based on price to earnings ratio or P/E, price to book value ratio or P/BV, and dividend yield or dividend to price ratio or D/P, but not the method of discounted cash flow. Thus, this style might equally well be referred to as price investing volatility: Price volatility is the ups and downs of market price over time. Volatility, as measured by the beta statistic, is used in pricing models as opposed to valuation models, as a proxy for risk. W
wash sale: This type of sale involves selling and then buying the same stock in order to gain a tax benefit. Y
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