A glossary of investing terms
Listed here are stock market terms that investors with a value investing approach may need to understand.
Financial abbreviations and acronyms are found elsewhere on this site.
Above par: Any security trading at a price greater than its face value.
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.
Accounting period: The period over which companies prepare reports of their financial transactions.
Accounting ratios: Describe significant relationships between figures shown on financial ststements and simplify the comprehension of these statements. Ratios tell the whole story of changes in the financial condition of a company and allow easy company comparisons within a sector. More ...
Accumulation index: An index in which figures are adjusted for the dividends paid by companies included in the index. This is considered a better measure of total return on a stock than price index figures.
Acid test ratio: A measure of a company's position if inventory cannot be liquidated and the overdraft cannot be paid immediately. Also know as the quick ratio.
Across the board: As a whole. If the stock market rises across the board, it means that most sectors are improving.
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.
Annual General Meeting: Or AGM is a meeting for shareholders tha must be held every year so they can view and discuss the records of the company.
Application for listing: The application made by a private company to have its shares placed on the official list of the stock exchange so they can be traded. They then pay an annual listing fee.
Application money: The amount a shareholder must pay if accepting a rights issue.
Arbitrage: Taking advantage of a price difference in different markets by buying and selling securities at the same time.
Asking price: A term used to describe the price at which someone is prepared to sell securities. The same as selling price or offer price.
Asset: Anything that a person or company owns or is entitled to. Assets are divided by companies into categories such as fixed assets (buildings and machinery), intangible assets (patents and good will), and current assets (inventories and accounts receivable).
Asset allocation: A portfolio strategy that involves periodically rebalancing the portfolio in order to maintain a long-term goal.
Asset stripping: The process of buying companies with a book value lower than their market value and then disposing of its assets for a profit.
Asset turnover ratio: This ratio is used to determine the amount of sales that are generated from each dollar of assets. Companies with low profit margins tend to have high asset turnover, those with high profit margins have low asset turnover. The ratio is more useful for growth companies to check if in fact they are growing revenue in proportion to sales.
At call: Funds that can be withdrawn at any time.
Backdoor listing: A method of achieving stock exchange listing by gaining control of a listed company with minimal assets and ativity and then adding new assets and a new direction.
Balance sheet: A financial statement that declares what a company owns and what it owes, usually at the end of the financial year. More ...
Bear: An investor who believes the price of stocks will fall. The opposite of a bull.
Bear market: A market in which stock prices are falling and the volume and value of stocks are low. More ...
Beta: A measure of the volatility, or systematic risk, of a stock or a portfolio in comparison to the market as a whole. It is also known as stock beta or beta coefficient. Value investors have a different understanding of risk. More ...
Black swan event: An event that is unexpected or unpredictable, carries an extreme impact and which after the event causes us to make it explainable and predictable. More ...
Blue chip stock: A stock recognized for its ability to make profits and pay dividends in good and bad times. This type of stock is not often able to be purchased below its intrinsic value.
Bonus issue: A free issue of stock to shareholders on a pro-rata basis. For example, one free share for every five shares held.
Books closing date: The date on which a company closes its books to determine which shareholders are eligible for dividends, rights issues or bonuses etcetra.
Book value: The value of an asset as declared in a company's accounts. More ...
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.
Bourse: Another name for the stock market derived from the French word for stock exchange.
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.
Brokerage: The stock broker's fee for buying and selling stock for a client.
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 on and off the second richest man in the world. More ...
Bull: An investor who believes the price of stock will rise. The opposite to a bear.
Bull market: A market in which stock prices are rising and the volume and value of stock traded is high. More ...
Bulldog market: Refers to the British stock market after the famous bulldog that comes from the UK.
Call: A request for payment of part or all of the money owing on a contributing share.
Call option: A contract which gives the buyer the right, but not the obligation, to buy stock at a specified price at any time up to an expiry date.
Capital allocation: The process by which businesses divide their financial resources and other sources of capital. Overall, it should be management's goal to optimize capital allocation so that it generates as much wealth as possible for its shareholders. Vakue investors are particularly concerned about how free cash flow is allocated and whether it adds value over time.
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.
Capital gain: The profit obtained when a stock is sold for more than it cost. Capital gains tax may be payable. The opposite is capital loss which may be declared for tax purposes in some instances.
Capital raising: The issue of new stock by a company to obtain funds. A popular move after the recent global financial crisis. More ...
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.
Cash reserve ratio: The required percentage of reserves (deposits) that banks and thrifts must hold in cash or in deposits at the Federal Reserve. This requirement is set by the Fed. The greater the percentage, the less money a bank has to loan out to businesses.
Collateralized debt obligation: CDOs represent different types of debt and credit risk often referred to as 'tranches' or 'slices'. Each slice has a different maturity and risk associated with it. The higher the risk, the more the CDO pays.
Chinese wall: An ethical imaginary dividing wall between different divisions of a company. These walls are set up ensure that sensitive information is not freely available within the company and so avoid conflicts of interest.
Churning: A practice of turning over a stock portfolio by too much buying and selling. Alternatively, creating a situation where a stock trades at high volumes as a result of a relatively small number of traders trading regularly amongst themselves. The aim bsing to attract other investors to buy at higher prices.
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. More ...
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. More ...
Contributing share: A share that has not had its full par value paid. Also called a partly paid share.
Convertible note: A loan to a company at a fixed rate of interest with the right that it can be called in (redeemed) or converted into fully paid ordinary shares at a predetermined time or before a specified period has elapsed.
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. More ...
Credit default swap: A CDS is designed to transfer the the credit exposure of fixed income products between parties. The risk of default is transferred from the holder of the fixed income security to the seller of the swap.
Cum dividend: Cum means with. Hence the shares carry the entitlement to the dividend and if purchased 'cum-dividend', the buyer will receive the dividend. Cum rights and cum interest are similar terms.
Current liability: Short-term liability that must be paid within one year.
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. More ...
Dark pools: Private trading systems in which participants can trade stock away from the public stock exchanges. The purpose is to avoid telegraphing large trades so that the stock market won't react in a way that may 'disadvantage' the trader. The SEC in the US is looking at aspects of dark pools with a view to some kind of regulation.
Days receivable ratio: A measure of the average collection period for a company's receivables. That is, how quickly it receives payment of its bills.
Debenture: A loan made to a company for a fixed period of time and at a specified rate of interest. The loan is secured by a charge over the company's assets.
Debt to 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. More ...
Defalcation: A term used by lawyers when describing company funds that have been misappropriated.
Deflation: The opposite of inflation. The general level of prices falls.
Delisted: A publicly listed company whose stock is no longer quoted/traded on the stock exchange. The company has been delisted.
Delivery not enforceable (del): A new security for which scrip has not yet been issued. For example, a rights issue.
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. More ...
Dirty float: The situation when a currency is not free to respond to market conditions because it is affected by intervention by authorities.
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 Cash Flow model: Used for the appraisal of the true, intrinsic economic value of companies. Beta and market timing are not involved. It is said to be 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). More ...
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. More ...
Dividend cover: A measure of the number of times the dividend on common stock is covered by earnings.
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 imputation: The system under which shareholders receiving dividends are entitled to a credit for the tax paid by a company on its income. Not all countries use this system. The idea is that dividend imputation avoids double taxation.
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. More ...
Dividend payout ratio: The percentage of earnings paid to shareholders in dividends. The payout ratio provides an estimate of how well earnings support the dividend payments. More mature companies tend to have a higher payout ratio.
Dividend reinvestment plan: A plan by which shareholders receive dividends in the form of company shares rather than in cash.
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. It is the theoretical return on shares if the investor buys at the current price. More ...
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. When the share price is high, the regular amount buys fewer shares than when the share price is low. So over time you average down the price of shares that you are buying. More ...
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.
Dual listing: Stock listed on the stock exchanges of more than one country.
Earnings per share: Is the ratio of the net annual earnings of a company to the number of shares. It is one of the common financial measures that all companies include in their annual reports, usually in graphical form. Companies like to ensure (by fair means or foul) that the earnings per share ratio increases. More ...
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. More ...
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.
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. More ...
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 (also referred to as stocks or shares) is also referred to as one of the principal asset classes.
Equity funding: The raising of company funds by issuing stock.
Equity trust: A unit trust that invests pooled savings in equities (stocks/shares).
Exchange rate: What one country's currency is worth in terms of another.
Ex date: The date when stock changes from being 'cum' (with) to 'ex' (without) the dividend.
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.
Free Cash Flow To Equity ratio (FCFE) is a valuation measure of how much cash can be paid to the shareholders of the company after all expenses, reinvestment and debt repayment. FCFE = Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment. This valuation method became popular as the dividend discount model became increasingly questionable.
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'. More ...
Fiscal cliff: is the term used to describe the situation that will arise in the U.S. at the end of 2012 when laws coming into effect will include temporary payroll tax cuts, the end of some tax breaks for businesses, shifts in the minimum tax, the end of the tax cuts from previous years, and the beginning of taxes relating to health care. At the same time, previously agreed spending cuts will begin to go into effect.
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.
Foreign exchange market (FOREX): The market where foreign currencies are bought and sold.
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.
Generally Accepted Accounting Principles (GAAP): are the common set of accounting standards and procedures that companies are required to use to compile their financial statements. GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes.
Glamour stocks: Popular stocks that apparently offer strong potential for capital gain.
Golden handshake: A substantial parting gift for a formerly valuable employee who is leaving the firm whether by choice or not. A golden handcuff is the opposite term.
Goodwill: Or accounting goodwill represents the value or amount paid in stock or cash for an acquisition above the identifiable net tangible assets (NTA) of the acquired company. More ...
Green shoots: A term used to refer to those economic indicators that were suggesting that the recent global financial crisis was showing signs of easing.
Green shoe provision: A provision that allows members of an underwriting syndicate to purchase additional shares at the initial public offering (IPO) of a company's shares. This is a useful provision for underwriters in the event of exceptional public demand. The name refers to the Green Shoe Company which was the first company to grant such an option to underwriters. Also called an over-allotment provision.
Gross profit margin ratio: A measure of how much a company makes on each dollar of sales, before tax.
Gross profit ratio: The gross profit ratio indicates how much of each sales dollar is available to meet expenses and profits after paying for the goods that were sold.
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. More ...
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.
Hedging: This involves making an investment to reduce the risk of adverse price movements in a stock. Normally, a hedge consists of taking an offsetting position in a related financial instrument, such as a futures contract.
Hybrid security: A combination of debt and equity. For example, a convertible note.
Index investing: Also known as passive investing or index couch potato investing, this form of investing seeks to match the performance of an index of a specific financial market. Equity index funds invest money money into the market in a way determined by some stock market index and do minimal further trading other than making adjustments as stock weightings alter. More ...
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. More ...
Insider trading: Buying or selling using information not available to all other market participants.
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. More ...
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. More ...
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.
Large cap: A term used by the investment community to refer to companies with a market capitalization value of more than $10 billion. This is a abbreviation of the term 'large market capitalization'. The meaning of this term may vary over place and time. See mid-cap and small-cap.
Leverage ratio: Any ratio used to calculate the financial leverage of a company to measure its ability to meet financial obligations. The most common financial leverage ratio is the debt-to-equity ratio.
Leveraged buy out: The purchase of a company by the existing company management using borrowed funds.
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. More ...
Long squeeze: A long squeeze may occur with individual stocks when a sudden drop in the stock price causes investors who are long in the stock to sell their holding to avoid a significant loss. This may result in further erosion of the stock price. The squeeze may be more extreme for stocks which have low liquidity. Opposite of short squeeze.
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.
Magic formula investing: An investing approach whereby one chooses stocks with a combination of high return on capital and high earnings yield in order to achieve superior returns. More ...
Margin loan: Is the term used to describe a loan for the purpose of buying shares where your current portfolio provides the equity (financial backing) to support the loan. The purpose of a margin loan is to be able to enlarge your portfolio at a greater rate than what you would otherwise be able to do and hence leveraging profits if your investment strategies are successful - and magnifies losses if your investment strategies are unsuccessful. More ...
Margin of safety: the difference between the price of a stock and its calculated value. Value investing requires the calculatd value of a stock to be below its current price in order to minimise risk. More ...
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. More ...
Market risk: The risk of investing in a stock market where supply and demand and general economic forces determine stock market direction.
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. More ...
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.
Minority interest: The shareholders in a company in which the majority of voting rights are held by another company or individual investor.
Momentum investing: An investment strategy that aims to capitalize on the continuance of existing trends in the market. More ...
Mutual fund: Stock mutual funds or managed share funds are investments where individual investors pool their money with other investors. More ...
Naked position: An unhedged long or short position.
Nasdaq: An electronic stock market that provides price quotations and allows trading on more than 5,000 of the more actively traded over the counter U.S. stocks. Many high-tech stocks, such as Microsoft, Intel, Dell and Cisco are traded on this stock market.
Net Current Asset Value (NCAV):Otherwise known as working capital,equals Current Assets (cash, accounts receivable, inventory) divided by Current Liabilities. A margin of safety may be obtained by buying shares that are trading at two thirds the NCAV per share.
Net present value: A net present value calculator (NPV calculator) enables an investor to determine the difference between the present value (PV) of the future cash flows from an investment and the amount initially invested. More ...
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.
Non current liability: Long-term liability with a repayment period greater than one year.
Odd lot: A non marketable parcel of shares.
Operating margin or operating profit margin: Tells how much of every dollar in sales or revenue the company has left after paying all the costs of the business. Value investors prefer to invest in companies with high operating margins that provide a cushion if the company has to be flexible on price, or when costs rise. Calculated by dividing operating income by net revenue, and expressed as a percentage.
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.
Option stocks: Stocks over which the stock exchange allows options to be traded.
Overbought: A market situation whern prices overall have been pushed up to a level that is viewed as too high to be sustained. The opposite of oversold.
Paper profit: What profit would be made if the stocks in a portfolio were sold. Paper profits are worth nothing until actually realized.
Par value: The value given to a stock when first issued to the public. Also called face value or nominal value.
Pari passu: This term is applied to a particular class of stock indicating that it has equal voting and dividend rights.
Passive income: It is income that you generate when you are not actively involved - like when you are sleeping at night! More ...
Patronage dividends: A dividend or distribution that a cooperative pays to its members or investors that is calculated according to how much each member has used the cooperative's services.
Penny dreadful: Highly speculative stock with small face value that usually suffers dreadfully after a stock market crash.
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. More ...
Preference share: A share having a claim to profits and the company's assets should the company be liquidated or wound up ahead of ordinary/common stock.
Poison pill: A means of defending a company from a takeover. Any activity that makes the takeover target less attractive.
Portfolio: A group of stocks held directly by an investors and/or managed by financial professionals.
Preferred stock dividend: A dividend that is paid on a company's preferred shares and which takes precedence over dividends that are paid on common shares.
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. More ...
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. More ...
Profitability ratios: Profitability ratios highlight a company's overall efficiency and performance. Return on equity and return on assets are two examples.
Profit and loss statement: A financial statement that gives details of a company's revenue and expenditure over a period, usually one year. Also called the Income Statement or Statement of Company Performance. More ...
Profit margin ratio: Net Profit Margin Ratio or After Tax Margin Ratio is the net profit after tax divided by sales - as distinct from the pretax margin ratio which is net profit before taxes divided by sales.
Put option: A contract that gives the buyer the right, but not the obligation, to sell shares at a specified price at any time up to an expiry date.
Qualified dividend: A type of dividend paid by an American company or a qualifying foreign company to which (usually lower) capital gains tax rates are applied. They need to be listed with the IRS as dividends that do not qualify and they need to meet the required dividend holding period.
Qualitative analysis: Stock analysis that uses subjective judgment based on non-quantifiable information, such as management expertise, industry cycles, strength of research and development, competitive advantage and so on. Value investors use it in conjunction with quantitative analysis. More ...
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.
Quantitative Easing: A process by which a central bank increases the credit in its own account by the stroke of a computer key in order to use the additional capital to purchase assets like corporate bonds, or other assets, in order to attempt to stimulate the economony. Sometimes mistakenly referred to as 'printing money'.
Ratio analysis: An examination of a company's financial ratios in order to decide its value, progress or efficiency as an entity.
Real interest rate: The interest rate quoted minus the rate of inflation.
Recession: A slowdown in economic growth usually declared after a country's gross national product (GDP) has fallen for two consecutive quarters. More ...
Record date: It is the date used to determine the shareholders on the register who are entitled to receive the dividend and the number of shares on which it will be paid.
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. More ...
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.
Risk-free interest 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. More ...
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%.
Residential mortgage-backed securities: RMBS are a type of security whose cash flows come from residential debt such as mortgages, home-equity loans and subprime mortgages.
Safety margin: See margin of safety.
Samurai market: Refers to the Japanese stock market as the term relates to the famous samurai warriors.
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. More ...
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 capitalization and the like. More ...
Securities: The different types of investments offered by companies and government authorities such as shares, debentures, bonds and notes.
Selling short: Or short selling is the promise to sell a stock or other security (not currently owned) in the future at a price determined today. The hope is that the price will fall so the purchase price will be lower than the selling price. More ...
Sensex: is an index that captures the direction of the 30 stocks that it comprises on the Bombay Stock Exchange (BSE). The word Sensex comes from sensitive index. More ...
Separately managed account (SMAs): 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. More ...
Short squeeze: A stock market situation arising when a stock has been sold short. If the price rises instead of falling, investors who sold the stock short then have to buy the stock to cover their short position in order to cut their losses. This may have the effect of making the stock price rise further. Opposite to a long squeeze.
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.
Sovereign risk: The risk associated with a country going broke or failing to meet its financial obligations.
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. More ...
Sponsoring broker: A member firm of the stock exchange sponsoring a company intending to become publicly listed. All such companies must have a sponsor.
Stagflation: The combination of inflation and unemployment.
Standard and Poors (S&P): A US credit rating agency.
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. More ...
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. More ...
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%. See also trailing stop loss.
Technical analysis: A method of analyzing common stock prices that uses market-generated data such as share price and share trading volume in order to time market turns, rather than using company generated financial statements.
Theoretical Ex-Rights Price (TERP): The diluted share price resulting from a company rights issue that increases the shares on 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.
Topix: Tokyo stock exchange stock price index.
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.
Trailing stop loss: A trailing stop loss, or rolling stop loss, is one that automatically closes off a trade at a price, called the trigger point, that is a certain percentage below the highest price reached. More ...
Triple Witching hour: A U.S. term for the time when equity options, index options and index futures expire. It is the Friday at the close of every quarter.
USD: United States Dollar.
Valuation analysis: This analysis is done to evaluate the potential merits of an investment. The analysis is based on either current projections or projections of the future. Many types of valuation methods are used, involving several sets of metrics. For equities, the most common 'relative' valuation metric to use is the P/E ratio.
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. More ...
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. More ...
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.
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.
Warrant: Is a derivative security that gives the holder the right to purchase securities (usually shares) from the issuer at a specific price within a certain time frame. More ...
Wash sale: This type of sale involves selling and then buying the same stock in order to gain a tax benefit.
Working capital ratio or current ratio: This ratio indicates whether a company has enough short term assets to cover its short term debt. Most believe that a ratio between 1.2 and 2.0 is sufficient.
Yankee market: Refers to the US stock market because 'Yankee' (or 'Yank') is a nick name for US citizens.
Z Share: A class of mutual fund shares that employees of the fund's management company are allowed to own. Employees may have the option of buying Z shares or receiving them as a part of compensation or a reward package.
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