Essential Terminology

Key Words.

Stock 

A type of security (financial assets) that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings.

There are two main types of stock namely common and preferred. Common stock usually entitles the owner to vote at shareholders' meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares.

Bond

A debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and governments to finance a variety of projects and activities.

Venture Capital

This pertains to financing for new businesses. In other words, money provided by investors to startup firms and small businesses with perceived, long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns.

Private Equity

Equity capital that is made available to companies/investors, but not quoted on a stock market (i.e. unlisted). The funds raised through private equity can be used to develop new products and technologies, to expand working capital, to make acquisitions, or to strengthen a company's balance sheet.

Dividend

Distribution of a portion of a company's earnings, decided by the Board of Directors to a class of its shareholders. The dividend is most often quoted in terms of the currency amount each share receives (dividends per share). It can also sometimes be quoted in terms of a percent of the current market price, referred to as dividend yield. Dividends may be in the form of cash, stock or property.

Technical Analysis

A method of evaluating securities (prices) by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.

Fundamental Analysis

A method of evaluating a security (e.g. stock, bond) by attempting to measure its intrinsic value by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts attempt to study everything that can affect the security's value, including macroeconomic factors (like the overall economy and industry conditions) and individually specific factors (like the financial condition and management of companies). The main idea could be to determine a value for securities.

 Efficient Market Hypothesis

An investment theory which 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. According to the EMH, this means that stocks always trade at their fair value on stock exchanges, and thus it is impossible for investors to either purchase undervalued stocks or sell stocks for inflated prices. Thus, the crux of the EMH is that it should be impossible to outperform the overall market through expert stock selection or market timing, and that the only way an investor can possibly obtain higher returns is by purchasing riskier investments. 


Asset leverage: Ratio of the total assets of a firm to its equity. This ratio gives an indication of the size of liabilities used to finance the assets.

CAPEX: Capital Expenditure. The resources committed by a firm to acquire or upgrade physical assets used in operations, such as buildings or equipment.

COGS: Cost of Goods Sold. An expense that is incurred during a financial period that reflects the cost of the goods or services that generate revenue for a firm.

COPAT: Cash Operating Profit After Taxes. Refers to the amount of cash generated from operations after all operations-related costs have been paid and all potential taxes deducted.

DCF: Discounted Cash Flow. A method of evaluating an investment by estimating future cash flows and discounting them to their present value based on a discount rate.

EBITDA: Earnings before Interest, Taxes, Depreciation and Amortization. An approximate measure of a firm’s operating cash flow based on data from the firm’s income statement. EBITDA is calculated by subtracting operating costs from revenue, before the deduction of interest expenses, taxes, depreciation, and amortization.

EPS: Earnings per Share. Total earnings for a period (usually a year) divided by the average number of shares outstanding during that period. EPS therefore gives the portion of a firm’s profit allocated to each outstanding share of common stock.

EV: Enterprise Value. Refers to the total value of a firm. It is calculated by adding the market capitalization, debt and preferred shares, less cash & cash equivalents.

Fair Value: The price of a firm’s share based on ‘fundamental’ interpretation of financial analysis of that company. Fair Value may not necessarily be achievable in the market place, since other factors such as sentiment, fund flows and technical support and resistance levels come into play during trading in the market place.

Market Cap: The market capitalization of a firm, obtained by multiplying the price of its share by the total number of shares outstanding.

Net Cash Flow: Cash receipts minus cash payments over a given period of time. Usually refers to operating cash flow after CAPEX and working capital payments have been made.

P/E: Price-to-Earnings Ratio. The most common measure of valuation for stocks. It relates a stock’s price to its share of the firm’s earnings in a particular year. It is obtained by dividing the market capitalization by earnings over a given 12-month period.

P/B: Price-to-Book Value. This ratio relates a stock’s price to its accounting value as represented on the firm’s balance sheet.

PEG: Is the P/E relative to the average expected earnings growth in coming years. This ratio, in essence, projects a future P/E based purely on projected future earnings of the firm.

ROE: Return on Equity. A measure of a firm’s earnings in any given financial period (usually a year) relative to total equity as represented on the balance sheet. It is used as a general indicator of efficiency.

SG&A: Selling, General and Administrative expenses. Refers to the portion of a firm’s costs that are more general in nature, not directly related to the goods sold or services rendered, but are still considered operations-related.

Working Capital: Equals current assets less current liabilities. Working Capital is a measure of how much liquid assets a firm requires in order to remain in operation.

Dividend Yield: This is a percentage return that a cash dividend payment represents relative to the price of the share. It is calculated by dividing the amount of dividends paid per share by the stock’s price. Mature, well-established companies tend to have higher dividend yields, while young, growth-oriented companies tend to have lower dividend yields.