GLOSSARY
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As a beginner to the stock market, it helps and is important to have a solid glossary at your reach to revise a particular term or to expand your stock market vocabulary. This is just a short glossary with some basic investing terms that may be useful. Please take a look at other online stock market glossaries as this just includes a small fraction of the terms.
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Average Selling Price (ASP): The price a specific type or class of product is sold for. To calculate it, one must divide a product’s revenue by the amount of products sold during that specific time period.
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Bear market: A market in which stock prices are consistently following a downward trend. This is the opposite of a bull market.
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Blue chip stock: This is a stock of a large, stable and reliable company that has operated for many years. It typically has a large market capitalization in the billions, making it a growth stock.
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Book value: This indicates how much a company is worth if it stopped operating today, sold all its assets and paid off all its debts. It can also indicate if a stock is under or overpriced.
It is calculating by subtracting all tangible assets (physical items of value,like machinery, that are used to generate revenue for the company) by liabilities. Therefore, Total Tangible assets - Total Liabilities = Book Value.
Bull market: A market that is experiencing a long period of increasing stock prices. This is the opposite of a bear market.
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Cash flow: This is simply the amount of money expected to be generated by an investment, asset of business. Positive cash flow indicates that a company’s liquid assets (an asset that can be converted into cash quickly) are increasing, which allows the company to pay any debts, reinvest in the business, increase the dividends given to its stockholders, etc… Negative cash flow indicates the opposite. Cash flow is used to assess the quality of a company’s income: its liquidity, which shows how safe the company is. However, negative cash flow is not necessarily bad always. If a company is spending more cash than it earns because it is improving its goods and services, the investment should pay off later when these alterations (e.g.release of a product) are applied. On the other hand, if a company has negative cash flow due to it being overvalued or making poor decisions, then this is an indicator that investing in that company is not a good idea.
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Equity: This refers to ownership in any asset after all debts (associated with that asset) are paid off. Thus, an equation representing this is: Assets − Liabilities = Equity.
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Leverage: This is an investing strategy that involves using borrowed money to purchase an asset. When using this technique, investors expect an increase in the potential return of an investment, due to the after tax income and asset price appreciation, thus being able to make profit and not be in debt.
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Liability: A liability is a company's financial debt or obligations (such as legal obligations that require a company to pay money to the government) due to past events. They are an indication of future use of company funds.
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Market value: The price for which a security can be bought and sold. This measure is determined by fluctuations in supply and demand. It can also be affected by the conditions of the market as a whole or the company's sector. Note: Market value is what someone is willing to pay for a security, not the offered price.
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Outstanding Shares: This refers to the total number of shares of a corporation that are owned by all of its investors. This is used in the calculation of market capitalization, EPS, P/E ratio, and other measurements.
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Quarter: A three-month period on a financial calendar. There are a total of four quarters: Q1, Q2, Q3, and Q4. Each quarter represents one-fourth of a year. It is often represented with its relevant year, such as Q1 2017 or Q1/2017 (this represents the first quarter of 2017). Companies normally publish a financial report of the company each quarter, which is a very important source that investors use to analyze whether the company is worth investing in.
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Price-to-book ratio: Also commonly referred to as P/B ratio, this compares the market value of an asset to its book value. This measure is sometimes used to see if a stock is over or undervalued. It is calculated by dividing the current closing price of the stock by the most recent book value per share. To find the book value per share, you simply divide the Book Value by the Number of Outstanding Shares. Then, the P/B ratio is calculated by using the following equation: Market Price per Share / Book Value per Share = P/B ratio. According to Buffett, a safe P/B ratio must be lower than 1.5. If the ratio is lower than this, it may indicate that the stock is undervalued.
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Total return: This is the total income made from an investment over a specific time frame (normally per year). It is sometimes shown as a percentage of the invested amount (total income x 100 / investment). This measure takes into account the following: capital gains, dividends, interests, and more.
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Volatility: This refers to the fluctuation of a stock's price or the stock market as a whole. Highly volatile stocks constantly experience spikes (up and down movements) and are commonly traded at low volumes. A lower volatility indicates the opposite: the stock's price does not fluctuate as much. Instead, it gradually changes in value at a steady pace over a time period. A common way to measure volatility is a stock's beta