Over the course of the past two months, readers have brought to my attention that there is a steep learning curve for investment terminology. That's why the focus of this month's Beginning Investor column will be investment terminology. The world of finance can be complex. This article doesn't intend to provide an all-encompassing set of definitions, but rather, as a general guide to help you understand the most frequently
used financial terms. There's no way we could cover everything - and I'm sure that we won't - but this should clarify some things for those new to investing. This month, we'll be looking at stock-related words in particular.
Stock
Let's start with the absolute basics. The most
common type of investment is in the form of
stock. Stock is an equity security - that is,
when you buy stock, you are purchasing a
piece of that company. You are part owner,
and therefore entitled to help select the people
who run the company from day-to-day.
Money is made from stocks either by dividends,
or capital gains.
Annual Report / 10-K
The annual report can come in two forms,
the glossy annual report, which looks pretty,
and is relatively easy to read and comprehend,
and the 10-K, which is an official SEC
filing that is required of public companies.
The 10-K is a legal document, and is therefore
much more difficult to read, however, it
can provide much more information.
Capital Gains
The sell price minus the purchase price of
stocks are referred to as capital gains.
Dividend
A dividend is a per share payment that a
company has the option to declare.
Essentially, dividends are a way for a company
to share their profits with its owners, the
shareholders. Public companies are not
required to declare dividends.
EPS
The term EPS refers to a company's earnings
per share for the fiscal year.
Equity
Equity is just a term to signify that a particular
type of security grants you partial ownership
of a company.
Liabilities
Liabilities are a company's debts of any kind.
Market Capitalization
The Market Capitalization, or Market Cap, is
the total number of shares outstanding (held
by investors) multiplied by the share price on
any given day.
Mutual Fund
A Mutual Fund is an investment company
whose sole business is to purchase stock in
other companies, and turn a profit for their
own customers. When you buy a share of a
mutual fund, you're essentially buying into
each and every company that that particular
fund holds. Mutual funds are can be a good
investment for those who are new to investing.
Net Quick Assets
A company's Net Quick Assets, or NQA are
the sum of a company's liabilities subtracted
from the sum of a company's assets.
P/E
The P/E is a company's ratio of their share
price to their earnings for a particular fiscal
year. This can be used as a good indicator of
a company's financial health and buy
prospects. A good P/E value varies by industry.
Par Value
Par Value is an arbitrary figure determined by
a company at the issuance of a particular
type of stock (i.e. it varies from class to
class). Essentially, par value carries no real
significance.
Share Price
Share Price is the price at which one share of
a company's stock is selling.
Short
A short is a method of making money even
when a stock's price drops. The way a short
works is that an individual will get shares of a
stock on margin (loan of shares from stock
broker). This person will then sell these
shares, and wait until the price drops before
repaying his broker. If then, you buy 100
shares of company x at $10 per share, and
sell them for that price, you will have $1000.
If the price of the stock drops to $5, you will
still have to pay your broker for those 100
shares, but the price will be only $5. Thus
you pay your broker $500 for those shares,
and pocket the difference.
Split
When a stock split is declared, a ratio is
picked by the company. The company's total
shares are multiplied by this ratio, while the
share price is divided by this ratio. Thus a
2:1 split on your 20 shares of a $10 stock
would result in 40 shares of a $5 stock.
Stock Classes
Companies can issue numerous classes of
stock, each with its own voting rights, stock
price, and par value. Typically, special classes
are only available to certain individuals, while
common stock is traded on public exchanges.
SEC
The SEC, or Securities and Exchange
Commission, is a United States government
agency that focuses on the regulation of public
companies and the stock market.
Companies are required to follow SEC directives.
Securities
The word security is just the technical term
for any asset like a stock or bond. Use it frequently,
as it will make people think you're
really smart.
Well, that about does it. Now when you
hear about the SEC cracking down on a company
for not being accurate on their 10-K, or
when someone talks about shorting an equity
security with a horrible P/E, you know exactly
what they're talking about.
Jonas Elmerraji is the founder and editor of growFolio, the world's first free online investment and business magazine. Issues are available online at http://www.growfolio.com
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