Term
| Discounted Cash Flow Calculation (DFC) |
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Definition
| A valuation method used to estimate the value of an investment based on its future cash flows. DCF analysis attempts to figure out the value of a company today, based on projections of how much money it will generate in the future. |
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Term
| Price – to – Earnings Ratio (P/E) |
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Definition
| Measures the current share price relative to the company’s earning per share. A high PE ratio can indicate a company’s share price is high relative to its earning and is possibly overvalued. |
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Term
| Price – to – Book Ratio (P/B) |
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Definition
| Compares a company’s market value (share price x number of shares outstanding) to its book value (total assets – total liabilities). A low book value indicates a company could be undervalued. |
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Term
| Price/Earnings – to – Growth Ratio (PEG) |
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Definition
| Measures a stocks value while factoring in the company’s forecast earnings growth rate. A PEG ratio over 1 is considered overvalued, while a value below 1 is considered undervalued. |
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Term
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Definition
| Income generated from normal business operations and includes discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income. |
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Term
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Definition
| Free Cash Flow is the amount of cash generated by a business that is available for distribution. This cash could be used for expansion and acquisitions, to pay dividends, reduce debt, or many other purposes. |
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Term
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Definition
| Earnings typically refer to after–tax net income, sometimes known as the bottom line or a company's profits. Earnings are the main determinant of a company's share price, because earnings and the circumstances relating to them can indicate whether the business will be profitable and successful in the long run. Earnings are perhaps the single most important and most studied number in a company's financial statements. It shows profitability compared to analyst estimates, the company's own historical performance, and relative to its competitors and industry peers. |
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Term
| Earnings Per Share Ratio (EPS) |
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Definition
| Earnings per share (EPS) is calculated as a company's profit divided by the outstanding shares of its common stock. The resulting number serves as an indicator of a company's profitability. It is common for a company to report EPS that is adjusted for extraordinary items and potential share dilution. The higher a company's EPS, the more profitable it is considered. |
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Term
| Return on Invested Capital (ROIC) |
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Definition
| Return on invested capital (ROIC) is a calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. The return on invested capital ratio gives a sense of how well a company is using its money to generate returns. Comparing a company's return on invested capital with its weighted average cost of capital (WACC) reveals whether invested capital is being used effectively. This measure is also known simply as "return on capital." |
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Term
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Definition
| Return of capital occurs when an investor receives a portion of his or her original investment not considered income or capital gains from the investment. Return of capital occurs when an investor receives a portion of his or her original investment, and these payments are not considered income or capital gains from the investment. Capital is returned first on some types of investments like retirement accounts and permanent life insurance policies; regular investment accounts return gains first. |
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Term
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Definition
| A profitability measure which shows how efficiently a company’s management team has used its shareholders money to generate profits. |
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Term
| Weighted Average Cost of Capital (WACC) |
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Definition
| The weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All sources of capital, including common stock, preferred stock, bonds, and any other long–term debt, are included in a WACC calculation. A firm’s WACC increases as the beta and rate of return on equity increase because an increase in WACC denotes a decrease in valuation and an increase in risk. |
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Term
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Definition
| Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets. ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings. Return on assets is displayed as a percentage. ROA is best used when comparing similar companies or comparing a company to its previous performance. ROA takes into account a company’s debt, unlike other metrics, such as Return on Equity (ROE). |
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Term
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Definition
| Rate of return (%) you would receive on a low risk government bond. |
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Term
| Return on Capital Employed (ROCE) |
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Definition
| Return on capital employed (ROCE) is a financial ratio that measures a company's profitability and the efficiency with which its capital is used. In other words, the ratio measures how well a company is generating profits from its capital. The ROCE ratio is considered an important profitability ratio and is used often by investors when screening for suitable investment candidates. |
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Term
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Definition
| How much longer a company can operate for until it runs out of money to fund the business, assuming they are unable to raise more money in the future. Fair Value: An estimate of what the stock price is worth today, based on the cash flows the company is expected to generate in the future. |
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Term
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Definition
| Assets owned by the company which can be sold, converted or liquidated within one year. |
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Term
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Definition
| An estimate of what the stock price is worth today, based on the cash flows the company is expected to generate in the future. |
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Term
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Definition
| Commitments the company has made which are due within one year. |
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Term
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Definition
| Commitments the company has made which are due in more one year. |
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Term
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Definition
| A balance sheet is a financial statement that reports a company's assets, liabilities and shareholders' equity at a specific point in time and provides a basis for computing rates of return and evaluating its capital structure. It is a financial statement that provides a snapshot of what a company owns and owes, as well as the amount invested by shareholders. |
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Term
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Definition
| An income statement is one of the three important financial statements used for reporting a company's financial performance over a specific accounting period, with the other two key statements being the balance sheet and the statement of cash flows. Also known as the profit and loss statement or the statement of revenue and expense, the income statement primarily focuses on the company’s revenues and expenses during a particular period. Also known as: Statement of Operations, Profit and Loss (P&L) Statement, Statement of Earnings, or Statement of Income. |
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Term
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Definition
| Stockholders' equity, also referred to as shareholders' equity, is the remaining amount of assets available to shareholders after all liabilities have been paid. It is calculated either as a firm's total assets less its total liabilities or alternatively as the sum of share capital and retained earnings less treasury shares. A negative stockholders' equity may indicate an impending bankruptcy. |
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Term
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Definition
| An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit. Assets are reported on a company's balance sheet and are bought or created to increase a firm's value or benefit the firm's operations. An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses or improve sales, regardless of whether it's manufacturing equipment or a patent. |
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Term
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Definition
| A liability, in general, is an obligation to, or something that you owe somebody else. Liabilities are defined as a company's legal financial debts or obligations that arise during the course of business operations. They can be limited, or unlimited liability. Liabilities are settled over time through the transfer of economic benefits including money, goods, or services. Recorded on the right side of the balance sheet, liabilities include loans, accounts payable, mortgages, deferred revenues, earned premiums, unearned premiums, and accrued expenses. Even marriages can change your liability. |
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Term
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Definition
| There are various types of equity, but equity typically refers to shareholder equity, which represents the amount of money that would be returned to a company’s shareholders if all of the assets were liquidated and all of the company's debt was paid off. We can think of equity as a degree of ownership in any asset after subtracting all debts associated with that asset. Equity represents the shareholders’ stake in the company. The calculation of equity is a company's total assets minus its total liabilities. |
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Term
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Definition
| Dividends are payments made by publicly–listed companies or funds as a reward to investors for putting their money into the venture. They can be paid as cash or in the form of stock. Announcements of dividend payouts are generally accompanied by a proportional increase or decrease in a company's stock price. Investors can use models, such as the dividend discount model or Gordon growth model, to find dividend–paying instruments. |
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Term
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Definition
| Yield is a return measure for an investment over a set period of time, expressed as a percentage. Yield includes price increases as well as any dividends paid, calculated as the net realized return divided by the principal amount (i.e. amount invested). Higher yields are perceived to be an indicator of lower risk and higher income, but a high yield may not always be a positive, such as the case of a rising dividend yield due to a falling stock price. |
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Term
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Definition
| Market capitalization is the aggregate market value of a company represented in dollar amount. Since it represents the “market” value of a company, it is computed based on the current market price (CMP) of its shares and the total number of outstanding shares. Companies may be categorized as large–, mid–, or small–cap. Blue chip companies are Large–cap ($10b – $200b) or Mega–cap stocks (>$200b), Mid–caps ($2b – $10b), Small–cap ($300m – $2b), Micro–cap ($50m – $300m), while the very smallest are Nano–caps (<$50m). |
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Term
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Definition
| Volume is the number of shares or contracts traded in a security or an entire market during a given period of time. For every buyer, there is a seller, and each transaction contributes to the count of total volume. That is, when buyers and sellers agree to make a transaction at a certain price, it is considered one transaction. If only five transactions occur in a day, the volume for the day is five. |
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Term
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Definition
| Beta is a measure of a stock's volatility in relation to the overall market. By definition, the market, such as the S&P 500 Index, has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. If a stock moves less than the market, the stock's beta is less than 1.0. High–beta stocks are supposed to be riskier but provide higher return potential; low–beta stocks pose less risk but also lower returns. |
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Term
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Definition
| A team of people elected by the company’s shareholders to supervise the management team and ensure the company is acting in tis shareholders best interests. |
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Term
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Definition
| Directors, officers or employees of a company who are required to report to the relevant regulatory body when they buy or sell shares in their company. |
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Term
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Definition
| When a company issues new shares, it decreases the existing shareholders’ ownership percentage of the company. |
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Term
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Definition
| Base salary, plus short–term incentives, such as cash bonuses and stock options. |
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Term
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Definition
| Shares outstanding refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. Outstanding shares are shown on a company’s balance sheet under the heading “Capital Stock.” The number of outstanding shares is used in calculating key metrics such as a company’s market capitalization, as well as its earnings per share (EPS) and cash flow per share (CFPS). A company's number of outstanding shares is not static and may fluctuate wildly over time. |
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Term
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Definition
| Institutional ownership is the amount of a company’s available stock owned by mutual or pension funds, insurance companies, investment firms, private foundations, endowments or other large entities that manage funds on behalf of others. Stocks with a large amount of institutional ownership are often looked upon favorably. |
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Term
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Definition
| Floating stock is the number of shares available for trading of a particular stock. Low float stocks are those with a low number of shares. Floating stock is calculated by subtracting closely held shares and restricted stock from a firm’s total outstanding shares. Closely held shares are those owned by insiders, major shareholders, and employees. Restricted stock refers to insider shares that cannot be traded because of a temporary restriction such as the lock–up period after an initial public offering. A stock with a small float will generally be more volatile than a stock with a large float. |
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Term
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Definition
| Short interest is the number of shares that have been sold short but have not yet been covered or closed out. Short interest, which can be expressed as a number or percentage, is an indicator of market sentiment. Extremely high short interest shows investors are very pessimistic, potentially over–pessimistic. When investors are overly pessimistic it can lead to very sharp price rises at times. Large changes in the short interest also flash warning signs, as it shows investors may be turning more bearish or bullish on a stock. |
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Term
| Price to Sales Ratio (P/S Ratio) |
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Definition
| The price–to–sales (P/S) ratio is a valuation ratio that compares a company’s stock price to its revenues. It is an indicator of the value placed on each dollar of a company’s sales or revenues. The P/S ratio can be calculated either by dividing the company’s market capitalization by its total sales over a designated period – usually twelve months, or on a per–share basis by dividing the stock price by sales per share. The P/S ratio is also known as a "sales multiple" or "revenue multiple." The P/S ratio is a key analysis and valuation tool that shows how much investors are willing to pay per dollar of sales for a stock. |
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Term
| Price to Cash Flow Ratio (P/CF Ratio) |
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Definition
| The price–to–cash flow (P/CF) ratio is a stock valuation indicator or multiple that measures the value of a stock’s price relative to its operating cash flow per share. The ratio uses operating cash flow which adds back non–cash expenses such as depreciation and amortization to net income. It is especially useful for valuing stocks that have positive cash flow but are not profitable because of large non–cash charges. |
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Term
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Definition
| A non–cash charge is a write–down or accounting expense that does not involve a cash payment. They can represent meaningful changes to a company's financial standing, weighing on earnings without affecting short–term capital in any way. Depreciation, amortization, depletion, stock–based compensation, and asset impairments are common non–cash charges that reduce earnings but not cash flows. |
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Term
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Definition
| The payout ratio shows the proportion of earnings paid out as dividends to shareholders, typically expressed as a percentage of the company's earnings. The payout ratio can also be expressed as dividends paid out as a proportion of cash flow. The payout ratio is also known as the dividend payout ratio. |
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Term
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Definition
| The dividend yield is the ratio of a company's annual dividend compared to its share price. The dividend yield is the amount of money a company pays shareholders (over the course of a year) for owning a share of its stock divided by its current stock price—displayed as a percentage. Mature companies tend to pay dividends, with companies in the utility and consumer staple industries often paying higher dividend yields. |
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Term
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Definition
| The quick ratio is an indicator of a company’s short–term liquidity position and measures a company’s ability to meet its short–term obligations with its most liquid assets. Since it indicates the company’s ability to instantly use its near–cash assets (that is, assets that can be converted quickly to cash) to pay down its current liabilities, it is also called the acid test ratio. An acid test is a quick test designed to produce instant results—hence, the name. |
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Term
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Definition
| The current ratio is a liquidity ratio that measures a company's ability to pay short–term obligations or those due within one year. It tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables. The current ratio compares all of a company's current assets to its current liabilities. These are usually defined as assets that are cash or will be turned into cash in a year or less, and liabilities that will be paid in a year or less. |
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Term
| Debt to Equity Ratio (D/E Ratio) |
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Definition
| The debt–to–equity (D/E) ratio is calculated by dividing a company’s total liabilities by its shareholder equity. These numbers are available on the balance sheet of a company’s financial statements. The debt–to–equity (D/E) ratio compares a company's total liabilities to its shareholder equity and can be used to evaluate how much leverage a company is using. Higher leverage ratios tend to indicate a company or stock with higher risk to shareholders. |
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Term
| Debt to Assets Ratio (D/A Ratio) |
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Definition
| Total–debt–to–total–assets is a leverage ratio that defines the total amount of debt relative to assets. The total debt to total assets ratio shows the degree to which a company has used debt to finance its assets. The calculation considers all of the company's debt, not just loans and bonds payable, and considers all assets, including intangibles. If a company has a total debt to total assets ratio of 0.4, this shows that 40% of its assets are financed by creditors, with owners (shareholders) financing the remaining 60% with equity. |
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Term
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Definition
| Gross margin is a company's net sales revenue minus its cost of goods sold (COGS). In other words, it is the sales revenue a company retains after incurring the direct costs associated with producing the goods it sells, and the services it provides. The higher the gross margin, the more capital a company retains on each dollar of sales, which it can then use to pay other costs or satisfy debt obligations. The net sales figure is simply gross revenue, less the returns, allowances, and discounts. The gross profit margin shows the amount of profit made before deducting selling, general, and administrative costs. |
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Term
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Definition
| The operating margin measures how much profit a company makes on a dollar of sales, after paying for variable costs of production, such as wages and raw materials, but before paying interest or tax. It is calculated by dividing a company’s operating profit by its net sales. |
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Term
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Definition
| EBITDA margin is a measure of a company's operating profit as a percentage of its revenue. The acronym stands for earnings before interest, taxes, depreciation, and amortization. Knowing the EBITDA margin allows for a comparison of one company's real performance to others in its industry. EBITDA divided by total revenue equals operating profitability. |
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Term
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Definition
| The net profit margin is equal to how much net income or profit is generated as a percentage of revenue. Net profit margin is the ratio of net profits to revenues for a company or business segment. Net profit margin is typically expressed as a percentage but can also be represented in decimal form. The net profit margin illustrates how much of each dollar in revenue collected by a company translates into profit. |
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Term
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Definition
| The asset turnover ratio measures the value of a company's sales or revenues relative to the value of its assets. The asset turnover ratio can be used as an indicator of the efficiency with which a company is using its assets to generate revenue. The higher the asset turnover ratio, the more efficient a company. Conversely, if a company has a low asset turnover ratio, it indicates it is not efficiently using its assets to generate sales. |
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Term
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Definition
| Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing and purchasing new inventory. |
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Term
| Receivables Turnover Ratio |
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Definition
| The accounts receivable turnover ratio is an accounting measure used to quantify a company's effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a company uses and manages the credit it extends to customers and how quickly that short–term debt is collected or is paid. The receivables turnover ratio is also called the accounts receivable turnover ratio. |
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Term
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Definition
| The effective tax rate is the average tax rate paid by a corporation or an individual. The effective tax rate for individuals is the average rate at which their earned income, such as wages, and unearned income, such as stock dividends, are taxed. The effective tax rate for a corporation is the average rate at which its pre–tax profits are taxed, while the statutory tax rate is the legal percentage established by law. |
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Term
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Definition
| Receivables, also referred to as accounts receivable, are debts owed to a company by its customers for goods or services that have been delivered or used but not yet paid for. Companies that allow customers to purchase goods or services on credit will have receivables on their balance sheet. Receivables are recorded at the time of a sale when a good or service has been delivered but not yet been paid for. |
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Term
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Definition
| Inventory is the term for the goods available for sale and raw materials used to produce goods available for sale. Inventory represents one of the most important assets of a business because the turnover of inventory represents one of the primary sources of revenue generation and subsequent earnings for the company's shareholders. |
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Term
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Definition
| An intangible asset is an asset that is not physical in nature. Goodwill, brand recognition and intellectual property, such as patents, trademarks, and copyrights, are all intangible assets. Intangible assets exist in opposition to tangible assets, which include land, vehicles, equipment, and inventory. |
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Term
| Gross Expense Ratio (GER) |
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Definition
| The gross expense ratio (GER) is the total percentage of a mutual fund's assets that are devoted to running the fund. he gross expense ratio includes all fees incurred by the fund including management fees, 12B–1 fees, administrative costs, and operating expenses. However, it does not include any sales or brokerage commissions that are not charged to the fund directly, but which would be included in the net expense ratio. |
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Term
| Discount to Net Asset Value |
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Definition
| Discount to net asset value is a pricing situation that occurs when an ETF's or mutual fund’s market trading price is lower than its daily net asset value (NAV). Discounts can occur in times where the market has a pessimistic future outlook on the underlying mutual fund holdings. Other factors may also influence a mutual fund discount. |
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Term
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Definition
| Market value (also known as OMV, or "open market valuation") is the price an asset would fetch in the marketplace, or the value that the investment community gives to a particular equity or business. Market value is also commonly used to refer to the market capitalization of a publicly traded company and is calculated by multiplying the number of its outstanding shares by the current share price. |
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Term
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Definition
| Leverage results from using borrowed capital as a funding source when investing to expand the firm's asset base and generate returns on risk capital. Leverage is an investment strategy of using borrowed money—specifically, the use of various financial instruments or borrowed capital—to increase the potential return of an investment. Leverage can also refer to the amount of debt a firm uses to finance assets. When one refers to a company, property or investment as "highly leveraged," it means that item has more debt than equity. |
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Term
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Definition
| The net asset value (NAV) represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. Most commonly used in the context of a mutual fund or an exchange–traded fund (ETF), the NAV represents the per share/unit price of the fund on a specific date or time. NAV is the price at which the shares/units of the funds registered with the U.S. Securities and Exchange Commission (SEC) are traded (invested or redeemed). |
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Term
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Definition
| A market index is a hypothetical portfolio of investment holdings which represents a segment of the financial market. The calculation of the index value comes from the prices of the underlying holdings. Some indices have values based on market–cap weighting, revenue–weighting, float–weighting, and fundamental–weighting. Weighting is a method of adjusting the individual impact of items in an index. The three most popular stock indexes for tracking the performance of the U.S. market are the Dow Jones, S&P 500 and Nasdaq Composite. |
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Term
| Standard & Poor’s 500 (S&P 500) |
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Definition
| The Standard & Poor's 500 Index (known commonly as the S&P 500) is an index with 500 of the top companies in the U.S. Stocks are chosen for the index primarily by capitalization but the constituent committee also considers other factors including liquidity, public float, sector classification, financial viability, and trading history. The S&P 500 Index represents approximately 80% of the total value of the U.S. stock market. In general, the S&P 500 Index gives a good indication of movement in the U.S. market as a whole. The S&P 500 Index is a market weighted index. Therefore, every stock in the index is represented in proportion to its total market capitalization. In other words, if the total market value of all 500 companies in the S&P 500 drops by 10%, the value of the index also drops by 10%. |
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Term
| Dow Jones Industrial Average (DJIA) |
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Definition
| The DJIA is a price–weighted index. The DJIA represents about a quarter of the value of the entire U.S. stock market, but a percent change in the Dow should not be interpreted as a definite indication that the entire market has dropped by the same percent. A change in the Dow represents changes in investors' expectations of the earnings and risks of the large companies included in the index. In general, the Dow is known for its listing of the U.S. markets best blue–chip companies with regularly consistent dividends. Therefore, while not necessarily a representation of the broad market, it can be a representation of the blue–chip, dividend–value market. |
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Term
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Definition
| The Nasdaq Composite Index is a market–capitalization–weighted index of all the stocks traded on the Nasdaq stock exchange. This index includes some companies that are not based in the United States. Known for being heavily tech weighted, this index includes several subsectors across the tech market including software, biotech, semiconductors, and more. Although this index is known for its large portion of technology stocks, it does include some securities from other industries as well. Investors will also find securities from a variety of sectors as well, including financials, industrials, insurance, and transportation stocks, among others. The Nasdaq Composite includes large and small firms, but unlike the Dow and the S&P 500, it also includes many speculative companies with small market capitalizations. Consequently, its movement generally indicates the performance of the technology industry as well as investors' attitudes toward more speculative stocks. |
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Term
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Definition
| The Wilshire 5000 is sometimes called the "total stock market index" or "total market index" because it includes all of the publicly traded companies with headquarters in the United States that have readily available price data. Finalized in 1974, this index represents the entire U.S. stock market and its movement aggregately. Although it is a very comprehensive measure of the entire U.S. market, the Wilshire 5000 is referred to less often than the more popular S&P 500 Index. |
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Term
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Definition
| Correlation, in the finance and investment industries, is a statistic that measures the degree to which two securities move in relation to each other. Correlations are used in advanced portfolio management, computed as the correlation coefficient, which has a value that must fall between –1.0 and +1.0. |
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Term
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Definition
| The correlation coefficient is a statistical measure of the strength of the relationship between the relative movements of two variables. The values range between –1.0 and 1.0. A calculated number greater than 1.0 or less than –1.0 means that there was an error in the correlation measurement. A correlation of –1.0 shows a perfect negative correlation, while a correlation of 1.0 shows a perfect positive correlation. A correlation of 0.0 shows no linear relationship between the movement of the two variables. |
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Term
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Definition
| Call options are financial contracts that give the option buyer the right, but not the obligation, to buy a stock, bond, commodity or other asset or instrument at a specified price within a specific time period. The stock, bond, or commodity is called the underlying asset. A call buyer profits when the underlying asset increases in price. A call option may be contrasted with a put, which gives the holder the right to sell the underlying asset at a specified price on or before expiration. |
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Term
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Definition
| A put option is a contract giving the owner the right, but not the obligation, to sell, or sell short, a specified amount of an underlying security at a pre–determined price within a specified time frame. The pre–determined price the put option buyer can sell at is called the strike price. Put options are traded on various underlying assets, including stocks, currencies, bonds, commodities, futures, and indexes. A put can be contrasted with a call option, which gives the holder to buy the underlying at a specified price on or before expiration. They are key to understanding when choosing whether to perform a straddle or a strangle. |
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Term
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Definition
| Unsystematic risk can be described as the uncertainty inherent in a company or industry investment. Types of unsystematic risk include a new competitor in the marketplace with the potential to take significant market share from the company invested in, a regulatory change (which could drive down company sales), a shift in management, and/or a product recall. Unsystematic risk can be mitigated through diversification, and so is also known as diversifiable risk. |
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Term
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Definition
| An asset class is a grouping of investments that exhibit similar characteristics and are subject to the same laws and regulations. Asset classes are made up of instruments which often behave similarly to one another in the marketplace. Historically, the three main asset classes have been equities (stocks), fixed income (bonds), and cash equivalent or money market instruments.1 Currently, most investment professionals include real estate, commodities, futures, other financial derivatives, and even cryptocurrencies to the asset class mix. Investment assets include both tangible and intangible instruments which investors buy and sell for the purposes of generating additional income on either a short– or a long–term basis. |
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Term
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Definition
| Systematic risk, also known as volatility, non–diversifiable risk or market risk, is the risk everyone assumes when investing in a market. Think of it as the overall, aggregate risk that comes from things like natural disasters, wars, broad changes in government policies and other events that cannot be planned for or avoided. The best way to measure the amount of systematic risk an investment has is to look at the investment’s beta. Beta measures an investment’s volatility as it correlates to market volatility. A beta greater than one means the investment has more systematic risk than the market. If the beta is less than one, then the investment has less systematic risk than the market. If the beta equals one, then the investment has the same systematic risk as the market. |
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Term
| Capital Asset Pricing Model (CAPM) |
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Definition
| The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. CAPM is widely used throughout finance for pricing risky securities and generating expected returns for assets given the risk of those assets and cost of capital. |
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Term
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Definition
| The standard deviation is a statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance. It is calculated as the square root of variance by determining the variation between each data point relative to the mean. If the data points are further from the mean, there is a higher deviation within the data set; thus, the more spread out the data, the higher the standard deviation. Standard deviation is a statistical measurement in finance that, when applied to the annual rate of return of an investment, sheds light on the historical volatility of that investment. The greater the standard deviation of securities, the greater the variance between each price and the mean, which shows a larger price range. For example, a volatile stock has a high standard deviation, while the deviation of a stable blue–chip stock is usually rather low. |
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Term
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| Diversification is a risk management strategy that mixes a wide variety of investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt at limiting exposure to any single asset or risk. The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on average, yield higher long–term returns and lower the risk of any individual holding or security. |
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| Commodities are goods that are more or less uniform in quality and utility regardless of their source. For instance, when shoppers buy an ear of corn or a bag of wheat flour at a supermarket, most don't pay much attention to where they were grown or milled. Commodity goods are interchangeable, and by that broad definition, a whole host of products where people don't particularly care about the brand could potentially qualify as commodities. Investors tend to take a more specific view, most often referring to a select group of basic goods that are in demand across the globe. Many commodities that investors focus on are raw materials for manufactured finished goods. |
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| Hard commodities require mining or drilling to find such as metals like gold, copper, and aluminum, and energy products like crude oil, natural gas, and unleaded gasoline. |
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| Soft commodities refer to things that are grown or ranched such as corn, wheat, soybeans, and cattle. |
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| Currency is a medium of exchange for goods and services. In short, it's money, in the form of paper or coins, usually issued by a government and generally accepted at its face value as a method of payment. The value of any currency fluctuates constantly in relation to other currencies. The currency exchange market exists as a means of profiting from those fluctuations. |
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| Volatility is a statistical measure of the dispersion of returns for a given security or market index. In most cases, the higher the volatility, the riskier the security. Volatility is often measured as either the standard deviation or variance between returns from that same security or market index. Volatility represents how large an asset's prices swing around the mean price – it is a statistical measure of its dispersion of returns. |
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| Variance is calculated by taking the differences between each number in the data set and the mean, then squaring the differences to make them positive, and finally dividing the sum of the squares by the number of values in the data set. Variance is one of the key parameters in asset allocation, along with correlation. Calculating the variance of asset returns helps investors to develop better portfolios by optimizing the return–volatility trade–off in each of their investments. |
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| A mean is the simple mathematical average of a set of two or more numbers. The mean is a statistical indicator that can be used to gauge the performance of: a company’s stock price over a period of days, months, or years; a company through its earnings over a number of years; a firm by assessing its fundamentals such as P/E ratio, FCF, liabilities on the balance sheet, etc.; and a portfolio by estimating its average returns over a certain period. |
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| A futures market is an auction market in which participants buy and sell commodity and futures contracts for delivery on a specified future date. Examples of futures markets are the New York Mercantile Exchange, the Kansas City Board of Trade, the Chicago Mercantile Exchange, the Chicago Board Options Exchange and the Minneapolis Grain Exchange. |
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| A futures contract is a legal agreement to buy or sell a particular commodity asset, or security at a predetermined price at a specified time in the future. Futures contracts are standardized for quality and quantity to facilitate trading on a futures exchange. The buyer of a futures contract is taking on the obligation to buy and receive the underlying asset when the futures contract expires. The seller of the futures contract is taking on the obligation to provide and deliver the underlying asset at the expiration date. |
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| A futures exchange is a marketplace where a diverse range of commodities futures, index futures, and options on futures contracts are bought and sold. Those who are allowed access to the exchange are brokers and commercial traders who are members of the exchange. Members need to be registered with the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC). Individuals who want to trade futures contracts must do so by establishing an account with a registered broker. Futures exchanges also provide clearing and settlement functions. |
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| Dividend Reinvestment Plan (DRIP) |
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| A dividend reinvestment plan (DRIP) is a program that allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend payment date. Although the term can apply to any automatic reinvestment arrangement set up through a brokerage or investment company, it generally refers to a formal program offered by a publicly traded corporation to existing shareholders. |
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| A buyback, also known as a share repurchase, is when a company buys its own outstanding shares to reduce the number of shares available on the open market. Companies buy back shares for a number of reasons, such as to increase the value of remaining shares available by reducing the supply or to prevent other shareholders from taking a controlling stake. |
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| A price multiple is any ratio that uses the share price of a company in conjunction with some specific per–share financial metric for a snapshot on valuation. The share price is typically divided by a chosen per–share metric to form a ratio. Price multiple = share price / per–share metric |
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| Stock dilution occurs when a company's action increases the number of outstanding shares and therefore reduces the ownership percentage of existing shareholders. Although it is relatively common for distressed companies to dilute shares, the process has negative implications for a simple reason: A company's shareholders are its owners, and anything that decreases an investor's level of ownership also decreases the value of the investor's holdings. |
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| Position sizing refers to the size of a position within a particular portfolio, or the dollar amount that an investor is going to trade. Investors use position sizing to help determine how many units of security they can purchase, which helps them to control risk and maximize returns. |
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| Weighted average is a calculation that takes into account the varying degrees of importance of the numbers in a data set. In calculating a weighted average, each number in the data set is multiplied by a predetermined weight before the final calculation is made. A weighted average can be more accurate than a simple average in which all numbers in a data set are assigned an identical weight. |
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| Rebalancing is the process of realigning the weightings of a portfolio of assets. Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original or desired level of asset allocation or risk. Primarily, portfolio rebalancing safeguards the investor from being overly exposed to undesirable risks. Secondly, rebalancing ensures that the portfolio exposures remain within the manager's area of expertise. Often, these steps are taken to ensure the amount of risk involved is at the investor's desired level. |
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| Dollar Cost Averaging (DCA) |
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Definition
| Dollar–cost averaging (DCA) is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to reduce the impact of volatility on the overall purchase. The purchases occur regardless of the asset's price and at regular intervals; in effect, this strategy removes much of the detailed work of attempting to time the market in order to make purchases of equities at the best prices. Dollar–cost averaging is also known as the constant dollar plan. |
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| A value trap is a stock or other investment that appears to be cheaply priced because it has been trading at low valuation metrics, such as multiples in terms of price to earnings (P/E), price to cash flow (P/CF), or price to book value (P/B) for an extended time period. Generally, a company that has been trading at low multiples of earnings, cash flow or book value for an extended period of time has little promise, and possibly no future–even if the price of their stock appears attractive. A stock becomes a value trap to an investor if no material improvements are made in the company's competitive stance, in its ability to innovate, in its ability to contain costs, and/or in its executive management. |
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| A growth stock is a share in a company that is anticipated to grow at a rate significantly above the average for the market. These stocks generally do not pay dividends, as the companies usually want to reinvest any earnings in order to accelerate growth in the short term. Investors then earn money through capital gains when they eventually sell their shares. |
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| A value stock is a security trading at a lower price than what the company’s performance may otherwise indicate. Investors in value stocks attempt to capitalize on inefficiencies in the market, since the price of the underlying equity may not match the company’s performance. Common characteristics of value stocks include high dividend yield, low price–to–book ratio (P/B ratio) and/or a low price–to–earnings ratio (P/E ratio). Investors can find value stocks using the "Dogs of the Dow" investing strategy by purchasing the 10 highest dividend–yielding stocks on the Dow Jones at the beginning of each year and adjusting the portfolio every year thereafter. |
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| An income stock is an equity security that pays regular, often steadily increasing dividends. Income stocks usually offer a high yield that may generate the majority of the security's overall returns. While there is no specific breakpoint for classification, most income stocks have lower levels of volatility than the overall stock market and offer higher–than–market dividend yields. Income stocks may have limited future growth options, thereby requiring a lower level of ongoing capital investment. Any excess cash flow from profits can be directed back to investors on a regular basis. |
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