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Beginning Investor - Investment Terms
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 wont - 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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