Investing Terms and Ratios Defined

There are an incredible number of investing terms that are used by stockbrokers and finance professionals every day. Not having a general knowledge of some of the most commonly used financial terms can make conversations confusing and possibly even a bit intimidating. However, by familiarizing yourself with the most common phrases, terms and financial ratios, you will feel much more comfortable and in the end it will make your research more effective and enjoyable.

Annuity – An investment issued by an insurance company, which issues payments at specified intervals determined prior to purchase. Investments within an annuity grow tax deferred (until withdrawal) and may be guaranteed by the insurance company, depending on the type of annuity.

Ask Price – This is the price for which a dealer or market maker will sell a security. The ask price is the price which a buyer must pay when purchasing shares of stock.

Asset – Anything of value owned by a business or an individual. For individuals this could be cash (bank accounts), stocks, bonds, vehicles, real estate and other property. Corporations generally separate assets into categories such current assets (cash, liquid investments), long term assets (equipment, buildings, real estate) and intangible assets (trademarks, patents, etc.).

Bear Market – This is a long period of time in which the overall market and economic outlook is poor and stock prices are moving downward and is the opposite of a bull market. If an individual has a negative outlook on the market or a particular investment, they are said to be bearish.

Beta – A measure of the relative volatility of a stock, usually to the S&P 500 index. A beta of 1 – moves up and down equally with the S&P 500. A beta of greater than 1 is more volatile while a beta of less than 1 is less volatile.

Bid Price – This is the price that a dealer or market maker will pay for a security. The bid price is the amount for which an individual can sell shares of stock.

Blue Chip Stock – Refers to stocks of very large, well-known companies. These companies have usually been around for a long time and have a history of stable earnings, dividend payments and growth, solid management and high quality products. Blue Chip Stocks are usually considered a safe investment over the long term.

Bond – A fixed income investment issued by a corporation or government body that pays a set amount of interest over a fixed number of years before returning the principal in full at expiration. A bond is like a loan from the investor to the entity issuing the bond.

Broker – *refer to stockbroker definition*

Bull Market – The opposite of a bear market, this is when the outlook on the overall economy and market is optimistic and investments are on a long term upward trend. If an individual has a positive outlook on the market or a particular investment, they are said to be bullish.

Capital – For an investor, capital is the amount of cash available for investing. For a business, capital is the amount by which assets are greater than liabilities.

Capital Gains – The amount of profit made when a security is sold for more than the price paid.

Commodity – A physical object that investors will buy or sell, usually by way of futures contracts. Examples include livestock, grains, metals, and oil. Prices are based upon supply and demand.

Derivatives – An investment vehicle in which its value is dependent upon the value of a separate equity, commodity, bond or currency. Examples include futures contracts and stock options.

Dividend – Dividends are the means by which a corporation distributes profit to its shareholders or owners. They are not mandatory and some profitable companies choose not to issue dividends. They are usually distributed quarterly, but measured annually.

Earnings Per Share (EPS) – A company’s total earnings divided by the number of shares outstanding is its earnings per share or EPS. Can be measured for the past year, which is trailing EPS, the current year (current EPS) or it can be estimated for the year to come, which is forward EPS. Larger numbers are better.

Equity – An equity may refer to a share of stock. For instance, if one invests in equities, they invest in stocks. Equity is also a term used on a corporation’s financial statements or possibly for an individual. When used in the context of a company’s equity or an individual’s equity, this is total assets minus total liabilities. For shareholder’s equity, it will be the amount of total assets available to shareholders minus total liabilities, divided by the number of shares outstanding.

ETF – ETFs or exchange traded funds are a pool of equities, bonds, or other securities that are not actively managed, but are usually developed and issued to emulate the market movements of a specific index or industry. ETFs may include dozens or hundreds of separate securities in one fund.

Forex – Also called FX, foreign exchange or foreign exchange market, is the market where investors buy and sell foreign currencies. This is often considered a risky, speculative investment.

Futures – A risky investment strategy of selling contracts to purchase a security at a specified price at a future date. Unlike options trading, futures trading involves an obligation to deliver the security (stock, bond, commodity, etc.) at the set price. It is a zero sum strategy, meaning one investor gains at another’s loss.

Gilts – Bonds issued by the UK government.

Index – An index is a benchmark for a given market, usually comprised of a selection of stocks from the broader market. Examples of indexes (indices) are the Dow Jones Industrial Average, the NASDAQ, and the FTSE.

IRA – stands for Individual Retirement Account. This investment account allows for tax advantages for US residents when saving for retirement. Earnings in a regular IRA grow tax free until withdrawn at retirement and investments are made with pre-tax money. Roth IRA investments are made with after-tax money and are not taxed at withdrawal.

ISA – stands for Individual Savings Account. A type of account for residents of the UK, which allows for tax advantages over normal trading accounts. Earnings within an ISA are tax free in the UK, no matter when the money is withdrawn.

Long – In financial investing terms, this refers to ownership, most commonly of stock. Example: The investor was long 1000 shares of XYZ stock.

Market Capitalization – The overall market value of a company based on its stock price. Measured by taking the number of shares outstanding multiplied by the current market price per share.

Market Maker – The actual broker-dealer firms that buy and sell shares of a security on the open market. They are required to hold a certain number of shares at all times and must make a market on them buy listing competitive bid and ask pricing and trading shares accordingly.

Mutual Fund – An investment pool of several hundred underlying securities grouped into one. Mutual funds are usually actively managed and issued by large financial institutions.

Options – An investing strategy that involves trading the right (but not the obligation) to buy or sell an equity at a set price at a future date for a fee, called a premium. It is a risky strategy for inexperienced investors but can actually mitigate a portfolio’s risk when used properly.

P/E Ratio – Price to earnings ratio. This is calculated by dividing the stock’s current market price by the annual earnings per share for the past 12 months. For example a stock with a market price of £100 and annual earnings per share of £5 would have a P/E Ratio of 20 (£100/£5). P/E is a good measure of whether or not a stock is under or overvalued and should be compared against similar stocks in the same industry. In general, small numbers are better than large numbers.

Pullback – A (usually sharp) reversal of an upward trend. Also called a market correction, a pullback is often seen as a normal and reasonable reaction to a market that is slightly overvalued or has grown at too quick a pace.

Roth IRA – *included in IRA definition*

Short – This refers to selling short or short sales. It is the practice of selling an equity without actually owning it. It is the opposite of long – basically if you are short a stock, you have a negative balance of that stock.

SIPP – SIPP stands for Self Invested Personal Pension. This is a tax advantaged account that offers tax rebates to UK residents and a tax-free 25% lump sum payment at retirement age. Other payments after retirement are taxed at the standard rates.

Stock – Also called common stock or equity, is an investment signifying ownership in the issuing corporation. Stock ownership usually gives the holder the right to vote and share in the company’s profits through dividends. Preferred stock is a form of stock that usually has guaranteed dividend payments but does not offer the right to vote.

Stockbroker (and Broker) – A company or an individual who acts as an intermediary between a buyer and a seller of a commodity or security (stock for a stockbroker). They are usually paid a fee in the form of commission and must be licensed by the appropriate authorities.

Stock Split – A strategy used by some companies to increase the number of outstanding shares while lowering the current market price. The theory is that lower prices will be more attractive to the average investor, thereby increasing demand and eventually, the price of the stock. Shareholders receive more shares of stock, but the overall value of their investment remains the same. In a two-for-one split (most common), every share that is held will become two shares, each with half of the value that they previously had. For instance, if XYZ, trading at £100, issues a two-for-one split, a shareholder with 200 shares at £100 each, would own 400 shares at £50 each after the completion of the split.