An Investor’s Dictionary: Five Terms You Need To Know

Written by on July 13, 2013 in Money - No comments | Print this page

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Forex InvestingWhen setting foot in investment for the first time, one of the most important things you need to do is to learn the “market talk”.

Here are some common investment terms when referring to stocks and stock market – with these, you’ll be talking like an industry regular before long!

Stock

All right, this word is pretty generic, but pretty important as well. Stock is the ownership of a corporation or company, which represents a piece of the corporation’s assets and earnings.

A business is divided into shares of stock and parts of the shares are sold to investors in order to raise money.

A related concept is “stock split”, which refers to a corporate action in which a company’s existing shares are divided into multiple parts.

For instance, in a 2-for-1 split, each stockholder receives an additional share for each share they hold. Stock splits are performed when a company’s share price has become so high and the shares are too expensive to buy in round lots.

While the number of shares outstanding increases, the total dollar value remains the same as the pre-split amounts.

Reverse stock split, on the other hand, refers to a proportionate decrease in the shares of stock.

A 1-for-2 split, for example, will result in the stockholders owning 1 share for every 2 shares owned before the split. This action is taken by the company to increase the market price of its stock.

Blue-chip stocks

This is a term generally applied to stocks of well-established and financially sound companies known for their long-standing track records. A blue-chip stock often has a market capitalization in the billions.

While dividend payments are not absolutely necessary for a stock to be considered a blue-chip, most blue-chips have a record of paying stable or rising dividends for decades.

Nevertheless, a blue-chip company may not always be a safe investment: even the best companies may fail to survive during periods of extreme stress.

Earnings

This is the income of a business (revenue minus expenses). Earnings per share or EPS refer to the income for a specific period, usually a quarterly or a fiscal year period, divided by the shares outstanding during that period.

EPS do not factor in the dilutive effects on convertible securities. For a company with a simple capital structure without issuing any potential dilutive securities, basic EPS can be a useful metric on its own.

EBITDA is the earnings before interest, taxes, depreciation and amortization, and is an indicator of a company’s financial performance.

Since it has eliminated the effects of financing and accounting decisions, it can be used to compare the profitability between companies and industries. A common misunderstanding of EBITDA is that it represents cash earnings.

However, EBITDA is a good metric to evaluate profitability, not cash flow. It leaves out the cash used in funding working capital and replacement of old equipment.

That’s why EBITDA is often used as an accounting gimmick to dress up a company’s profit. Therefore, investors using this metric need to pay attention to other performance measures as well.

Dividend

This term refers to the distribution of earnings to shareholders, prorated by the class of security and paid in the form of money, stock, scrip or even company products or property.

The dividend is most often quoted in terms of the dollar amount each share receives. It can also be quoted in terms of a percent of the current market price, referred to as dividend yield. Mutual fund dividends are paid out of income, usually on a quarterly basis from the fund’s investment.

Dow Jones Industrial Average (DJIA)

The Dow Jones Industrial Average index is a price-weighted average of 30 actively traded blue chip stocks, including companies like General Electric, Disney, Exxon and Microsoft.

Prepared and published by Dow Jones & co., “the Dow,” is the oldest and most widely quoted of all the market indicators.

DJIA is calculated by adding the closing prices of the component stocks and using a divisor adjusted for splits and stock dividends equal to 10% or more of the market value of an issue as well as substitutions and mergers.

Yuan Liu is a freelancer in Sydney. As a first-time investor, she finds Stocks in Value a good place to start, which provides practical tools for stock valuations and professional advice on investment. 

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