Definitions of Investment and Stock Market Terms

Please refer to the basic stock market terms here.

The definitions here expand and augment the list referenced above. These definitions are of interest to intermediate and advanced readers, specially for practicing investors in the stock market. We go into sufficient detail necessary to make the concept clear, and give examples where necessary.
























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What is Price to Book Ratio or P/B Ratio in Investing

Price to Book Ratio or P/B Ratio is used to determine the valuation of the company with respect to its balance sheet strength. It is calculated by one of the following two methods: 1. Price/Book Value = Total Market Capitalization / Total Book Value OR, 2. Price/Book Value = Latest Closing Stock Price / Book… [Read More]

P/E Ratio Definition

What is P/E Ratio? P/E Ratio is one of the most common valuation metric used to identify stocks attractively priced for investment. As the name implies, the Price/Earnings Ratio is simply the price of the stock divided by the earnings per share as reported by the company. Most commonly, the last 12 months of eps… [Read More]

Interest Coverage

Interest coverage ratio measures a company’s ability to pay the interest on its outstanding debt. A high ratio means that the company will have no trouble paying the interest expense, while a low ratio indicates a potential default on the loan payments. Lenders and creditors use this ratio to determine if they would be willing… [Read More]

17 Key Financial Ratios to Pay Attention To

Financial ratios allow an analyst to quickly analyze a business and its operations and understand the financial situation of a company. These ratios answer many different kinds of questions that can be asked about a business performance. Normally, many of these ratios need to be understood in the context of a benchmark, such as, past… [Read More]

What is Book Value Per Share

What is Book Value per Share Book value per share is simply (Common Stockholder’s Equity / Number of Shares of Common Stock) If there are no preferred shares outstanding, Total Stockholder’s Equity can be used in place of Common Stockholder’s Equity. The Balance Sheet is expressed as the following: Assets = Liabilities + Equity Therefore,… [Read More]

January Effect Definition

The January Effect is named after an observation made in 1942 by banker Sydney Wachtel. He noted that small stocks have tended to outperform the market in the month of January since 1925. The hypothesis rests on the belief that in December stocks tend to decline as investors sell off their losing positions to harvest… [Read More]

What are Value Stocks?

Value Stocks Definition Value stocks are stocks that currently trade below the intrinsic value of the company. A value investor typically considers various fundamentals of the business to determine the value of the company. If the market price is below the value of the company as determined by the investor, the stock is considered as… [Read More]

Deflation Definition - How Does It Affects the Economy

What is Deflation? – Definition Deflation is a period of falling prices of goods and services in the economy. This is the opposite of inflation, which is when general prices rise over time. Normally, economies are inflationary over the long term. This means that the value of money declines over time. A dollar is able… [Read More]

Value Premium Definition

Is Value Premium a Free Lunch?

Value premium refers to the observation that value stocks tend to return better than growth stocks on a risk-adjusted basis. Fama and French defined the value premium as the difference in returns between high book to market stocks and low book to market stocks, also referred to as HML. Value premium has been shown to… [Read More]

What is Stock? Definition, Types and How to Value Them

Stock Definition Stock, equity or share as used in finance represents a part ownership in a company. Ownership of a stock entitles the owner (stockholder or shareholder) with all the profits distributed in form of dividends in direct proportion to the amount of shares owned. For example, consider a hypothetical company that has issued 100… [Read More]