Basic Investment Terms and Definitions

As investors, we all know that the earnings of a company are of paramount importance to the growth of the business as well as creation and growth of shareholder wealth. Question then arises on how the earnings should be measured. In US, the Generally Accepted Accounting Procedures (GAAP), specifies the way a company can recognize its revenue and expense. Like most investors, you are undoubtedly familiar with the terms “earnings”, “net income”, and, “earnings per share”.

Then there is EBIT.

Enterprise value can be thought of as a private market valuation for the company. When a buyer purchases a company in the private market, he has to pay for the company equity (including common stock, preferred shares, minority interest, etc – learn about common stock vs preferred stock), he has to pay off all the debt, but in return the buyer gets the cash the company has in its bank accounts and other cash equivalents in form of securities and other liquid assets.

Quick ratio measures the liquidity of the company. It is similar to current ratio but a bit more restrictive in what it considers to be liquid. Inventory is part of the current asset used for current ratio. However, it is explicitly excluded from the calculation of quick ratio.

What is Inventory Turnover? Inventory turnover is used to indicate how many times a company sells its complete inventory in any given period of time. This measures the briskness of the business.

Enterprise Value/EBIT or EV/EBIT is a similar measure as P/E ratio (P E ratio definition). Instead of the Market Value, we use the Enterprise Value and instead of the Earnings in the denominator, we use EBIT.

The investment world is filled with trading opportunities outside of your traditional stocks and bonds. You may not have heard about them as much, but each one offers their own set of benefits and risks. Take, for example, a master limited partnership.

A master limited partnership (MLP) is a publicly traded partnership that shares elements of a limited partnership and a corporation.

There are a lot of different methods for valuing stocks and determining a fair price for their shares. One of the oldest methods is the dividend discount model, commonly abbreviated to DDM. It’s a more theoretical model in a lot of ways, but can be helpful once you learn how to use it. Let’s dive right in and learn about this tool.

With a constantly changing market, assessing the potential risks and rewards of and investment can be tricky. As you build your portfolio, you may be in search of the ideal investment that helps bring in a maximized return while minimizing risks.

This type of investment is almost impossible find, but that hasn’t stopped people from developing strategies and theories to achieve the perfect investment. One of the most popular by far, is the Modern Portfolio Theory (MPT).

CAPM stands for Capital Asset Pricing Model. It is used to calculate the predicted rate of return of any risky asset. It compares the relationship between systematic risk and expected return. Typically, it’s used on stocks. However, CAPM can also be used throughout financial decision making to price riskier investments. When pricing them, it’s important to reach a balance between the price due to risk and the expected return – thus, using CAPM can help.

Assessing and understanding the risks associated with investment is one of the biggest decisions an investor has to make. It’s important to know how to measure, understand and express the level of risk that you face when investing.

One of the most common ways to do this is by using a statistical measure known as “beta.” Let’s take a look at what it is, how you can use it and the advantages and disadvantages it brings.

The risk premium is the minimum amount of money that a person is willing to accept as compensation for taking on a risky or volatile investment.

So, in investing, it is the minimum amount of money by which the expected return on a risky investment exceeds the known return on a non-risky asset.

A risk premium is a sort of hazard pay for your investments. Riskier investments – typically the more volatile ones – have to provide investors with the potential for higher gains than those that are risk-free, in order to convince the investors the risk is worthwhile.

When looking to invest, you’ll often be advised to “diversify” your portfolio. But exactly what is diversification? In short, diversification of a portfolio (See: investment portfolio definition) is a risk-management technique. A diverse portfolio is comprised of a variety of types of investments, instead of just one or two. The thought process and rationale behind portfolio diversification is that by having many different types of investments, the risk of each one is mitigated.

PEG ratio is often used to bridge the gap between value and growth.

Most value investors tend to consider the P/E ratio as one of the more important qualifying metric to find a value stock. However, the P/E ratio often does not tell the complete story. A stock may sell for a low price to earnings multiple and appear to be undervalued, but it is not necessarily an good investment. For example, if the company expects earnings declines in the future, the low P/E ratio may actually mask the overvaluation in the stock price.

What is PEG Ratio?
PEG ratio or Price/Earnings-Growth ratio is an attempt to normalize the P/E ratio with the expected earnings growth rate of the company.

Whether you are looking at investing or just want to get a better handle on finances, there are a lot of important terms to know. One of these terms is the debt to equity ratio. This is also called the debt/equity ratio, D/E ratio or simply referred to as “risk.” To help you with your investment and financial terminology, let’s take a look at the share market basics for beginners, and what this ratio is, what it means, how to calculate it and the importance of understanding a long term debt to equity ratio.

As an investor, you want to make sure that your money is being spent wisely. Some companies do better with investment capital than others do, and knowing your money is going to be well-spent is a great incentive to invest in that particular business. This is where “return on equity” comes in.

When considering which companies to invest in, there are a lot of factors to look over. It can confusing or intimidating at first, but the more you know, the more able you are to make wise decisions with your money. One of these factors that might seem confusing as first is “Return on Assets.” Read on to learn more about this important term