Undervalued stocks are the stocks that can be purchased at prices that are below the intrinsic value of the stock, as calculated by the investor in question. A stock that is deemed undervalued by one investor may not be considered undervalued by another investor.
Basic Investment Terms and Definitions
Welcome to the comprehensive list of investment terms and their definitions, designed for investors at all levels.
In this article we will go over the basic stock market terms. Stock market trading goes back about 200 years. In the US, the colonial government used to sell bonds in order to finance the war. The government promised to pay the buyers of bonds at a later date. It was during this time that private banks started issuing stocks of companies to raise money. This was also a time when the rich had tremendous opportunities to scale up their wealth.
In 1792, twenty four big merchants joined hands to create the New York Stock Exchange (NYSE). The daily meeting in Wall Street for trading bonds and stocks was also initiated during this time. In the early half of the 19th century, the US witnessed rapid economic growth. The companies understood that investors were eager to have partial ownership so they offered stocks. By the turn of the 20th century, stocks worth millions of dollars were traded and the stock markets began to grow globally. Today the stock exchanges such as NYSE, London Stock Exchange, and the Tokyo Stock Exchange have a major impact on global economy and commerce.
History has shown that the issuing of stocks helped companies to expand exponentially. The economy where the stock market is on the rise can be considered an upcoming economy. Rising share prices tend to be associated with the increased business investments. Share prices also actively influence the wealth of households and their consumption. Exchanges act as the clearinghouse for every transaction which means that they collect and deliver the shares, guaranteeing payment to the sellers. Over time, the increased usage of the stocks and stock exchanges created a unique vocabulary. Today, to understand the workings of the financial markets, it is important that we have a good knowledge of these basic stock market terms.
- NYSE: A history of the New York Stock Exchange.
- SEC: The official website of the US Securities and Exchange Commission.
- NASDAQ: The largest electronic-based stock exchange in the United States.
- CBOE: The largest options exchange in the world.
Basic Stock Market Terms
Here’s a glossary of stock market terms, suitable for beginners just learning how to pick stocks. Additionally, consider practicing your investing skills with our list of stock market game for kids. Younger students can take a look at the money games for kids
Days Sales Outstanding
Debt to Equity Ratio
Over the Counter Market (OTC)
Did this get you interested in learning more about investing in the stocks? Read our extensive guide on how to invest in stocks for practical investment concepts to help you buy your first stock
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Black-Scholes model is used to estimate the fair value of European call options based on the probabilistic distribution of future prices and volatility. It takes the the risk free interest rate, the volatility of the stock, the strike price of the option, time to expiry and the current stock price into account.
To calculate the p/e (ex cash), subtract Cash from the market value before dividing by earnings.
So, P/E (ex cash) = (Market Value – Cash and cash equivalents)/Net Income
There is a very good reason why this is done.
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
An investment portfolio is basically a collection of assets owned by an individual or institution designed to grow in value or provide income. Typically, an investment portfolio is well-diversified, and may contain many different types of assets, including cash, real estate, and gold. Most commonly, however, an investment portfolio will contain stocks and bonds whose overall value fluctuates depending on market performance. Most individual portfolios contain a wide range of assets designed provide a long-term gain to provide for things like retirement or children’s inheritances. There are several different types of investment portfolios, but this post we’re going to cover three of the major debates when it comes to investment portfolios.