Finmasters’ glossary of investing terms lets you quickly look up clarification on a particular term and expand your stock market vocabulary. Our investment glossary lists a variety of commonly used stock market terms, investing terms, and definitions from the financial world.
- 10 Year PE: The 10 Year PE, or cyclically adjusted PE ratio (CAPE), is the price divided by the inflation adjusted average earnings over the previous 10 years. This ratio gives a better idea of the earnings multiple based on average earnings over an economic cycle. It is better suited to cyclical stocks which have periods of higher and lower earnings growth. For stocks with high earnings growth rates the average earnings tend to be understated.
- Bar Chart: A bar chart uses vertical bars to display the open, high, low and closing price of a security during a series of trading sessions. The high and low price are represented by the high and low point of the bar, while the open and closing price are represented by horizontal lines on the left and right of the vertical bar.
- Bear Market: The opposite of a bull market, a bear market is a downtrend or market that is decreasing in value.
- Bonds: Bonds are debt contracts, or more simply loans. They can take a variety of forms in how they are paid out, if they can be prepaid, and more. Unbeknownst to most investors, the global bond market is astronomically larger than the equity market. Furthermore, bonds aren’t regularly traded in many cases, making the price arbitrage on them much higher.
- Bull Market: This ubiquitous term describes when a market is in an uptrend or is increasing in value.
- Candlestick Chart: A candlestick chart is similar to a bar chart, but includes a wider body between the open and closing price. The body is usually green or white if the close is higher than the open and red or black if the close is lower than the open. A “wick” connects the body to the high and low. Consecutive candles of the same color represent trends and long wicks often warn of trend reversals.
- Close: The last traded price for a security during a trading session.
- Compound Interest: Compound interest refers to the gains you receive from an investment that are then put back into the investment to generate higher returns. Mathematically, if you earn 5% on $100, you would have $105 at the end of the first year, but $110.25 at the end of the second year because you got 5% on your initial $100 plus 5% on the gained $5.
- Common Stock: The most basic form of ownership in a company. They have shareholder rights, and are entitled to a proportionate share of company earnings. However, they are also last in line when a company goes bankrupt.
- Earnings Per Share (EPS): The total profits of a company divided by the number of shares outstanding. This incorporates non-cash items such as depreciation.
- Exchange Traded Funds: ETFs are basically mutual funds that are traded like stocks during the regular trading sessions. They generally offer exposure to indexes or subsectors of a larger index, such as technology or healthcare.
- Exchange Traded Notes: ETNs look like ETFs but have a significant difference. ETNs don’t actually own the underlying assets while ETFs do. ETNs are essentially guarantee contracts by the issuing institution to follow a particular index or strategy. What most investors don’t realize is that there generally aren’t assets backing up the ETN, and thus they are exposed to additional risk.
- Exponential Moving Average: An exponential moving average gives more weight to recent price levels.
- Free Cash Flow: The amount of cash generated by a company after all operating and capital expenditures.
- Hedge Fund: Although a hedge fund’s initial purpose was to provide lower risk ways to invest in the market, most hedge funds today are actively managed by a person or a group of individuals that engage in leveraged and high risk investing. These funds are usually more exclusive, less scrutinized than mutual funds, and less liquid.
- HEPS: Headline earnings per share for a given time period for a company. HEPS excludes exceptional and one off items from the EPS number.
- Index: An index refers to a basket of assets that are weighted in a particular way to give an overall value for those assets. Methods of weighting index constituents include equal weight, fundamental factors and price weighted. Common indexes include the FTSE, Dow Jones, S&P 500, Russell 2000, and more. As the price of the assets within the basket changes, so do the indexes themselves.
- Margin: Made famous in the financial crisis, margin simply means investing that is backed up by borrowed funds. When you short a stock you must do so on margin because in theory the stock could go to infinity. Many hedge funds use margin, which is essentially a loan, to purchase more shares of a company than they can do so outright.
- Moving Average: A moving average is the average price over the previous n number of time periods.
- Mutual Funds: Mutual funds are pools of money managed by a group of individuals. They can utilize a simple strategy, such as following the S&P 500, or run entirely on the decisions of the management team. These funds can be open to new investors, or limited in their participation. They can only be purchased at the close of business.
- OHLC: The open, high, low, and closing price of a security during a trading session.
- PEG Ratio: The PEG ratio, or Price Earnings/Growth ratio is the price earnings ratio divided by the earnings growth rate. The PEG ratio tends toward 1 over time as the growth rate should keep up with the PE. If the growth rate is much lower than the PE there is little reason for the PE to remain at such high levels.
- Preferred Stock: While preferred stocks don’t have voting rights, preferred stock holders receive a dividend from a company that is generally much higher than the regular dividend or bond payments, and usually guaranteed.
- Price to Earnings Ratio (P/E): The PE ratio, or earnings multiple, is the price of a share divided by the earnings per share. The PE ratio reflects the multiple of earnings that investors are prepared to pay for a share. High or rising PEs indicate that investors are expecting higher earnings in the future. Low PE ratios indicate stocks are either undervalued or that investors expect lower earning in the future.
- Real Estate Investment Trust (REIT): Investors who can’t afford to invest in real estate themselves often use REITs as an investment vehicle. REITs are pooled funds that invest in real estate, and generally receive special tax treatment. In many cases REITs have special governance structures that require them to pay out 90% or more of their profits continuously in the form of dividends.
- Return on Investment: The rate of return (interest rate) that one receives on a defined period basis (usually annually).
- Short Selling: Known as one of the few ways to bet against an asset, short selling involves borrowing an asset, such as stock or bond, and selling it with the intention of repurchasing that asset at a lower price at a future date. During that time the short seller is responsible for all dividend and coupon payments, and only makes money if the price of the asset goes down.
- Trust Fund: Trusts are special types of funds, normally set up by families for their decedents, that hold assets or investments with the intention of giving those to another.
- Volume: The number of shares traded during a trading session or during a given time period.
