Just starting out?
If you’re just beginning to learn about investments and don’t have much background knowledge, we recommend reviewing this list of terms. To read more about these concepts, Investopedia.com is a great resource.
Basic Terms to Know – compiled by Lauren Glasse ’18 and Max Le Merle ’16
Download the PDF print-out here: TCIC Terms to Know
- Stock: Stock is ownership. A business is divided up into shares of stock and parts of the company (the shares) are sold to investors to raise money.
- Ask: The lowest price a seller is willing to accept when selling a security (stock).
- Bid: The highest price a buyer is willing to accept when purchasing a security (stock).
- Spread: The difference between the Ask and the Bid. Basically, say we have a company called Hundred with a current stock price of $100, and people think that the price will rise. Buyers might put in a “bid” for $100 whereas sellers may be “ask”ing for $101. In this case, the “spread” is 1.
- Bearish – Characterized by falling share prices. An investor who thinks a stock price will decline would be considered bearish. The term “bearish” comes from the action a bear makes when it attacks: it swipes downwards with its claws.
- Bullish – Characterized by rising share prices. An investor who thinks that a specific security, an industry, or the whole market will rise would be considered bullish. A “bull” approach would be to purchase securities under the assumption that they can be sold later at a higher price. The term “bullish” comes from the action a bull makes when it attacks: it knocks upwards with its horns.
- Broker: A person that buys or sells an investment vehicle for you (securities, bonds, commodities, etc.,) in exchange for a fee which is called a commission.
- Blue-Chip Stock – Stock of a large, well-established, and financially sound company that has operated for many years. Typically has a market capitalization in the billions, and is generally the market leader or among the top three in its sector. Most blue-chips have a record of paying stable or rising dividends for years, if not decades. Think of companies household name companies.
- Dow Jones Industrial Average: The Dow Jones Industrial Average (or DJIA for short) is by far the most popular and widely used gauge of the U.S. Stock Market. It consists of a price-weighted list of 30 highly-traded Blue Chip companies.
- S&P 500: The S&P 500 is one of the most commonly used benchmarks for the overall U.S. stock market. This consists of a price-weighted list of 500 highly-traded Blue Chip companies. The Dow Jones Industrial Average (DJIA) was at one time the most renowned index for U.S. stocks, but because the DJIA contains only 30 companies, most people agree that the S&P 500 is a better representation of the U.S. market. In fact, many consider it to be the definition of the market.
- Market Cap – A company’s market capitalization (or “market cap” as it s frequently called) is calculated by taking the number of outstanding shares of stock multiplied by the current price-per-share. RECOMMENDED TO WATCH:http://www.investopedia.com/terms/m/marketcapitalization.asp
- NASDAQ: A stock exchange where mostly shares of technology companies such as Microsoft and Cisco are traded. An exchange is a place where options, futures, and shares in stocks, bonds, indexes, and commodities are traded. The most famous in the United States is the New York Stock Exchange.
- Alpha – The difference between a fund’s expected returns based on its beta and its actual returns. A positive alpha of 1.0 means the fund has outperformed its benchmark index by 1%. Correspondingly, a similar negative alpha would indicate an underperformance of 1%.
- Beta – A measure of the volatility of a security or portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns. You can think of beta as the tendency of a security’s returns to respond to swings in the market. A beta of 1 indicates that the security’s price will move with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security’s price will be more volatile than the market.
- Bonds – A bond is a debt investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate.
- Catalyst – Something that gives institutional investors reason to buy or sell a stock. Examples: product release or recall, bad publicity, earnings releases, management changes, etc. A catalyst is something that is likely to cause changes in the value of the stock (think of the definition of catalyst in chemistry).
- Cash Flows – The amount of cash generated and used by a company in a given period
- CFO: Cash flows from operations
- CFI: Cash flows from investing
- CFF: Cash flows from financing
- CAPEX – CAPital EXpenditures. Think “expenditures” using the company’s capital. Funds used by a company to acquire or upgrade physical assets such as property, industrial buildings or equipment. Often used to undertake new projects or maintain/increase the scope of their operations.
- Dividend Yield – A ratio that shows how much a company pays out in dividends each year relative to its share price. Essentially, investors are “rewarded” a portion of money each year depending on their investment. If I invest $100 in a company with a 3% dividend, then I will receive $3 from the company annually for my $100 investment.
- EPS (Earnings Per Share) – portion of a company’s profit allocated to each outstanding share of common stock. Serves as an indicator of a company’s profitability. This, along with P/E ratio, is a very important multiple http://www.investopedia.com/articles/analyst/03/091703.asp
- Hedging – http://www.investinganswers.com/financial-dictionary/investing/hedge-345. Essentially the measures a company takes to protect itself from market risk. If I think the price of coffee beans will be volatile in the coming year, I might enter into a contract with a coffee bean seller who will agree to a consistent year-long price, to avoid the financial loss that changing prices might bring. “To Hedge: to protect oneself against loss on (a bet or investment) by making balancing or compensating transactions”.
- Price/Earnings Ratio (P/E) – Company’s current share price compared to its per-share earnings. How much money you are paying for $1 of the company’s earnings. In other words, if a company is reporting a profit of $2 per share, and the stock is selling for $20 per share, the P/E ratio is 10 because you are paying ten-times earnings ($20 per share divided by $2 per share earnings = 10 P/E.)
- This is a very important multiple. Watch: http://www.investopedia.com/terms/p/price-earningsratio.asp http://www.investopedia.com/video/play/price-to-earnings-ratio/
- Profit Margins – Ratio of a profitability that measures how much out of every dollar of sales a company actually keeps in earnings. Higher profit margin indicates a more profitable company with better control over costs.
- Volume – Number of shares/contracts traded in a security or an entire market during a given period of time.
- 52 Week Range – Lowest and highest prices at which a stock has traded in the past 52 weeks. Used to compare against a stock’s current trading price to get a sense of how the stock is doing + how its price has fluctuated.