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Beginning Investor - Investment Terms
Over the course of the past two months, readers have brought to my attention that there is a steep learning curve for investment terminology. That's why the focus of this month's Beginning Investor column will be investment terminology. The world of finance can be complex. This article doesn't intend to provide an all-encompassing set of definitions, but rather, as a general guide to help you understand the most frequentlyused financial terms. There's no way we could cover everything - and I'm sure that we wont - but this should clarify some things for those new to investing. This month, we'll be looking at stock-related words in particular.
Let's start with the absolute basics. The mostcommon type of investment is in the form ofstock. Stock is an equity security - that is,when you buy stock, you are purchasing apiece of that company. You are part owner,and therefore entitled to help select the peoplewho run the company from day to day.Money is made from stocks either by dividends,or capital gains.
Annual Report / 10-K
The annual report can come in two forms,the glossy annual report, which looks pretty,and is relatively easy to read and comprehend,and the 10-K, which is an official SECfiling that is required of public companies.The 10-K is a legal document, and is thereforemuch more difficult to read, however, itcan provide much more information.
The sell price minus the purchase price ofstocks are referred to as capital gains.
A dividend is a per share payment that acompany has the option to declare.Essentially, dividends are a way for a companyto share their profits with its owners, theshareholders. Public companies are notrequired to declare dividends.
The term EPS refers to a company's earningsper share for the fiscal year.
Equity is just a term to signify that a particulartype of security grants you partial ownershipof a company.
Liabilities are a company's debts of any kind.
The Market Capitalization, or Market Cap, isthe total number of shares outstanding (heldby investors) multiplied by the share price onany given day.
A Mutual Fund is an investment companywhose sole business is to purchase stock inother companies, and turn a profit for theirown customers. When you buy a share of amutual fund, you're essentially buying intoeach and every company that that particularfund holds. Mutual funds are can be a goodinvestment for those who are new to investing.
Net Quick Assets
A company's Net Quick Assets, or NQA arethe sum of a company's liabilities subtractedfrom the sum of a company's assets.
The P/E is a company's ratio of their shareprice to their earnings for a particular fiscalyear. This can be used as a good indicator ofa company's financial health and buyprospects. A good P/E value varies by industry.
Par Value is an arbitrary figure determined bya company at the issuance of a particulartype of stock (i.e. it varies from class toclass). Essentially, par value carries no realsignificance.
Share Price is the price at which one share ofa company's stock is selling.
A short is a method of making money evenwhen a stock's price drops. The way a shortworks is that an individual will get shares of astock on margin (loan of shares from stockbroker). This person will then sell theseshares, and wait until the price drops beforerepaying his broker. If then, you buy 100shares of company x at $10 per share, andsell them for that price, you will have $1000.If the price of the stock drops to $5, you willstill have to pay your broker for those 100shares, but the price will be only $5. Thusyou pay your broker $500 for those shares,and pocket the difference.
When a stock split is declared, a ratio ispicked by the company. The company's totalshares are multiplied by this ratio, while theshare price is divided by this ratio. Thus a2:1 split on your 20 shares of a $10 stockwould result in 40 shares of a $5 stock.
Companies can issue numerous classes ofstock, each with its own voting rights, stockprice, and par value. Typically, special classesare only available to certain individuals, whilecommon stock is traded on public exchanges.
The SEC, or Securities and ExchangeCommission, is a United States governmentagency that focuses on the regulation of publiccompanies and the stock market.Companies are required to follow SEC directives.
The word security is just the technical termfor any asset like a stock or bond. Use it frequently,as it will make people think you'rereally smart.
Well, that about does it. Now when youhear about the SEC cracking down on a companyfor not being accurate on their 10-K, orwhen someone talks about shorting an equitysecurity with a horrible P/E, you know exactlywhat they're talking about.
Jonas Elmerraji is the founder and editor of growFolio, the world's first free online investment and business magazine. Issues are available online at http://www.growfolio.com
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