Beginning Investor - Investment Terms

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Beginning Investor - Investment Terms

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 frequently used 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.

Stock

Let's start with the absolute basics. The most common type of investment is in the form of stock. Stock is an equity security - that is, when you buy stock, you are purchasing a piece of that company. You are part owner, and therefore entitled to help select the people who 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 SEC filing that is required of public companies. The 10-K is a legal document, and is therefore much more difficult to read, however, it can provide much more information.

Capital Gains

The sell price minus the purchase price of stocks are referred to as capital gains.

Dividend

A dividend is a per share payment that a company has the option to declare. Essentially, dividends are a way for a company to share their profits with its owners, the shareholders. Public companies are not required to declare dividends.

EPS

The term EPS refers to a company's earnings per share for the fiscal year.

Equity

Equity is just a term to signify that a particular type of security grants you partial ownership of a company.

Liabilities

Liabilities are a company's debts of any kind.

Market Capitalization

The Market Capitalization, or Market Cap, is the total number of shares outstanding (held by investors) multiplied by the share price on any given day.

Mutual Fund

A Mutual Fund is an investment company whose sole business is to purchase stock in other companies, and turn a profit for their own customers. When you buy a share of a mutual fund, you're essentially buying into each and every company that that particular fund holds. Mutual funds are can be a good investment for those who are new to investing.

Net Quick Assets

A company's Net Quick Assets, or NQA are the sum of a company's liabilities subtracted from the sum of a company's assets.

P/E

The P/E is a company's ratio of their share price to their earnings for a particular fiscal year. This can be used as a good indicator of a company's financial health and buy prospects. A good P/E value varies by industry.

Par Value

Par Value is an arbitrary figure determined by a company at the issuance of a particular type of stock (i.e. it varies from class to class). Essentially, par value carries no real significance.

Share Price

Share Price is the price at which one share of a company's stock is selling.

Short

A short is a method of making money even when a stock's price drops. The way a short works is that an individual will get shares of a stock on margin (loan of shares from stock broker). This person will then sell these shares, and wait until the price drops before repaying his broker. If then, you buy 100 shares of company x at $10 per share, and sell them for that price, you will have $1000. If the price of the stock drops to $5, you will still have to pay your broker for those 100 shares, but the price will be only $5. Thus you pay your broker $500 for those shares, and pocket the difference.

Split

When a stock split is declared, a ratio is picked by the company. The company's total shares are multiplied by this ratio, while the share price is divided by this ratio. Thus a 2:1 split on your 20 shares of a $10 stock would result in 40 shares of a $5 stock.

Stock Classes

Companies can issue numerous classes of stock, each with its own voting rights, stock price, and par value. Typically, special classes are only available to certain individuals, while common stock is traded on public exchanges.

SEC

The SEC, or Securities and Exchange Commission, is a United States government agency that focuses on the regulation of public companies and the stock market. Companies are required to follow SEC directives.

Securities

The word security is just the technical term for any asset like a stock or bond. Use it frequently, as it will make people think you're really smart.

Well, that about does it. Now when you hear about the SEC cracking down on a company for not being accurate on their 10-K, or when someone talks about shorting an equity security with a horrible P/E, you know exactly what 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

In The News:

Yahoo! News: Top Stories

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AP - The reality that the nation is indeed in recession and that the downturn may well be prolonged sent Wall Street plunging Monday, hurtling the Dow Jones industrials down nearly 700 points and wiping out more than half of last week's big gains. All the major indicators fell more than 7 percent, with the Standard & Poor's 500 index down nearly 9 percent.

Obama announces Clinton, Gates for Cabinet (AP)

AP - President-elect Barack Obama picked a national security team headed by former campaign rival Hillary Rodham Clinton and Bush administration holdover Robert Gates on Monday, and said he wants to consult with military commanders before settling on a firm timetable to withdraw U.S. combat troops from Iraq.

It's official: U.S. has been in recession since Dec. '07 (AP)

AP - The U.S. economy has been in a recession since December 2007, the National Bureau of Economic Research said Monday. The NBER a private, nonprofit research organization said its group of academic economists who determine business cycles met and decided that the U.S. recession began last December.

India demands strong action from Pakistan (AP)

AP - India demanded Monday that Pakistan take "strong action" against those behind the deadly Mumbai attacks, and Washington pressured Islamabad to cooperate with the investigation.

Bush uses final 50 days in office to tout legacy (AP)

AP - President George W. Bush says history will judge him, but he is getting his own crack first. Bush is using his final 50 days in office to tout his legacy, hoping to leave a lasting impression of overshadowed progress. On Monday, World AIDS Day, Bush was heralded for his leadership in fighting the disease, a point that even his Democratic critics readily concede.

Parents: Slain anchorwoman was sexually assaulted (AP)

AP - The parents of the television anchorwoman who was beaten to death said Monday there is evidence their daughter also was sexually assaulted, and that she broke her hand fighting her attacker. Five days after a suspect was arrested in the Oct. 20 beating of KATV anchorwoman Anne Pressly, Guy and Patti Cannady said on NBC's "Today" that the family still has many questions about the killing.

Palin helps Ga. Republican on eve of Senate runoff (AP)

AP - Alaska Gov. Sarah Palin urged Georgia voters to back Sen. Saxby Chambliss in Tuesday's runoff in an election eve appeal that underscored her popularity within the Republican Party and the GOP's efforts to stave off erosion of its shrinking Senate numbers.

1 in 5 young adults has personality disorder (AP)

AP - Almost one in five young American adults has a personality disorder that interferes with everyday life, and even more abuse alcohol or drugs, researchers reported Monday in the most extensive study of its kind.

Man says God ordered him to ram vehicle at 100 mph (AP)

AP - A man who rammed his truck into a woman's vehicle on a highway early Friday told authorities he crashed into her while going more than 100 mph because God told him "she needed to be taken off the road."

Burress appears in court, has bail set at $100,000 (AP)

AP - Taken to court in handcuffs, Plaxico Burress posted $100,000 bail on weapons possession charges Monday as a frenzy grew around the case of the Giants star receiver who accidentally shot himself in a nightclub.

Obama names Clinton, Gates to lead foreign policy (Reuters)

Reuters - U.S. President-elect Barack Obama named former rival Hillary Clinton as secretary of state on Monday and said Robert Gates would remain defense secretary in a national security team charged with recasting America's leadership role in the world.

Stocks slide as economy, Bernanke raise fears (Reuters)

Reuters - Stocks tumbled on Monday as news pointing to the deepening economic slump around the world erased much of last week's sharp gains, with financial services companies and retailers among Wall Street's biggest casualties.

India demands Pakistan act decisively on Mumbai attack (Reuters)

Reuters - India demanded Pakistan take decisive action over deadly attacks in Mumbai it said were carried out by militants from its nuclear-armed rival, while the West urged cooperation to ease tension.

Bush calls flawed Iraq intelligence biggest regret (Reuters)

Reuters - President George W. Bush said the biggest regret of his presidency was flawed intelligence that Iraq had weapons of mass destruction and told ABC "World News" in an interview airing on Monday that he was unprepared for war when he took office.

U.S. in recession, Europe backs spending hikes (Reuters)

Reuters - The U.S. economy has been in a recession for a year, the nation's business cycle arbiter declared on Monday, while European leaders vowed to step up public spending to try to cushion a deepening downturn.

House to push $500 billion stimulus bill (Reuters)

Reuters - U.S. House of Representatives Speaker Nancy Pelosi met leading governors on Monday to discuss the size and shape of an economic stimulus package that one Democratic aide said was likely to cost around $500 billion.

Thai protesters consolidate hold on airport (Reuters)

Reuters - Thai protesters prepared to end their three-month occupation of the Prime Minister's office on Monday to consolidate their grip on the main airport ahead of a court verdict that could dissolve the elected government.

Alabama mayor arrested on corruption charges (Reuters)

Reuters - Federal authorities arrested the mayor of Birmingham, Alabama, on Monday in a corruption probe surrounding a massive sewer bond debt that has forced Jefferson County to the brink of bankruptcy.

Hawkish Obama names Clinton as top diplomat (AFP)

AFP - Barack Obama on Monday nominated Hillary Clinton to be his "tough," "smart" secretary of state as his former foe vowed to give her all to steer America through a storm of international crises.

Mumbai attacks: India demands Pakistan take 'strong action' (AFP)

AFP - India on Monday formally accused "elements" in Pakistan of being behind the devastating Islamic militant attacks in Mumbai and demanded that Islamabad take "strong action".

Beginning Investor - Investment Terms

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