Basic Investing Terms

There are numerous internet sites that provide definitions of various investing terms. The table below provides the most common and basic terms that every investor should know. At the end of the table, there are references to other sites with more comprehensive list of investing terms.

Term Definition
Revenue Revenue is the total amount of money a company takes in before any expenses.

Income statement Income Statement is a document that records revenue and expenses to summarize a company's performances for a period of time usually quarterly or annually.

Net income Net Income, (sometimes referred to as "net profit", or simply "earnings") is the amount of profit left over after all expenses, including government taxes, have been subtracted.

Balance sheet A balance sheet, or statement of financial position, provides a snapshot of a company's assets and liabilities at a given point in time. It also shows shareholders' equity, the net value of the company, by taking the difference between the company's assets and liabilities.

Cash flow statement A Cash flow statement shows the change in a company's cash balance over a certain period.

Free cash flow Free cash flow is the cash a company produces from its operations less the cost of expanding its asset base. It is essentially the money that the company could return to shareholders if the company was to grow no further.

Dividend Dividends are payments made by a company to its shareholders. When a company earns a profit, that money can be put to two uses: it can either be re-invested in the business (called retained earnings), or it can be paid to the shareholders of the company as a dividend.

Dividend yield Dividend Yield is the percentage return a company pays out to its shareholders each year relative to its share price. Dividend yield is calculated as Annual Dividends per Share / Price per Share

Operating margin Operating margin is expressed as a percent of revenue and is the amount of profit you have for each $1 in sales after deducting all expenses other than interest and taxes.

Market capitalization Market capitalization, also called market cap, is the overall price of the company as measured by the price of all outstanding shares. It's calculated by multiplying the share price by the number of shares outstanding.

P/E ratio The P/E ratio is defined as the price per share of a stock divided by the earnings per share of the stock. The P/E ratio (or "PE") is probably the most common and widely used of valuation metrics. It is a quick way to look at the value of a stock. One way to view it is as how many years it would take for you to recover your investment principle from the earnings a company generates, assuming no change in those earnings.

Earnings per share Earnings per share is the company's total earnings or net income divided by its shares outstanding. This is reported either for one quarter or for an entire year (four quarters). It is usually abbreviated as "EPS".

Compound interest Compound interest is, in a nutshell, interest upon interest. That is, when an interest payment is added to the principal and then the whole thing (principal + interest) earns interest.

Stock split A stock split simply involves a company altering the number of its shares outstanding and proportionally adjusting the share price to compensate. A stock split in no way affects the intrinsic value or past performance of your investment.

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