Need to Start from Square One?
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Know Your Taxes: Local, State, and Federal Explained
Know Your Taxes: Local, State, and Federal Explained Understanding taxes on different levels of government can be very challanging, as a college student I had to learn about them when…
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What is a Stock?
When you buy a stock, you’re purchasing a small piece of ownership in a company, called a “share.” Owning stock means you claim part of the company’s assets and earnings.…
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What Should a New Investor Invest in?
There are hundreds of investment tools, many are too complicated for new investors to comprehend let alone use. So what should a new investor invest in? This article will simply…
If you are someone with absolutely zero investing experience, this page is the place to be. Our “Square One” articles explain the most basic foundations of investing in simple and easy to read terms. These articles will aid in comprehension of other content on the website.
Square One Vocabulary
Learning these vocabulary terms is necessary to furthering your investment knowledge.
Basic Terminology (Beginner)
Bullish- The belief that the value of an investment will increase.
Bearish- The belief that the value of an investment will decrease.
Sector- A way to categorize companies based on the products or services they offer. (Ex: Technology, Healthcare, Energy)
Index- A statistical measure of the performance of a group of stocks that represents a portion of the market. (Ex: S&P 500, Dow Jones)
Market Cap- The total market value of the companies shares (Stock price times shares outstanding). Used to measure how large a company is.
“Beating the Market”- Achieving a higher rate of return than the S&P 500 for a specific time frame
Earnings Report- A set of financial documents released by companies quarter that detail profitability, financial health, and the managements plans for the company.
Volatility- How quickly the price of an investment fluctuates. High volatility= lots of fluctuations -> Low volatility= fewer fluctuations.
Blue Chip Stock- Large, reputable companies with a long history of reliability and financial stability.
Company Financials (Intermediate)
Income Statement- An income statement is like a report card for a company’s financial performance. It shows how much money the company made , how much it spent, and what’s left over over a specific period of time, like a quarter or a year.
Balance Sheet- A balance sheet is a snapshot of what a company owns , owes, and what’s left for the owners at a specific point in time. It’s like a financial picture of the company’s health.
Cash Flow Statement- The cash flow statement shows where the company’s money is coming from and where it’s going. It tracks the cash flowing in and out of the business, giving a clear view of how well the company is managing its cash to pay bills and invest in its future.
Revenue- Revenue is the total amount of money a company earns from selling its products or services. It’s like the company’s paycheck before any expenses are taken out.
Expenses- Expenses are the costs a company has to pay to keep the business running, like rent, salaries, and materials. It’s the money going out to cover the bills.
Net Profit- Net profit is what’s left after a company subtracts all its expenses from its revenue. It’s the actual profit the company keeps, also known as the bottom line.
Assets- Assets are everything a company owns that has value, like cash, equipment, and buildings. They’re like the tools the company uses to make money.
Liabilities- Liabilities are what a company owes to others, like loans, bills, and other debts. It’s the money the company has to pay back.
Free Cash Flow- Free cash flow is the money a company has left over after paying all its expenses and investing in its business. It’s the cash that can be used for things like paying dividends to shareholders or saving for future opportunities.
Dividends- Dividends are payments made by a company to its shareholders, usually from its profits. It’s like a reward for investing in the company. Not all companies pay dividends, but those that do often share a portion of their earnings with investors on a regular basis, such as quarterly.
Higher Level Investing Concepts (Advanced)
Price to Earnings Ratio (P/E)- A measure of how much investors are willing to pay for a company’s earnings. It’s calculated by dividing the current share price by the earnings per share (EPS). A high P/E ratio might suggest that investors expect future growth, while a low P/E could indicate the stock is undervalued or that the company’s earnings are declining.
PEG Ratio- (Price/Earnings to Growth)- The PEG ratio builds on the P/E ratio by adding the company’s growth rate into the mix. It’s calculated by dividing the P/E ratio by the annual earnings growth rate. This ratio helps investors understand whether a stock is overvalued or undervalued considering its expected growth. A lower PEG ratio may indicate that the stock is undervalued relative to its growth potential.
Price to Book Ratio- The Price to Book (P/B) ratio compares a company’s market value to its book value (the value of its assets minus liabilities). It’s calculated by dividing the stock price by the book value per share. A P/B ratio of less than 1 might suggest the stock is undervalued, meaning the market thinks the company’s assets are worth more than the current stock price.
Beta- Beta measures how much a stock’s price moves relative to the overall market. A beta of 1 means the stock moves with the market, a beta greater than 1 means the stock is more volatile than the market, and a beta less than 1 means it’s less volatile. Investors use beta to understand the potential risk of investing in a particular stock.
Leverage- Leverage refers to the use of borrowed money to increase the potential return of an investment. Companies often use leverage to finance operations, but it also increases the risk because it means taking on more debt. High leverage can lead to higher profits if things go well, but it can also lead to bigger losses if things go wrong.
Yield Curve- The yield curve is a graph that shows the relationship between interest rates and the maturity dates of debt securities, like bonds. Normally, the curve slopes upward, indicating that longer-term bonds have higher yields than shorter-term ones. An inverted yield curve, where short-term rates are higher than long-term rates, can signal a potential economic recession.
Junk Bonds- Junk bonds are bonds with a lower credit rating, meaning they have a higher risk of default. Because of this higher risk, they offer higher interest rates to attract investors. While they can provide higher returns, they also carry a greater chance that the bond issuer might not be able to repay the bond’s principal or interest.
Hedge Fund- A hedge fund is a type of investment fund that pools money from investors to invest in a variety of assets, often using complex strategies to generate high returns. Unlike mutual funds, hedge funds can invest in a wider range of assets, including stocks, bonds, commodities, and derivatives, and they often use techniques like short selling and leverage. Hedge funds are typically open only to accredited or wealthy investors due to their higher risk and less regulation.
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