Glossary · 119 terms

Investing terms, explained with real numbers.

Every entry follows the same three moves: The math (a worked example in dollars), The trap (where investors get burned), The move (what a stock picker does with it).

Valuation

CAPE Ratio (Shiller P/E)

Share price divided by ten years of inflation-adjusted average earnings, smoothing the business cycle out of the P/E ratio.

Discounted Cash Flow (DCF)

A valuation method that estimates a company's worth as the present value of all the cash it will generate for its owners.

Earnings Yield

Earnings per share divided by share price, the inverse of the P/E ratio, showing the profit a stock generates per dollar invested.

Enterprise Value (EV)

Market cap plus net debt: the full price of buying the whole business, debts included. The number acquirers actually pay.

EV/EBITDA

Enterprise value divided by EBITDA: a valuation multiple that includes debt, making leveraged companies comparable.

Forward P/E

Share price divided by next year's expected earnings. A valuation multiple built on a forecast, with all that implies.

Intrinsic Value

What a business is actually worth based on the cash it will generate, independent of its market price. The anchor of value investing.

Margin of Safety

The discount between price paid and estimated value. The buffer that absorbs bad luck and bad analysis alike.

Market Capitalization

The total market value of a company's shares: share price multiplied by shares outstanding. What the market says the equity is worth.

Multiple Expansion

The share of a stock's return that comes from investors paying a higher multiple for the same earnings rather than from earnings growth.

P/E Ratio

Price-to-earnings ratio: a stock's price divided by its earnings per share. The most common shorthand for how expensively a stock trades.

PEG Ratio

The P/E ratio divided by expected earnings growth. A quick way to judge whether a high multiple is justified by the growth behind it.

Price-to-Book (P/B)

Share price divided by book value per share: what the market pays for each dollar of net accounting assets.

Price-to-Sales (P/S)

Market capitalization divided by annual revenue. The multiple of last resort when profits do not exist yet.

Profitability

Asset Turnover

Revenue divided by total assets, measuring how many dollars of sales each dollar of assets produces in a year.

Capital Expenditures (Capex)

Money a company spends on physical assets like plants, equipment, and technology to maintain or grow the business.

Cash Conversion Cycle

The number of days a company's cash stays tied up between paying suppliers and collecting from customers.

Cash Flow Statement

The statement tracking actual cash moving through a business across operating, investing, and financing activities.

Earnings Per Share (EPS)

A company's net income divided by its share count. The profit attached to each individual share, and the denominator of the P/E ratio.

EBITDA

Earnings before interest, taxes, depreciation and amortization. A rough proxy for operating cash generation, and a famously flattering one.

Free Cash Flow

The cash a company generates from operations minus capital expenditures. A measure of what a business really earns in cash terms.

Gross Margin

Revenue minus direct production costs, as a share of revenue. The rawest measure of a product's pricing power.

Income Statement

The financial statement showing a company's revenue, costs, and profit over a quarter or year, from the top line down to net income.

Inventory Turnover

How many times a company sells and replaces its inventory in a period: cost of goods sold divided by average inventory.

Net Income

The profit left after every cost, interest and tax. The bottom line that feeds EPS, and an opinion shaped by accounting.

Normalized Earnings

An estimate of what a company earns in an average year across a full cycle, stripping out peaks, troughs, and one-time items.

Operating Cash Flow

Cash generated by a company's core business operations, before investment spending and financing moves.

Operating Leverage

The degree to which fixed costs make operating profit move faster than revenue, in both directions.

Operating Margin

Operating income as a percentage of revenue: what the core business keeps from each dollar of sales before interest and taxes.

Owner Earnings

The cash a shareholder could withdraw each year without harming the business, after non-cash items and maintenance capital spending.

Return on Equity (ROE)

Net income divided by shareholders' equity: how much profit a company generates on the capital its owners have in the business.

Return on Invested Capital (ROIC)

After-tax operating profit divided by all capital invested in the business, debt and equity alike. The cleanest measure of business quality.

Revenue

The total money a company brings in from selling goods and services before any costs are subtracted, also called the top line.

Stock-Based Compensation

Non-cash pay in shares or options that dilutes existing shareholders while flattering reported cash flow.

Balance sheet

Accounts Receivable

Money owed to a company by customers who bought on credit: revenue booked but not yet collected in cash.

Altman Z-Score

A five-ratio composite score that estimates the probability a company goes bankrupt within the next two years.

Balance Sheet

A snapshot of what a company owns, owes, and what remains for shareholders at a single date: assets, liabilities, and equity.

Book Value

The accounting value of a company: total assets minus total liabilities, also called shareholders' equity.

Current Ratio

Current assets divided by current liabilities, testing whether a company can cover the bills coming due within a year.

Debt-to-Equity Ratio

Total debt divided by shareholders' equity. The quickest read on how much of a company is financed by borrowing.

Goodwill

The premium paid above the fair value of a target's net assets in an acquisition, carried on the buyer's balance sheet.

Interest Coverage Ratio

Operating income divided by interest expense: how many times profits cover the debt bill. The distance between a company and trouble.

Net Debt

Total debt minus cash and equivalents, the true borrowing burden a buyer of the whole business would assume.

Quick Ratio

Current assets excluding inventory divided by current liabilities, a stricter test of short-term solvency.

Working Capital

Current assets minus current liabilities: the short-term cushion a company uses to fund day-to-day operations.

Dividends

Dividend Aristocrat

A Dividend Aristocrat is an S&P 500 company that has raised its dividend every year for at least 25 consecutive years.

Dividend Growth Rate

The dividend growth rate is the annualized pace at which a company increases its dividend per share, usually measured over 3, 5, or 10 years.

Dividend King

A Dividend King is a company that has raised its dividend for at least 50 consecutive years, twice the streak required of an aristocrat.

Dividend Trap

A dividend trap is a stock whose unusually high yield signals a coming dividend cut or business decline rather than a genuine income bargain.

Dividend Withholding Tax

Dividend withholding tax is the share of a dividend a country deducts at the source before the payment ever reaches a foreign investor's account.

Dividend Yield

A company's annual dividend per share divided by its share price. The cash return you collect just for holding the stock.

DRIP (Dividend Reinvestment Plan)

A DRIP automatically uses each dividend payment to buy more shares of the paying stock, often in fractional amounts and without commission.

Ex-Dividend Date

The ex-dividend date is the first trading day a stock trades without its upcoming dividend; buy on or after it and the payment goes to the seller.

Payment Date

The payment date is the day a declared dividend is actually deposited into shareholders' accounts, typically weeks after the ex-dividend date.

Payout Ratio

The share of a company's earnings paid out as dividends. The single best early-warning number for a dividend cut.

Qualified Dividend

A qualified dividend meets IRS holding period and issuer rules, so it is taxed at long-term capital gains rates instead of ordinary income rates.

Record Date

The record date is the day a company checks its shareholder register to determine who is entitled to receive a declared dividend.

Special Dividend

A special dividend is a one-time cash distribution outside a company's regular payout schedule, often after an asset sale or a cash buildup.

Yield on Cost

Yield on cost is a stock's current annual dividend divided by the price originally paid for the shares, not by today's market price.

Business quality

Circle of Competence

The set of businesses an investor can genuinely understand and value, and the discipline of staying inside its edges.

Economic Moat

A durable competitive advantage that protects a company's profits from competition. The difference between a good year and a good business.

Pricing Power

A company's ability to raise prices without losing customers, the most reliable single marker of a durable competitive advantage.

Market mechanics

10-K

The annual report public companies file with the SEC: audited financials, risk factors, and the full picture of the business.

10-Q

The quarterly report public companies file with the SEC: unaudited financials covering the most recent three months.

After-Hours Trading

Trading that takes place outside regular US market hours, with thinner volume, wider spreads, and prices that often reverse by the open.

Bear Market

A decline of 20 percent or more from a recent market peak. The standard label for a serious, broad downturn in stock prices.

Bid-Ask Spread

The gap between the highest price buyers will pay (bid) and the lowest price sellers will accept (ask), a hidden cost paid on every trade.

Blue Chip

A large, established company with a long record of profitability, financial strength, and often decades of dividend payments.

Bull Market

A sustained rise in stock prices, conventionally declared once a broad index climbs 20 percent from a significant low.

Circuit Breaker

An automatic trading halt triggered by sharp price declines, designed to pause markets and interrupt panic-driven selling cascades.

Dilution

The reduction in existing shareholders' ownership percentage and earnings per share when a company issues new shares.

Dow Jones Industrial Average

A price-weighted average of 30 large US companies, where a stock's share price, not its market value, sets its influence.

Federal Reserve

The central bank of the United States, tasked with maximum employment and stable prices, chiefly through its policy rate.

Free Float

The portion of a company's shares actually available for public trading, after excluding insider and strategic holdings.

Guidance

Management's public forecast of upcoming revenue or earnings, which anchors analyst estimates and market expectations.

Inflation

A sustained rise in the general price level, which steadily erodes the purchasing power of cash and fixed payments.

Interest Rates

The price of borrowed money, which flows through corporate costs and sets the discount rate on every future cash flow.

IPO (Initial Public Offering)

The first sale of a company's shares to the public, converting a private business into a listed one at a price set by its bankers.

Limit Order

An order to buy or sell a stock at a specified price or better, guaranteeing the price you get but not that the trade executes.

Liquidity

How easily a stock can be bought or sold in size without moving its price, measured by trading volume and the tightness of the spread.

Margin Trading

Buying stocks with money borrowed from a broker, which amplifies both gains and losses and adds interest costs and forced-sale risk.

Market Breadth

A measure of how many stocks participate in a market move, typically tracked through advancing versus declining issues.

Market Correction

A decline of at least 10 percent in a broad index from its recent peak, by long-standing market convention.

Market Maker

A firm that continuously quotes both a buy and a sell price in a stock, earning the spread in exchange for providing liquidity.

Market Order

An order to buy or sell a stock immediately at the best available price, guaranteeing execution but not the price you pay.

Nasdaq-100

An index of 100 large non-financial Nasdaq-listed companies, cap-weighted and heavily tilted toward technology and growth.

Recession

A broad, sustained decline in economic activity, with output, employment, income, and spending falling together.

Russell 2000

The standard US small cap benchmark, holding roughly the 2,000 smallest members of the Russell 3000, rebuilt each year.

S&P 500

A capitalization-weighted index of about 500 large US companies, where the biggest market values carry the most weight.

Settlement (T+1)

The process that finalizes a trade one business day after execution, when cash and shares legally change hands in US markets.

Share Buyback

A company repurchasing its own shares, shrinking the share count. Value creation or financial makeup, depending entirely on the price paid.

Short Selling

Borrowing shares to sell now and repurchase later, a bet on a falling price with limited upside and theoretically unlimited loss.

Slippage

The difference between the price an investor expects when placing an order and the price at which the trade actually executes.

Soft Landing

The outcome where central bank tightening cools inflation without triggering a recession, keeping growth and employment intact.

Stock Split

An increase in share count by a fixed ratio with a proportional price cut, leaving ownership stakes and market capitalization unchanged.

Stop-Loss Order

An order that becomes a market order to sell once a stock trades at or below a trigger price, intended to cap losses on a position.

Yield Curve

A plot of government bond yields across maturities; when short yields exceed long ones, the curve is inverted.

Portfolio

Alpha

The portion of an investment's return above what its market exposure explains, the standard measure of genuine stock-picking skill.

Asset Allocation

The division of a portfolio across asset classes such as stocks, bonds, and cash, setting its overall risk before any single security is picked.

Beta

A measure of how much a stock tends to move relative to the overall market, where 1.0 means it moves in line with the index.

Compound Interest

Growth earned on both the original capital and its accumulated gains. The mechanism that makes time the most powerful variable in investing.

Correlation

A measure from -1 to +1 of how two assets move relative to each other, and the raw material that makes diversification work.

Diversification

Spreading capital across holdings that do not move together, so no single failure can sink the portfolio.

Dollar-Cost Averaging

Investing a fixed dollar amount at regular intervals regardless of price, which automatically buys more shares when prices are low.

Drawdown

The decline from a portfolio's peak to its lowest point before recovery. The real-world measure of what an investor has to sit through.

FOMO (Fear of Missing Out)

The urge to buy an asset because its price is rising and others are visibly profiting, a pressure that peaks near market tops.

Loss Aversion

The behavioral tendency to feel losses about twice as strongly as equivalent gains, which drives panic selling and holding losers too long.

Rebalancing

Periodically resetting a portfolio to its target weights by trimming what has grown and adding to what has lagged.

Sharpe Ratio

A measure of return per unit of volatility: excess return above the risk-free rate divided by standard deviation.

Standard Deviation

A measure of how widely returns scatter around their average, used throughout finance as the standard proxy for volatility.

Survivorship Bias

The distortion created when failed funds and stocks drop out of the data, making surviving performance look better than the truth.

Time Horizon

The length of time before invested money must be spent, which determines how much risk a portfolio can afford to carry.

Value Investing

The discipline of buying securities for less than a conservative estimate of what the underlying business is worth.

Volatility

The size of a stock's price swings over time, usually expressed as an annualized standard deviation of returns.