To begin your learning in the stock market, you must first familiarize yourself with some of the fundamental terms used in stock market. If you go through any of the statistical data of a stock, you will come across many parameters all in numbers. Understanding how those numbers are obtained is your fundamental task. Just do not jump in to Fundamental, Analysis or Technical Analysis or using a tool before you familiarize yourself.
Here are some basic terms used in the stock market data:
Assets:
Item or property owned by the organization which has some value. It is based on the organization’s business.
Liabilities:
Debt, any type of borrowing, an entity arising out of past transactions/events. All these may require exhausting or using the assets in some way.
Debt:
There are two types of debt:
Short Term Debt: Lines of credit from a lending institution. It may also be a short-term corporate bonds, and accounts payable, Royalty payments amortized over time, or settlement payments from a lawsuit.
Long term debt: corporate bonds or other long-term loans.
Share Holder Equity:
It reflects what would be left if the company were liquidated and all of its liabilities paid off. It may be termed as Net Worth or Book Value.
Share Holder Equity = Assets + Liability
Revenue:
It is also called Income or Sales.
Shares Outstanding:
Shares held by all the stockholders including the shares that are with Institutional Investors and the organization’s insiders.
Earnings Per Share:
If you subtract a company’s expenses from revenues, and then divide that number by the shares outstanding, then the result would be the Earnings per Share (EPS). It gives you a fair idea of the net profit.
Price/Earnings Ratio (P/E):
It is obtained by dividing the price of the stock into the earnings per share over the last four quarters.
Price/Earnings to Growth (PEG):
It is obtained by dividing the current P/E ratio by the expected Earnings Per Share (EPS). It helps you to analyze if a stock is undervalued, overvalued, or fairly valued.
If PEG =1, fairly valued
If PEG > 1, over valued
If PEG < 1, under valued
Cash Flow Per Share:
It indicates the organization’s ability to earn cash. It is thus earnings plus depreciation, on a per share basis.
Cash Flow Per Share = (Operating Cash Flow – Preferred Dividends) / Common Shares Outstanding.
Market Capitalization:
It is calculated by multiplying the current stock price by the shares outstanding. This categorizes an organization as a Large, Mid, Small, or Micro Cap stock.
Note: Larger capitalization stocks trade more shares on a daily basis and are thus thought of as being more liquid.
Stock split:
An event where the company takes all of the shares outstanding. It then issues more shares to the owners to put more available shares outstanding onto the market.
Float:
It is calculated by subtracting the shares outstanding by the number of shares held by insiders. It gives you an idea on how many shares are available for sale in the stock market.
Debt/Equity Ratio:
It indicates the capitalization of the company. In short, it shows how much debt a company has as compared to its shares outstanding.
Note: A high debt/equity ratio usually means the company has borrowed heavily to finance its operations.
Return on Equity (ROE):
It is calculated by dividing earnings for a one-year period by the shareholder equity. This measurement gives investors a sense for management’s ability to effectively build cash from existing assets.
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