Glossary of Finance

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    Glossary of Finance

    • Price to Earning Ratio (P/E)

      The most popular ratio for investors. A valuation ratio of a company's current share price compared to its per-share earnings. Calculated as :

      Company Share Price
      Earning per Share (EPS)
    • Price to Book Ratio (P/B)

      Arguably, the most popular ratio for investors after P/E. A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share. Calculated as :

      Company Share Price
      Book Value per Share (BVPS)
    • Price to Sales Ratio (P/S)

      Price to sales is calculated by dividing a stock's current price by its revenue per share for the trailing 12 months. It is useful for valuing new companies that still in the infancy period that haven't derived net income yet. Calculated as :

      Company Share Price
      Sales per Share (SPS)
    • Price to Cashflow Ratio (P/S)

      A ratio used to compare a company's market value to its cash flow. It is calculated by dividing the company's market cap per share by the company's operating cash flow. Calculated as :

      Company Share Price
      Cashflow per Shares (CPS)
    • Earnings per Share (EPS)

      The portion of a company's profit allocated to each outstanding share of common stock. It is generally considered to be the single most important variable in determining a share's price.

    • Book Value Per Share (BVPS)

      It is used to calculate the per share value of a company based on its equity available to shareholders. It is also known as "equity per share". It is useful for some investors to determine the equity in a company relative to the market value of the company.

    • Discounted Cash Flow Valuation

      A valuation method that uses future free cash flow projections and discounts them (most often using the weighted average cost of capital) to arrive at a present value, which is used to evaluate the potential for investment. Most financial research reports by fundamental analysts use this approach for valuing companies. Calculated as :

    • Cost of Capital

      Cost of obtaining funds, through debt or equity, in order to finance an investment. It also includes the opportunity cost.

    • Weighted Average Cost of Capital (WACC)

      A calculation of a firm's cost of capital in which each category of capital (equity and debt) is proportionately weighted. It serves as a discount rate for discounted cash flow valuation method.

    • Dividend Rate

      How much dividend that a company gives back to its shareholder in a proportion to its net income.

    • Dividend Yield

      Shows how much a company pays out in dividends each year relative to its share price. Calculated as :

      Annual Dividend per Share
      Company share's price
    • Value investing

      The method of selecting stocks that trade for less than their intrinsic values. Value investors actively seek stocks of companies that they believe the market has undervalued. Warren Buffet, the richest investor on earth, is the proponent of this method of investing.

    • Momentum investing

      Momentum investing is an investment strategy that aims to capitalize on the continuance of existing trends in the market because of fundamental changes of a company or economy. The horizon of this method of investing is short to mid-term.

    • Contrarian investing

      Contrarian investing is an investment strategy that goes against market trends by buying assets that are performing poorly and then selling when the assets perform well.

    • Terminal growth

      An assumed constant growth of a company that is used in Discounted Cash Flow valuation method.

    • Systematic Risk

      The risk inherent to the entire market that cannot be diversified.

    • Diversification

      A risk management technique that mixes a wide variety of investments within a portfolio to lower the risk of investing.

      Company Share Price
      Earning per Shares (EPS)
    • Return on Equity

      The amount of net income returned as a percentage of shareholders equity. It is used as a measure of profitability.