Stock Market Glossary - Market Terms
Book Value. The current value of an asset on a company’s balance sheet according to its accounting conventions. The shareholders’ equity on a company’s balance sheet is the book value for that entire company. Many times when investors refer to book value, they actually mean book value per share, which is the shareholder’s equity (or book value) divided by the number of shares outstanding. As the book value is theoretically what a company could be sold for (liquidation value), this book value number is sometimes used as a rough guide as to whether or not the shares are undervalued.
Capital Appreciation. One of the two components of total return, capital appreciation is how much the underlying value of a security has increased. If you bought a stock at $10 and it has risen to $13, you have enjoyed a 30% return from the appreciation of the original capital you invested. Dividend yield is the other component of total return.
Dividend Yield. A ratio of a company’s annual cash dividends divided by its current stock price expressed in the form of a%age. To get the expected annual cash dividend payment, take the next expected quarterly dividend payment and multiply that by four. For instance, if a $10 stock is expected to pay a 25 cent quarterly dividend next quarter, you just multiple 25 cents by 4 to get $1 and then divide this by $10 to get a dividend yield of 10%.
Dividend Yield = Ann. Div.
Price
= $0.25* 4
$10
= 0.10 = 10%
Many newspapers and online quote services will include dividend yield as one of the variables. If you are uncertain whether the current quoted dividend yield reflects a recent increase in the dividend a company may have made, you can call the company and ask them what the dividend per share they expect to pay next quarter will be.
Earnings Per Share (EPS). Earnings, also known as net income or net profit, is the money that is left over after a company pays all of its bills. For many investors, earnings are the most important factor in analyzing a company. To allow for apples-to-apples comparisons, those who look at earnings use earnings per share (EPS).
Market Capitalization. The current market value of all of a company’s shares outstanding. To calculate market value, you take the number of shares outstanding and multiply them by the current price of each share. You can find information about shares outstanding from the company’s last quarterly report or any online quote service.
For instance, if a company has 10 million shares outstanding and trades at $13 per share, the market capitalization is $130 million.
Market Cap.
= Shares Outstanding* Share Price
=10 million * $13 = $130 million
Price/Earnings Ratio (P/E). Earnings per share alone mean absolutely nothing. In order to get a sense of how expensive or cheap a stock is, you have to look at those earnings relative to the stock price. To do this, most investors employ the price/earnings (P/E) ratio. The P/E ratio takes the stock price and divides it by the last four quarters’ worth of earnings. If XYZ Corp. is currently trading at $15 a share with $1.00 of earnings per share (EPS), it would have a P/E of 15.
Real Estate Investment Trusts (REITs): REITs are a specialized form of equity that allows investors to own a portion of a group of real estate properties, although many investors think of them as an alternative to bonds. REITs have become increasingly popular over the past decade. Granted special tax status by the Internal Revenue Service, REITs pay out at least 95% of their earnings in the form of dividends to shareholders, often offering healthy dividend yields of the same magnitude as bonds. Even better, as REITs acquire more property and increase the value of the properties they own, the value of the equity increases as well, providing a nice total return. For more information on REITs, check the website for the National Association of REITS (NAREIT).
Relative Strength : Relative strength, also known as relative price strength, rates the performance of a stock versus the performance of the market as a whole over a given time period. The rating system gives a numerical grade - just like the ones Mr. Spicer used to scrawl in bright red ink on your algebra quizzes - to the performance of a stock over a given period, normally the past 12 months. Thus, relative strength is a momentum indicator.
The most popular form of relative strength ratings are those published in Investor’s Business Daily, which go from 1 to 99. A relative strength of 95, for example, indicates a wonderful stock, one that has outperformed 95% of all other U.S. stocks over the past year. However, given that relative strength is only a mathematical relationship between the stock’s performance and an index’s performance, many others have created their own relative strength measures.
Revenues. Also known as sales, revenues are how much the company has sold over a given period. Annual revenues would be the sales for a given year, whereas quarterly revenues would be the sales for a given quarter.
Sales. Also known as revenues, sales are literally how much the company has sold over a given period. Annual sales would be the sales for a given year, whereas quarterly sales would be the sales for a given quarter.
Utilities. A business that provides a service essential to almost everyone is called a utility. These businesses are almost always under some form of regulation by the government and normally have a monopoly position in a certain region. Electric companies, natural gas providers, and local phone companies are often referred to as utilities.
Volume. The number of shares traded on a given day is known as the volume. Many investors look at volume over a month or a year to come up with average daily volume. Market watchers will say a company has traded at a certain number of times the average daily volume, giving the investor a sense of how active the stock was on a certain day relative to previous days. When major news is announced, a stock can trade as much as 20 or 30 times its average daily volume, particularly if the average daily volume is very low.
The average number of shares traded gives an investor an idea of a company’s liquidity - how easy it is to buy and sell a particular stock. Highly liquid stocks trade easily in large batches with low transaction costs. Illiquid stocks trade infrequently and large sales often cause the price to rise or fall dramatically. Illiquid stocks on the Nasdaq also tend to carry the largest spreads, the difference between the buying price and the selling price.
