Investing Glossary

The ratio of a stock's price to its earnings per share. A P/E of 20 means you're paying $20 for every $1 of annual earnings. Lower P/E may indicate undervaluation, but context matters — growth companies typically trade at higher P/E ratios.

The ratio of a stock's price to its book value (total assets minus liabilities) per share. A P/B below 1.0 means the stock trades below the value of its net assets, which may signal deep value or fundamental problems.

A company's net income divided by its number of outstanding shares. EPS is the foundation for the P/E ratio and one of the most-watched metrics in investing.

Net income divided by shareholder equity. Measures how efficiently a company generates profits from shareholders' investment. Warren Buffett looks for companies with consistently high ROE (above 15%).

Net income divided by total assets. Shows how efficiently a company uses its total asset base to generate profits. Useful for comparing companies in capital-intensive industries.

Operating profit after tax divided by invested capital (equity + debt - cash). Often considered the best measure of a company's true profitability because it accounts for all capital sources.

Cash from operations minus capital expenditures. Represents the actual cash a business generates after maintaining its asset base. Often more reliable than reported earnings because it's harder to manipulate.

Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for operating cash flow that removes the effects of financing decisions and accounting methods. Commonly used in valuation multiples (EV/EBITDA).

Revenue minus cost of goods sold, divided by revenue. Shows how much profit a company makes on each dollar of sales before operating expenses. Higher margins generally indicate pricing power.

Operating income divided by revenue. Measures profitability from core operations, excluding interest and taxes. Shows how well management controls costs.

Total debt divided by shareholder equity. Measures financial leverage. A ratio below 0.5 is generally conservative; above 2.0 may signal excessive leverage risk.

Current assets divided by current liabilities. A quick measure of short-term liquidity. Above 1.5 is generally healthy; below 1.0 may indicate potential cash flow problems.

A company's total assets minus total liabilities, also called shareholder equity. Represents the theoretical value shareholders would receive if the company were liquidated.

The estimated true worth of a business based on its fundamentals — future cash flows, assets, and earning power. The cornerstone of value investing: buy when price is below intrinsic value.

The difference between a stock's intrinsic value and its market price. Benjamin Graham's central concept: always buy at a significant discount to protect against errors in your analysis.

A valuation method that estimates intrinsic value by projecting future free cash flows and discounting them back to present value. The gold standard of fundamental valuation used by professional analysts.

Annual dividends per share divided by the stock price. Represents the income return on your investment. A sustainable dividend yield above 3% with growing dividends is often attractive for income investors.

The percentage of earnings paid out as dividends. A payout ratio below 60% is generally sustainable; above 80% may indicate the dividend could be cut if earnings decline.

A sustained period of rising stock prices, typically defined as a 20%+ gain from recent lows. Bull markets are driven by economic growth, low interest rates, and investor optimism.

A sustained decline of 20% or more from recent highs. Bear markets are typically caused by economic recession, rising interest rates, or financial crises. Historically, they last 9-16 months on average.

The total market value of a company's outstanding shares (price × shares outstanding). Used to classify companies: micro-cap (<$300M), small-cap ($300M-$2B), mid-cap ($2B-$10B), large-cap ($10B-$200B), mega-cap ($200B+).

The number of shares traded in a given period. High volume on a price move suggests conviction; low volume moves are less reliable. Average daily volume indicates a stock's liquidity.

How easily an asset can be bought or sold without significantly affecting its price. Large-cap stocks are highly liquid; micro-cap stocks may have very limited liquidity.

The degree to which a stock's price fluctuates over time. Higher volatility means bigger price swings. Value investors view volatility as opportunity, not risk.

A measure of a stock's volatility relative to the overall market. A beta of 1.0 means the stock moves with the market; above 1.0 means more volatile; below 1.0 means less volatile.

The excess return of an investment relative to a benchmark index. Positive alpha means the investment outperformed; negative alpha means it underperformed. Generating consistent alpha is extremely difficult.

A fund that tracks a market index (like the S&P 500) by holding all or a representative sample of its constituent stocks. Index funds offer broad diversification at very low cost.

A fund that trades on an exchange like a stock. ETFs can track indices, sectors, commodities, or other assets. They combine the diversification of mutual funds with the trading flexibility of stocks.

When a private company first sells shares to the public. IPOs can be exciting but are often overpriced — academic research shows IPOs underperform the market on average over 3-5 years.

When a company divides its existing shares into multiple shares, reducing the price per share while keeping total market cap the same. A 2:1 split doubles your shares but halves the price.

When a company repurchases its own shares from the market. Good buybacks (when stock is undervalued) increase per-share value for remaining shareholders; bad buybacks (at high prices) destroy value.

Buying stocks trading below their estimated intrinsic value. Pioneered by Benjamin Graham and refined by Warren Buffett. The core principle is margin of safety — buying at a discount to protect against errors.

Buying stocks of companies expected to grow revenue and earnings faster than the market average, even if current valuations seem expensive. Growth investors focus on future potential rather than current metrics.

A blend of value and growth investing that seeks companies with above-average growth but reasonable valuations. Popularized by Peter Lynch, who used the PEG ratio (P/E divided by growth rate) as a key metric.

Building a portfolio of stocks that pay regular, growing dividends. The strategy focuses on generating passive income and benefits from the compounding effect of reinvested dividends.

A passive strategy of buying index funds that track broad market indices like the S&P 500. Championed by Jack Bogle (Vanguard founder), index investing beats most active managers over long periods due to low costs.

Investing a fixed dollar amount at regular intervals regardless of market conditions. DCA reduces the risk of buying at market highs and removes emotion from investment timing decisions.

A movement focused on aggressive saving and investing to achieve financial independence and the option to retire decades before the traditional age of 65. Typically requires a 50-70% savings rate.

The process of dividing your portfolio among different asset classes (stocks, bonds, real estate, cash) based on your risk tolerance, time horizon, and financial goals.

Spreading investments across different assets, sectors, and geographies to reduce risk. The idea is that not all investments will decline at the same time.

Periodically adjusting your portfolio back to your target asset allocation. If stocks outperform and grow to 80% of your portfolio (target 70%), you'd sell some stocks and buy bonds.

Deliberately going against prevailing market sentiment — buying when others are fearful and selling when others are greedy. Requires emotional discipline and conviction in your analysis.

The difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask). Tighter spreads indicate more liquid markets; wider spreads increase transaction costs.

An order to buy or sell immediately at the best available price. Guarantees execution but not price — in fast-moving or illiquid markets, you may get a worse price than expected.

An order to buy or sell at a specific price or better. Guarantees price but not execution — the order only fills if the market reaches your limit price.

An order that automatically sells a stock if it drops to a specified price. Used to limit downside risk, though gap-downs can cause execution at prices below the stop level.

Borrowing shares and selling them, hoping to buy them back at a lower price for a profit. Extremely risky because losses are theoretically unlimited (a stock can rise infinitely but can only fall to zero).

Contracts that give the right (but not obligation) to buy or sell a stock at a specified price before a specified date. Calls give the right to buy; puts give the right to sell.

Borrowing money from your broker to buy securities. Margin amplifies both gains and losses. A 50% margin means you're borrowing half the purchase price — a 20% decline wipes out 40% of your equity.

Using borrowed money or financial instruments to amplify investment returns. While leverage can increase gains, it also magnifies losses and can lead to forced selling during downturns.

The rate at which the general level of prices for goods and services rises over time, eroding purchasing power. Moderate inflation (2-3%) is normal; high inflation (above 5%) can hurt stock and bond returns.

The rate at which banks lend to each other overnight, set by the Federal Reserve. This rate influences all other interest rates and has a powerful effect on stock valuations — lower rates generally support higher stock prices.

The total value of goods and services produced by a country in a given period. GDP growth indicates a healthy economy; two consecutive quarters of negative GDP growth technically defines a recession.

A significant decline in economic activity lasting more than a few months, typically visible in GDP, employment, and industrial production. Recessions historically occur every 5-10 years and often (but not always) cause bear markets.

A graph showing interest rates across different bond maturities. A normal yield curve slopes upward (longer-term bonds yield more). An inverted yield curve (short-term yields exceed long-term) has historically predicted recessions.

The most widely followed measure of inflation, tracking the average change in prices paid by consumers for a basket of goods and services. The Fed targets 2% annual CPI growth.