Equity (Stock) Terminologies and Math

Equity/Stock

Ownership in a company through shares

Dividends

Excess cash that a company pays shareholders based on the shares owned.

Common Stocks

Ownership of a company that are eligible to receive dividends. Common stock holders are able to vote on corporate matters and have the last claim on assets in the event of liquidation.

Preferred Stocks

Receive promised dividends that are not available to common stocks (has preference over common stocks). Preferred stock holders generally do not have voting rights but have a higher claim on assets during liquidation.

Convertibles

Allows the investor to convert a bond into equity.

Market Capitalization (market cap)

The total market value of a company's outstanding shares of stock, calculated by multiplying the stock price by the total number of shares.

Large Cap

Top 100 companies in terms of market cap (often considered the most stable and less risky).

Mid Cap

101-250 ranking per market cap (typically higher growth rates than large cap)

Small Cap

All remaining companies not in top 250 (typically higher volatility in stock price)

Cyclical Stocks

These stocks move in sync with the economy:  stock price drops when the economy declines and vice versa.

Defensive Stocks

These stocks prices don’t react strongly to economic swings - less volatile stock price movements.

Income Stocks

These stocks offer consistent dividends - typically companies that have strong finances and steady dividends.

Growth Stocks

These stocks don’t offer dividends but instead reinvest their profits into the new growth opportunities.  These stocks usually have more volatility in price and are riskier than income stocks.

Blue-Chip Stocks

These chips are typically large cap (well established), defensive (lower price volatility), and income (stable profits/dividends) stocks.

Earnings Per Share (EPS)

net income / total outstanding common stock shares

P/E ratio

Price of stock / Earnings per share (EPS)

What is P/E ratio used for?

Used to compare one company to another within the same industry as an indicator of growth prospect expectations. Investors usually use this to spot undervalued or overvalued stocks.

Bull Market

Characterized by rising stock prices, strong economic conditions (low unemployment), and high investor confidence and optimism.

Bear Market

Characterized by falling stock prices, weak economic conditions (high unemployment), and low investor confidence and optimism

Market Order

A directive to buy or sell immediately at the prevailing market price.

Limit Order

A directive to buy or sell a specific price (which may not be executed if the market price does not hit the specified price).

Exchange

A marketplace where stocks, bonds and other financial securities are bought and sold.

New York Stock Exchange (NYSE)

Biggest stock exchange. To be listed on NYSE, a company must have 400 shareholders and 1.1 million shares

National Association of Securities Dealers Automated Quotation System (NASDAQ)

Second largest stock exchange, largest electronic screen-based market (technology) that offers lower listing fees than NYSE

American Stock Exchange

Focuses mostly on exchange traded funds (ETFs)

Chicago Mercantile Exchange (CME) Group

Exchange for commodities and derivatives made up of Chicago Board of Trade and Chicago Mercantile Exchange

Chicago Board of Trade

An exchange merged with the original CME in 2007 focused in agricultural commodities and interest rate products

Chicago Mercantile Exchange

Exchange focused in equity products, foreign exchange, and other products

Stock Indices

Basket of stocks (usually the most significant ones) to represent the overall health of a market

S&P 500

Tracks the performance of 500 of the largest publicly traded companies in the US.

Dow Jones Industrial Average

Tracks the performance of 30 of the largest companies in the US.

Nasdaq Composite

Tracks the performance of all stocks listed on the Nasdaq stock exchange.

Initial Public Offering (IPO)

The process of offering shares of a private company to the public on a stock exchange

Mutual Fund

An investment fund that holds a diverse portfolio of securities.

Open-ended Mutual Fund

Shares are traded at the end of the day, and the price is based on the net asset value (NAV) of the fund, calculated at the end of the day.

Closed-ended Mutual Fund

Fixed number of shares issued through an IPO and traded on a stock exchange (similar to stocks)

Exchange Traded Fund (ETF)

An investment fund that holds a basket of securities (stocks or bonds) that can be bought and sold on an exchange like an individual stock. Prices can change throughout the day similar to stocks. An investor buys shares of ETF which owns the shares of the underlying basket of securities.

Top 3 ETF Providers

BlackRock under iShare name, Vanguard under Vanguard name, State Street under SPDR name

Index Fund

A mutual fund or ETF that replicates a basket of underlying investments (common index funds attempt to replicate the return of a particular index). Usually has lower fees than mutual funds. Index funds were popularized by John Bogle, the founder of Vanguard.

Commodities

Global markets that trade precious metals, energy, raw materials, and agricultural products.  Commodities typically do not meet the definition of a financial instrument as they do not have a claim or obligation.

Derivative Instruments

Financial instruments that derive their value from underlying asset, index, or reference rate.  These instructions are typically used to hedge risk, offer leverage (increase risk, but also return), and speculate future prices.

Call Option

Right to buy

Put Option

Right to sell

Futures

Standardized contracts traded on exchanges where the buyer is obligated to purchase and the seller is obligated to deliver/sell an asset at a predetermined price and date.

Forwards

Similar to futures except they are privately negotiated contracts; less liquid and carry higher counterparty risk than futures

Swaps

Agreements between two parties to exchange cash flows based on different financial instructions such as interest rates or currencies.