Investment Club Education Series: Investing Terms | Part 4

 Lauren Wilson

July 31, 2019

Build Your Vocabulary with These Common Investment Terms - Part 4

When beginning to invest, you will likely encounter new terms, strategies, and ways of thinking that may make your research seem daunting. There is no reason to be intimidated by investing and by learning a few key basics, you’ll quickly be able to ‘speak the lingo’ and participate in investment discussions.

In our first Investment Club Education series, we are sharing common investment terms to help you build your investing vocabulary.

In Part 4 we share some types of financial statements and valuations that can be useful for evaluating potential investments. Have you used these before? 

Annual report: An annual report is a required publication for public corporations in the US. Annually they must produce an annual report to describe their operations and financial positions to their shareholders. Often, the annual report includes both a narrative which shares activities of the past years, accompanied by pictures and graphics, with the final part of the report including detailed financial and operational information and statements. An annual report is designed to be friendly and easily understood by investors.

10-K reports: A 10-K report is a second required publication that US public corporations must produce. This report is produced in a very generic format, as dictated by the Securities and Exchange Commission (SEC).  Unlike the annual report, its purpose is not to be easily understood by investors, and can be very lengthy. It provides details that may not be included in the Annual Report and expands into the industry and marketplace as a whole.

Balance sheet: A balance sheet is a financial statement reporting a company’s assets, liabilities and shareholder’s equity at one specific point of time. This snapshot shows what a company owns, owes, and the amount invested by shareholders. This provides the information for calculating rates of return and evaluating a company's capital structure.

Income statement: Income statement, also known as the profit and loss statement, or statement of revenue and expense is a financial statement that shares a company's revenues and expenses during a particular period.  An income statement provides insights into a company’s operations and how efficiently its management is working, while enables a comparison of performance to industry peers.

Cash flow statement: A cash flow statement is a financial statement that provides aggregated data of all cash inflows and cash outflows, categorized into three sections: operations, investment, and financing, for a certain period.  The sum of these three categories is called net cash flow.

Book value: Book value is the value of a company, based on its books. The equation is Book value of a company = Total assets − Total liabilities. Book value has some limitations, namely that it is only reported quarterly or annually and it is only after the companies reporting that an investor would know how the book value changed.  

Market capitalization: Market capitalization, also known as market capitalization, bases the value of the company on the stock market. The market capitalization equation is Market cap of a company = Current market price (per share) ∗ Total number of outstanding shares.

Market value: Market value is often used synonymously with market capitalization; however, the true market value is more complicated than just the simple equation of market capitalization. True market value would need to take into consideration other metrics and factors such as bonds, debt and interest payments, taxes and long-term growth potential. Two companies with the same market capitalization will have a different market value due to these factors.

Enterprise value: Enterprise value (EV) is a comprehensive measure of a company's value. value. To calculate EV you consider both the market capitalization of a company but also their short-term and long-term debt and any cash on the company's balance sheet. The equation for Enterprise value is Enterprise value = Market capitalization + Total debt - cash.

 

Want to learn more investing terms? We've got you covered. View all of our Investment Club Education Series: Investing Terms here.

 

Ready to try out your new vocabulary? Start your own investment club with Voleo.

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