Investment Club Education Series: Investing Terms | Part 5

 Lauren Wilson

August 14, 2019

Build Your Vocabulary with These Common Investment Terms - Part 5

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 5 we share some types of financial securities and ratios. Get your calculators ready!

Derivative: A derivative is a financial security that's value is derived from an underlying asset or group of assets, referred to as a benchmark. The underlying assets are most commonly stocks, bonds, interest rates, currencies, and commodities.

Futures: Futures refers to futures contracts, which are a legal agreement to buy or sell an asset or commodity at a predetermined value, at a predetermined time in the future. Futures are bought and sold on the futures market, or futures exchange, which is larger than the commodities market, plays an important role in the financial system.

Forwards: Forwards, or forward contracts, are a type of derivative in which two parties agree to make a deal at a later date for a specific price. This can be a number of different assets such as commodities or currencies.  Forwards do not guarantee the best rate, but provide certainty for planning purposes and can help reduce risk. Forwards are unregulated, and trade over-the-counter. Due to a lack of transparency the size of the forwards market is unknown. 

Volatility: Volatility measures the magnitude of change in prices of a security. In general, the higher the volatility, the greater the risk and the reward. Understanding volatility is a good step when evaluating trade decisions.

Dividend yield: Dividend yield is a financial ratio that shows a company's annual dividend versus its share price and provides the dividend-only return of a stock investment. The calculation is dividend yield = annual dividend / share price and is represented by a percentage.  

Earnings per Share (EPS): Earnings per share is the amount of a company’s total profit allocated to each outstanding common stock. It is the portion of a company's net income that would be earned per share if all profits were paid to shareholders. It is used to determine the overall financial health of a company.

Price-to-earnings ratio (P/E): The price-to-earnings ratio (P/E) is one of the most common metrics used to determine stock valuation, comparing the companies market value of stock versus their earnings. It shows whether a company’s stock is overvalued (high P/E) or undervalued (low P/E) and can be used to compare across the industry or against benchmarks. The equation is P/E = Share Price / Earnings Per Share (EPS).

Expense Ratio (ER): The expense ratio (ER), also known as the management expense ratio (MER). It shows how much of a fund’s assets are used for administration and operating expenses as a form to compare the efficiency and how it maximizing it’s return to investors. The formula is ER = Total Fund Costs / Total Fund Assets.

Price/Earnings-to-Growth (PEG) Ratio: A PEG ratio calculates the relationship between the P/E ratio and a company’s earnings growth. This provides a more complete view that P/E alone as it overcomes a limitation of P/E, in that it doesn't show whether the P/E is appropriate based on the forecasted growth rate. The formula is PEG = P/E / EPS Growth (annual earnings per share growth).

 

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.

Disclaimer: If specific securities are mentioned they are for illustrative purposes only and such mention shall not be seen as a recommendation to buy and/or sell. None of the opinions expressed by Voleo or participating guests should be construed as investment advice. Securities offered through Voleo USA, Inc. Member of the Financial Industry Regulatory Authority (FINRA), Securities Investor Protection Corporation (SIPC). Security products are not FDIC insured, not bank guaranteed, and will fluctuate in value. We do not solicit, recommend, or offer investment advice. Voleo USA, Inc. is a wholly owned subsidiary of Voleo, Inc.