# "Investing Fundamentals" Terms

The 52-week high refers to the highest market price of a given security over a 52-week (one year) period.
If you observe the market prices for a given security during a specific period of time, ther...

The 52-week low refers to the lowest market price of a security over a 52-week (one year) time span.
If you observe the market prices for a given security during a specific period of time, there wil...

Also called the residual income model, the abnormal earnings valuation model is a method for predicting stock prices.
In this theory, every stock is worth the company's book value per share if inves...

Abnormal rate of return, also known as "alpha" or "excess return," is the fraction of a security's or portfolio's return not explained by the rate of return of the market. Rather, it is produced from...

Abnormal return, also known as "alpha" or "excess return," is the fraction of a security's or portfolio's return not explained by the rate of return of the market. Instead, it is a result of the expe...

The accounting rate of return (ARR) is a simple estimate of a project's or investment's profitability that subtracts money invested from returns without regard to interest accrual or applicable taxes...

The acid-test ratio is a measure of how well a company can meet its short-term financial liabilities.
Also known as the quick ratio, the acid-test ratio can be calculated as follows:
Acid-Test Ra...

An acquisition is the purchase of all or a portion of a corporate asset or target company.
An acquisition is commonly mistaken with a merger – which occurs when the purchaser and the target both c...

An acquisition premium is the difference between the actual price paid to acquire a company and the estimated real value of the acquired company before the acquisition. It is often recorded as "goodw...

An activity ratio is a metric which determines the ability of a company to convert its balance sheet accounts into revenue.
Activity ratios assess how effectively a company is able to generate reven...

Actual return refers to the nominal return made on an investment during a given period.
The actual return on an investment is the actual amount of money gained or lost during a period of time (e.g...

Alpha, also known as "excess return" or "abnormal rate of return," is one of the most widely used measures of risk-adjusted performance. The number shows how much better or worse a fund performed rel...

Altman's Z-score is a financial statistic that is used to measure the probability of bankruptcy.
Altman's Z-score is used to determine the likelihood of a company going bankrupt. A company's Altman'...

Arbitrage pricing theory (APT) is a well-known method of estimating the price of an asset. The theory assumes an asset's return is dependent on various macroeconomic, market and security-specific fac...

The arithmetic mean is the average of a series of numbers.
The formula for calculating the arithmetic mean is:
Arithmetic mean = (X1 + X2 + X3 + ... +XN) / N
where X1, X2, X3, XN are the values of t...

The arithmetic mean average is the average of a series of numbers.
The formula for calculating the arithmetic mean average is:
Arithmetic mean average = (X1 + X2 + X3 + ... +XN) / N
where X1, X2, X3...

The ask size is the number of shares that a seller is willing to sell at a given price. For instance, a seller is willing to part with 3,000 of their shares at a specific asking price.
People who o...

The asset turnover ratio is a measure of how efficiently a company's assets generate revenue. It measures the number of dollars of revenue generated by one dollar of the company's assets.
The form...

A Baby Berkshire is a Class B share of Berkshire Hathaway (NYSE: BRK-B). The term also refers to the act of creating a portfolio of the same companies that Berkshire Hathaway invests in and then buyi...

Banks use the back-end ratio to determine whether a mortgage applicant is a good credit risk. The formula for the back-end ratio, generally, is: Back-End Ratio = (All monthly loan payments + reques...

"Bagel land" is a slang term that describes where investments go when their prices approach zero.
For example, let's assume that Company XYZ's stock falls from $10 per share to $0.50 per share due t...

A bank efficiency ratio is a measure of a bank's overhead as a percentage of its revenue.
The formula varies, but the most common one is:
Bank Efficiency Ratio = Expenses* / Revenue
*not including i...

Beta is a measure of a stock's volatility relative to the overall market. It is most often calculated using a stock's movements relative to the S&P 500 Index over the trailing 12-month period.
A...

A company's book-to-bill ratio measures the company's number of outstanding orders as compared with the number of shipped or fulfilled orders. The book-to-bill ratio is a valuable tool for measuring ...

CAGR stands for compound annual growth rate. A widely-used measure of growth, CAGR is used to evaluate anything that can fluctuate in value (such as assets and investments). It represents the consi...

Callable common stock is an equity stake in a company where either the issuer or a third party has the right, but not the obligation, to repurchase the stock at a specific price after a certain date....

Issuers of callable preferred stock have the right (but not the obligation) to repurchase the stock at a specific price after a certain date.
For example, consider Company XYZ preferred stock issu...

The capital asset pricing model (CAPM) is used to calculate the required rate of return for any risky asset. Your required rate of return is the increase in value you should expect to see based on th...

The cash flow return on investment (CFROI) measures a company's cash return on invested assets. It is determined by dividing a company's gross cash flow by its gross investment.
A company invests in...

Cash flow to capital expenditures is the ratio of a company's cash from operations to its capital expenditures for acquiring or upgrading assets, such as buildings or equipment, required to improve o...

A cash market is a market for securities or commodities in which the goods are sold for cash and delivered immediately. In some cases, "immediate" means one month or less. For example, foreign exchan...

The financial world often refers to compound interest as magic. Compound interest can be thought of as “interest building on interest” which adds to your principal. In layman’s terms, it’s a f...

A consensus estimate is a shared prediction of a company's quarterly or annual earnings per share.
Securities analysts are tasked with the job of making earnings estimates for the companies they cov...

A conversion ratio is the number of one security given for another security (usually a convertible security).
For example, convertible preferred stock is preferred stock that holders can exchange fo...

Convertible preferred stock is preferred stock that holders can exchange for common stock at a set price after a certain date.
Let's assume you purchase 100 shares of XYZ Company convertible preferr...

Cost of equity refers to a shareholder's required rate of return on an equity investment. It is the rate of return that could have been earned by putting the same money into a different investment wi...

A coverage ratio divides a company's income or cash flow by a certain expense in order to determine financial solvency.
Some of the most common coverage ratios include the fixed-charge coverage rati...

The current ratio is the ratio of current assets to current liabilities.
The current ratio is a commonly used liquidity ratio that measures a company's ability to pay its current liabilities with it...

A debt ratio is simply a company's total debt divided by its total assets.
Debt Ratio = Total Debt / Total Assets
For example, if Company XYZ had $10 million of debt on its balance sheet and $15 ...

A company's debt service coverage ratio (DSCR) refers to its ability to meet periodic obligations on outstanding liabilities with respect to its net operating revenue.
The debt service coverage rat...

The debt-to-equity ratio (D/E) is an essential formula in corporate finance. It’s used to measure leverage (or the amount of debt a company has) compared to its shareholder equity.
All companies h...

Dilution is a reduction in proportional ownership caused when a company issues additional shares.
Let's assume you own 100,000 shares of XYZ Company. The company has 1,000,000 shares outstanding, me...

Discounted cash flow (DCF) analysis is the process of calculating the present value of an investment's future cash flows in order to arrive at a current fair value estimate for the investment.
The f...

The dividend discount model (DDM) is a method for assessing the present value of a stock based on the growth rate of dividends.
The dividend discount model (DDM) seeks to estimate the current value ...

Investment advisors frequently suggest dollar-cost averaging in their articles and publications, but what does it mean? Why do many advisors believe it is the best strategy?
Dollar-cost averaging (DC...

DuPont analysis examines the return on equity (ROE) analyzing profit margin, total asset turnover, and financial leverage. It was created by the DuPont Corporation in the 1920s.
The DuPont analysis ...

The DuPont identity breaks down return on equity (ROE) into its components -- profit margin, total asset turnover, and financial leverage -- so that each one can be examined in depth.
The DuPont ide...

An earnings estimate is an estimate of a company's future quarterly or annual profits by a market analyst.
Earnings estimates are created by analysts who work for investment research companies.
The ...

The earnings yield is the ratio of a company's last twelve months (LTM) of earnings per share (EPS) to its stock price. It is the inverse of the price-to-earnings (P/E) ratio.
The formula for earnin...

An efficiency ratio is a measure of a bank's overhead as a percentage of its revenue.
The formula varies, but the most common one is:
Efficiency Ratio = Expenses* / Revenue
*not including interest e...

The equity multiplier is a ratio used to determine the financial leverage of a company.
The formula for the equity multiplier is:
Equity Multiplier = Total Assets / Total Stockholders' Equity
If c...

The equity risk premium is the difference between the rate of return of a risk-free investment and the geometric mean return of an individual stock over the same time period. Since all investments...

Event risk is the risk of a negative impact on a company's financial position as a result of an unexpected event like a natural disaster, industrial accident or hostile takeover.
Occasionally compan...

Fair value is an estimate of a security's worth on the open market. There is no one way to calculate the fair value for a security, but calculations typically take into account future growth rates, ...

A falling knife describes a stock which has experienced a rapid decline in value in a short amount of time. Just like a falling knife, you don't want to catch these companies on their way down.
[For ...

Free asset ratio refers to the net assets of an insurance company as a percentage of its total assets. Free assets are the same as net assets, that is, assets that are not obligated to insurance po...

The goodwill-to-assets ratio describes the percentage of a firm's total assets that can be explained by the amount of goodwill on the balance sheet.
The formula for the goodwill-to-assets ratio is...

The Gordon Growth Model (GGM) is a version of the dividend discount model (DDM). It is used to calculate the intrinsic value of a stock based on the net present value (NPV) of its future dividends.
...

Gross profit margin is a measure of a company’s profitability, calculated as the gross profit as a percentage of revenue. Gross profit is the amount remaining after deducting the cost of goods sold...

The interest coverage ratio, also known as times interest earned, is a measure of how well a company can meet its interest-payment obligations.
The interest coverage ratio is also referred to as t...

Intrinsic value has two primary connotations in the finance world. In the options-trading world, the term refers to the difference between the option's strike price and the market value of the underl...

Investing is the strategic purchase or sale of assets in order to produce income or capital gains.
Investing can involve the purchase or sale of stocks, bonds, mutual funds, interest-bearing account...

An investment is an asset that is intended to produce income or capital gains.
Investing is the act of using currently-held money to buy assets in the hopes of appreciation. Investing is a way to b...

Joint probability is the likelihood of more than one event occurring at the same time.
he joint probability for two events, A and B, is expressed mathematically as P(A,B). Joint probability is calcu...

A key ratio is any financial ratio that is especially important, prevalent, or necessary in analyzing a company's performance in relation to other companies, the industry or the market.
Key ratios c...

Generally speaking, large cap companies have at least $8 billion of market capitalization.
Market capitalization refers to the value of a company's outstanding shares. The formula for market capital...

Margin of safety is the amount by which a company's shares are trading below their intrinsic value.
The formula for margin of safety is:
Margin of Safety = 1 - Stock's Current Price / Stock's Intrin...

The market conversion price is the price at which a convertible security is exchanged for common stock.
Convertible securities (for example, convertible bonds and convertible preferred stocks) allow...

A multiple is a relative valuation metric used to estimate the value of a stock.
Let's look at an example to illustrate the concept.
Assume that Big Store's stock is trading at $14 and the company's...

Net interest margin is the ratio of net interest income to invested assets.
Net interest margin is also known as "net yield on interest-earning assets."
The formula for net interest margin is:
N...

One key indicator of a business success is net operating profit after tax (NOPAT). Considered an “apples-to-apples” measure, NOPAT helps investors determine how well one company is performing ver...

Net profits interest is the proportion of net profits paid out to a particular investor, according to his or her percentage stake in the company.
Net profits interest is most often used in referen...

The null hypothesis (H0) suggests that there is no statistical significance in a given set of observations. This implies that any kind of deviation or importance you see in a data set is only the res...

The operating cash flow ratio is cash from operating activities as a percentage of current liabilities in a given period.
Operating cash flow ratio is generally calculated using the following for...

The operating expense ratio (OER) is equal to a company's operating expenses divided by its revenues. The measure is very common in real estate analysis, whereby analysts are measuring the costs to o...

Operating leverage is the ratio of a company's fixed costs to its variable costs.
Here is the formula for operating leverage:
Operating Leverage = [Quantity x (Price - Variable Cost per Unit)] / Q...

Operating ratio is the ratio of operating expenses to net sales. Operating ratio is also a common term in the insurance business, where it refers to an issuer's profit from underwriting and investmen...

Opportunity cost is the return on an investment/opportunity you missed out on, compared to the return on the investment that you chose. To determine what was lost (or gained), opportunity cost may be...

Orphan stocks is a colloquial term for stocks that analysts and investors seem to disregard.
Orphan stocks are stocks that investors and analysts tend to ignore. Also known as wallflowers, orphan st...

Paper loss refers to the amount that would be lost on a security if it were sold.
Also called a book loss, a paper loss is the not-yet-realized amount lost on a security based on the spread between ...

Paper profit refers to the amount you would gain on a security if it were sold.
Also called book profit, paper profit is the not-yet-realized amount gained on a security based on the spread between ...

A passive loss is a financial loss from rental property, limited partnership or other activities in which the investor is not materially involved.
When an investor buys shares in a rental property,...

The payout ratio, also known as the dividend payout ratio, is the percentage of a company's earnings paid out to investors as cash dividends.
At the end of a specified period, companies will somet...

Premium to net asset value (NAV) refers to a situation where shares of a closed-end stock fund are trading at a price higher than the fund's net asset value per share. For example, a fund could be de...

Present value (PV) measures the current value of an amount of money – or a stream of cash flows – that is expected in the future. This value will differ from the cash flows’ nominal value, sinc...

Price efficiency simply refers to whether the price of a security incorporates all the available information about the security.
For example, assume that Company XYZ is a public company trading at $...

A price multiple is a ratio that combines some measure of a company's performance and the company's stock price.
In general, a price multiple ratio looks like this: Price multiple = Price / Perform...

The price-earnings relative is a comparison of a stock's P/E ratio to the cumulative P/E ratio of a related market index.
The price-earnings relative considers the P/E of a given stock relative to t...

The price-to-book ratio measures a company's market price in relation to its book value. The ratio denotes how much equity investors are paying for each dollar in net assets.
Book value, usually loca...

The price-to-cash flow ratio (P/CF) is used to evaluate the price of a company's stock as compared to the amount of cash flow it generates.
The formula for the price-to-cash flow ratio is:
Price-to-...

The price-to-earnings ratio (P/E) is a valuation method used to compare a company’s current share price to its per-share earnings.
The market value per share is the current trading price for one s...

The price-to-free cash flow ratio (P/FCF) is a valuation method used to compare a company’s current share price to its per-share free cash flow.
The formula for the price-to-free cash flow ratio i...

The price-to-innovation-adjusted earnings ratio is used to evaluate the price of a company's stock as compared to its earnings when adjusted for the amount the company spends on R&D.
The formula...

The price-to-research ratio is used to evaluate the price of a company's stock as compared to its ability to generate future profits from new products.
The formula for the price-to-research ratio is...

The price-to-sales ratio helps determine a stock’s relative valuation. The formula to calculate the P/S ratio is:
P/S Ratio = Price Per Share / Annual Net Sales Per Share
Let's assume Company XYZ ...

The price-to-tangible book value ratio measures a company's market price in relation to its tangible book value. The ratio denotes how much investors are paying for each dollar of physical assets.
T...

The price/earnings-to-growth and dividend yield ratio (PEGY) demonstrates how much the market is willing to pay for earnings growth and dividend yield. By incorporating dividend yield, the PEGY ratio...

The PEG ratio is a derivative of the P/E ratio that takes into account future growth in earnings.
The formula for the PEG ratio is:
PEG Ratio = Price-to-Earnings (P/E) Ratio / Annual Earnings Per ...

Pro rata refers to the proportional distribution of a sum across a number of units.
A Latin term meaning "in proportion," pro rata is a method of allocating fractional amounts of something equally a...

The put/call ratio is a popular sentiment indicator based upon the trading volumes of put options compared to call options. The ratio attempts to gauge the prevailing level of bullishness or bearish...

A quartile is one of four equal parts.
For example, if we were to look at all of the closing prices for Company XYZ stock for every day in the last year, the top 25% of those prices would represent ...

The quick ratio (also known as the acid-test ratio) offers insight into how well a company can meet its short-term obligations. As in chemistry, an acid test provides fast results, showing how quick...

A quintile is one of five equal parts.
For example, if we were to look at all of the closing prices for Company XYZ stock for every day in the last year, the top 20% of those prices would represent ...

Ratio analysis is the exercise of calculating various pieces of financial data in relation to one another.
There are dozens of financial ratios out there. In fact, there are too many to list here in...

Also called the abnormal earnings valuation model, the residual income model is a method for predicting stock prices.
In this theory, every stock is worth the company's book value per share if inves...

A retracement is a temporary reversal in the movement of a stock's price.
Let's say the stock of company XYZ increased 20% over the course of a day. Anyone who has ever looked at a trend line know...

Return on invested capital (ROIC) is a profitability ratio. It measures the return that an investment generates for those who have provided capital, i.e. bondholders and stockholders. ROIC tells us...

Return on total capital is a profitability ratio. It is a measure of the return an investment generates for those who contribute capital, i.e. bondholders and stockholders. Return on total capital ...

Revenue per available room, or RevPAR for short, is a ratio commonly used to measure financial performance in the hospitality industry. The metric, which is a function of both room rates and occupanc...

The term sales per share represents the portion of a company's revenue that is allocated to each share of common stock. The figure can be calculated simply by dividing sales earned in a given reporti...

The sales to cash flow ratio measures the level of a company's sales against its total cash flow.
Expressed on a per-share basis, the sales to cash flow ratio is calculated by dividing a company's s...

The Sharpe ratio is measure of risk. It is named after Stanford professor and Nobel laureate William F. Sharpe.
The Sharpe ratio is a ratio of return versus risk. The formula is:(Rp-Rf)/ ?p
where:
R...

A short interest ratio is the number of shares or units of a security that have been sold short and not yet covered or repurchased. It is typically expressed as a percentage of the average daily trad...

Short interest theory suggests that a high level of short interest indicates an imminent rise in the price of a stock.
Short interest theory posits that a high number of outstanding short positions ...

In investing, a short sale occurs when an investor sells a stock they don’t own yet. They borrow the stock from a broker-dealer and ideally sell it at a high price. Later, they have an obligation t...

The speculation index measures the volume of trades on the American Stock Exchange (AMEX) versus trade volume on the New York Stock Exchange (NYSE).
The AMEX tends to list riskier stocks issued by s...

Standard deviation is a measure of how much an investment's returns can vary from its average return. It is a measure of volatility and, in turn, risk. Finding out the standard deviation as a measure...

The street expectation is the commonly-held estimate of a company's future performance by market analysts.
Market analysts consider economic conditions, consumer sentiment, research and development,...

Survivorship bias occurs when companies that no longer exist -- due to bankruptcy, acquisition or any other reason -- are not accounted for when calculating investment returns.
For example, suppos...

Tail risk is the risk that an investment will change by more than three standard deviations from its mean.
Standard deviation is a measure of how much an investment's returns can vary from its avera...

Tax gain/loss harvesting is a strategy for reducing taxes.
John Doe made two major investment transactions this year:
1. Sold 1,000 shares of Company XYZ at $25 a share (originally purchased five ye...

The Texas ratio was developed by RBC Capital Markets' banking analyst Gerard Cassidy as a way to predict bank failures during the state's 1980s recession. The ratio is still widely-used throughout th...

Timeliness is a ranking criterion of stocks based on the likely price performance of a stock over a short time period – usually less than 12 months.
Stocks are ranked on a 1 - 5 scale, with one th...

A torpedo stock is a stock that rapidly loses market value and follows a downward trend without any sign of recovery.
Torpedo stocks are named for the manner in which a ship descends, sinking into t...

Toxic waste is an idiomatic expression referring to high-risk assets with reputedly low liquidity.
Named in reference to the hazardous byproducts of industrial processes, toxic waste frequently desc...

A company's stock "trades below cash" if its market capitalization is less than the difference between its cash holdings and its liabilities.
Trading below cash can be illustrated by a company which...

The term underperform refers to an analyst recommendation that a stock is expected to do slightly worse than the overall market return.
Analysts regularly evaluate and project stock performance. A...

Undervalued describes a security for which the market price is considered too low for its fundamentals. Some metrics used to evaluate whether a security is undervalued are P/E ratio, growth potential...

An unrealized gain represents the increase in the value of an asset that has not been sold. This concept is often called paper profit.
Let's assume you own 100 shares of Company XYZ that you purcha...

An unrealized loss is a paper loss from holding an asset that has lost value but has not yet been sold.
Unrealized losses are losses in asset value, but not cash value. For example, an investor ma...

Wallpaper is slang for a security with minimal to no market value.
Once a security becomes worthless, its hard documentation (for example, its stock certificate) no longer has any practical function...

A company's working ratio measures its ability to cover its annual expenses.
A company's working ratio indicates whether or not it is capable of at least breaking even by dividing its annual expense...