Stock Valuation
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...
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...
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...
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...
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...
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...
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...
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 ...
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 equity risk premium is the difference between the rate of return of a risk-free investment and the rate of return of an individual stock over the same time period. Since all investments carry var...
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 ...
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...
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...
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...
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,...
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 describes how much a future sum of money is worth today.  The formula for present value is: PV = CF/(1+r)n Where: CF = cash flow in future period r = the periodic rate of return or in...
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 $...
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...
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...
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 ...
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...
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 y...
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...