30 essential stock market terms every investor should know. Simple definitions with real examples.
A valuation metric comparing a stock's price to its earnings per share. Shows how much investors pay for $1 of earnings. High P/E suggests growth expectations; low P/E may indicate value or concerns.
Total value of a company's outstanding shares. Stock price × shares outstanding. Large Cap (>$10B), Mid Cap ($2B-$10B), Small Cap (<$2B).
Stock price divided by book value per share. Compares market value to accounting value. P/B under 1.0 may indicate undervaluation; P/B over 3.0 suggests premium pricing.
Enterprise Value divided by EBITDA. Measures total company value relative to cash earnings. Useful for comparing companies with different debt levels. Lower is typically better.
P/E ratio divided by earnings growth rate. Accounts for growth when evaluating valuation. PEG under 1.0 suggests undervalued relative to growth; over 2.0 may be overvalued.
Company profit divided by shares outstanding. Shows how much each share "earned." Rising EPS often drives stock prices. Analysts track EPS growth quarter-over-quarter.
Total money earned from products/services before expenses. Also called "top line." Revenue growth indicates business expansion. First line of the income statement.
Revenue minus ALL expenses (costs, taxes, interest). Also called "bottom line" or "earnings." What shareholders actually earned. Can be negative even with high revenue.
Net income ÷ revenue as percentage. Shows how much profit kept from each dollar of sales. Higher = more efficient. Software: 20-40%, Grocery: 1-3%.
Net income ÷ shareholder equity. Measures efficiency of using shareholder money. ROE above 15% is strong. Higher is generally better but watch for excessive debt.
Operating cash flow minus capital expenditures. Actual cash available for dividends, buybacks, or debt reduction. Positive FCF crucial for survival.
Year-over-year change in total revenue. Shows how fast a company is expanding. Double-digit growth is strong. Negative growth may signal problems.
Year-over-year change in EPS or net income. More important than revenue growth for stock prices. Companies can grow revenue but shrink earnings.
Portion of profits paid to shareholders, usually quarterly. Dividend yield = annual dividend ÷ stock price. Mature companies pay dividends; growth companies reinvest.
Annual dividend per share divided by stock price. Shows income return on investment. High yield (>5%) may signal risk or undervaluation. S&P 500 average ~1.5%.
Total debt ÷ shareholder equity. Measures financial leverage. D/E under 1.0 = conservative. D/E over 2.0 = high leverage risk. Varies by industry.
Current assets ÷ current liabilities. Measures ability to pay short-term obligations. Above 1.5 is healthy. Below 1.0 may signal liquidity problems.
Measures stock volatility vs. the market. Beta 1.0 = moves with market. Beta 2.0 = twice as volatile. Beta 0.5 = half as volatile. Negative beta moves opposite.
How much a stock's price swings up and down. Measured by standard deviation. High volatility = more risk/reward. VIX index measures market-wide volatility.
Total assets minus total liabilities. What shareholders receive if company liquidated. Book value per share = book value ÷ shares outstanding.
Bull: Prices rising 20%+ from lows. Optimism. Bear: Prices falling 20%+ from highs. Pessimism. Most returns come from staying invested through both.
How easily an asset can be bought/sold without affecting price. High-volume stocks (Apple) are liquid. Penny stocks are illiquid—harder to sell at fair price.
Number of shares traded in a period. High volume confirms price moves. Low volume moves may reverse. Average volume helps identify unusual activity.
Betting a stock will fall. Borrow shares, sell them, buy back cheaper later. Very risky—losses unlimited if stock rises. "Short squeeze" forces shorts to cover.
Market order: Buy/sell immediately at current price. Limit order: Buy/sell only at specified price or better. Limit orders give control but may not execute.
Your collection of investments—stocks, bonds, ETFs. Portfolio allocation = how money is divided. Balanced portfolio includes different asset types.
"Don't put all eggs in one basket." Spread investments across stocks, sectors, asset types. When one drops, others may rise. Reduces overall portfolio risk.
Basket of stocks trading like one stock. Instant diversification at low cost. Can track indexes (SPY = S&P 500), sectors (XLF = Financials), or themes.
Benchmark measuring performance of a group of stocks. S&P 500 = 500 large US companies. Dow Jones = 30 blue-chips. NASDAQ = tech-heavy. Gauges "the market."
Large, stable, well-established companies with long track records. Apple, Microsoft, J&J. Lower risk, steady dividends, slower growth. Named after highest-value poker chips.
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