Learn Basic Stock Vocabulary - Top 10 Basic Words or Phrases to Know Before Investing Your Money

I know how hard it is to learn and understand those stock market jargon that appear almost every where in financial reports to business newspapers and keeps you guessing all day and night. There is no escaping from this terminologies and the only possible and simple solution is to learn them.

You may or may not be a complete beginner to stock markets, but you know that how frustrating it is when these financial report that gets in to your skin. Also, how arduous it is to decode and assess your investment.

In this list I am preparing the top ten basic words or phrases that every investor should know before investing in the stock market.

The list comprises of:

All definitions via investopedia.com dictionary.

1) Dividend

A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share).

Decoding the Jargon

Higher dividends - Better Stocks

2) Earnings Per Share (EPS)

The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability.

Calculation = Profit - Dividends / Number of Outstanding Shares

Decoding the Jargon

Higher earnings per share does not necessarily mean better share.

3) Price-to-Earnings ratio (P/E Ratio)

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculation : Market Value per Share / Earnings Per Share

Decoding the Jargon

Can definitely help in making an informed and better decision to consider stock option.

4) Stock Buyback

The repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Companies will buy back shares either to increase the value of shares still available (reducing supply), or to eliminate any threats by shareholders who may be looking for a controlling stake.

5) Return on Equity (RoE)

The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

Calculation

Return on Equity = Net Income/Shareholder's Equity

Decoding the Jargon

Can help in making a better stock option 

6) Stock Options

A privilege, sold by one party to another, that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed-upon price within a certain period or on a specific date.

7) Initial Public Offering (IPO)

The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded.

8) Limit Orders

An order placed with a brokerage to buy or sell a set number of shares at a specified price or better. Limit orders also allow an investor to limit the length of time an order can be outstanding before being canceled. 

9) Stop Loss

An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit an investor's loss on a security position. 

10) Compound Annual Growth Rate (CAGR)

The year-over-year growth rate of an investment over a specified period of time.

The compound annual growth rate is calculated by taking the nth root of the total percentage growth rate, where n is the number of years in the period being considered.