Investment Glossary for Savvy Investors
Welcome to your Wonder Stocks guide to investment terms. Understanding these definitions will help you navigate the world of finance with greater confidence. This is a free resource that will be expanded over time
Earnings-Based Terms
These terms help you understand how much profit a company is making.
EBIT (Earnings Before Interest and Taxes): This shows a company's profit from its core operations before accounting for interest payments and taxes. It's a good way to see how well the business itself is performing.
EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation): Similar to EBIT, but also adds back depreciation and amortisation. These are non-cash expenses, so EBITDA gives an even clearer picture of the cash a company is generating from its operations.
EPS (Earnings Per Share): This is a company's profit divided by the number of outstanding shares. It tells you how much profit the company made for each share of its stock.
FCFF (Free Cash Flow to Firm): The cash a company has left over after paying for its operating expenses and capital expenditures. This cash is available to all investors, both debt and equity holders.
FCFE (Free Cash Flow to Equity): The cash a company has left over after paying all its expenses and debt obligations. This cash is available only to the company's shareholders.
Net Income (NI): This is a company's total profit after all expenses, including taxes and interest, have been deducted. It's often referred to as "the bottom line."
Revenue: The total amount of money a company generates from its sales of goods or services before any expenses are deducted. Also known as "sales" or "turnover."
Gross Profit: The profit a company makes after subtracting the direct costs of making and selling its products or services. It does not include operating expenses like salaries or rent.
Operating Profit: The profit a company makes from its core business operations after deducting operating expenses (like salaries, rent, and marketing) but before deducting interest and taxes.
Valuation-Based Terms
These terms help you figure out how much a company or investment might be worth.
DCF (Discounted Cash Flow): A valuation method that estimates the value of an investment based on its expected future cash flows. These future cash flows are "discounted" back to their present value.
EV (Enterprise Value): The total value of a company, taking into account both its market capitalisation (value of its shares) and its debt, minus any cash. It's a more comprehensive measure of a company's value than just its market cap.
EV/EBITDA (Enterprise Value to EBITDA): A valuation multiple that compares a company's enterprise value to its EBITDA. It's often used to compare similar companies.
P/E Ratio (Price-to-Earnings Ratio): The share price of a company divided by its earnings per share. It tells you how much investors are willing to pay for each pound of a company's earnings. A high P/E might mean investors expect high future growth.
P/B Ratio (Price-to-Book Ratio): The share price of a company divided by its book value per share. Book value is the company's assets minus its liabilities. This ratio compares a company's market value to its accounting value.
Dividend Yield: The annual dividend payment per share divided by the share price. It shows the percentage return an investor receives in dividends relative to the share's price.
Market Capitalisation (Market Cap): The total value of a company's outstanding shares. It's calculated by multiplying the current share price by the total number of shares.
Returns-Based Terms
These terms help you understand the performance and profitability of your investments.
CAGR (Compound Annual Growth Rate): The average annual growth rate of an investment over a specified period longer than one year, assuming the profits are reinvested. It smooths out year-to-year fluctuations.
ROI (Return on Investment): A measure of the profitability of an investment. It's calculated by dividing the net profit of an investment by its cost, usually expressed as a percentage.
TR (Total Return): The total gain or loss on an investment over a period, including any income (like dividends) and capital gains (increase in value).
ROE (Return on Equity): Net income divided by shareholders' equity. It measures how much profit a company generates for each pound of shareholders' equity.
ROIC (Return on Invested Capital): A measure of how well a company is using all the capital (debt and equity) invested in it to generate profits.
IRR (Internal Rate of Return): A discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. It's used to evaluate the attractiveness of a project or investment.
Other Important Investment Terms
Asset: Something a company owns that has value, such as cash, property, or equipment.
Liability: Something a company owes to others, such as debts, loans, or accounts payable.
Equity: The value of a company's assets minus its liabilities. It represents the ownership stake in a company.
Diversification: Spreading your investments across different types of assets, industries, or geographic regions to reduce risk.
Volatility: The degree of variation of a trading price over time. High volatility means prices can change dramatically and quickly.
Liquidity: How easily an asset or security can be converted into cash without affecting its market price.
Bull Market: A period when stock prices are generally rising, and investor confidence is high.
Bear Market: A period when stock prices are generally falling, and investor confidence is low.
Dividend: A portion of a company's profits paid out to its shareholders.
Bond: A type of loan made by an investor to a borrower (typically a company or government). The borrower promises to pay back the principal amount plus interest over a set period.
Share: A unit of ownership in a company.
Portfolio: A collection of investments held by an individual or organisation.
FTSE 100: The Financial Times Stock Exchange 100 Index. It's an index of the 100 largest companies listed on the London Stock Exchange by market capitalisation.
ISA (Individual Savings Account): A tax-efficient savings and investment account available in the UK, allowing you to save or invest without paying income tax or capital gains tax on your returns.
SIPP (Self-Invested Personal Pension): A type of personal pension scheme in the UK that allows you to choose and manage your own investments.
