Some good advice from brokers and advisers for stock market investors is to know how to buy, which is very much more important than deciding on what to buy. Investing is risky business, but a knowledge of the market jargon can help. Here are some of the most used terms.

 

Price to Earnings Ratio (P/E)
The P/E or price-to-earnings ratio is used to compare a company’s share price with its per-share earnings. Let’s say the P/E of a company is 20, if it earned $5 a share and was recently traded at $50 a share. But when comparing it to a similar company with a P/E ratio of 10, investors are likely to assume the latter company is best, because it has the lower P/E. Investing Answers says this is a great, but limited vehicle for investors, permitting them a quick overall look at the company’s finances without have to refer to accounting records.

 

Beta (β)
Beta is the extent of the risk of a company’s assets in relation to the overall market or other benchmarks. Asset pricing theory says that Beta measures systematic risk, that cannot be easily solved. When a company’s Beta result turns out to be above 1 it is considered to have more risk, while that of a Beta that hits below 1 has less.

EPS or Earnings Per Share

To get a company’s EPS, its profit must be divided by the number of common shares that are outstanding. The NASDAQ provides an example of an EPS by choosing a company that’s made $2 million in one year and has 2 million shares of its own stock, whose EPS would turn out to be $1 per share. One year of EPS growth is determined by a percent change in the company’s share price. A high percent shows investors have increased expectations for the company’s future growth, and have bid up the stock’s price. The EPS is seen as the most important factor in the determination of a share’s price.
Futures

These are basically agreements made today to buy or sell a certain amount of a financial instrument at a predetermined price in the future. The NYSE says the price is agreed on by the buyer and seller and a contract is prepared. Then, the investor is required to make a small 10% deposit in order to control a much greater amount of the commodity.

 

Exchange Traded Funds (ETF)
Exchange Traded Funds or ETFs are a grouping of securities that investors can buy or sell via a broker. Fidelity reports that ETFs which began in 1993 have today over $1 trillion in investments and about 1,000 ETF products traded in U.S. exchanges. Offered in almost every investment, their appeal is on the rise, since they can be traded just like stocks, be bought and sold at any time of day, and the trading fees are low.

 

Buying on Margin
Buying on margin is the process of borrowing money from a broker to buy an investment. It can increase your portfolio rapidly if the right choices are made. Morningstar gives an example if an investor bought 100 shares of a company, with each share costing $10, the total price would be $1,000. If the share price rises to $12 after its purchase, the return on the 100 shares will be 20%, or $200. But if the shares were bought on margin, meaning $500 was borrowed from a broker, and the same stock rises to $12, the return would jump to 40%.

 

This article was written together with Donald Turner on behalf of Complex Search, a great source of financial information such as the Best Banks in 2013.

   

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Comment (1)

  • Richard_duggers
    Richard_duggers (February 20, 2014 at 7:36 pm) Newcomer

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