Most of the times when people share company with investment professionals they are more likely to describe the conversations they’ve had using unflattering words like ‘torture’. A lot of it has to do with the highly technical language used comprising unfamiliar investment words that investment professionals like to throw around. In addition to that, I believe somewhere in your resolutions one of your goals this year is to grow your money. Here are a few basic investment terms you ought to know in case you chose to invest in the capital markets, and to make that occasional drink with investment professionals less torturous.
Portfolio
A portfolio is a collection of financial assets held by an investor or investment company. Depending on the risk tolerance, investment objective and future capital needs of an investor, a portfolio’s composition would vary to include stocks, bonds and funds or exclusively stocks of different companies drawn from various sectors and economies. Studies have shown that in the long run stocks normally outperform bonds thus making a portfolio composed of carefully selected equities worthwhile.
Market Capitalisation
The product of the number of the outstanding shares and the per-share price of a listed company is known as market capitalisation or market cap. For instance a company with 100 million shares on issue at say kes 5 per share has a market cap of kes 500 million. This figure normally provides investors with a perfect starting point when it comes to valuing a company for comparison in performance with other similar sized companies from the same industry.
Earnings per Share (EPS)
A broad perspective is normally required to make an informed decision on which stocks to buy, especially when approached with two stocks that are quite similar. One of the methods that can be used to assist in that regard, although not entirely, is computation of the Earnings per share (EPS) which is only vital for comparison purposes. The EPS is calculated by dividing the Net earnings of a company with the number of it’s outstanding shares.
EPS= Net earnings/outstanding shares
From the formula above we can be able to calculate the EPS of company X with net earnings of kes 1000 and 100 outstanding shares by taking 1000/100 to get an EPS of 10.
P/E Ratio
The P/E ratio compares a stock’s price to it’s earnings and is often considered one of the most reliable ratios when it comes to evaluating stock. This is because it can be used to identify undervalued or overvalued stocks and act as a important metric for evaluating general market optimism of a company’s future growth prospects.Probably a darling amongst value investors.
P/E= market value per share/EPS
Therefore using the EPS from our earlier example of company X which was 10 and assuming the market value of the share price is kes 50 we can calculate the P/E =50/10 which is 5.
Bull and Bear markets
A good number of positions in the stock market trades are normally driven by either optimism or pessimism. Different investors will react differently to different markets which are normally classified as either bull markets or bear markets. A bear market is simply one that exhibits a fall in securities prices, is pessimism driven and usually ends in investors making losses. But investors using strategies like short selling in bear markets can return profits. On the other hand a bull market is normally characterized by rising securities prices driven by optimism amongst investors.
Of course there are many more investment terms you ought to know but the above should be a good start.So next time they talk about bull and bear markets you can have an idea what it means for your portfolio.