Investing Terms: Commonly used for Company’s Fundamental Analysis

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Investing terms are terms and phrases that are commonly used in the investment industry to describe various concepts, actions, and events related to investing in financial assets.

Investing Terms Must know before Investment

investing terms
Investing terms

Asset: An asset is any resource that has economic value, such as stocks, bonds, real estate, or cash.

Capital: Capital refers to the money or other resources that a company or individual has available for investment.

Diversification: Diversification is the practice of spreading investments across a variety of assets in order to reduce risk.

Earnings: Earnings refer to the profits generated by a company from its business operations.

Risk: Risk is the potential for loss or negative consequences associated with an investment.

Return: Return is the profit or loss that an investor realizes from an investment.

Yield: Yield is the annual return on an investment, expressed as a percentage of the investment’s cost.

Some Other Investing terms widely used

Corporate Governance

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community.

The goal of corporate governance is to ensure that a company is managed in an accountable, transparent, and responsible manner. It helps to protect the interests of shareholders, while also taking into account the needs of other stakeholders.

Corporate governance structures and practices vary from country to country and from company to company. However, there are some general principles that are commonly followed, such as:

Separation of ownership and control: In many companies, the people who own the company (the shareholders) are not the same people who run the company (the management). Corporate governance systems aim to ensure that there is a clear separation of these roles, so that the interests of the shareholders are protected.

Board of directors: The board of directors is responsible for overseeing the management of a company. It represents the interests of the shareholders and is responsible for making key decisions about the company’s strategy and operations.

Disclosure and transparency: Companies are expected to disclose information about their operations and financial performance in a timely and transparent manner. This helps shareholders and other stakeholders to make informed decisions about the company.

Responsibility and accountability: Companies are expected to be accountable for their actions and to take responsibility for the impact of their operations on stakeholders.

Equity Share

An equity share, also known as a common share or a common stock, represents a type of ownership in a company. When you own equity shares in a company, you are a shareholder and have a claim on a portion of the company’s assets and profits.

Equity shares typically entitle their owners to participate in the company’s decision-making processes, such as electing the board of directors and voting on major corporate actions. They also entitle the owners to receive dividends, which are payments made by the company to its shareholders out of its profits.

The value of an equity share is determined by the market, and can fluctuate based on a variety of factors, including the company’s financial performance, market conditions, and investor sentiment. As a shareholder, you stand to benefit if the value of the company’s shares increases, but you also bear the risk of loss if the value of the shares decreases.

Face Value of Share

The face value of a share, also known as the par value or nominal value, is the value assigned to a share of stock by the issuing company. It is the minimum amount that the company is willing to sell the share for and is usually stated in the company’s articles of association.

The face value of a share has no direct relationship to the market value of the share, which is determined by supply and demand in the stock market. The market value of a share can be higher or lower than its face value, depending on a variety of factors, including the company’s financial performance, market conditions, and investor sentiment.

The face value of a share is typically a small amount, such as  1 or 10, and is used for accounting purposes. It does not represent the intrinsic value of the share or the amount that shareholders can expect to receive in dividends.

What is EBITA

EBITA stands for Earnings Before Interest, Taxes, and Amortization. It is a financial measure that represents a company’s operating profit, or the amount of profit it generates from its normal business operations before taking into account interest, taxes, and amortization.

EBITA is calculated by adding a company’s earnings before interest and taxes (EBIT) to its amortization expenses. It is a useful measure of a company’s financial performance because it excludes non-operating items, such as interest expenses and taxes, which can vary significantly from one period to another.

EBITA is often used to compare the operating performance of different companies or to assess the potential value of a company. It can also be used to evaluate the effectiveness of a company’s management team in maximizing profits from its core operations.

Free float Market Capitalization

Free float market capitalization is a measure of the size of a company’s stock market float, or the portion of its outstanding shares that are available for trading by the general public. It is calculated by multiplying the company’s free float stock price by the number of free float shares outstanding.

Free float market capitalization is often used as a benchmark for index inclusion, as it reflects the market value of a company’s shares that are actually available for trading and can be more representative of the company’s true size and value.

To calculate free float market capitalization, you need to know the number of free float shares outstanding and the current market price of the company’s stock. You can typically find this information on financial websites or in the company’s financial statements.

What is Bonus Share

Bonus shares, also known as stock dividends, are additional shares of a company’s stock that are distributed to its shareholders, usually free of charge. They are typically issued in proportion to the number of shares that a shareholder already owns, so that a shareholder with 100 shares would receive an additional 100 bonus shares, for example.

Bonus shares are issued by a company as a way to return value to its shareholders, typically when the company has excess profits or when it wants to increase its shareholder base. They can also be used as a way to reward shareholders for their loyalty and to encourage them to hold onto their shares.

When a company issues bonus shares, the value of each individual share may decrease, as the total number of outstanding shares has increased. However, shareholders may still benefit from the issuance of bonus shares if the overall value of their holding in the company increases.

What is Pledging of Shares

Pledging of shares refers to the practice of using shares of stock as collateral for a loan or other type of debt. When an individual or entity pledges shares, they are essentially borrowing money and using the shares as security for the loan. If the borrower is unable to make the required payments, the lender may have the right to sell the pledged shares to recoup their losses.

Pledging shares can be a way for individuals or companies to raise capital or to meet short-term financial needs. However, it also carries some risks, as the value of the pledged shares may fluctuate, which could impact the borrower’s ability to repay the loan.

In some cases, companies may pledge shares as collateral for loans or other financial obligations, such as when they issue bonds. In other cases, individuals may pledge shares that they own as collateral for personal loans or other purposes.

What is EPS of a Company

EPS stands for Earnings Per Share, which is a financial measure used to evaluate a company’s profitability. It represents the amount of a company’s profit that is allocated to each outstanding share of its common stock.

EPS is calculated by dividing a company’s net income by the number of its outstanding common shares. For example, if a company has net income of 1 million rupees and has 1 million outstanding common shares, its EPS would be 1 rupees.

EPS is an important financial metric that is used by investors and analysts to assess a company’s profitability and to compare the performance of different companies. A higher EPS generally indicates that a company is more profitable and may be more attractive to investors.

EPS can be affected by a variety of factors, including a company’s financial performance, the number of outstanding shares, and changes in the market value of its shares. It is important to consider EPS in the context of a company’s other financial metrics and the overall economic environment.

What is Cash Flow Statement

A cash flow statement is a financial document that shows the inflow and outflow of cash for a company over a specific period of time, typically a quarter or a year. It is one of the key financial statements that a company produces, along with the balance sheet and the income statement.

The cash flow statement is divided into three main sections:

  • Operating activities: This section shows the cash generated from a company’s normal business operations, such as the sale of goods or services.
  • Investing activities: This section shows the cash that a company has invested in long-term assets, such as property, plant, and equipment.
  • Financing activities: This section shows the cash that a company has received from financing sources, such as borrowing or issuing new shares, as well as the cash it has used to pay dividends or repurchase shares.

The cash flow statement provides insight into a company’s financial health and its ability to generate cash from its operations, invest in its business, and meet its financial obligations. It can be useful for investors and analysts to assess a company’s financial performance and its potential for future growth.

What is CAGR

CAGR stands for Compound Annual Growth Rate, which is a measure of the annualized percentage growth rate of an investment over a specific period of time. It takes into account the compound effect of any gains or losses, so it provides a more accurate representation of an investment’s growth than the simple annualized return.

To calculate CAGR, you need to know the initial value of the investment, the final value of the investment, and the number of years over which the investment was held. The CAGR is then calculated using the following formula:

CAGR = (Ending Value / Beginning Value)^(1 / Number of Years) – 1

CAGR is expressed as a percentage and represents the average annual growth rate of the investment over the specified period. It is often used to compare the performance of different investments or to assess the potential growth of an investment over time.

CAGR can be a useful measure of an investment’s performance, but it is important to keep in mind that it is based on historical data and may not accurately predict future returns. It is always important to carefully consider the risks and potential returns of any investment before making a decision.

What is Buyback of Shares

Buyback of shares, also known as share repurchase, is the process by which a company buys back its own shares from the market. Companies may choose to buy back their shares for a variety of reasons, including to reduce the number of outstanding shares, to increase the value of remaining shares, or to return excess cash to shareholders.

When a company buys back its shares, it typically uses cash on hand or raises funds through debt or other financing arrangements. The shares are then retired, which reduces the total number of outstanding shares and increases the ownership stakes of remaining shareholders.

Buyback of shares can be a way for a company to increase the value of its shares and to signal to the market that it believes its shares are undervalued. It can also be a way for a company to return excess cash to shareholders, particularly if it does not have any other attractive investment opportunities.

Overall, buyback of shares can be a useful tool for companies to manage their capital structure and to return value to shareholders, but it is important to carefully consider the potential impacts and risks of such a decision.

What is Cost of Capital

The cost of capital is the required rate of return that a company must earn on its investments in order to meet the expectations of its investors and creditors. It reflects the cost of the funds that a company uses to finance its operations, including equity capital (such as common and preferred stock) and debt capital (such as loans and bonds).

The cost of capital is an important consideration for companies when making investment decisions, as it determines the minimum rate of return that the company must earn in order to generate a positive return on its investments. It is also used to evaluate the potential profitability of different investments and to compare the return on different sources of capital.

There are several factors that can impact a company’s cost of capital, including its creditworthiness, the level of risk associated with its investments, and the market conditions for raising capital.

What is P/E Ratio (Price to Earning Ratio)

The P/E ratio, also known as the price-to-earnings ratio, is a financial metric used to evaluate the valuation of a company’s stock. It is calculated by dividing the market price per share of a company’s stock by its earnings per share (EPS).

The P/E ratio is used to compare the relative value of different stocks and to assess the market’s expectations for a company’s future earnings growth. A high P/E ratio generally indicates that investors are expecting strong earnings growth in the future, while a low P/E ratio may suggest that the market expects slower earnings growth or that the stock is undervalued.

It is important to keep in mind that the P/E ratio is just one factor to consider when evaluating a stock and that it can be affected by a variety of factors, including the company’s industry, its financial performance, and market conditions. It is always important to do your own research and analysis before making any investment decisions.

What is Money Flow Index (MFI)

MFI stands for Money Flow Index, which is a technical analysis indicator that measures the buying and selling pressure in a market or a security. It is calculated using both the volume and price of a security, and is based on the premise that the volume of a security can be a useful indicator of the strength of the buying or selling pressure behind it.

The MFI is calculated using the following formula:

MFI = 100 – (100 / (1 + MF))

Where MF is the money flow ratio, which is calculated as the sum of the positive money flow (which is the volume multiplied by the price change for up periods) divided by the sum of the negative money flow (which is the volume multiplied by the price change for down periods).

The MFI is typically plotted on a chart with a range from 0 to 100, with high values indicating strong buying pressure and low values indicating strong selling pressure. It is often used in conjunction with other technical analysis indicators to identify potential trend changes and entry and exit points in a market or a security.

Finally, the MFI is a useful technical analysis tool that can help investors and traders assess the buying and selling pressure in a market or a security and make more informed investment decisions.

What is Dividends

Dividends are payments made by a company to its shareholders out of its profits or reserves. They are a way for companies to distribute some of their earnings to their shareholders and can be an important source of income for investors.

Dividends are typically paid in cash, but they can also be paid in the form of additional shares of stock (known as stock dividends) or other assets. Companies may choose to pay dividends on a regular basis, such as quarterly or annually, or on an irregular basis, depending on their financial performance and other factors.

The amount of a dividend is typically expressed as a per-share amount and is determined by the company’s board of directors. Dividends may be paid to shareholders of all classes of stock, or they may be paid only to holders of certain types of stock, such as common stock or preferred stock.

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