There are lot of website available for providing free intraday stock tips, but majority are paid and those who have poor analysts take some meagre fees, The strange thing over internet and stock tips companies is that no-one bothers to educate an interested person even to know about basic of stock markets, which is in-fact much easier to grasp. This post is long and thus might require a revisit to understand it completely, but it's time well spent again.
When a person(who doesnot know much about Stocks) wants to invest in stocks and has paid a dedicated trader adviser/broker for providing tips about the stock to invest into, In such scenario it becomes nightmare for person to understand stock market terminology which these advisers speak over phone. My this post would clear clouds in your mind about such terminologies so that you understand correctly and 100 percent what your stock adviser describes you about merits/demerits about a stock. These terms are used in day-to-day life by the business channels/fund managers/stock brokers etc and is a kind of prerequisite to know for a person who wants to deal with stock markets in his/her life.
In this post first I would list down such terminology and then subsequently explain it individually.
Stock Market major terminologies
1) Market Capitalization
2) Earnings Per Share (EPS)
3) Profit Margins
4) Stock Price / EPS
5) Earning Yield (EPS/Stock-Price)
6) PE-Guidance
7) Price per book ratio
8) Price per sales ratio
9) Price per cash flow
10) Bottom line / Top line
11) Dividend yield
1) Market Capitalization - Market capitalization of a company is basically the value in rupees of the whole company in market or in other words it is 'market value of the company', Market capitalization is directly proportional to the size of the company i.e company with higher market capitalization would be bigger in size when compared to company with a less market capitalization value. It is rather easy to calculate the market value of any listed company by
multiplying the number of shares outstanding with the current share price of company, hence market capitalization changes daily as the current stock price change.
2) Earnings Per Share (EPS) - Earning per share or EPS (as it is used on daily basis) is basically a measure of the company performance over last 12 months and is calculated for each fiscal year at the end. The formula for calculation of EPS is rather simple to understand:
EPS = (company's net income) * (no of outstanding shares), the important point to understand here for the newbies is that EPS alone should not be considered as measure of company performance/growth.
3) Profit Margins - profit margins gives a measure of company's spending against company's revenue's , there are broadly three types of profits - gross profit margin, net profit margin, Operating profit margin, hence the calculation formula for each is similar ie:
Gross Profit Margin = (Gross Profits) / Revenues
Operating Profit Margin = (Operating Profits) / Revenues
Net Profit Margin = (Net Profits) / Revenues
These margins are generally expressed in percentage or revenues.
4) Stock Price / EPS - The price per earning or P/E is the price of a stock divided by its EPS from the trailing one year. The Price per earning ratio gives a rough idea of the price which investors are paying for a stock with respect to it's earnings. Hence the higher the P/E ratio, the more investors would be willing to purchase the stock. The formula for computation is rather simple : P/E = (Stock Price) / EPS .
5) Earning Yield (EPS/Stock-Price) - Earning yield is another ratio which should be taken care while choosing a stock to invest into. It is inverse of P/E ratio hence a high
earnings yield shows a relatively inexpensive stock while a low earnings yield indicates an expensive stock. While purchasing one should compare Earning yield with benchmark bonds to check whether stock is currently worth purchasing or not. Formula for calculation is rather simple:
Earnings Yield = EPS / (Stock Price)
6) PE-Guidance - The price-earning guidance is rather a risky thing while choosing a stock to invest into as it deals while keeping the future aspect of company in consideration. A stock's PEG ratio is its forward P/E divided by its expected earnings growth over the next five years as predicted by stock market analysts. Hence this ratio can be calculated while being over optimistic or overpessimistic about the stock. Formula for calculation is simple as given below:
PEG = (Forward P/E Ratio) / (5-Year EPS Growth/Decline Rate)
7) Price per Book Ratio - The P/B ratio relates a stock's market value with its book value as according to the latest balance sheet of company. Book value of stock does not accurately measure a company's worth, especially if the company possesses significant intangible assets such as brand names, market share etc.
Formulas for calculations are somewhat complex now:
Book Value Per Share = (Total Shareholders Equity) / (Shares Outstanding)
P/B = (Stock Price) / (Book Value Per Share) = (Market Capitalization) / (Total Shareholder Equity)
Price per book ratio is also tied to return on equity (ROE), which is net income divided by shareholder equity. For eg. two companies that are otherwise equal, the one with the higher ROE will have a higher P/B ratio.
8) Price per sales ratio - Formula for calculation of Price per sales ratio is straight forward
- P/S = Market Capitalization / Total Sales for a company. The advantage of using P/S ration instead of P/B ratio while choosing a stock to invest is that it is based on sales, which is much harder to manipulate (incase management forge the balance sheets.
10) Bottom line / Top line
- Company's bottom refers to company's income after all expenses have been deducted from revenues. These expenses include interest charges paid on loans, general and administrative costs and income taxes. It can also be called as net profit, whereas Top line refers to the revenues/gross sales for the company.
11) Dividend yield - Dividend yield is unit for measuring Dividend earned per share, formula for same is:
Dividend Yield = Annual Dividend Per Share / Stock Price . Stocks with high dividend yields are generally mature companies with few growth opportunities because in a new company majority of the profits earned are used again for expansion of business.
Huff!! It was a long post..took lots of time to jot down, but would surely help readers of my blog in understanding stock markets even in more better way and would help in making informed decisions themselves.
HAPPY INVESTING!!
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