Womenlines takes pleasure to welcome Geetanjali Tandon as a guest writer on Womenlines panel. She has more than 15 years of experience in corporate finance specifically in Financial Planning and Analysis in various companies/ industries. Geetanjali will be sharing series of articles on financial literacy at Womenlines. In this article, Geetanjali shares about the importance of understanding investment as an investor-
In my previous blog post, I advocated for women knowing their own finances. One of the most important steps in knowing and controlling your own finances is knowing more about financial markets and understanding investment as an investor. So here is a quick introduction to some of the terms that are referred to often when listening or reading about investment and financial markets. It is important to understand what these terms mean and become familiar with them. This list is by no means exhaustive. I have also provided links to other resources if you want to learn more about this subject. The best way to learn more about investing to is to hypothetically or actually invest a certain amount of money in the stock market and then follow the companies in the market. It does not have to be a large amount of money or even real money. Just hypothetically invest a certain amount making sure you deduct money for fees, etc., and then follow your investment. Record the value in an excel sheet on a daily or even a weekly basis. This is a no-risk way to learn about the stock market and investments.
Here are brief definitions of the top 10 most important terms to know about investments and financial markets:
1. Stocks: A stock is a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings. There are two main types of stock: common and preferred. Common stock usually entitles the owner to vote at shareholders’ meetings and to receive dividends. Preferred stock generally does not have voting rights, but has a higher claim on assets and earnings than the common shares. For example, owners of preferred stock receive dividends before common shareholders and have priority in the event that a company goes bankrupt and is liquidated.
2. Bonds: In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. The most common types of bonds include municipal bonds and corporate bonds. The bond is a debt security, under which the issuer owes the holders a debt and (depending on the terms of the bond) is obliged to pay them interest (the coupon) or to repay the principal at a later date, termed the maturity date.
3. Market Capitalization: Market capitalization refers to the total dollar market value of a company’s outstanding shares. Commonly referred to as “market cap,” it is calculated by multiplying a company’s shares outstanding by the current market price of one share. A company with 20 million shares selling at $100 a share would have a market cap of $2 billion. The terms small cap, mid cap, etc., refers to the total value of the market cap compared to the ranges in the market.
4. Ratings: A rating is an assessment tool assigned by an analyst or rating agency to a stock or bond. The rating assigned indicates the stock or bond’s level of investment opportunity. For a stock, an analyst may assign a buy, hold or sell rating and an explanation of why they recommend this action for the stock. For a bond, a rating agency will assess the bond’s relative safety based upon the issuing entity’s fundamental financial picture which scrutinizes the issuer’s ability to repay principal and make interest payments.
5. Mutual Funds: A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. These investors may be retail or institutional in nature. Mutual funds have advantages and disadvantages compared to direct investing in individual securities. The primary advantages of mutual funds are that they provide economies of scale, a higher level of diversification, they provide liquidity, and they are managed by professional investors. On the negative side, investors in a mutual fund must pay various fees and expenses.
6. Bear & Bull Market: In stock trading and investing there are bulls and bears. You often hear of the market is bullish or bearish. So what is the definition of a bull market and what is a bear market?
A Bull Market
This is when the market is showing confidence. Indicators of confidence are prices going up, market indices like the NASDAQ go up too. The number of shares traded is also high and even the number of companies entering the stock market shows that the market is confident. Technically though a bull market is a rise in the value of the market of at least 20%. The huge rise of the Dow and NASDAQ during the tech boom is a good example of a bull market.
A Bear Market
A bear market is the opposite of a bull. If the markets fall by more than 20% then we have entered a bear market. A bear market is a market showing a lack of confidence. Prices hover at the same price then go down, indices fall too and volumes are stagnant.
7. Revenue: In accounting, revenue is the income that a business has from its normal business activities, usually from the sale of goods and services to customers. Revenue is also referred to as sales or turnover. Some companies receive revenue from interest, royalties, or other fees. Revenue may refer to business income in general, or it may refer to the amount, in a monetary unit, earned during a period of time, as in “Last year, Company X had revenue of $42 million.”
8. Net Income: The total revenue in an accounting period minus all expenses during the same period. If income taxes and interest are not deducted, it is called operating profit (or loss, as the case may be). Also called earnings, net earnings, or net profit.
9. Earnings Per Share ( EPS): A company’s profit divided by its number of common outstanding shares. If a company earning $2 million in one year had 2 million common shares of stock outstanding, its EPS would be $1 per share. The one-year (historical or trailing) EPS growth rate is calculated as the percentage change in earnings per share.
10. Free Cash Flow: Free cash flow is the cash a company produces through its operations, less the cost of expenditures on assets. In other words, free cash flow or FCF is the cash left over after a company pays for its operating expenses and capital expenditures. Free cash flow is an important measurement since it shows how efficient a company is at generating cash.
Other Resources to help to know more about these terms and other investment related terms:
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