General Terms Flashcards
Arbitrage
The simultaneous purchase and sale of an asset in order to profit from a different price (in two or more markets). It exists as a result of market inefficiencies.
Exchange-traded Fund
ETFs are security certificates that state the legal right of ownership over a portion of a basket of individual stock certificates. It holds assets such as stocks, commodities, or bonds, and trades close to its net asset value over the course of the trading day.
Unit Investment Trust
An investment company that offers a fixed, unmanned portfolio, generally of stocks and bonds, as redeemable “units” to investors for a specific period of time.
Net Asset Value
Synonym to book value. Value of an entity’s assets less the value of it’s liabilities.
Prospectus
A formal legal document, which is required by and filed by the SEC, that provides details about an investment offering for sale to the public. Offers certain facts that an investor needs to make an informed investment decision.
Price Earnings Ratio
A valuation ratio of a company’s current share price compared to its per-share earnings.
Market Value (Price) per Share / Earnings (Net Income) per Share (EPS)
Price is what you pay, value is what you get. Low P/E values coincide with high returns, high P/E values coincide with low returns.
Quantitative Easing
When the government purchases debt in the open market to increase demand for those assets, thereby causing their prices to increase.
Industry Sectors (8)
Agriculture, Forestry & Fishing Construction & Mining Finance, Insurance, & Real Estate Manufacturing Public Administration Retail & Wholesale Trade Services Transportation & Utilities
Debt/Equity Ratio
A high debt / equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in volatile earnings as a result of the additional interest expense. The ratio also depends on the industry, for example, capital-intensive industries like auto manufacturing may have a debt/equity ratio above 2, while PC company may be under .5
Value Investing Concepts:
A stock is a vehicle by which a person becomes an owner of the company.
Value investing compares the current share price to intrinsic value, not historic share prices.
Efficient market hypothesis is false
Value stocks are often located in industries that recently have fallen on hard times.
Efficient market hypothesis
Claims that prices are always reflecting all relevant information, and therefore are already showing intrinsic worth. Value investors believes this is false (why) because the market price is driven by emotion in the short term.
Value Investor Guidelines
1) Share price should be no more than 2/3 of intrinsic worth.
2) Look at companies with P/E ratios at the lowest 10% of all equity securities
3) PEG should be less than 1
4) Stock price should be no more than tangible book value
5) There should not be more debt than equity.
6) Current Assets should be two times current liabilities
7) Dividend Yield should be at least 2/3 of the long-term AAA bond yield. (What about stocks that don’t give dividends?)
8) Earnings growth should be at least 7% per annum compounded over last 10 years.
Price/Earnings to Growth (PEG)
(P/E ratio / Annual EPS Growth rate). A stock’s price-to-earnings ratio divided by the growth rate of its earnings for a specified period of time. The lower the PEG ratio, the more the stock may be undervalued given its earnings performance. Forward v. Trailing PEG ratio depending if historical or projected growth data is used.
Free Cash Flow
Capital Expenditures - Operating Cash Flow = Free Cash Flow. The cash that a company is able to generate after spending the money required to run or expand its business.
Capital Expenditures (CAPEX)
Funds the company uses to upgrade its physical assets, such as property, industrial buildings or equipment.
