Income Buddies Financial Glossary

Here we will explore the different terms commonly used when doing stocks investment.

A

Asset Allocation

Definition: Asset allocation is the strategic distribution of an investment portfolio among different asset classes, such as stocks, bonds, and cash equivalents. It aims to optimize risk and return based on an investor’s goals and risk tolerance.

B

Bear Market

Definition: A bear market is characterized by a prolonged decline in investment prices, usually 20% or more from their recent highs. It often reflects a pessimistic economic outlook and a lack of investor confidence.

Beta

Definition: Beta measures a stock’s volatility in relation to the market. A beta greater than 1 indicates the stock is more volatile than the market, while a beta less than 1 suggests lower volatility.

Blue Chip Stocks

Definition: Blue chip stocks refer to shares of large, well-established, and financially sound companies with a history of stable performance. These companies are considered reliable and often pay dividends.

Bull Market

Definition: A bull market is marked by a sustained increase in investment prices, typically accompanied by optimism, rising confidence, and economic growth. It is the opposite of a bear market.

Buyback

Definition: A buyback, or share repurchase, is when a company buys its own outstanding shares from the market. It can be a strategy to return value to shareholders or signal that the company believes its stock is undervalued.

C

CAGR (Compound Annual Growth Rate)

Definition: CAGR represents the geometric progression ratio that provides a constant rate of return over a specified time period. It smoothens the effect of volatility in returns.

Compound Interest

Definition: Compound interest is the interest calculated on the initial principal, which also includes all the accumulated interest from previous periods on a deposit or loan. It’s a powerful force in long-term investing.

Custodian

Definition: A custodian is a financial institution or individual responsible for safeguarding and managing financial assets on behalf of a client. This role includes holding securities, processing transactions, and providing account statements.

Cyclical Stocks

Definition: Cyclical stocks are shares of companies whose performance is closely tied to economic cycles. These companies tend to thrive during periods of economic expansion and struggle during downturns.

D

Day Trading

Definition: Day trading involves buying and selling financial instruments within the same trading day. Day traders aim to capitalize on short-term price fluctuations.

Debt-to-Equity Ratio

Definition: The debt-to-equity ratio evaluates a company’s financial leverage by comparing its total debt to shareholders’ equity. It indicates the proportion of financing coming from debt relative to equity.

Dividend

Definition: A dividend is a payment made by a corporation to its shareholders, usually in the form of cash or additional shares. Dividends are a share of the company’s profits and are often distributed regularly.

Dividend Aristocrat

Definition: Dividend Aristocrats are companies with a history of consistently increasing their dividends for an extended period, often 25 years or more. These stocks are valued for their reliable dividend payment

Dividend Payout

Definition: Dividend payout refers to the distribution of a portion of a company’s earnings to its shareholders in the form of cash or additional shares. It represents the reward that investors receive for holding shares in the company.

Dividend Reinvestment Plan (DRIP)

Definition: A Dividend Reinvestment Plan (DRIP) is a program that allows investors to automatically reinvest their cash dividends into additional shares of the issuing company’s stock.

Dividend Yield

Definition: Dividend yield is a financial ratio that represents the annual dividend income as a percentage of a stock’s current market price. It helps investors assess the income potential of a dividend-paying stock.

Diversification

Definition: Diversification involves spreading investments across different assets or asset classes to reduce risk. The goal is to create a portfolio that is not overly reliant on the performance of any single investment.

E

Ex-Dividend Date

Definition: The ex-dividend date is a crucial date in the dividend distribution process. To be eligible for a dividend, an investor must own the stock before the ex-dividend date. If shares are purchased on or after this date, the buyer does not receive the upcoming dividend.

Earnings Per Share (EPS)

Definition: Earnings per share is a financial metric that represents the portion of a company’s profit allocated to each outstanding share of common stock. It is a key indicator of a company’s profitability.

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization):

Definition: EBITDA is a measure of a company’s operating performance, excluding interest, taxes, depreciation, and amortization. It provides a clearer view of a company’s profitability before accounting for non-operating expenses.

Economic Moat

Definition: Economic moat refers to a company’s competitive advantage that allows it to maintain a strong market position and defend against competitors. This advantage could be in the form of brand strength, cost advantages, or network effects.

Exchange-Traded Fund (ETF)

Definition: An exchange-traded fund is a type of investment fund that holds assets such as stocks or bonds and trades on stock exchanges. ETFs offer diversification and are bought and sold like a stock.

F

Futures

Definition: Futures are financial contracts that obligate the buyer to purchase, or the seller to sell, a specific quantity of an asset at a predetermined future date and price. They are commonly used for hedging and speculation.

G

Growth Stocks

Definition: Growth stocks are shares of companies expected to grow at an above-average rate compared to other firms. These stocks often reinvest earnings into expansion rather than paying dividends.

H

Hedging

Definition: Hedging is a risk management strategy aimed at offsetting potential losses in investments by taking an opposite position in a related asset. It helps protect portfolios from adverse market movements.

I

Index Fund

Definition: An index fund is a type of mutual fund or ETF that aims to replicate the performance of a specific market index, such as the S&P 500. It provides broad market exposure and is passively managed.

Initial Public Offering (IPO)

Definition: An initial public offering is the first sale of stock by a private company to the public. It marks the transition from private to public ownership and allows the company to raise capital from external investors.

IPO Lock-Up Period

Definition: The IPO lock-up period is a time after a company goes public during which insiders, such as company executives and early investors, are restricted from selling their shares. This period helps prevent a sudden flood of supply in the market.

Intrinsic Value

Definition: Intrinsic value is the true, inherent value of a security or investment, independent of market fluctuations. Investors use various methods, such as fundamental analysis, to estimate intrinsic value.

L

Liquidity

Definition: Liquidity refers to the ease with which an asset can be bought or sold in the market without affecting its price. Highly liquid assets can be traded with minimal impact on their value.

Leverage

Definition: Leverage involves using borrowed capital, such as margin, to increase the potential return of an investment. While it amplifies gains, it also magnifies losses, making it a high-risk strategy.

Long Position

Definition: A long position is the buying of an asset with the expectation that its value will increase over time. Investors who hold long positions profit when the asset’s price rises.

M

Market Capitalization (Market Cap)

Definition: Market capitalization is the total value of a company’s outstanding shares of stock. It is calculated by multiplying the current market price per share by the total number of outstanding shares.

Market Correction

Definition: A market correction is a short-term decline in the stock market, typically around 10% or more, after a sustained period of rising prices. Corrections are a natural part of market cycles.

Market Order

Definition: A market order is an order to buy or sell a security immediately at the best available current market price. Market orders guarantee execution but do not guarantee a specific price.

Market Sentiment

Definition: Market sentiment reflects the overall attitude or feeling of investors toward a particular asset or the market as a whole. It can influence buying and selling decisions.

Margin

Definition: Margin is the amount of money required by a broker to open and maintain a leveraged position. It allows investors to control a larger position with a smaller amount of capital.

Margin Call

Definition: A margin call occurs when an investor borrows funds to make an investment and the value of the investment falls below a certain level. The investor is then required to deposit additional funds to cover potential losses.

O

Options

Definition: Options are financial derivatives that give the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price within a specified time frame. They are commonly used for hedging and speculation.

P

Penny Stock

Definition: Penny stocks are low-priced stocks, typically trading at less than $5 per share. These stocks are often associated with smaller companies and can be more volatile and speculative.

PEG Ratio (Price/Earnings to Growth)

Definition: The PEG ratio is a valuation metric that takes into account both the P/E ratio and the expected earnings growth rate of a company. It helps investors assess whether a stock is overvalued or undervalued relative to its growth prospects.

Pip

Definition: In currency trading, a pip is a standardized unit of movement in the exchange rate between two currencies. It represents the smallest price move that can be observed in the exchange rate.

Portfolio

Definition: A portfolio is a collection of investments, such as stocks, bonds, and other assets, owned by an individual or an institution. Diversifying a portfolio helps spread risk and optimize returns.

Preferred Stock

Definition: Preferred stock represents ownership in a company with higher claim to assets and earnings than common stock. Preferred shareholders receive dividends before common shareholders and have a fixed dividend rate.

Price-to-Earnings Ratio (P/E Ratio)

Definition: The price-to-earnings ratio is a valuation metric calculated by dividing a company’s current stock price by its earnings per share. It helps investors assess the relative value of a stock.

Price-to-Book Ratio (P/B Ratio)

Definition: The price-to-book ratio is a financial metric that compares a company’s market value per share to its book value per share. It reflects the market’s valuation of a company relative to its accounting value.

Price-to-Sales Ratio (P/S Ratio)

Definition: The price-to-sales ratio measures a company’s market value per share relative to its revenue per share. It provides insights into how the market values a company’s sales.

Q

Quantitative Easing (QE)

Definition: Quantitative easing is a monetary policy in which a central bank purchases financial assets from the market to increase the money supply and encourage lending and investment.

R

Regular Savings Plan

Definition: A Regular Savings Plan is an investment strategy where an individual consistently invests a fixed amount of money at regular intervals, regardless of market conditions. It promotes disciplined and long-term investing.

Return on Assets (ROA)

Definition: Return on Assets is a financial metric that measures a company’s profitability by evaluating its ability to generate earnings from its assets. It is calculated by dividing net income by average total assets.

Return on Investment (ROI)

Definition: Return on investment is a financial metric that measures the profitability of an investment relative to its cost. It is expressed as a percentage and helps assess the success of an investment.

Return on Equity (ROE)

Definition: Return on Equity is a financial metric that measures a company’s profitability by evaluating its ability to generate profit from shareholders’ equity. It is calculated by dividing net income by shareholders’ equity.

Rollover IRA

Definition: A Rollover Individual Retirement Account (IRA) allows individuals to transfer funds from a previous employer’s retirement plan, such as a 401(k), into a new IRA without incurring taxes or penalties.

S

Securities

Definition: Securities are financial instruments that represent ownership or a creditor relationship with a company or government. Examples include stocks, bonds, and options.

Short Selling

Definition: Short selling is a strategy where an investor borrows shares of a security and sells them with the expectation that the price will decline. The investor can then buy the shares back at a lower price, making a profit.

Short Squeeze

Definition: A short squeeze occurs when a heavily shorted stock experiences a rapid price increase, forcing short sellers to cover their positions by buying shares, further driving up the price.

Small-Cap, Mid-Cap, Large-Cap

Definition: These terms refer to the market capitalization of a company. Small-cap companies have a smaller market capitalization, mid-cap companies fall in the middle, and large-cap companies have a higher market capitalization.

T

Technical Analysis

Definition: Technical analysis is a method of evaluating securities by analyzing statistical trends gathered from trading activity, such as price movement and volume. It is commonly used to make short-term trading decisions.

Ticker Symbol

Definition: A ticker symbol is a unique series of letters assigned to a security for trading purposes. It provides a quick and standardized way for investors to identify stocks on stock exchanges.

Treasury Bonds

Definition: Treasury bonds are long-term debt securities issued by the government to raise capital. They are considered low-risk investments and pay periodic interest until maturity.

V

Volatility

Definition: Volatility measures the degree of variation of a trading price series over time. High volatility indicates significant price fluctuations, while low volatility suggests a more stable price movement.

Y

Yield

Definition: Yield is the income generated by an investment, usually expressed as a percentage of the asset’s market price or face value. It is commonly associated with dividends from stocks and interest from bonds.

Yield Curve

Definition: The yield curve is a graphical representation of interest rates on debt for a range of maturities. It is a key indicator of the economic outlook and is often used to predict changes in economic conditions.

Z

Zero-Coupon Bond

Definition: A zero-coupon bond is a debt security that does not make periodic interest payments. Instead, it is issued at a discount to its face value, and the investor receives the face value at maturity.

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