Glossary

22 terms

Asset

Something a person or company controls that is expected to provide a future benefit. Cash, inventory, equipment, and buildings are common company assets. An accounting asset is a recorded number, which can differ from what a buyer would pay today.

Balance sheet

A snapshot of a company’s assets, liabilities, and equity on one date. The accounting identity is assets = liabilities + equity. It is a stock of value at a moment, unlike the income statement, which covers a period of time.

Bond

A loan packaged so it can be bought and sold. The issuer borrows, pays interest, and typically repays the principal at maturity if it does not default. Bondholders are lenders. They do not own the company.

Compound interest

Interest calculated on both the original amount and the interest already added. With annual compounding, a balance grows by multiplying by (1 + rate) once per year. Stock-market returns are not a promised interest rate, so the formula is a model, not a forecast.

Coupon

The interest a bond pays to its holder, often on a set schedule. A bond’s coupon is a contractual payment. It can stop if the issuer defaults.

Diversification

Spreading money across many holdings so one company’s failure does less damage. It reduces idiosyncratic risk. It does not remove the risk that the whole market falls, and it does not guarantee a gain.

Dividend

Cash a company chooses to pay to shareholders from its profits or reserves. Dividends are not obligated the way bond coupons are. A company can cut, skip, or never pay one. A dividend reduces the company’s cash.

Earnings per share

Profit attributable to common shareholders, divided by the share count used in the calculation. It puts earnings on a per-share basis so they can be compared with the share price. The share count and the profit figure both need a close reading.

EBITDA

Earnings before interest, taxes, depreciation, and amortization. It strips out capital structure and some non-cash accounting so people can compare operations. It is not cash in the bank, and it is not the same as profit.

Enterprise value

A common way to describe the value of a company’s operations: equity market value plus debt, minus cash. The idea is that a buyer of the whole firm pays shareholders and takes responsibility for the debt, while cash can offset that cost. Exact definitions of debt and cash vary.

Equity

The residual claim after obligations are met. On a balance sheet, equity is assets minus liabilities. In the market, equity usually means shares. Shareholders are paid after lenders, and they can lose what they put in.

Income statement

A report of revenue, expenses, and profit over a period such as a quarter or a year. Revenue is the top line. Profit is what remains after costs. Neither number is the same as the cash sitting in the company’s accounts.

Index fund

A fund that aims to track a published list of securities, such as a broad stock index, instead of picking favorites. It is a basket. The basket can still fall, and funds charge fees that reduce the return.

Inflation

A general rise in prices over time, which lowers what a unit of money can buy. Official statistics often use a weighted basket such as a consumer price index. The basket is a method, so different measures can disagree.

Liability

An obligation a company expects to settle, such as debt, unpaid bills, or money received for work not yet done. Liabilities are claims that sit ahead of owners.

Market capitalization

Share price multiplied by the number of shares. It is the market’s current price tag for the equity, not a measure of whether that price is wise, and not the full value of the business when the company also has debt and cash.

Mutual fund

A pooled portfolio run for many investors. Some track an index. Others choose securities actively. You own shares of the fund, not a private account of hand-picked stocks, and you still bear the fund’s losses.

Present value

The amount of money today that matches a future payment, once a discount rate is chosen. For a single future sum, divide by (1 + rate) once for each period. Change the rate and the present value changes. The rate is a judgment.

Price-to-earnings ratio

Share price divided by earnings per share, or market capitalization divided by earnings. It says how many times current earnings the price represents. It is silent about whether those earnings will last. A high or low ratio is not, by itself, a buy or sell signal.

Real return

A return after inflation. If prices rise almost as fast as an investment, the gain in purchasing power is smaller than the headline percentage. Nominal return is the percentage before that adjustment.

Share

A unit of ownership in a company. One share is a fraction of the equity, and companies issue different numbers of them. Share classes can carry different votes and different dividend rights. The price is what buyers and sellers last agreed, not a promise of what you will get back.

Volatility

How widely a price moves around. Larger swings mean a rougher path. Volatility is a description of movement, not a forecast, and a calm period can end.