Financial Terminology

Financial Terminology Made Simple

Understanding financial jargon can be a daunting task for those new to the world of investing. Here’s a quick and simple breakdown of some essential financial terms

A simplified breakdown of some important stock indicators and terms you may come across when researching and investing in shares:

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

A valuation metric that compares a company's stock price to its earnings per share. A higher P/E ratio can indicate expected growth, while a lower ratio may suggest undervaluation or limited growth prospects.

Earnings Per Share (EPS)

A measure of a company's profitability, calculated by dividing net income by the number of outstanding shares. Higher EPS values indicate better profitability and can influence stock prices.

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

A valuation metric that compares a company's stock price to its book value (assets minus liabilities) per share. A lower P/B ratio can indicate an undervalued stock or lower growth prospects.

Dividend

A payment made by a company to its shareholders, usually from its profits. Dividends are typically paid quarterly and can provide a steady stream of income.

Forward Dividend & Yield

Forward Dividend is an estimation of a company's annual dividend payment, while Yield is the annual dividend payment expressed as a percentage of the stock's current price. These metrics help investors evaluate a stock's potential income generation.

Ex-Dividend Date

The date by which an investor must own the stock to be eligible for the next dividend payment. Shares bought on or after the ex-dividend date will not receive the upcoming dividend.

Market Capitalization

The total value of a company's outstanding shares, calculated by multiplying the stock price by the number of shares. Market cap helps categorize companies by size (small-cap, mid-cap, large-cap).

Beta

A measure of a stock's volatility compared to the overall market. A beta greater than 1 indicates higher volatility, while a beta less than 1 suggests lower volatility. Beta helps investors assess a stock's risk profile.

Volume

The number of shares traded during a specific time period (e.g., daily, monthly). High trading volume can indicate strong investor interest, while low volume may suggest limited interest or liquidity.

Bid vs Ask

Bid and ask are terms used in financial markets to describe the prices at which buyers and sellers are willing to trade a security, such as a stock or a currency pair. They represent the highest price a buyer is willing to pay (bid) and the lowest price a seller is willing to accept (ask) for a security. The difference between the bid and ask prices is called the bid-ask spread.

Bid

Ask

The bid price is the highest price that a buyer is willing to pay for a security. Buyers place “buy orders” at their desired bid prices, which are usually lower than the current market price. The highest bid price in the order book is known as the “best bid” or “highest bid.”

The ask price, also known as the offer price, is the lowest price at which a seller is willing to sell a security. Sellers place “sell orders” at their desired ask prices, which are typically higher than the current market price. The lowest ask price in the order book is known as the “best ask” or “lowest ask.”

Bid-Ask spread

The bid-ask spread is an essential factor in determining the liquidity of a security. A smaller bid-ask spread indicates higher liquidity, as it implies that buyers and sellers are more closely aligned on the security’s price. In contrast, a larger bid-ask spread suggests lower liquidity and potentially higher transaction costs for traders.