Investing glossary

Weighted Average Cost of Capital. The average interest rate a company pays to finance itself.

Formula: (Eq% * CostEq) + (Debt% * CostDebt * (1-Tax))

The hurdle rate. If a project returns less than WACC, it destroys value.

Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for raw operating cash flow.

Useful for comparing companies with different debt/tax structures, but ignores the cost of assets (Capex).

The actual cash a company generates after spending money to maintain its asset base.

Formula: OperatingCashFlow - CapitalExpenditures

Cash is king. Dividends and buybacks are paid from FCF, not 'Net Income'.

The portion of a company's profit allocated to each share.

Formula: NetIncome / SharesOutstanding

The primary driver of stock prices in the long run.

The percentage of revenue retained after direct costs of goods sold (COGS).

Formula: (Revenue - COGS) / Revenue

High gross margins (e.g., Software > 80%) indicate a strong competitive moat.

A measure of a company's short-term liquidity.

Formula: CurrentAssets - CurrentLiabilities

Positive is good. Negative implies the company may struggle to pay bills soon.

Price-to-Earnings. How much you pay for $1 of earnings.

Formula: SharePrice / EPS

High P/E (>30) implies high growth expectations. Low P/E (<10) implies value or decline.

P/E Ratio adjusted for Growth. Helps find 'Growth at a Reasonable Price' (GARP).

Formula: PE / AnnualGrowthRate

PEG < 1 is undervalued. PEG > 2 is expensive.

The Enterprise Value divided by EBITDA. The standard valuation metric for M&A.

Better than P/E for comparing companies with different levels of debt.

Market value vs Net Asset Value.

Formula: Price / BookValuePerShare

Crucial for Banks and Real Estate. Irrelevant for Tech (which has few tangible assets).

Measures risk-adjusted performance.

Formula: (Return - RiskFree) / Volatility

A ratio > 1.0 is good. It exposes funds that generate returns simply by taking excess risk.

The excess return of an investment relative to the return of a benchmark index.

If the market did 10% and you did 12%, your Alpha is +2%.

A measure of volatility relative to the market.

Beta = 1.0 (Moves with market). Beta = 1.5 (50% more volatile). Beta < 1 (Defensive/Stable).

How two assets move together (-1 to +1).

Diversification only works if assets are not perfectly correlated. If everything falls together, you aren't diversified.

Borrowing shares to sell them now, hoping to buy them back cheaper later.

Profit from price drops. Infinite risk (price can go up forever).

The difference between the highest price a buyer offers (Bid) and lowest price a seller accepts (Ask).

A wide spread means low liquidity. You lose money instantly upon buying.

Market Order: Buy immediately at any price. Limit Order: Buy only at a specific price or better.

Always use Limit Orders in volatile markets to avoid bad fills.

Borrowed money used to purchase securities.

Magnifies gains and losses. Can lead to a 'Margin Call' where you are forced to sell assets.

A contract giving the right (but not obligation) to BUY a stock at a set price.

A bullish position: it gains when the price rises.

A contract giving the right (but not obligation) to SELL a stock at a set price.

A bearish bet or insurance. You profit if the price crashes.

The pre-agreed price at which the option can be exercised.

If stock price is above Strike, a Call option is 'In The Money'.

The rate at which prices rise. Erodes the purchasing power of cash.

The enemy of bonds. Stocks can sometimes pass on inflation costs; bonds cannot.

The base interest rate set by the Central Bank.

The 'Gravity' of finance. When rates rise, asset prices (Stocks, Real Estate) generally fall.

A line plotting yields of bonds having equal credit quality but differing maturity dates.

Inverted Yield Curve (Short term rates > Long term rates) has predicted every recession since 1950.

Central banks printing money to buy assets, injecting liquidity into the economy.

Generally boosts asset prices but risks inflation.

The total value of goods and services produced in a country over a period.

Two consecutive quarters of negative GDP growth typically defines a recession.

The percentage of the labor force that is jobless and actively seeking work.

A lagging indicator: it often peaks after a recession has already begun.

A survey-based indicator of manufacturing and services sector health.

Above 50 = expansion. Below 50 = contraction. A leading indicator.

Valuation method that projects future cash flows and discounts them to present value.

Formula: Value = Σ(FCF / (1+r)^n) + Terminal Value

The standard method for intrinsic valuation. Highly sensitive to growth and discount rate assumptions.

The value of a business beyond the explicit forecast period in a DCF.

Formula: FCF * (1+g) / (r-g) [Gordon Growth]

Often 60-80% of total DCF value. Small changes in assumptions dramatically affect results.

Valuing a company by comparing it to similar publicly traded companies.

Quick and market-based, but assumes comparables are fairly valued.

Valuing a company based on what similar companies sold for in M&A deals.

Includes control premiums, so typically higher than trading multiples.

Valuing each business segment separately and adding them together.

Used for conglomerates. Often reveals 'hidden value' in underappreciated divisions.

The total value of assets minus liabilities, divided by shares outstanding.

Formula: (Total Assets - Total Liabilities) / Shares

Primary valuation for REITs, closed-end funds, and asset-heavy businesses.

The smoothed annualized growth rate over a period.

Formula: (Ending Value / Beginning Value)^(1/Years) - 1

Useful for comparing growth rates across different time periods.

Like Sharpe Ratio but only penalizes downside volatility.

Formula: (Return - RiskFree) / Downside Deviation

Better for asymmetric returns since it ignores upside volatility.

The largest peak-to-trough decline in portfolio value.

Measures worst-case loss. A 50% drawdown requires 100% gain to recover.

Risk-adjusted return using beta instead of total volatility.

Formula: (Return - RiskFree) / Beta

Best for evaluating diversified portfolios where unsystematic risk is minimized.

Active return divided by tracking error vs benchmark.

Formula: (Portfolio Return - Benchmark Return) / Tracking Error

Measures consistency of outperformance. Higher is better.

The maximum loss expected over a given time period at a confidence level.

e.g., '95% VaR of $1M' means 95% confident losses won't exceed $1M.

Investing a fixed amount at regular intervals regardless of price.

Reduces timing risk and emotional decision-making. Best for long-term investors.

Buying stocks trading below their intrinsic value with a margin of safety.

Pioneered by Graham & Dodd. Requires patience and contrarian thinking.

Buying stocks with above-average growth potential, often at premium valuations.

Focuses on revenue/earnings growth rather than current valuation.

Buying assets that have been rising, selling those falling.

Based on the tendency of trends to persist. Requires disciplined exits.

Passive strategy that tracks a market index like the S&P 500.

Low cost, tax efficient. Outperforms most active managers over time.

Targeting specific drivers of return: value, momentum, quality, size, low volatility.

Systematic approach to capturing risk premiums across asset classes.

The annual interest payment as a percentage of the bond's face value.

A 5% coupon on a $1,000 bond pays $50 per year.

The total return expected if the bond is held until maturity.

Accounts for coupon payments, current price, and time to maturity.

A measure of a bond's sensitivity to interest rate changes.

A duration of 5 means a 1% rate rise causes ~5% price drop.

The yield difference between a corporate bond and a government bond of same maturity.

Wider spreads indicate higher perceived default risk.

Bonds rated BBB-/Baa3 or higher by major rating agencies.

Lower risk, lower yield. Many institutions can only hold investment grade.

Bonds rated below investment grade (BB+/Ba1 or lower).

Higher default risk but significantly higher yields. Behave more like equities.