Anyone who wants to become a Do-It-Yourself (DIY) investor should consider becoming more familiar with various financial terms and definitions. Otherwise, if and when you decide to own stocks, you might not be able to differentiate your hanging man from your spinning top when looking at the candlestick chart for Telus stock. Huh? Actually, you don’t even need to know that stuff. For today’s post as part of Financial Literacy Month #FLM2013 I thought I’d list a few financial terms worth remembering when you hear or read about them.
Earnings per Share (EPS)
When you hear this term think profit.
A simplified equation for EPS is net income divided by average shares outstanding.
You’ll often read about this denominator being “weighted” or “averaged” because the amount of common shares changes during the reporting period. There is no rule of thumb that I know of to interpret EPS but a high(er) EPS is usually a sign of good company financial health.
Price-to-Earnings Ratio (P/E)
When you hear this term think about an investor’s willingness to pay for a dollar of company earnings. So, a low P/E implies the will factor is low; the company is expected to have lower earnings in the future. A high P/E suggests investors believe the company has higher growth prospects.
The price/earnings ratio is a common stock’s current market price divided by its annual earnings per share.
What is a Bear Market?
When you hear this term think about falling prices, consumer pessimism and economic slowdown.
What is a Bull Market?
When you hear this term think about rising prices, consumer optimism and economic growth.
DIY investors do not need to memorize a whack of financial definitions but I think these terms above are important for context so you don’t get totally lost in the alphabet soup of today’s financial jargon.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Great information for those who don’t know it yet. There are a surprising amount of people that don’t really get the basics! I really love investopedia. It’s great for a simplistic approach to things that are made to seem complicated.
Thanks Daisy. I don’t think financial terms can ever be oversimplified. The more simplistic things are, the easier they can be understood and applied. At least that’s the theory.
Nice primer on the basics. Supposedly the story is that they call it a bull market because bulls defend themselves by moving their horns up while bears swipe their paws down, hence a bear market.
P/E ratios seem to be a hot topic right now.
Thanks Ben. Yes, I’ve noticed folks are all over P/E ratios now. The new fad?
Mark