Key Terms to Make Money From Stock Trading
Closing Price
The final price at which a security is traded on a given trading day. The closing price represents the most up-to-date valuation of a security until trading commences again on the next trading day.
Dividend
A portion of a company's income that is paid out to shareholders on a quarterly or annual basis. The Board of Directors declares dividends. Dividends may be in the form of cash, stock, or property. Most secure and stable companies offer dividends to their stockholders. Their share prices might not move much, but the dividend attempts to make up for this.
Earning Per Share (EPS)
Suppose there are 2 companies- A and B. Both earn $100, but company A has 10 shares outstanding, while company B has 50 shares outstanding.
Which company's stock do you want to own?
It makes more sense to look at earnings per share (EPS) for use as a comparison tool. You calculate earnings per share by taking the net earnings and divide by the outstanding shares.
Using our example above, Company A had earnings of $100 and 10 shares outstanding, which give an EPS of 10 ($100 / 10 = 10). Company B had earnings of $100 and 50 shares outstanding, which equal an EPS of 2 ($100 / 50 = 2).
So, you should buy Company A with an EPS of 10, right? Maybe, but not just on the basis of its EPS. The EPS is helpful in comparing one company to another, assuming they are in the same industry, but it doesn't tell you whether it's a good stock to buy or what the market thinks of it.
An important aspect of EPS that is often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number but one could do so with more equity. This tells investors that the company with the most equity is less efficient at using its equity to generate income.
Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure but to use them in conjunction with statement analysis and other measures.
Earning Yield
The earnings per share for the most recent 12 months divided by market price per share. Earnings yield is the inverse of the price-earnings ratio.
Face Value
The nominal value of a security stated by the issuer. For stocks, it is the original cost of the stock shown on the certificate.
Initial Public Offer (IPO)
It stands for Initial Public Offering. An IPO is when a company sells stock in itself for the first time.
Joint Stock Company
An organization that falls between the definitions of a partnership and corporation. This type of company issues stock and allows for secondary stock market trading; however, stockholders are liable for company debts. This is a type of company that has access to the liquidity and financial reserves of stock markets, but also has the restrictions of a partnership.
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Anthony Green is an expert author on stock market related topics. His articles about stock trading, stock market trading, stock recommendations and stock tips have been published on numerous web sites, forums, blogs and e-zines all over the Internet. For more information visit at http://www.5minutetrader.com.
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