Jargon: Code Language for Investing

There’s a unique language for almost everything in life from medicine     to mining. The stock market is no exception. If you’re a new investor, or thinking about opening an IRA (individual retirement account), a good first step is to acquaint yourself with stock market lingo. Mastering market jargon will go a long way in understanding your investments, communicating with your financial advisor and following the fate of your investment dollars.                                                                                                    

Return on Investment (ROI)                                                    

An important fact to find out before making an investment is the ROI of the company you want to invest in. Return on Investment (ROI) is what you will make or lose. If an investor buys $1,000 worth of McDonald’s stock, and later sells it for $2,000, he or she realized a 100 percent ROI, or 100% return on that investment. You can find out typical returns on any stock by asking a financial advisor about the ROI, or studying a certain stock’s performance history.

Earnings Per Share (EPS)

Earnings per share, or EPS, refers to a company’s profit, or how much money the company was able to make        per each share of stock it issued. Beware, however, if a business you want to invest in does not provide any expense information. If one company says it made $10 per share and another boasts $12 per share, the second company’s earnings are only impressive . . . if they spent the same or less money to generate that much income. Your financial advisor can tell you how much money each corporation had to spend to reach its EPS rate.

Price to Earnings Ratio (P/E)

The Price to Earnings Ratio (or P/E ratio) compares a company’s current stock price to its per-share earnings.  That is one of the best ways to measure the value of a stock. It’s similar to comparing the price of a product in the grocery store to its value in nutrition, ingredients and other features. You expect to get more if you pay more. If two  products are exactly the same, the more expensive one may not be the best value, because it has no distinguishing features. When a stock has a higher P/E ratio than other similar companies, it’s regarded as overvalued unless the company has something else that makes the high P/E worth the money. The actual price of a stock is not an indication of value. A higher-priced stock may become less attractive when an investor knows its P/E.

Return on Equity (ROE)

Return on equity (ROE) measures a corporation’s profitability, or how efficient a company is at generating profits. If company A had profits of $2 million with $1 million of equity, that firm would be considered more efficient than company B that also made $2 million, but had $1.5 million in equity, which in the context of the corporate world means ownership. Company A is operating more efficiently because it was able to make more money with less investment in property, equipment, supplies, etc.

Do your research. The more you know about each company you buy shares in, the better your        luck in the stock market. A good financial planner welcomes your questions and helps educate you.

Manage Your Money . . . financial facts for a brighter future provided by Advancd Asset Management LLC                          

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