Investing Terms & Vocabulary
Demystify essential market vocabulary including capital gains, dividend yields, market cap, volatility, and liquidity.
TL;DR
- Distinguish between unrealized paper profits and realized taxable
capitalGains. - Measure company scale using shares multiplied by price for
marketCap. - Assess investment drag by inspecting the annual fund
expenseRatio.
Foundational Return Concepts
Capital GainProfit realized when selling an asset for more than purchase basis.
Set capital gain to sale price minus purchase basis.Dividend YieldAnnual cash distribution expressed as a percentage of share price.
Annual cash distribution expressed as a percentage of share price.Total ReturnCombined profit including both capital appreciation and dividend cash.
Set total return to capital gain plus dividends received.Company Scale and Metrics
Market CapitalizationTotal equity value of all outstanding common corporate shares.
Set market capitalization to share price times total shares out.Price-to-Earnings RatioCompares current share price against annual earnings per share.
Set price-to-earnings ratio to share price divided by earnings per share.Earnings Per SharePortion of corporate profit allocated to each individual share.
Set earnings per share to net income divided by total shares out.Market Conditions & Movement
Bull MarketSustained upward trend gaining 20% or more from recent lows.
Check whether price gain from low is at least 0.20.Bear MarketDecline of 20% or more from recent peaks with pessimistic sentiment.
Check whether price drop from peak is at least 0.20.Market CorrectionA normal temporary pullback between 10% and 19.9% from highs.
Check whether drop is at least 0.10 and drop is less than 0.20.Fund Costs and Mechanics
Expense RatioAnnual operational percentage fee deducted from fund assets.
Set expense ratio to fund balance times expense ratio.Net Asset Value (NAV)Per-share value of a fund computed after trading day close.
Per-share value of a fund computed after trading day close.Liquidity MeasureEase of converting assets into cash without major price impact.
Check whether daily volume is greater than 1000000.Tips
- Learn the difference between short-term and long-term
capitalGains; holding assets over one year slashes federal tax rates dramatically. - Evaluate
liquiditybefore allocating capital so you understand how quickly an investment can convert to cash without price discounts.
Warnings
- Do not confuse high
dividendYieldwith total return; struggling companies often display artificially high yields before cutting payouts. - Never ignore the
expenseRatioon managed mutual funds; an apparently small 1% fee consumes significant compound wealth over thirty years.
In Practice
Compute total return on an investment incorporating both share price growth and reinvested dividends.
Carlos bought 100 shares of an index ETF at $100/share ($10,000). After 1 year, price is $108 and dividends paid were $300.
- Calculate capital gain: ($108 - $100) * 100 shares = $800 price appreciation.
- Add total cash dividends received during holding period: $300.
- Calculate total dollar return: $800 capital gain + $300 dividends = $1,100.
- Compute total percentage return: ($1,100 total return / $10,000 cost basis) * 100 = 11.0%.
Carlos earns an 11% total return from 8% price gain and 3% dividends.
Always calculate total return by combining capital appreciation with cash dividend payouts.
FAQ
A bull market is a sustained period where asset prices rise 20% or more from recent lows, while a bear market is a 20% drop from peaks accompanied by pessimism.
Market capitalization reflects the total dollar market value of a company's outstanding shares, classifying firms into small-cap, mid-cap, and large-cap tiers.
An expense ratio is the annual percentage fee deducted directly from fund assets by management to cover operational, administrative, and legal expenses.