Stock trading has many ins and outs that include lots of weird technical terms. One look at a traditional investing website is enough to scare off from investing immediately simply due to how overwhelming all of the terms are.
You’re not a finance major or a stockbroker, so how are you going to understand all of this? With WealthStack. Not only is our platform designed to make learning about this stuff easy, but it’s also designed to be fun (as fun as finance can be, at least).
While it might take you some time to find your own investment style (which we can help you with), there are a few terms that every stock investor must know when learning about how to invest.
Let’s take a look at five of the most common (and important) terms that you might face on a day-to-day basis as you start your investment journey (if you need a more in-depth lesson or want to learn about actual strategies, go into the Learn section to find full courses).
Free Cash Flow (FCF)
This is the cash that a company has after paying all of its expenses (bills). When they’ve paid off all of their operational and capital expenses, they have cash leftover (at least, that’s the idea). However, this number only represents cash assets, as the name suggests.
Basically, free cash flow is one of the most important factors to look at when gauging whether or not a business is worth investing in. If their free cash flow is positive, that’s good, especially if it’s been that way for some time.
To put it simply, free cash flow is a measure of profitability as it tells you how much money the company has left to pay creditors, shareholders, and interest to investors (like you). As an investor, you can look at this number to figure out how much cash the company will have leftover at the end of each year to pay you your share.
When it comes down to it, this is a better indicator of a company’s cash dynamics than other metrics such as pure profit.
Enterprise Value (EV)
When investing, you’ll see enterprise value as a number that’s thrown around a lot. It’s, as you might guess, used to value a company. However, it looks at more than just the market value of a company, but also the company’s long-term and short-term debt obligations, as well as any cash it has available.
So what’s the real difference between enterprise value and market capitalization? Market capitalization represents a company’s value relative to stock market participants; enterprise value is an all-around measure that tells you how much a company can be bought at. In short, it’s more accurate.
Earnings Before Interest, Taxes, Depreciation, And Amortization (EBITDA)
EBITDA measures the company’s revenue before taxes and depreciation. Why would you want to know that? It helps you figure out the real earning power of a company despite its capital structure.
You want to see that a company can generate a profit on sales alone, and looking at EBITDA is the way to do that. It paints a picture of a company’s earnings before the influence of taxation and other mandatory accounting deductions.
Earnings Per Share (EPS)
Earnings per share are simply the company’s profits over the outstanding shares. It’s another measure of profitability, so the higher the EPS, the more profitable the company.
All in all, it’s a pretty fair and realistic way of looking at a company’s profitability.
You might also see adjusted EPS, which is an even better indicator of profitability. It shows you the actual earnings after adjusting for losses and costs of maintaining the business.
What are you really looking for here? It’s a bit more complex than we could probably explain in this blog (we suggest our course for that). But, any earnings per share number that you see for a company that’s consistently over 25% is a good company to take a deeper look at.
Price to earnings (P/E)
EPS can be used to determine another special metric called the price to earnings valuation ratio. Sometimes called the price multiple, P/E is calculated by dividing the company’s share price by its earnings per share.
On some finance websites, you might see P/E (TTM) against a company’s stock. The TTM means “trailing twelve months,” which is essentially another way of indicating the company’s performance over the past year.
P/E, therefore, reveals to investors whether the particular stock is overvalued or undervalued. The metric indicates how much an investor may pay to receive one dollar of that company’s earnings. For example, if a stock is trading at a P/E of 30x, it means investors are willing to invest $30 in the company in order to earn $1 of the earnings.
Investing for Beginners: What’s Next?
So, you’ve understood five of the most common and important investing terms. What’s next? If you’re interested in learning how to invest, we suggest signing up for our free course Investing 101.
It’s an easy-to-understand course complete with videos and other helpful resources that will guide you as you begin to understand not only investing terms but strategies too.
Not quite there yet? Download the Wealth Stack app for free on the App Store or on Google Play so that you can start learning through our helpful video courses. Then, interact with our Speakers to see how to implement the techniques you're learning.
