Stock Market Terms

Financial Performance

Financial Health

Stock Valuation

General

Stock Chart Analysis

Uptrend
A series of higher highs and higher lows.

Downtrend
A series of lower lows and lower highs.

Support
A level or zone where buyers in a market keep the price from falling lower.
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Resistance
A level or zone where sellers in a market keep the price from moving higher.

Trading range
An area between support and resistance levels where buyers and sellers are of equal strength.

Breakout
A breakout occurs when a price breaks out above a significant resistance level. This is a bullish sign but it needs to be accompanied by other bullish indicators in order for it to represent a buying situation.

Breakdown
A breakdown occurs when a price breaks down below a support level. This is a bearish sign.

Moving average
An average of past prices over a certain period that smooth out the gyrations of the market to give a clear indication of the trend.
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Relative Strength Index
A measure of strength where you compare the performance of one thing against another. It’s commonly used to measure the strength in price action of a stock against it’s market index.
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Chart patterns
Commonly occurring chart patterns may be used to predict likely stock movements. There are two main types of chart patterns: continuation and reversal. Continuation patterns indicate that the direction of the current trend may continue. And reversal patterns indicate that the direction of the current trend may be reversing.
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Financial Performance

Return on Equity
Is a measure of the return the management have been able to achieve on shareholders funds. It is calculated by dividing net income by shareholder’s equity. Shareholder’s equity is equal to total assets minus total liabilities.
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Return on Assets
Is a measure of the return a company’s management has been able to achieve on the assets invested in the business. It’s calculated by dividing net income by average total assets for the period.
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Return on Capital
Is a measure of the return the management has been able to achieve on the capital invested in the business.

ROC = EBIT / Total Assets – Current Liabilities

Note: Return on capital is also called “Return on Invested Capital".
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Net profit margin
Measures the profitability of sales. It also gives you an idea of costs. The company with the highest net profit margin will be the lowest cost operator.

Net profit margin = Net profit / Revenue

Note: Net profit margin is also called “net margin".
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Retained earnings
Is the money left over after the company has paid dividends. These funds drive the company’s growth. This why it’s advisable to look for companies with dividend payout ratios of less than 70%.
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Dividend payout ratio
A ratio indicating what percentage of earnings is paid out in dividends.
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EBITDA
Is an acronym for: earnings before interest, taxes, depreciation and amortization. It is a commonly used earnings performance measure.
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Cash flow from operations
Is the cash flow that a company has received from the normal operations of its business. Some investors consider it the true measure of profitability.
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Revenue
Is the money coming into the business from normal business operations. The money might not actually have been received yet, but it is booked up.

Note: Revenue is also called “sales".
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Financial Health

Current ratio
Is a measure of short-term liquidity. It measures how easily or otherwise a company can pay its short-term (i.e. within one year) commitments.

Current ratio = Current assets / Current liabilities

As a rule of thumb, values between 1 and 2 are normal. But it all depends on the type of company in question. For example, companies operating in a high cash turnover business such as a supermarket can operate with a lower current ratio than a low turnover business such as an aeroplane manufacturer.
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Quick ratio
Is a measure of the immediate short-term (i.e. within one year) liquidity of a business.

Quick ratio = (Current assets – Inventories) / Current liabilities
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Interest cover
Measures how easily or otherwise a company is able to repay the interest on its loans. It’s usually used in conjunction with the debt to equity ratio.

Interest cover = EBIT / Interest expenses

A value above 3 times is considered safe.Note: Interest cover is also called “interest coverage" and “times interest earned".
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Stock Valuation

Price to book value
A common valuation measure that compares the share price to the book value of assets.

Price to book value = Share price / Total assets – (Intangible assets + Total liabilities)

This ratio is only useful for valuing companies that derive their profits from a large asset base.Note: Price to book value is also called the “price to book ratio" and “price to net tangible assets ratio" (P/NTA).
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Price to cash flow ratio
A valuation metric that compares the share price to cash flow per share.
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Price to sales ratio
A useful valuation metric to use when companies have negative earnings due a loss. It compares the share price to sales per share.
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Dividend yield
A common valuation measure calculated by dividing dividends per share by the share price. It is useful for making comparisons against money market interests rates. Dividends can add a few percent to your overall stock market returns.
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General

Shares outstanding
The number of shares able to be bought or sold in the market. It is desirable to see this number stay the same from one year to the next. The stock market works on the concept of supply and demand. If more shares are made available on the market, then theoretically, the shares that existed before are now worth less.
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Enterprise value
Enterprise value represents that value of a publicly listed company if it was to be privatized (i.e. taken off the market as a private going concern). It is calculated as market capitalization plus total debt, less cash. It is useful in valuation measures such as Enterprise Value to EBITDA.
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Stock market sectors
The stock market consists of a number of different sectors that are grouped according to the GICS industry standard. Before purchasing a stock it is essential that you determine what sector the stock belongs to and then have a look at the GICS sector chart to ensure that the sector as a whole is not trending downwards or sideways.
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