Language of Investing



a) Terminology

Book Value
The current value of an asset on a company's balance sheet according to its accounting conventions. The shareholders' equity on a company's balance sheet is the book value for that entire company. Many times when investors refer to book value, they actually mean book value per share, which is the shareholder's equity (or book value) divided by the number of shares outstanding. As the book value is theoretically what a company could be sold for (liquidation value), this book value number is sometimes used as a rough guide as to whether or not the shares are undervalued.


Capital Appreciation
One of the two components of total return, capital appreciation is how much the underlying value of a security has increased. If you bought a stock at $10 and it has risen to $12, you have enjoyed a 20% return from the appreciation of the original capital you invested. Dividend yield is the other component of total return.


Dividend Yield
A ratio of a company's annual cash dividends divided by its current stock price expressed in the form of a %. To get the expected annual cash dividend payment, take the next expected quarterly dividend payment and multiply that by four. For instance, if a $10 stock is expected to pay a 25 cent quarterly dividend next quarter, you just multiple 25 cents by 4 to get $1 and then divide this by $10 to get a dividend yield of 10%.

Dividend Yield =
Ann. Div.
--------------
Price
=
$0.25* 4
-----------
$10
= 0.10 = 10%


Many newspapers and online quote services will include dividend yield as one of the variables. If you are uncertain whether the current quoted dividend yield reflects a recent increase in the dividend a company may have made, you can call the company and ask them what the dividend per share they expect to pay next quarter will be.


Earnings Per Share (EPS)
Earnings, also known as net income or net profit, is the money that is left over after a company pays all of its bills. For many investors, earnings are the most important factor in analysing a company. To allow for apples-to-apples comparisons, those who look at earnings use earnings per share (EPS).
You calculate the earnings per share by dividing the dollar amount of the earnings a company reports over the past 12 months by the number of shares it currently has outstanding. Thus, if XYZ Corp. has 1 million shares outstanding and has earned $2 million in the past 12 months, it has an EPS of $1.00.

$2,000,000
--------------
1,000,000 shares
= $2.00 in earnings per share (EPS)


Market Capitalisation
The current market value of all of a company's shares outstanding. To calculate market value, you take the number of shares outstanding and multiply them by the current price of each share. You can find information about shares outstanding from the company's last quarterly report or any online quote service.
For instance, if a company has 10 million shares outstanding and trades at $13 per share, the market capitalisation is $130 million.

Market Cap.
= Shares Outstanding x Share Price
=10 million x $13 = $130 million