Stock investing basics

Acción

The shares (“shares”) are securities that represent aliquots in the capital of a corporation, in other words, they are securities that represent a part of the ownership of a company.

The owners of the shares acquire economic rights, such as the collection of dividends, and political rights, such as attending and voting at shareholders' meetings.

Underestimated action

An undervalued stock is a stock that trades below its intrinsic value.

Preferred share

The preferred stock (“preferred stock”) is a type of share that confers some type of advantage over the rest of common shares, usually the preferred payment of a dividend.

Shareholder

The shareholder ("shareholder") is the person who owns shares of a company.

Assets (accounting)

Assets (“assetts”) are the assets owned by a company recorded on its balance sheet.

Financial asset

A financial asset (“financial assett”) is a title that gives its owner the right or the possibility of receiving future income from its issuer.

Underlying asset

The underlying asset (“underlying asset”) is the asset on which the value of finished derivative financial products is obtained, such as financial options or swaps.

Intangible assets

Intangible assets (“intangible assets”) are assets that do not have physical existence, such as intellectual property rights (such as trademarks or patents) or goodwill.

Tangible assets

Tangible assets are those assets that have physical existence.

Friendly acquisition

A "friendly takeover" is a corporate acquisition that is supported by the management team of the acquired company.

Fundamental Analysis

Fundamental analysis (“fundamental analysis”) is the investment analysis in which information about the company's business fundamentals (balance sheet, results, competitive position, etc.) is taken into account to make its valuation.

Dividend aristocrats

Dividend aristocrats (“dividend aristocrats”) are companies that have continuously increased their annual dividend over long periods of time.

Situation balance

The balance sheet (“balance sheet”) is a financial statement that reflects the equity situation of a company at a given time, showing the assets it owns (assets) and the way to finance them (liabilities).

Beat the market

Beat the market ("beat the market") is to have a profitability after commissions higher than the market average.

Benchmark

A benchmark is a benchmark for evaluating the performance of an investment manager. The most common benchmarks are usually stock indices.

Earnings per share (accounting)

Earnings per share (“earnings per share”) is the net profit obtained by a company divided by the total number of shares.

Beta

Beta is a statistical measure of academic origin used by some financial professionals to measure the risk of an investment. It is calculated by comparing the historical volatility of a financial asset with the historical volatility of the market.

Stock Exchange

The stock exchange is an organized stock market in which stocks and other types of financial assets are bought and sold.

Bond

Bonds (“bonds”) are debt issuance titles of a company or state, which usually grant the holder the right to collect periodic interest and the repayment of the principal according to the fixed terms.

Junk bond

Junk bonds are corporate bonds with a high probability of default. They tend to offer high returns to attract investors.

Bróker

A broker is a company whose activity is to serve as a financial intermediary to carry out operations in the financial markets in exchange for commissions.

Working capital

Working capital is the result of subtracting current assets less current liabilities.

Capítulo 11

Chapter 11 (“chapter 11”) is a section of the US federal bankruptcy code in which the debtor company is reorganized so that it continues with its activity instead of being liquidated.

Investment portfolio

The investment portfolio ("investment portfolio") is the set of financial assets belonging to an individual or an entity.

Catalyst

A "catalyst" is an event that causes the price of a stock to rapidly approach its intrinsic value.

See article on catalysts

Circle of competence

The circle of competence is the set of companies that an investor follows.

Coverage

A hedge ("hedging") is an investment that is appreciated inversely to another, so that it covers the possible losses that the second may cause.

Commission

A commission (“commission”) is a charge for carrying out operations with financial assets.

Creditor contest

The bankruptcy ("insolvency") is a legal situation that derives from the inability of a company to meet its payments.

Contrarian Investing

Investment style that focuses on looking for companies that are forgotten or excessively punished by the market, based on the market's over-reaction to bad news that can affect the profitability of companies in the short and medium term, without being affected in the long term .

Transaction costs

The transaction costs (“transaction costs”) are the costs derived from carrying out a transaction in the market. Transaction costs in the securities markets tend to be in the form of commissions, the most common being purchase and sale and custody commission.

See article on transaction costs.

Opportunity cost

The opportunity cost (“opportunity cost”) is the cost of not using economic resources or using them in an investment of lower profitability than the optimal one. In other words, it is the money that you stop earning by not making the most profitable investment.

Example: If we have € 10.000 in non-profitable assets and we have the opportunity to invest in an asset that would provide us with a 10% return, the cost of continuing is not zero, but there is an opportunity cost of € 1.000.

Income Statement

The income statement is the financial statement that shows the profits and losses of a company, as well as the way in which they are generated.

Cupón

A coupon is each specific interest payment on a bond. It is usually expressed as a percentage.

Depreciation (accounting)

Depreciation (“depreciation”) is an accounting procedure by which the purchase of fixed assets with several years of useful life is recorded as an expense in different periods.

Financial derivatives

Financial derivatives (“derivative securities”) are financial products whose value depends on the price of an underlying asset.

Diversification

Diversification (“diversification”) is the property of various types of financial products. The objective of diversification is to limit the risk of events that specifically affect a single financial product in the investment portfolio.

Dividend

The dividend (“dividend”) is the part of the profit obtained by the companies that is distributed among the shareholders.

Bonus

The extraordinary dividend (“extraordinary dividend”) is the dividend that is not related to the profits of a year and that is not usually distributed on a regular basis.

EBITDA (accounting)

EBITDA is the acronym for “earnings before interest, taxes, depreciation, and amortization”, that is, the profit before interest, taxes, depreciation and amortization.

Cleavage

A company division ("spin-off") consists of the separation of a subsidiary of a company from its parent company.

Cash flows

Cash flow is the inflow or outflow of cash from a company for a given period.

Investment fund

A mutual fund (“mutual fund”) is an investment portfolio in which professional investors invest the money of the participants.

equity

Own funds (“shareholder's equity”) is the part of a company's liabilities that results from subtracting debts from a company's assets.

Fusión

A merger (“merger”) is a corporate operation in which two companies decide to join together to form a single company that encompasses both.

Efficient market hypothesis

The efficient-market hypothesis is a highly controversial (and in my opinion, erroneous) academic theory that holds that all available information about financial assets is reflected on their price instantly.

Privilege information

Inside information is information of a listed company that is not available to the general public, the use of which can lead to criminal consequences.

Insolvency

Insolvency (“default) is the inability of a company to pay its debts.

Interests

The interests ("interests") are the compensation that is made as consideration in exchange for borrowing money.

Investment

An investment ("investment") is an asset that is purchased with the aim of obtaining a return in addition to keeping the investment.

Bottom-up inversion

Bottom-up investing is an investment strategy that focuses on finding specific investment opportunities through fundamental analysis.

"Top-down" inversion

The investment "top-down" ("top-down investing") is an investment strategy that consists of basing portfolio management fundamentally on a macroeconomic analysis.

Institutional investors

Institutional investors (“institutional investors”) are investors who professionally manage assets in investment funds, pension funds, hedge funds, etc.

Invest short

Investing short (“sort-selling”) implies the sale of a financial asset that is borrowed with the intention of obtaining benefits by lowering the price of this asset.

Invest long

Investing long (“going long”) implies buying a financial asset with the intention of obtaining benefits due to its revaluation due to the interest or dividends generated.

Liquidity

Liquidity (“liquidity”) is the ability of a financial asset to be converted into cash immediately without loss of value in the operation.

Safety margin

The margin of safety is the margin between the price of an asset and its intrinsic value. It is one of the most important concepts of value investing.

See article on margin of safety.

Bull market

The bull market is a stock market environment characterized by the continuous rise in the price of financial assets.

Bear market

The bear market is a stock market environment characterized by the continuous decline in the price of financial assets.

Initial public offering

An initial public offering is the offering of shares in a company that goes public. It can be a public offering of subscription (OPS) or of sale (IPO)

Takeover bid

A public acquisition offer (“takeover”), better known as a takeover bid, is an offer made by an individual or a company to acquire a company listed on a secondary market.

Public subscription offer

A public subscription offering, known by its acronym OPS, is an initial public offering in which new shares of a company are offered.

Public offer of sale

A public offering for sale, known by its acronym IPO, is an initial public offering in which existing shares of a company are offered.

Financial option

A financial option (“option”) is a financial derivative that gives its owner the option (not the obligation) to buy (purchase option or “call”) or sell (put option or “put”) a certain underlying asset at a specified price on a specified date (European-type options) or until a specified date (American-type options).

Pay-out

The pay-out is the percentage of the profits that a company dedicates to dividends.

For example, if a company has profits of € 2 / share and distributes a dividend of € 1 / share, its pay-out will be 50%.

Locking position

The blocking position is the capacity of a person or company that has a sufficient percentage of voting rights to block decisions that benefit them.

Market price

The market price ("market price") is the price of the last transaction of a financial asset that is listed on a market.

Average Down

Increase the amount of a financial asset owned by a price lower than the previous purchases, resulting in a reduction in the average cost.

Fixed rate

Fixed income securities are made up of financial securities that give their holder the right to receive a constant flow of money over time. The most common fixed income securities are bonds.

Variable rate

Variable income securities are made up of financial securities that give their holder the right to receive money in the future that we cannot determine in advance, usually in the form of dividends obtained based on the earnings of a company. The most common equity securities are stocks.

Relative profitability

Relative performance is a way of evaluating an investment manager's performance by comparing it to the performance of other managers and their benchmark performance.

Risk

The risk ("risk") of a financial transaction in the amount and probability of a potential loss of permanent capital.

Parent company

A holding company is a company that is the owner of other companies, called subsidiaries.

Value

A security ("security") is a title that represents the ownership of a part of a company, loan or its derivatives.

Book value or book value

The book value or book value (“book value”) represents the theoretical value on the balance sheet held by the shareholders of a company. It is calculated by subtracting the book value of debts from the book value of a company's assets.

Intrinsic value

The intrinsic value (“intrinsic value”) is the present value of the future cash flows of a financial asset.

See article on intrinsic value.

Liquidation value

The liquidation value (“liquidation value”) is the value of a company after its extinction and liquidation, after selling its assets and paying off its debts.

Net present value

The net present value (“net present value”) is the calculation of the value of an investment by means of discounting the estimate of your future cash flows.

Complex values

Complex securities or complex financial instruments are securities with unusual payment characteristics.

Cash payment values

Cash-pay securities are financial assets that pay interest or dividends to their owners in cash.

Value investing

Value investing, commonly known as “value investing,” is an investment style that involves buying undervalued companies. The search for this type of company is carried out through analysis and evaluation processes.

See the guía rápida de value investing.

Volatility

The volatility (“volatility”) is the degree of variability or abruptness in the variations in the price of an asset.

Repurchase of shares

Share buybacks are the purchases of own shares by a company to redeem or distribute them among its investors.

Split

Division of shares in several of lower nominal value. Its effect on the valuation is neutral or slightly positive, as it can increase the liquidity of the shares.

Discount rate

The discount rate is the interest rate that makes an investor indifferent between current money and future money.