Key Terms To Stock Market

Market CapitalizationnnA company's market capitalization (or "market cap") is calculated by taking the number of outstanding shares of stock multiplied by the current price-per-share. It is the amount of money you would have to pay if you bought every share of stock in a company.nThe price that an investor pays for a security. This price is important, as it is the main component in calculating the returns achieved by the investor.nFor example, if an investor buys XYZ at $35, then this would be the purchase price. When looking at the return on the investment, the investor would compare the purchase price of $35 to the price the investment was sold at or the current market price for XYZ.nnShare nnCertificates representing ownership in a corporation. Shares are also known as stocks or equities.nnP/E Ratio nnThe P/E ratio is how much money you are paying for $1 of the company's earnings. If a company were currently trading at a P/E of 20, an investor would be paying $20 for $1 of earningsnThe P/E looks at the relationship between the stock price and the company's earnings. You calculate the P/E by taking the share price and dividing it by the company's EPS.nIn other words, if a company is reporting a profit of $2 per share, and the stock is selling for $20 per share, the P/E ratio is 10 because you are paying ten-times earnings n[$20 per share dividend by $2 per share earnings = 10]nIn general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. nnHowever, the P/E ratio doesn't tell us the whole story itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, or to the market in general, or against the company's own historical P/E.nnIt would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.nPrice / Earnings To Growth - PEG RationA ratio used to determine a stock's value while taking into account earnings growth. The calculation is as follows:nPEG Ratio = Price to Earnings ratio / Annual EPS GrowthnPEG is a widely used indicator of a stock's potential value. It is favored by many over the price/earnings ratio because it also accounts for growth. Similar to the P/E ratio, a lower PEG means that the stock is more undervalued.nKeep in mind that the numbers used are projected and, therefore, can be less accurate. Also, there are many variations using earnings from different time periods (i.e. 1 year vs. 5 year). Be sure to know the exact definition your source is using.nnShort SellingnnThe selling of a security that the seller does not own, or any sale that is completed by the delivery of a security borrowed by the seller. Short sellers assume that they will be able to buy the stock at a lower amount than the price at which they sold short. nnSelling short is the opposite of going long. That is, short sellers make money if the stock goes down in price.