Glossary

Investing glossary

Plain definitions of the terms you meet when you research a stock.

  • Accruals: The part of reported profit that has not arrived as cash yet.
  • Backtest: A test of an investment rule on past data, to see how it would have done.
  • CAGR (compound annual growth rate): The steady yearly rate that would turn a starting value into an ending value over a period.
  • Cost of equity: The return shareholders expect for owning a company's shares, given their risk.
  • Dividend payout ratio: The share of a company's profit it pays out as dividends.
  • Dividend yield: The dividends a share paid over a year, divided by its current price.
  • Drawdown: The fall from an investment's peak value to its lowest point before it recovers.
  • Equal weight: Holding the same amount of money in every stock of a portfolio or index.
  • Free cash flow: The cash a business produces from its operations after paying for the investment it needs to keep going.
  • Fundamental analysis: Judging a company by its business (sales, profits, cash, debt) rather than by its share-price chart.
  • Look-ahead bias: Using information in a test that was not yet available on the date of the decision.
  • Momentum: The tendency of stocks that have risen over the past year to keep rising for a while, and of fallers to keep falling.
  • Return on invested capital (ROIC): How much profit a company earns on the money invested in it by shareholders and lenders.
  • Share buyback: A company buying its own shares, so each remaining share owns more of the business.
  • Share dilution: A fall in each shareholder's slice of a company when it issues new shares.
  • Stock screener: A tool that filters thousands of stocks down to the few that meet your rules.
  • Survivorship bias: The error of studying only the companies that still exist, which leaves out the ones that failed.
  • Value trap: A stock that looks cheap but stays cheap, or gets cheaper, because the business is declining.
  • WACC (weighted average cost of capital): The average return a company's lenders and shareholders expect, weighted by how much of each it uses.