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Investment in Mutual Funds
Investment Funds (Collective Investment) Investment in mutual funds is one of the most popular types of investment. A mutual fund is just a large and well diversified investment portfolio of many securities, in which ca
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Share
A share is a unit of firm’s ownership, which represents the rights and obligations of the shareholder (owner of the shares). If investor owns all shares of the company he is a complete owner, but if he
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shareholder
A shareholder (stockholder) is a individual or company that owns some shares of stock in a corporation. Technically, every investor who is investing in shares is a shareholder for as long as he holds those s
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Stock Split
A stock split is a divide of existing company’s shares decreasing its face value. For every owned share an investor gets a several (or one) additional shares depending on split ratio, and the total out
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Book Value of Share
A book value of share is calculated dividing all company’s book value (less preferred equity) by its common share number. For example, if company’s book value is 1,000,000 USD and issued share nu
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Stock Book Value
Stock book value is a book value of one share. It is calculated dividing shareholders equity by share number and gives some very approximate investing guidance about the value of the stock. It is popular to look
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Stockholder Wealth Maximization
Stockholder wealth maximization is a main goal for firm’s managers in corporate finance. Stockholder wealth maximization is above the profit maximization because of long term orientation and better risk man
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Dividends
Dividends are capital payments from companies to theirs shareholders. Normally dividends are paid by cash and usually but necessary once a year. Every company’s common share of the same class gets equal div
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Dividend Yield
A dividend yield is a ratio that shows how much investor gets dividends from the stock compared to its price. It is calculated dividing dividend per share by the share price. Dividend yield is impo
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Dividend Payout Ratio
Payout ratio is a percentage that shows a portion of company’s income distributed as dividends. Formula Dividend payout ratio = common shares dividends / net income *For the sam
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Dividend Stocks
Dividend stocks are called stocks that have high dividend yield and high dividend payout ratio. Normal dividend stocks should have stable 6%-10% dividend yield and possible 60-100% dividend payout ratio. High div
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Stock Buyback
A stock buyback (share repurchase) is a company’s purchase of its own stock on the market. It is contrary way to pay out capital for shareholders to dividends. Stock buybacks are getting more and more
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Venture Capital
A venture capital is a capital provided by capital investment groups or private equity funds for small start up businesses. There are not many opportunities for young fast growing companies. If they
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Private Equity Fund
A private equity fund is a fund that invests in a stakes of non-listed companies (private equity). Investment in private equity funds is much different from investment in mutual funds. They are illiquid, riskier
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Corporation
A corporation is a legal business form that is dominating over capital world. Most of the biggest businesses in the world are working under corporation form. Capital raising, transferring of shares, mergers &
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Enterprise Value
Enterprise value (EV) is a financial measure that is used to reflect the magnitude of the business. If market capitalization shows only the value of shareholders equity, enterprise value includes both: equity val
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Holding Company
Holding company is a type of a company which main activity is to invest in other companies. Holding as itself does not do any activity instead of managing their subsidiary companies and searching for new investme
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Preemptive Right
A preemptive right is a right of company’s shareholders to acquire more shares in case of new share issue proportionally. Usually such right is described in shareholder’s agreement. Such righ
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Working Capital
Working capital can be calculated from balance sheet data. There are few ways to calculate working capital, but the most accurate is this one (for operating working capital): Working capital = total curr
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P/B Ratio
P/B (P/Bv or price-to-book) ratio shows how expensive stock is compared to its books value. Company’s book value (also called equity, capital, shareholders funds etc.) is equal to company’s total assets les
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Cost of Equity
Cost of equity is the rate of return that is required by equity owners from their investment. Of course, requirements of the shareholders have to be real and meet market conditions as well. Basically cost of equi
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Relative Valuation
Comparative analysis Relative valuation is stock valuation method that gained its popularity because of simplicity and practical importance. The key principle of relative valuation is about valuation multi
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WACC
WACC (Weighted Average Capital Cost) shows cost of capital when capital is consisted of both equity and debt capital. So WACC simply calculates the weighted average between equity cost and debt cost.
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Earnings Per Share
Earnings per share (EPS) shows how much of net earnings are allocated to one common share. EPS might give some guidance about the value of the share for shareholder. Share price compared to EPS is equal to P/E ra
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Free Float
Free float is a proportion of company’s shares that are really traded in the market. Normally, free float is lower than the total outstanding number of shares, because most of the largest shareholders do no
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ROE
ROE (Return on Equity) shows profitability of company’s book value. Company’s book value (equity) is equal to company’s assets less liabilities, and ROE is usually higher if company ha
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ROA
ROA (Return on Assets) shows what profits are earned by company’s assets. Of course, assets alone usually do not earn the profit, because most of the times profit is the result of know-how and hard work of
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Acquisition
An acquisition is a takeover of one corporation by another when shares are bought and control of management is overtaken. Acquisition is an M&A deal and as targets for acquisition usually become some competin
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Hostile Takeover
A hostile takeover is an acquisition of a target company when its management doesn’t want the company to be overtaken by another corporation. The target of a hostile takeover may be only listed company whic
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Greenmail
A greenmail is one of the strategies used to avoid hostile takeover. Greenmail is used when significant stake of an acquisition target is held by hostile company which tries to overtake the control of company tar
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Management Buyout
A management buyout (MBO) is an acquisition of a company when company’s management gets the control interest in the company. Management buyout can be placed on if existing shareholders agree to sell their s
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Employee Buyout
An employee buyout is a takeover of the company’s control interest by its employees (usually employee stock ownership plan). Compared to a management buyout, employee buyout involves much more employees, an
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Floatation
Floatation means going public through an IPO. If companies go public they have to get listed their shares on some stock exchange. Each company’s may choose any stock exchange, but normally smaller companies
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Voting Right
A voting right is a right provided by every common stock to participate in a shareholders’ meeting and vote for the decisions as management election, audit company election and other important questions. Us
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Income Statement
Income statement (also called statement of operations, profit and loss statement, P&L or other) is one of three main financial statements reported by the companies periodically. Income statement exposes compa
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Balance Sheet
Balance sheet is one of the three main financial statements (others are income statement and cash flow statement). Balance sheet also might be called a statement of financial position because this statement expla
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Earnings
Earnings are calculated gains of the company and should represent the profit of that business. There are several types of earnings: Retained earnings are equal to net profit less dividends. Net earnin
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Profit
Profit is a term used in various finance fields and may have many meanings. Basically profit is the positive difference between the income and costs. If costs are higher than income, then instead of profit loss w
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Loss
Loss (net loss) is a financial situation of the company when its revenue is lower than expenses. It is natural that every company tries to receive a profit instead of a loss, but not every succeeds that. Some com
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EBIT
EBIT (also called Earnings Before Interest and Taxes) is a financial indicator of the company that provides information about company’s profitability while ignoring the impact of capital structure and corpo
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Return
Return analysis is different from profitability analysis because usually return is measured as a profitability of the assets, investments, capital or other similar asset group but not as a profitability of the re
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Debt to Equity
Debt to equity ratio (also known as D/E ratio, Debt/Equity) measures how big is company’s debt compared to its book capital (equity). The higher is the debt to equity ratio the higher is the insolvency risk
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Cash Debt Coverage Ratio
‘Cash debt coverage ratio’ (also known as ‘current cash debt coverage ratio’) measures company’s ability to repay its debts. Basically, it compares cash flow that is received from op
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Working Capital Management
Why Working Capital Is Important? Working capital is one of the main parts of company’s finances and every manager, even of the small company, manages working capital despite the fact he knows about that o
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Investments in Small Cap Stocks
Investments in Small Cap Stocks Investments in small cap stocks could be compared to penny stock investments but the term ‘penny stocks’ is not specific enough. The thing is that the determination of
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Cost of Debt
Cost of debt shows what the capital cost of the company for its debt capital is. Basically company’s capital consists of two parts: debt capital and equity capital. (A mixed capital like mezzanine financing
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Price to Free Cash Flow
Price to free cash flow (P/FCF) or EV/FCF ratio are ratios that compare company's price to its free cash flow. The main difference between those two ratios is that EV/FCF also includes the eff
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Free Cash Flow Yield
Free cash flow yield (FCF yield) show how much of cash that may be distributed to shareholders the business earns compared to its price on the stock exchange (including both: equity value and debt value or just e
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Minority Interest
Minority interest (non-controlling interest) is a part of net income or of an equity that does not belong to the shareholders of the main group. Basically there are two types of the minority interest:
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Free Cash Flow
Free cash flow of the company shows how much of cash business has earned in the reality over the period. There are many ways to determine the free cash flow of the company, and most often this indicator is provid
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Share Issue
Share issue may refer to a new share issue or an existing one. An issue of new shares is associated with capital increase of a company during IPO (initial public offering) or SPO (secondary public offering). All
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Annual Report
Annual report is a report on company’s activity issued each year. Not every company issues an annual report and mostly such reports are issued by public companies or those that are preparing going public.&n
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Capital Employed
Capital employed is a value of capital investments in a company. Basically, the capital of each company can be classified in these types of capital: Equity capital Debt capital Working capital
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Cash Ratio
Cash ratio is a financial ratio that measures company’s financial liquidity over short term. It compares company’s cash reserves to short-term liabilities. If ‘cash ratio’ is high, it may
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Equity Ratio
Equity ratio is a financial ratio that compares company’s equity to assets. Basically, it shows what part equity capital makes in total capital of a company. If ‘equity ratio’ is very high (clos
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Return on Capital Employed
Return on capital employed ratio (ROCE) measures company’s return compared to its employed capital. Return in this case is some kind of profit (mostly EBIT or NOPAT) and the capital employed means equity ca
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Net Interest Margin
Net interest margin shows the profitability of the lending business for a bank or other financial institution. Lending business is the core business for most of the banks, and the profitability of this operational segmen
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Equity to Asset Ratio
Equity to asset ratio measures company’s riskiness by comparing its equity to its assets. If this ratio is very low (lower than 0.3), it might mean that company may be at risk if conditions of the market wo
http://www.investingforbeginners.eu/equity_to_asset_ratio
Asset to Equity Ratio
Asset to equity ratio compares company’s assets to the book value and measures the riskiness of the company. This ratio cannot be lower than 1.0, and if it is equal to 1, it means that assets are equal to e
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Total Debt Ratio
Total debt ratio compares total liabilities to total assets. The higher ratio represents riskier situation. And if this ratio is equal to 1.0, it would mean that liabilities are equal to assets or in other words
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Book Value
There are two main types of values that are used in finance: Book value Market value Book value is a value that is recorded in the balance sheet of a company. Every asset of the company must
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Leverage
Leverage definition In finance leverage means usage of debt capital in addition to the equity capital in order to increase the profit. Increase in leverage is understood as increase in riskiness and volatility.
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Back-End Load
Back-End Load (redemption fee) is a load fee which is similar to ‘front-end load’ but is paid when investor sells his mutual fund units instead of during the acquisition as in case of ‘front-end
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Internal Rate of Return
An internal rate of return (IRR) is a ratio used very often to measure a profitability of some investment project. IRR is determined as a discount rate when NPV of the project is equal to zero. If IRR is higher t
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Privately Held Corporation
Privately held corporation or closely held corporation is a company, which doesn’t have its shares listed on the stock exchange. If a corporation is closely held it not necessary means that it is small busi
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