Five Key Terms all Investors Should Understand

You don’t have to know everything when you invest.

However, there are some key terms to master before you place your first trade.  After all, it never hurts to understand the bare-bones basics.

Term No. 1 – Bid/Ask Price

The bid price is the highest price a buyer is willing to pay for an investment.  The ask price is the lowest price an investor is willing to accept for an investment.

Term No. 2. – Book Value

If you take all the liabilities a company has, and subtract them from the assets and common stock equity of the company, what you would have left over is the book value.

Term No. 3 – Market Capitalization

The market cap of a company is figured by multiplying its current share price by the number of shares outstanding. The largest companies have market caps in the billions.

  • Mega-cap companies have a market cap of more than $200 billion
  • Large-cap companies have a market cap of $10 billion to $200 billion
  • Mid-cap companies have a market cap of $2 billion to $10 billion
  • Small-cap companies have a market cap of $300 million to $2 billion
  • Micro-cap companies have a market cap of $50 million to $300 million

Term No. 4 – P/E Ratio

The P/E reflects how much you pay for each dollar that company earns. If a $75 company  earned $5 per share, it would have a P/E of 15. The higher a P/E ratio is, the higher the expectation for higher earnings.

Term No. 5 – Balance Sheet

A statement that shows what a company owns, in addition to liabilities and the outstanding shareholder equity.

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