You will come across investing jargon everywhere, and to learn the nuances of investing, it’s important to understand the investing terms. Here we decode the 8 most commonly used investing jargons in the Indian stock market.
Margin of Safety: Margin of safety (MOS) is the difference between the intrinsic value of a stock and its market price. Investment moguls such as Warren Buffett considers this principle as a cornerstone of successful investing.
Alpha: It is most commonly used to measure the performance of portfolio manager. It is used to depict the portfolio returns in relative to the benchmark indices. For e.g. an alpha of 1.0 indicates that the portfolio’s return surpassed benchmark index (Sensex or Nifty) by 1%. Similarly, if the benchmark fetches a return of 15% as against a return of 10% on a portfolio, alpha would be -5%. Goes without saying, an investor prefers stocks which have a high alpha.
Beta: Investments are based on a risk-reward principle, which helps investors to determine how much risk they are willing to take in order to achieve the returns. Beta is frequently used to measure the volatility of an asset or portfolio in comparison to the overall market. A beta of 1 indicates that the price movement is exactly similar to the market movement. A beta of less than 1 indicates that the stock is less volatile, whereas a beta of more than 1, indicates that the stock is more volatile.
Growth Stocks: Unlike dividend stocks which provide you with a generous income in the form of dividends, growth stocks don’t pay you dividends as the companies are scouting for growth or rapid business expansion. They are shares of companies which are forecasted to grow at a rate higher than the industry norm. Their prices tend to oscillate at a rapid rate which categories them as highly risky, but the risks are compensated with the possibility of high returns as well.
Value Stocks: They tend to trade at a lower price as compared to its fundamental or intrinsic value, and hence, investors believe they are undervalued. Key indicators of such stocks are low price to book value ratio or low price to earnings ratio. Many investors believe that the price of such strong shall rebound to reflect its true value. Value investors are always on the lookout for such bargain deals and conduct robust fundamental analysis of stocks before buying them.
Compounded Annual Growth Rate (CAGR): It is a useful measure to determine the growth of your investment over a specified period. It is calculated as:
It describes the rate at which an investment would have grown if it had to grow at a constant rate each year. The concept of CAGR comes into the picture, only if you reinvest your gains every year.
“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” – Albert Einstein
Market Capitalisation: It is the aggregate value of a company’s outstanding shares, which is calculated as: Current market price X Total no. of outstanding shares. It is an important parameter to determine a company’s size, returns and risks as well as stock selection. Though there is no hard and fast rule to classify the companies based on their market cap, they are normally categorised as small cap companies (market cap less than INR 1,000 crore), mid cap companies (market cap between INR 1,000-10,000 crore) and large cap companies (market cap more than INR 10,000 crore). Small cap stocks are considered to be the riskiest, whereas large cap stocks are believed to be less risky.
Earnings Per Share (EPS): EPS is used to gauge the profitability of a company. It is calculated by:
(Net Income After Tax – Dividends on Preferred Stock) / Average Number of Outstanding Shares
It is the portion of a company’s profit that is allocated to every individual share of a common stock. The higher the EPS of a company, the better is its profitability.