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The 7 Most Important Terms for Any Beginning Investor

Those just starting to get their feet wet in the world of finance don’t always know some of the key financial terms that come up when analysts talk about the stock market. Having a working understanding of basic financial terminology will help a beginner navigate their way through the market and start investing successfully.

Here are 7 of the most important terms a beginning investor should know:

Capital Gain: The increase in value of an asset, achieved by selling an investment for a higher price than what an investor bought it for. A capital loss occurs when the investment is sold for a lower price than the purchase price.

Dividend: The portion of a company’s profit that the board of directors decides to pay its investors. Dividends can take the form of cash, shares of stock, or another kind of asset. The Coca-Cola Company KO recently doled out a quarterly dividend of $0.37 per share, meaning for every share of KO their stockholders owned, they received $0.37.  

Index: A statistical measurement that tracks the movement of the economy by focusing on a specific group of companies, often used as a reference for traders and portfolio managers. The most well-known indices include the Dow Jones and Standard & Poor’s 500. Each index has its own methodology and looks at a different group of companies to represent the overall economy.

Initial Public Offering (IPO): When a company that has only internal or private investors first offers public investors the opprotunity to buy shares of their stock. Younger, smaller companies typically do this to expand, although more established companies can do this to become publicly traded.  Earlier this year, Snap Inc. SNAP went public for the first time in the largest U.S. technology IPO since Facebook FB in 2012. At the end of its first day of trading, Snap closed at $24.44, up 44% from its offer price of $17.

Market capitalization: The total dollar value of a company’s shares. Sometimes referred to as simply market cap, it is calculated by multiplying the price of an individual stock by the total number of outstanding shares. Apple AAPL is currently the largest company based on market cap, worth $752.31 billion.

Price-Earnings Ratio (P/E ratio): This measure represents how much an investor makes for each dollar invested into a company. For example, if an investor invests $50 and makes $5, then their P/E ratio is 10. The higher the ratio is, the more an investor will make. Typically, an average P/E ratio is between 10 and 17.

Yield: The measure of return an investor gains from an investment based on the dividend received. A yield is calculated by dividing the annual dividend by the price paid for a single share of stock. So if an investor received $1 annual dividend for a $50 stock, the yield is 2%.

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