Preferred Stock - Capital stock having priority over a corporation's common stock in the distribution of dividends and often of assets. Holders of preferred stock receive dividends at a fixed annual rate. The earnings of a corporation are applied to this payment before common stockholders receive dividends.

Return on Assets (ROA) - is a very useful number for comparing companies in the same industry. It tells us how many dollars can company generate with each dollar of assets. ROA is expressed as percentage and is computed as:

ROA= Net Income\Total Assets

The higher the ROA is, the better, because the company is generating more money with the given assets, or is generating the same amount of money on less investments.
It is important to remember that both debt and equity are included in total assets of the company.

Return on Equity (ROE) - is a measure that tells us how much additional earnings company has generated with the money shareholders have invested. It is one of the most important financial ratios because it measures efficiency of a company at generating revenue.
ROE is expressed as percentage and is calculated:

ROE = Net income \ Average shareholders equity

ROE is very useful for comparing companies in the same industries and usually, the higher ROE, the better, but the ROE as a financial ratio is irrelevant if company does not reinvest its earning.

Revenue - is the money that company received from its sales including discounts and deductions for returned or lost in delivery merchandise. It is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.

Outstanding shares - it is a total of all issued shares, including restricted shares, held by investors, company officers or public. Shares re-purchased by the company are not outstanding shares.

Short Selling - is an advanced trading technique when the seller does not even own a security. The seller borrows the stock from the broker, sells it and than hopefully buys it back at lower price that he sold it. After buying it back, the stock must be returned to the broker from whom it was borrowed; also the commission must be paid to the lender.

In order to cover its short position and profit from buying the stock back, investor must have large trading knowledge, so novice investors should avoid this strategy.

Stock Split - When a company declares a stock split, the price of the stock will decrease, but the number of shares will increase proportionately. For example, if you own 100 shares of a company that trades at $100 per share and it declares a two for one stock split, you will own a total of 200 shares at $50 per share after the split. A stock split has no effect on the value of what shareholders own. If the company pays a dividend, your dividends paid per share will also fall proportionately.

Companies often split their stock when they believe the price of their stock exceeds the amount smaller individual investors would be willing to pay for the stock. By reducing the price of the stock, companies try to make their stock more affordable to these investors.

Although many stock splits are two for one, companies can split their stock in any number of ways, including three for one, three for two, and so forth. It could be an indicator that a particular stock is doing well.

Investment Dictionary

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