This equals the value of an asset divided by its useful life. For example, if a company buys a machine that is expected to last 10 years, depreciation will be the cost of the machine / 10. This is intended to approximate the amount of money a company needs to spend each year to maintain its tangible assets.
If you will receive money in the future, that is worth less than money today. If your discount rate is 10%, that means if you will receive $1100 one year from now, it's worth ($1100/(1+10%)) = $1000 today. If you will receive $1100 two years from now, it's worth $1100/(1+10%)^2 = $909.09.
Your expected return is the gain you expect from an investment. It's an educated guess of how much money you might make. The actual return may be more, or less.
For example, suppose there is a 60% chance an investment will gain 30%, and a 40% chance it will lose 5%. The expected return is then
The expense ratio represents the annual operating expenses of a fund expressed as a percentage of the fund's average assets under management.
If you invest in a mutual fund, the underlying holdings return 8% annually and the expense ratio is 0.5%, your return will be 8% - 0.5% = 7.5%.
FDIC stands for the Federal Deposit Insurance Corporation. It is an entity of the United States government that protects your money in the event of a bank failure. Deposits are insured to at least $250,000 at each FDIC-insured bank. Credit unions have similar protections, but they are covered by a different, equivalent entity, the NCUA (National Credit Union Administration).
Free cash flow is the cash a company generates, and is reported on a company's Cash Flow Statement. This is the actual cash a company earns, while Net Income can be thought of as an approximate, smoothed estimate if what the company would earn if it were not growing. It is calculated by subtracting capital expenditures from operating cash flow:
An index fund is a type of mutual fund or ETF designed to replicate the performance of a benchmark index. For example, an S&P 500 index fund aims to mirror the performance of the S&P 500 by holding the same stocks, with the same weights.
If an investor buys a bond and interest rates increase, the bond's value will fall. The longer it will the bond to mature, the larger the decline. A 1% increase in rates will cause a decline of approximately x%, where x is the number of years to maturity. You can get a precise answer with our bond value calculator.
In an investing context, this typically refers to the net present value of all future cash an asset will deliver. For example, if an asset will pay $1000 per year, and your required return, known as the discount rate, is 10%, the intrinsic value of the asset is $10000, because the annual return will be $1000/$10000 = 10%.
Investment horizon refers to the length of time that an investor expects to hold an investment or a portfolio. Generally, if an investor's horizon is short, riskier investments such as stocks are not recommended. If an investor invests in bonds, they will incur interest rate risk if they sell it before their horizon. Therefore, investors are taking a risk if they invest in bonds that will mature after they need the money.
Liquidity is how easily you can turn an investment into cash. Stocks are usually considered to be liquid because you can sell them quickly. Real estate (such as a house) is less liquid, because it generally takes time to sell.
A stock's margin of safety is the difference between the intrinsic value you calculate for an investment and its market price. The actual intrinsic value of a stock is unknown, so value investors typically only buy stocks that trade at large discount to their calculation of fair value, in order to be confident that they are getting a good price.
Margin of Safety = (Intrinsic Value - Market Price) / Intrinsic Value
For example, if the intrinsic value of a stock is $50 but it trades at $30, the margin of safety is (50 - 30) / 50 = 40%.
The date on which an investor will be repaid. For bonds, the principal is typically returned at this time.
Net income is the total earnings of a company after subtracting all expenses, including cost of goods sold, operating expenses, taxes, and interest expenses. This differs from cash earnings; accounting standards are generally intended to smooth net income so that it is a more stable indicator of profitability than Free Cash Flow. For example, profits are typically only realized when an item is sold, even if cash changes hands earlier or later. Furthermore, if a company invests in property, plant and equipment (which can wildly vary year to year) this is excluded. Instead, depreciation is deducted.
Risk is the chance that your investment will perform poorly. Different types investments have different risks. Investments with the potential for high returns typically come with higher risk, meaning they are more likely to lose money.
Investments that are safe from one perespective may be risky from another. For example, if you have cash in the bank, it won't lose value, before considering inflation. However, if you leave it in the bank for many years, it may lose considerable value when accounting for inflation. On the other hand, if you buy a 10 year Treasury Inflation Protected Security, and hold for 10 years, it will give you a specific, inflation-adjusted return, without the risk of losing value. However, in the meantime, it can change in value, so you can lose money if you sell it before the 10 years are up.
The P/E ratio compares a company's share price to its earnings per share, indicating how much investors are willing to pay per dollar of earnings. The formula is:
The initial sum that a person or company borrows. This is typically returned to the investor on the maturity date.
A company's Return on Equity is its profitability relative to the net value of its assets. The formula is:
ROE = Net Income / Shareholder's EquityIf a company has a high Return on Equity, it shouldn't cost much money for the company to grow. Thus, cash earnings (Free Cash Flow) should generally be close to net income. On the other hand, if Return on Equity is low, it will be expensive for the company to grow, so it may have low or even negative Free Cash Flow.
Total return includes all sources of return including dividends, interest, and capital gains. For a stock, if you buy it for $100, receive $5 in dividends over a year, and sell it for $110, the total return is:
So, (10 + 5) / 100 = 15%.