Stocks & ETFs (definitions)

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  • Stock exchange (also known as stock market or bourse) – a market where securities are bought and sold. Companies may be listed on a stock exchange after the process called initial public offering (IPO). After that investors are able to buy or sell its shares as a stock exchange acts as an intermediary – a centralised location where buyers and sellers conclude transactions.  
  • Stocks capitalisation – it is a measure of the total market value of a certain company. Market capitalisation (often referred to as “market cap”) is calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share. 
  • EPS (Earnings Per Share) – a company’s net profit divided by the number of shares outstanding. The ratio indicates how much profit a company generates for each share of its stock. 
  • P/E (Price to Earnings) – a company’s share price divided by earnings per share. It is one of the most widely used metrics for determining stock valuation as it shows what the market is willing to pay for a stock based on in its past (trailing P/E) or future earnings (forward P/E).
  • Dividend - a share of profits and retained earnings that a company pays out to its shareholders. When a firm generates a profit and/or accumulates retained earnings, those proceeds can be either reinvested in the business or paid out to shareholders as a dividend. The most common type of dividend is a cash dividend, which means that a company pays it in cash directly into the shareholder’s brokerage account
  • ROE (Return on Equity) – a company’s net profit divided by shareholder’s equity. It is considered a measure of a firm’s profitability in relation to stockholder’s equity. In general investors prefer firms with higher ROEs within the same sectors. However, the ratio may differ significantly across sectors. 
  • BETA – a measure of a stock’s volatility in relation to the broad market. By definition, the market (e.g. the S&P 500 index) has a beta of 1.0. If the company’s beta is below 1.0, its stock swings less than the market (defensive stocks – less risk, but also lower returns). If the company’s beta is above 1.0, its stock swings more than the market (offensive stock – more risk, but higher return potential). 
  • P/B (Price to Book value) – a company’s market capitalisation per share divided by its book value per share. Low P/B ratio may indicate the stock is either undervalued or faces fundamental problems. The higher the ratio, the higher the premium market participants are willing to pay for the company above its hard assets. 
  • Stock scanner – a tool for investors that helps them find stocks that meet a set of criteria and metrics. Therefore, stock scanners allow users to screen potential opportunities. Usually such tools are available on brokerage trading platforms, including XTB’s xStation5.  
  • TER (Total Expanse Ratio) – a measure of the total costs associated with managing and operating an investment fund, such as a mutual fund or an ETF. These costs mainly include management fees and other additional expenses (trading fees, legal fees or operational expenses). From investor’s perspective – the lower the TER the better. 
  • ETF rating – an assessment of ETFs conducted by research firms (e.g. Morning Star’s rating that may be found in XTB’s ETF scanner). Such ratings are based on the fund’s historical performance compared to similar funds. Generally the higher the rating the better.
  • ETF distribution type – there are two major distribution types. Firstly, a distributing ETF (often marked as “Dist”) pays out all dividends or interest so investors receive annual payments. Secondly, an accumulating ETF (often marked as “Acc”) reinvests income back into the fund, therefore, investors benefit from compounding returns. 
  • ETF scanner – a tool for investors that helps them find ETFs that meet a set of criteria and metrics. It works just like stock scanners, but here users are able to screen potentially interesting ETFs. Our XTB’s xStation5 platform has its own ETF scanner – a tool that may be particularly helpful for long-term investors.
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