The stock market glossary explained clearly

P/E ratio

The P/E ratio (Price-to-Earnings ratio) tells you how many times the annual earnings you are paying for a stock. A P/E of 15x means you pay €15 for every €1 of earnings; as a rough guide, the US stock market has averaged a P/E of around 15x-20x over the long run.

EV/EBITDA

The EV/EBITDA compares the Enterprise Value with its EBITDA (earnings before interest, taxes, depreciation and amortisation). It measures how many times the gross operating result you pay for the whole business, debt included; as a rough guide, an EV/EBITDA of 8x-12x is considered a usual zone.

Enterprise Value

Enterprise Value (EV) is what it would cost to buy a whole business: its market capitalization plus net debt (debt minus cash). Unlike the stock market price, it reflects the value for all providers of finance —shareholders and creditors— not just for shareholders.

Price-to-Book (P/B)

The Price-to-Book (P/B) or price-to-book-value ratio compares the price of a stock with the company's book value (shareholders' equity) per share. A P/B of 1x means you pay exactly the book value; as a rough guide, values below 1x can signal "cheap" stocks according to the balance sheet.

PEG ratio

The PEG ratio divides the P/E by the expected earnings growth: it adjusts the valuation to the growth pace. As a rough rule, a PEG close to 1.0x is considered reasonable, below 1 it can signal an opportunity and above 2 a demanding price. It is not a verdict: it is a first filter best completed with quality and real valuation.

Market capitalization

Market capitalization is the total value of a company on the stock market: the share price multiplied by the number of shares outstanding. It measures how much the whole company is worth to the market, not its price per share. It is used to classify companies into small, mid and large cap and to compare sizes fairly.

Intrinsic value

The intrinsic value of a stock is what a company is really worth according to its ability to generate cash in the future, regardless of the price the market sets today. It is estimated by discounting future cash flows to present value. When the price falls below the intrinsic value, the margin of safety appears, the foundation of value investing.

Discounted cash flow (DCF)

The DCF (discounted cash flow) is the valuation method that estimates how much a company is worth by summing its future cash flows brought to present value. It is the professional standard for calculating intrinsic value, but its result depends enormously on the growth, margin and discount-rate assumptions used.

WACC

The WACC (Weighted Average Cost of Capital) is the minimum return a company must generate to satisfy both its shareholders and its creditors at the same time. It is the discount rate with which future cash flows are brought to the present: in stable sectors it is around 5-7% and in risky businesses or those highly dependent on growth it can exceed 9-10%.

Margin of safety

The margin of safety is the difference between the estimated real value of a stock and the price you pay for it. Buying with a margin of safety means paying clearly below what it is worth, so that a calculation error or an unexpected event does not ruin the investment. A typical margin demanded by prudent investors is between 25% and 50%.

ROIC

ROIC (return on invested capital) measures how much operating profit a company generates for every euro of capital it has put to work, whether that capital comes from shareholders or from debt. It's the most demanding and revealing profitability metric: a ROIC sustained above 10-15% usually signals a quality company with a competitive advantage.

ROE

ROE (return on equity) measures how much net profit a company generates for every euro contributed by its shareholders. It's the best-known profitability gauge: a ROE sustained above 15% usually signals a good business, but beware, because debt can inflate it artificially.

ROA

ROA (return on assets) measures how much profit a company generates for every euro of assets it owns, regardless of how it financed them. It's the gauge of how efficiently the company squeezes its resources: a ROA above 5% is usually reasonable, although the bar varies a lot by sector.

ROCE

ROCE (return on capital employed) measures the operating profit a company generates for every euro of capital it has put to work, adding equity and debt. It's a highly valued operating-efficiency indicator: a ROCE sustained above 15% usually signals a quality business.

Economic moat (competitive advantage)

An economic moat (or competitive advantage) is the set of barriers that protect a company's profits from the competition, like the moat surrounding a castle. A company with a wide moat can maintain a high return for many years without rivals eating it away; one without a moat sees any extra profit evaporate quickly. It isn't a number: it's a characteristic of the business that is demonstrated with data such as a high and sustained ROIC.

Value investing

Value investing is an investment philosophy built on buying stocks below their real worth and waiting for the market to recognize that worth. It rests on telling the difference between price (what you pay) and value (what you receive), and on always demanding a margin of safety. It was created by Graham and Dodd, and popularized by Warren Buffett.

Value trap

A value trap is a stock that looks cheap —with low multiples such as the P/E or price-to-book— but whose business is deteriorating, so that its real value falls as fast as, or faster than, the price. The discount is an illusion: the expected gain never arrives because the company keeps getting worse.

Gross margin

Gross margin measures what percentage of every euro of sales the company keeps after paying the direct cost of making the product or delivering the service (raw materials, production labor, the purchase of merchandise). It's calculated as gross profit / sales and expressed as a %. A high gross margin (for example, 70-80% in software) indicates that the product sells for well above what it costs to produce; a low one (10-20% in distribution) is normal in high-volume businesses.

Operating margin

Operating margin measures what percentage of every euro of sales turns into operating profit (EBIT), that is, what the business itself earns before paying interest on its debt and taxes. It's calculated as EBIT / sales and expressed as a %. It's the best measure of the real efficiency of the business: a high and stable operating margin (for example, above 20%) usually signals a strong, well-managed business; a low or erratic one warns of structural problems or intense competition.

Net margin

Net margin measures what percentage of every euro of sales turns into net profit, that is, what really remains for the shareholder after paying absolutely everything: production costs, the costs of the activity, the interest on the debt and taxes. It's calculated as net profit / sales and expressed as a %. It's the last step of the profitability cascade: a high net margin (for example, above 15%) usually indicates a very profitable business, but you have to look at why it's high (or low).

EBITDA margin

The EBITDA margin is the percentage of sales that a company converts into EBITDA (earnings before interest, taxes, depreciation and amortization). It is a measure of operating profitability: the higher it is, the more efficient the business is at generating cash before the bank and the tax authorities take their cut. A 20% EBITDA margin is solid in most sectors, although what counts as normal varies enormously from one industry to another.

EBIT

EBIT (Earnings Before Interest and Taxes) is a company's operating profit: what it earns from its core activity before paying the interest on its debt and taxes. Unlike EBITDA, EBIT does deduct depreciation and amortization, so it better reflects what it costs to maintain the business's assets. It is the basis for calculating the operating margin and many quality ratios.

EBITDA

EBITDA is a company's earnings before interest, taxes, depreciation and amortization (Earnings Before Interest, Taxes, Depreciation and Amortization). It is used to measure the operating profitability of the business without debt, taxes or the accounting entries for depreciation distorting the comparison. It is very popular, but it has a key catch: EBITDA is not free cash flow.

EPS

EPS (earnings per share) is a company's net profit divided by the number of shares outstanding. It measures how much the company earns for each share and is the basis of the P/E and of many valuations. What matters is not a single year's EPS, but its sustained growth and that it is not inflated by accounting tricks or diluted by new shares.

Free Cash Flow

Free cash flow (FCF) is the real money a company has left over after paying its operating expenses and its investments in assets (capex). If it generates €1,000 million of operating cash and invests €300 million in capex, its FCF is €700 million. It is the money that really remains to pay debt, dividends or buy back shares, and that is why many consider it more reliable than accounting profit.

FCF Yield

FCF yield (free cash flow yield) divides a company's free cash flow by its market capitalisation (or its enterprise value), and is expressed as a percentage. If it generates €600 million of free cash and is worth €10,000 million on the market, its FCF yield is 6%. It indicates how much real cash the business produces per euro invested; a high FCF yield usually signals a cheap stock, and a low one, an expensive or high-growth stock.

CapEx

CapEx (capital expenditure) is the money a company invests in long-lived assets: factories, machinery, equipment, buildings or technology. What capex means: the investments that maintain and grow the business. It is the piece that separates operating cash flow from free cash flow, and distinguishing maintenance capex from growth capex is key to judging the quality of a company.

Shareholders' equity

Shareholders' equity (or net worth) is what would be left for a company's owners if it sold all its assets at book value and paid off all its debts: total assets minus total liabilities. If a company has €5,000 million in assets and €3,000 million in debts, its shareholders' equity is €2,000 million. It is the book value of the company and the basis of ratios such as ROE and price-to-book.

Net debt / EBITDA

Net debt / EBITDA is the ratio that measures how many years of operating profit (before interest, taxes and depreciation) a company would need to pay off all its net debt. If a company has €300 million of net debt and generates €100 million of EBITDA, its ratio is 3x. Below 2x-3x is usually considered comfortable; above 4x-5x, a warning sign about leverage.

Current ratio

The current ratio measures a company's ability to pay its short-term debts with its short-term assets. It is calculated by dividing current assets by current liabilities. A ratio of 1.5x-2x is usually considered comfortable; below 1x the company has fewer liquid assets than immediate debts, a sign of cash-flow strain.

Interest coverage ratio

The interest coverage ratio measures how many times a company can pay the interest on its debt with the profit it generates. It is calculated by dividing the EBIT by the interest expense. An interest coverage ratio above 5x is considered comfortable; below 1.5x or 2x it sets off solvency alarms, because the company barely earns enough to pay its creditors.

Free float

The free float is the portion of a company's shares freely available to buy and sell on the market, excluding those held by stable shareholders (founders, the state, executives or controlling partners). It's expressed as a percentage of total shares. A high free float (above 70-80%) supports liquidity; a low one usually means more volatility.

Dividend yield

Dividend yield is the percentage that the annual dividend a company pays represents over the price of its stock. It's the way to know how much cash the company returns to you each year just for holding its shares: a dividend yield of 3-4% is considered attractive and sustainable in most markets, while figures above 7-8% usually hide a risk worth investigating.

Payout ratio

The payout ratio is the percentage of profit (or cash flow) a company distributes to its shareholders as dividends. It's the metric that reveals whether a dividend is sustainable or fragile: a payout ratio below 60% usually indicates a comfortable dividend with room to grow, while figures above 90-100% are a warning sign because the company has barely anything left to reinvest or to weather a bad year.

Drawdown

Drawdown is the fall from the all-time high to the subsequent low that an investment or portfolio suffers: it measures how much you've lost from your highest point before recovering. The maximum drawdown (max drawdown) is the worst of those falls and is the best way to know how much real pain you'd endure: a stock portfolio can have drawdowns of -30% to -50% in a crisis, and knowing it in advance prevents panic selling at the worst moment.

Sharpe ratio

The Sharpe ratio measures the return an investment achieves for each unit of risk it takes on: that is, how much you're paid for the suffering you endure. It's calculated by subtracting the risk-free return and dividing by the volatility. As a reference, a Sharpe ratio above 1 is considered good, above 2 excellent, and below 1 indicates you're taking on quite a lot of risk for the return you get.

Beta

The beta of a stock measures how much its price moves relative to the market: a beta of 1 rises and falls just like the index, a beta of 1.5 amplifies its movements by 50% and a beta of 0.6 is calmer. In practice, a high beta (>1) means more nerves and more volatility; a low beta (<1), more calm. It's the standard measure of systematic risk professionals use to estimate the cost of equity.

Volatility

Volatility measures how much a stock's prices rise and fall around their average: the higher it is, the sharper and more unpredictable its movements. It's usually expressed as annualized volatility in percentage; a stock with volatility of 15% is fairly stable, while one of 45% gives frequent scares. It's the most-used risk measure in the stock market, although it doesn't distinguish between falls and rises.

CAGR

CAGR (compound annual growth rate) is the "smoothed" average annual return an investment has had over several years, as if it had grown at a constant pace. For example, an investment that goes from 10,000 € to 17,000 € in 5 years has a CAGR of 11.2%. It's the most honest way to compare long-term returns because it incorporates the effect of compound interest.

Compound interest

Compound interest is the effect of earning returns not only on your initial capital, but also on the returns you have already accumulated. By reinvesting every year, a portfolio returning 8 % a year does not add up, it multiplies: €10,000 becomes around €21,589 in 10 years and around €46,610 in 20. It is the most powerful force in long-term investing, and it depends on three things: return, contributions and, above all, time.

Dollar Cost Averaging (DCA)

Dollar Cost Averaging (DCA), or periodic contributions, means investing a fixed amount at regular intervals (for example, €300 each month) without trying to guess the best moment. By always buying the same amount in euros, you acquire more shares when prices fall and fewer when they rise, which smooths the average purchase price and removes the pressure of getting the timing right. It is the strategy most used by the disciplined long-term retail investor.

Alpha

Alpha measures the extra return an investment achieves above what would be expected given its risk: a positive alpha means you've beaten the market adjusting for the risk taken on, and a negative alpha, that you've done worse than expected. It's the ultimate metric for knowing whether your skill (or a manager's) adds real value or whether you've just had luck or more risk.

ETF

An ETF (Exchange Traded Fund) is an investment fund that trades on the stock market like a share and that normally tracks an index (for example, the S&P 500 or the MSCI World). By buying a single unit you get instant diversification across hundreds or thousands of companies, with very low costs (the TER is around 0.05 %-0.40 % a year) and daily liquidity. It is the retail investor's preferred vehicle for investing simply and cheaply over the long term.

TER of an ETF

The TER (Total Expense Ratio) is the annual cost an ETF charges to manage your money, expressed as a percentage of the amount invested. A TER of 0.07 % means you pay €0.70 a year for every €1,000 invested. It is deducted automatically and daily from the fund's value, without you seeing a bill. In broad index ETFs it is usually between 0.03 % and 0.30 %; the lower it is, the more net return is left for you.

Stock split

A stock split is the division of a company's shares into more units, reducing their price proportionally, without changing the total value of your investment. In a 2-for-1 split, each share becomes two worth half as much: if you had 10 shares at 200 €, you end up with 20 at 100 €. The value stays the same; only the "presentation" changes.

Spin-off

A spin-off is when a company separates one of its divisions and turns it into an independent company that trades on its own. The parent's shareholders receive shares in the new company proportionally, usually without paying anything. It is one of the corporate operations that generates the most value opportunities, because it brings to light businesses that were hidden inside a large group.

Stock buyback

A stock buyback is when a company uses its money to buy its own shares on the market and, normally, cancel them. With fewer shares outstanding, each remaining shareholder comes to own a larger slice of the business, and metrics such as EPS rise. It is a way of returning money to the shareholder, an alternative to the dividend, but it only creates value if the shares are bought cheaply.

Short interest

Short interest is the number of a company's shares that have been sold short and have not yet been bought back. It measures how much money is betting that the price will fall. It is expressed in number of shares, as a percentage of the free float and in days to cover; a short interest above 10 % of the free float is usually considered high.

RSI (Relative Strength Index)

The RSI (Relative Strength Index) is a technical indicator that measures the speed and magnitude of recent price moves on a scale of 0 to 100. It is used to detect whether a stock is overbought (RSI above 70) or oversold (RSI below 30). It is one of the most widely used oscillators in technical analysis.

Guidance (company forecasts)

Guidance is the forecasts a company itself publishes about its future results: expected revenue, profit or margins for the next quarter or year. It is one of the pieces of information that moves the share price the most, because the market reacts not so much to what the company earned as to what it says it is going to earn.

Quantitative analysis

Quantitative analysis consists of making investment decisions based on numerical data and objective rules, rather than opinions or intuitions. It uses financial metrics (P/E, ROIC, margins), models and statistics to score, filter and compare thousands of companies systematically. It is the foundation of screeners, of factor strategies and of funds that move trillions, and today it is within reach of any retail investor.