Investing glossary

Explained in full

These concepts change how you read a company, so each has its own page with the formula, a worked example, the common mistake and how we use it in our research.

• Compound interest

  Compound interest is growth earned on both your original money and on the growth it has already produced. It is the reason long holding periods matter more than clever entry points.

• Dollar-cost averaging

  Dollar-cost averaging means investing a fixed amount on a fixed schedule regardless of price. It removes the need to decide when to invest, and it buys more shares when prices are lower.

• Free cash flow

  Free cash flow is the cash a business has left after paying the costs of running and maintaining itself. It is the cash that can fund dividends, buybacks, debt repayment or reinvestment.

• Expense ratio

  An expense ratio is the annual percentage of your money a fund keeps to run itself. It is deducted from returns quietly, every year, whether the fund performs well or badly.

• Maximum drawdown

  Maximum drawdown is the largest peak-to-trough fall an investment has suffered over a period. It measures the worst stretch an investor would have had to sit through.

• Diversification

  Diversification means owning enough different investments that no single failure can decide your outcome. It reduces the damage of being wrong about any one company.

• Price-to-earnings ratio

  The price-to-earnings ratio compares a company's share price to its earnings per share. It is a rough statement of how much investors are paying for each dollar of profit.

• Dividend yield

  Dividend yield is the annual dividend per share divided by the share price. It tells you the current income rate, not whether the dividend is safe.

• Total return

  Total return counts price change plus dividends and other distributions. It is the only honest way to compare investments where some pay income and some do not.

• Share dilution

  Dilution happens when a company issues new shares, shrinking each existing shareholder's slice of the business. Your ownership can fall even when the company grows.

• Volatility

  Volatility measures how much an investment's price moves around, usually as the standard deviation of returns. It describes turbulence, not the probability of permanent loss.

• Form 13F

  Form 13F is a quarterly filing in which large U.S. investment managers disclose the qualifying stock positions they held at quarter end. It is public evidence of professional ownership, reported after the fact.

• Market capitalization

  Market capitalization is share price multiplied by shares outstanding — the market's current price for the entire company. It measures size and market sentiment, not quality, safety or how much cash a company actually has.

• Revenue

  Revenue is total sales recognised over a period, before any costs are subtracted. It is the top line of the income statement and the base every margin is calculated from.

• Earnings per share

  Earnings per share divides a company's net income by its share count, giving profit on a per-share basis. It is the figure most valuation ratios, including the price-to-earnings ratio, are built on.

• Operating margin

  Operating margin is operating profit divided by revenue, showing how much of each sales dollar remains after running the core business. It is a measure of operating efficiency, before interest and taxes.

• Return on invested capital

  Return on invested capital measures how much operating profit a business generates relative to the capital — debt and equity combined — used to produce it. It is a measure of how efficiently a company turns capital into profit.

• Balance sheet

  A balance sheet is a snapshot of what a company owns and owes on a specific date. Assets always equal liabilities plus shareholders' equity, by definition.

• Payout ratio

  The payout ratio is the share of a company's earnings or cash flow paid out as dividends. A very high ratio leaves little room for setbacks, while a low ratio can mean either caution or heavy reinvestment.

• Buyback

  A buyback is a company purchasing and retiring its own shares, which increases each remaining share's claim on the business. Whether that benefits owners depends on the price paid and how it is funded.

• Shares outstanding

  Shares outstanding is the total number of a company's shares currently held by all owners. It is the denominator behind market capitalization, earnings per share and every other per-share measure.

• Index fund

  An index fund is built to match the return of a benchmark, such as the S&P 500, rather than to beat it. It typically achieves this at a far lower cost than a fund trying to pick winners.

• ETF

  An ETF, or exchange-traded fund, is a basket of investments that trades on an exchange throughout the day like a single stock. Most track an index, but the label alone does not guarantee diversification or low cost.

• Time horizon

  Time horizon is how long until you actually need the money, and it should be set by a real date rather than by comfort with risk. It determines what you can responsibly hold, because risk you can absorb over decades can be devastating over a couple of years.

• Moat

  A moat is a durable competitive advantage that makes a business hard for rivals to displace. It is a qualitative concept, best supported by measurable evidence like sustained margins rather than treated as a label on its own.

Keep reading

• Compound interest

  Compound interest is growth earned on both your original money and on the growth it has already produced. It is the reason long holding periods matter more th

• Dollar-cost averaging

  Dollar-cost averaging means investing a fixed amount on a fixed schedule regardless of price. It removes the need to decide when to invest, and it buys more s

• Free cash flow

  Free cash flow is the cash a business has left after paying the costs of running and maintaining itself. It is the cash that can fund dividends, buybacks, deb

• Expense ratio

  An expense ratio is the annual percentage of your money a fund keeps to run itself. It is deducted from returns quietly, every year, whether the fund performs

• Maximum drawdown

  Maximum drawdown is the largest peak-to-trough fall an investment has suffered over a period. It measures the worst stretch an investor would have had to sit

• Diversification

  Diversification means owning enough different investments that no single failure can decide your outcome. It reduces the damage of being wrong about any one c