Enjoy this collection of terms used in our finance simulation.
Cash - when it comes to investing, cash can mean not just physical money (coins and paper bills), but also money in a savings account, a money market account, and government bonds that can quickly be turned into cash.
Equity - a general term, often used to describe ownership in a company. Shares is more specific, referring to how a company's stock is divided. Owning stock in a corporation means you own a specific number of shares. Equity can mean stock or shares, although it's often used to refer to stock options as well.
Stocks - a share of ownership in a public or private company. When you buy stock in a company, you become a shareholder and when the company does well, your investment goes up. When it does poorly, however, so does your stock investment.
Ticker Symbol - an abbreviation used to uniquely identify publicly traded shares of a particular stock on a particular stock market. A stock symbol may consist of letters, numbers or a combination of both. For example, the ticker symbol for the company Apple is AAPL in the NASDAQ market.
Market - a medium that allows buyers and sellers of a specific good or service to interact in order to facilitate an exchange. In finance this refers to the general market where securities including equities, bonds, currencies and derivatives are traded. Some financial markets are small with little activity, while some financial markets like the New York Stock Exchange (NYSE) trade trillions of dollars of securities daily.
ETF - or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
Bond - a fixed income investment in which an investor loans money to an entity (typically corporate or governmental) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer.
Long Position - a long (or long position) is the buying of a security such as a stock, commodity or currency with the expectation that the asset will rise in value. In the context of options, long is the buying of an options contract. An investor that expects an asset’s price to fall will go long on a put option, and an investor that hopes to benefit from an upward price movement will be long a call option.
Short Position - a short, or short position, is selling first and then buying later. The trader's expectation is that the price will drop; the price they sell at is higher than the price they buy it at later. The difference between the sale price and the buy price produces a profit or loss. In the forex and futures markets, a short position can be initiated at any time. In the stock market, the trader must borrow shares from a broker in order to short them. This creates a share deficient in the account. When the trader buys the shares back, the borrowed shares are returned to the broker and the profit or loss on the trade is realized.
S&P 500 - the Standard & Poor's 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ market. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.
Market Index - a weighted average of several stocks or other investment vehicles from a section of the stock market, and it is calculated from the price of the selected stocks. Market indexes are intended to represent an entire stock market and track the market's changes over time.
Index values help investors track changes in market values over long periods of time. For example, the widely used Standard and Poor's 500 Index is computed by combining 500 large-cap U.S. stocks into one index value. Investors can track changes in the index's value over time and use it as a benchmark for their own portfolio returns.
Sharpe Ratio - the average return earned in excess of the risk-free rate per unit of volatility or total risk. Subtracting the risk-free rate from the mean return, the performance associated with risk-taking activities can be isolated. One intuition of this calculation is that a portfolio engaging in “zero risk” investment, such as the purchase of U.S. Treasury bills (for which the expected return is the risk-free rate), has a Sharpe ratio of exactly zero. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.
At EquitySim we use Sharpe Ratio for the rankings. To learn more, please refer to these articles on Sharpe Ratio
- Overview of Sharpe Ratio.
- Example: Why you may have equal return but a different Sharpe Ratio score.
- What is a negative Sharpe Ratio?
- Sharpe Ratio Compared to Alpha and Beta.
- What is a "good" Sharpe Ratio?
- Why you may have negative Sharpe Ratio even with positive return.
Alpha - is used in finance as a measure of performance. Alpha, often considered the active return on an investment, gauges the performance of an investment against a market index or benchmark which is considered to represent the market’s movement as a whole. The excess return of an investment relative to the return of a benchmark index is the investment’s alpha.
Beta - measures volatility or risk. Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns. Beta is also known as the beta coefficient.
Portfolio Composition - our portfolio composition feature shows the Diversification of your portfolio. Diversification is the financial industry’s equivalent of “don’t put all your eggs in one basket.” When you invest, you want to put your money in a few different areas to reduce risk. You don’t want to have all your money invested in tech companies, for example, only to lose all of it in another dot com crash. (Bubbles can happen in any industry, even tulip bulb-buying.)
Bear Market vs Bull Market - “Bear market” and “bull market” are both terms to describe the stock market and investing. They’re easy to tell apart when you consider the animals’ characteristics. In a bullish market, everything’s moving forward: investors are confident making a lot of buys, more companies are entering the stock market, and more money is being invested in the stock market overall (technically, a bull market means the market has risen in value by at least 20%). In a bear market, investors pull back (like bears hibernating). Prices start to hover and go down, and people wait and see more before investing additional money in stocks and bonds.
Capital Gains vs Capital Losses - if you sell something for more than you spent to acquire it, that’s a capital gain. If you sell it for less than your original purchase price, it’s a capital loss.
Bid vs Ask - the ask price is what sellers are willing to take for it. If you are selling a stock, you are going to get the bid price, if you are buying a stock you are going to get the ask price. The difference (or "spread") goes to the broker/specialist that handles the transaction.
Financial Statements - written records that convey the financial activities and conditions of a business or entity and consist of four major components. Financial statements are meant to present the financial information of the entity in question as clearly and concisely as possible for both the entity and for readers. Financial statements for businesses usually include income statements, balance sheets, statements of retained earnings and cash flows but may also require additional detailed disclosures depending on the relevant accounting framework. Financial statements are often audited by government agencies, accountants, firms, etc. to ensure accuracy and for tax, financing or investing purposes.
Revenue - the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the top line or gross income figure from which costs are subtracted to determine net income.
Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.
Revenue is also known as sales on the income statement.
Net Income - is equal to net earnings (profit) calculated as sales less COGS, SG&A, operating expenses, depreciation, interest, taxes and other expenses. This number appears on a company's income statement and is an important measure of how profitable the company is over a period of time.
Net income also refers to an individual's income after taking taxes and deductions into account.
Diluted EPS - a calculation used to gauge the quality of a company's earnings per share (EPS) if all convertible securities were exercised. Convertible securities are all outstanding convertible preferred shares, convertible debentures, stock options, and warrants. Unless a company has no additional potential shares outstanding (rare), the diluted EPS will always be lower than the simple or basic EPS.
Operating income - an accounting figure that measures the amount of profit realized from a business's operations, after deducting operating expenses such as wages, depreciation and cost of goods sold (COGS). Operating income takes a company's gross income, which is equivalent to total revenue minus COGS, and subtracts all operating expenses. A business's operating expenses are costs incurred from normal operating activities and include items such as office supplies and utilities.
Net Change in Cash - the final amount of a company's total cash minus total liabilities reported on financial statements. It is commonly used in evaluating a company's cash flows. Net cash also refers to the amount of cash remaining after a transaction has been completed and all associated charges and deductions have been subtracted.
Cash on Hand - includes items with a similar nature to cash. If a company has cash or cash equivalents, the aggregate of these assets is always shown on the top line of the balance sheet. This is because cash and cash equivalents are the most liquid assets. All cash and cash equivalents must be current assets.
Cash of Revenue - as determined for any applicable period, any and all cash income realized by Borrower as a result of its operating activities calculated in accordance with generally accepted accounting principles.
Net Profit Margin - is equal to net income or profits divided by total revenue and represents how much profit each dollar of sales generates. Net profit margin is the ratio of net profits or net income to revenues for a company, business segment or product. Net profit margin is typically expressed as a percentage but can also be represented in decimal form. The net profit margin illustrates how much of each dollar collected by a company as revenue translates into profit. The term "net profits" is equivalent to "net income" on the income statement and the terms can be used interchangeably. Most commonly, investors will refer to net profit margin as the "net margin" and describe it as "net income" divided by total sales instead of using the term "net profits.”