The portion of a company's profit allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. Calculated as: When calculating, it is more accurate to use a weighted average number of shares outstanding over the reporting term, because the number of shares outstanding can change over time. However, data sources sometimes simplify the calculation by using the number of shares outstanding at the end of the period. Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in the outstanding shares number. Watch: Earning Per Share Taobiz explains Earnings Per Share - EPS Earnings per share is generally considered to be the single most important variable in determining a share's price. It is also a major component used to calculate the price-to-earnings valuation ratio. For example, assume that a company has a net income of $25 million. If the company pays out $1 million in preferred dividends and has 10 million shares for half of the year and 15 million shares for the other half, the EPS would be $1.92 (24/12.5). First, the $1 million is deducted from the net income to get $24 million, then a weighted average is taken to find the number of shares outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M). An important aspect of EPS that's often ignored is the capital that is required to generate the earnings (net income) in the calculation. Two companies could generate the same EPS number, but one could do so with less equity (investment) - that company would be more efficient at using its capital to generate income and, all other things being equal, would be a "better" company. Investors also need to be aware of earnings manipulation that will affect the quality of the earnings number. It is important not to rely on any one financial measure, but to use it in conjunction with statement analysis and other measures.
The estimated price-earnings ratio adjusted for the current level of interest rates. Taobiz explains Earnings Multiplier This is yet another variation on the P/E ratio.
A stock option granted to specified employees of a company. ESOs carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price. An employee stock option is slightly different from a regular exchange-traded option because it is not generally traded on an exchange, and there is no put component. Furthermore, employees typically must wait a specified vesting period before being allowed to exercise the option. Taobiz explains Employee Stock Option - ESO The idea behind stock options is to align incentives between the employees and shareholders of a company. Shareholders want to see the stock appreciate, so rewarding employees when the stock goes up ensures, in theory, that everyone is striving for the same goals. Critics point out, however, that there is a big difference between an option and the ownership of the underlying stock. If the stock goes down, the holder of an option would lose the opportunity for a bonus, but wouldn't feel the same pain as the owner of the stock. This is especially true with employee stock options because they are often granted without any cash outlay from the employee. Another problem with employee stock options is the debate over how to value them and the extent to which they are an expense on the income statement. This is an ongoing issue in the U.S. and most countries in the developed world.
A program that facilitates the acquisition and distribution of a company's shares to its employees. Taobiz explains Employee Share Ownership Trust - ESOT ESOTs are trust accounts with which a company can sell its shares to employees. Some reasons to provide the ESOT include the following: 1. The ability for company to test out how an employee share ownership plan would work 2. The creation of a mini market for the transference of company's stock, which allows the company to obtain funds efficiently and educate their employees in share ownership 3. The provision of a tax incentive to shareholders should they decide to sell their shares in the company to the company's ESOT
An exchange-traded fund that focuses on the stocks of emerging market economies, such as Latin America, Asia and Eastern Europe. The underling indexes tracked by emerging market ETFs vary from one fund manager to another, but all should be passively managed and contain equities from multiple countries, unless otherwise stated. Within the broad class of emerging market ETFs, there are fund members that focus on certain market-capitalization ranges, high-dividend stocks, or funds with high allocations towards specific sectors. Watch: Understanding ETF Taobiz explains Emerging Market ETF Emerging market securities are finding their way into more and more portfolios; many investors (especially those with longer time horizons) simply cannot afford to miss out on the higher returns offered by many emerging market economies. These nations are typically identified by high growth rates in areas like natural production, and many have surpluses of rich natural resources that are heavily consumed by the entire world. Expense ratios for emerging market ETFs may be slightly higher than the average for domestic-focused funds. Trading costs tend to be higher when investing directly in local stock exchanges in emerging market nations.
Theory named after Ralph Nelson Elliott, who concluded that the movement of the stock market could be predicted by observing and identifying a repetitive pattern of waves. Watch: Eilliott Wave Theory Basics Taobiz explains Elliott Wave Theory based on rhythms found in nature, the theory suggests that the market moves up in a series of five waves and down in a series of three waves. The key difference between the Elliott Wave Principle and other cyclical theories is that this theory suggests no absolute time requirements for a cycle to complete.
A group or individual allowed to engage in financial transactions not open to retail customers. The Commodity Exchange Act outlines the requirements for eligibility, stating that those seeking to become eligible contract participants must have sufficient regulated status or a specified amount of assets. Taobiz explains Eligible Contract Participant Eligible contract participants include financial institutions, insurance companies, commodity pools and wealthy individuals. These participants are authorized to engage in complex stock or futures transactions such as block trades, exchanging excluded commodities and transacting on a derivatives transaction execution facility. Becoming an eligible contract participant provides a person or group with a wider range of investment choices and financial options than would be available to a standard investor.
Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants deal in, any investment decisions that they make will have a large influence on the price of the underlying financial asset. Taobiz explains Elephants Think of a swimming pool: if an elephant steps into the pool (buys into a position), the water level (stock price) increases; if the elephant gets out of the pool (sells a position), the water level (stock price) decreases. In comparison to the elephant's influence on stock prices, the effect of an individual investor is more like that of a mouse. Examples of elephants are professionally managed entities like mutual funds, pension plans, banks and insurance companies. Contrarian investors specialize in doing the opposite of the elephants, that is, buying when institutions are selling, and selling when institutions are buying.
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