A distribution of a portion of a company’s profits to the shareholders, payable in cash, stock or other property. Profits that are not distributed remain with the company as retained earnings. Start-ups and high-growth companies rarely offer dividends because their profits are reinvested to help sustain higher-than-average growth and expansion. Larger, established companies tend to issue regular dividends to maximize shareholder returns in ways aside from capital growth.
Analysis of the qualitative and quantitative information that contributes to the economic well-being and the subsequent financial valuation of a potential investment. Investors analyze these fundamentals to develop an estimate of whether the underlying asset is a worthwhile investment. For businesses, information such as revenue, earnings, assets, liabilities, and growth are considered some of the fundamentals.
1. A person making investment recommendations in return for a flat fee or percentage of assets managed, known as a commission. 2. An individual who has the day-to-day responsibility of investing and monitoring the cash and securities within a fund’s portfolio in order to achieve the fund’s objectives.
An asset class consisting of equity securities and debt, which is invested in an operating company that is not publicly traded on a stock exchange. A private equity investment is typically made by a firm that specializes in private equity, venture capitalist or an angel investor. Each investor category has different goals, preferences and investment strategies; however, all provide working capital to nurture expansion, new product development, or restructuring of the company’s operations, management, or ownership.
The actual financial benefit of an investment after accounting for inflation and taxes. The after-tax real rate of return is an accurate measure of investment earnings and usually differs significantly from an investment’s nominal rate of return. Calculated as the nominal return – inflation rate x tax rate = Real Rate of Return.
Assume your bank pays you interest of 5% per year on the funds in your deposit account. If the rate of inflation is 3.5% per year, and your tax rate is 33% the real return on your savings is 1%.
You may think 5% sounds great, however, when taking into account inflation and taxes, it is a very low return. If the nominal interest rate goes down, inflation goes up (global inflation was 5.05% in 2011), and taxes go up you can have a negative return on your savings.
Return On Investment is a performance measure used to evaluate the efficiency of an investment. ROI measures the amount of return on an investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is expressed as a percentage or a ratio.
To calculate your ROI, the formula is:
The act of trading an asset or conducting a financial transaction with a significant risk of losing most or all of its value with the expectation of a substantial gain. The risk of loss is more than offset by the possibility of a huge gain, otherwise, there would be very little motivation to speculate. To determine if an activity qualifies as speculative or investing can depend on the nature of the asset, holding period, and the amount of leverage.
An investment strategy that involves buying a stock that appears underpriced by some form of fundamental analysis. The stock may be trading at a discount to the book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios. High-profile proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, who for more than 25 years, has taken the value investing concept even further with a focus on “finding an outstanding company at a sensible price” rather than generic companies at a bargain price.