The market continued its recovery this month. The Dow had its best quarter in many years.
The topic of this newsletter will be definitions of several words and concepts that you are likely to hear in relation to the investment industry.
Market capitalization refers to the market value of the company. It is simply the price of one share of stock multiplied by the number of shares that exist. People used the terms small cap, mid cap, and large cap (cap is short for capitalization) to refer to different size categories of market capitalization. A common idea is that small cap companies (between $300 million and $2 billion) will over time yield greater return than mid cap (between $2 billion and $10 billion) and large cap (over $10 billion) companies.
Value stocks and growth stocks refer to how expensive the stock is relative to some measure of value. Usually the measure of value used is earnings or book value (assets-liabilities). A high Price/Earnings or high Price/Book ratio means that the buyer is paying a higher price for the underlying worth of the stock. While the exact cutoffs are very subjective the basic idea is that a high ratio is referred to as a growth stock and a low ratio is referred to as a value stock.
Return on Equity is how much income is earned per unit of equity. Equity is the same thing as book value. Return on Equity (ROE) is often looked towards as a measure of company efficiency. How effectively did the company utilize its financial resources to create a profit? If everything else is equal, investors will prefer a company with high ROE over a company with low ROE.
Capital gain/losses are the result of taking the proceeds from the sale and subtracting off the purchase price. Capital gains are taxed differently whether they are short term (the asset was owned for less than a year) or long term (the asset was owned longer than a year). Long term capital gains are taxed much lower than short term. As a result, we firmly recommend that unless you have very compelling reason to sell early, you should keep your capital gains long term.
If you have any questions about these definitions or any others that you encounter, please call at any time. We sincerely hope you got value from this newsletter. We appreciate your business and trust.
Daniel and Eli
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Questions for the comments
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