FE-1 Equity key terms

The portion of a company's shares held by public investors rather than insiders, founders, or strategic holders. Index providers and liquidity screens often weight or exclude stocks based on this measure.

The total value of a company's outstanding shares, found by multiplying share price by shares outstanding. It is the standard size classification metric used to build equity universes and benchmarks.

A negotiable certificate issued by a bank representing ownership of shares in a foreign company. It lets investors hold offshore equities in local currency and trading hours, easing cross-border settlement.

An equity class with a contractual dividend priority and seniority over common shares in liquidation, usually without voting rights. Its hybrid debt-like features affect valuation and capital structure analysis.

The residual ownership claim on a company's assets and earnings after all liabilities and senior securities are satisfied. Holders typically vote on governance matters and receive discretionary dividends.

The ease and speed with which a security can be traded in size without materially moving its price. It drives bid-ask spreads, position sizing, and the discount applied to illiquid holdings.

The gap between the highest price a buyer will pay and the lowest price a seller will accept. A narrower spread signals a more liquid, lower-transaction-cost market for the stock.

Shareholders' equity on the balance sheet, equal to total assets minus total liabilities. It is an accounting measure of net worth and the denominator in price-to-book analysis.

The total claim on a business held by all capital providers: market capitalization plus debt and preferred stock, minus cash. It is the correct numerator for comparing firms with different leverage.

Net income divided by average shareholders' equity, showing profit generated per unit of owner capital. It can be decomposed into margin, turnover, and leverage to reveal its drivers.

A framework that splits return on equity into net profit margin, asset turnover, and financial leverage. It isolates whether returns come from profitability, efficiency, or borrowing.

The use of debt to amplify the return on equity capital, measured as assets divided by equity. Higher leverage raises both potential returns and the risk of financial distress.

Recording revenue when earned and expenses when incurred, regardless of cash timing. It improves matching but creates accruals that analysts must test for quality and persistence.

The degree to which reported earnings reflect sustainable, cash-backed operating performance rather than accounting choices or one-off items. Low-quality earnings raise the risk of future restatement or reversal.

Gains, losses, or charges unlikely to repeat, such as restructuring costs or asset impairments. Analysts strip them out to estimate normalized earnings used in forecasting and multiples.

An adjusted earnings estimate that removes unusual items and smooths cyclical or temporary effects. It provides a cleaner base for projecting future profits and applying valuation multiples.

Cash generated by operations after capital expenditure needed to maintain and grow the asset base. It is the cash available to debt and equity holders and underpins most intrinsic valuations.

A valuation method that projects future cash flows and discounts them to present value using a risk-adjusted rate. The output is an intrinsic value estimate independent of current market pricing.

The required rate of return used to convert future cash flows into today's value, reflecting time value and risk. A higher rate lowers valuation and should match the cash flow's risk profile.

The blended after-tax cost of a firm's debt and equity, weighted by their market value proportions. It is the standard discount rate for enterprise free cash flow in a DCF.

The return shareholders require for bearing a company's equity risk, often estimated with the capital asset pricing model. It reflects the risk-free rate plus a premium for systematic risk.

A measure of a stock's sensitivity to movements in the broad market. A beta above one implies amplified market risk, which feeds directly into the cost of equity.

The estimated value of all cash flows beyond the explicit forecast horizon, usually from a perpetuity growth or exit multiple. It often dominates DCF output, so its assumptions need scrutiny.

The long-run rate at which free cash flow is assumed to grow forever in a terminal value calculation. It should not exceed nominal GDP growth over the long term.

A valuation approach that prices a share as the present value of its expected future dividends. It suits stable, dividend-paying firms and links value directly to payout policy.

A constant-growth dividend model valuing a stock as next year's dividend divided by the difference between required return and growth. It requires growth below the discount rate.

The share of earnings paid out as dividends, equal to dividends per share divided by earnings per share. The retention ratio is its complement and funds future growth.

The pace a firm can grow using internally generated funds without changing leverage, roughly return on equity times the retention ratio. It flags when external financing will be needed.

Share price divided by earnings per share, showing how much investors pay per unit of profit. Comparability requires consistent earnings definitions and adjustment for one-off items.

Share price divided by book value per share, commonly used for banks and asset-heavy firms. A ratio below one can signal distress or undervaluation relative to accounting net worth.

Enterprise value divided by earnings before interest, taxes, depreciation, and amortization. It neutralizes capital structure and is widely used for comparing operating businesses.

Estimating a stock's worth by comparing its multiples with peers, the sector, or its own history. It is fast and market-anchored but inherits any mispricing in the comparison set.

Selecting listed firms similar in industry, size, and growth, then applying their multiples to the target's metrics. Peer selection and metric consistency determine the reliability of the result.

A concise, testable argument for why a stock is mispriced, naming the catalyst and the evidence that would prove it wrong. It anchors the research report and the recommendation.

The analyst's expected share price over a stated horizon, derived from a chosen valuation method. It should follow logically from the forecast and be paired with an explicit upside or downside.

A specific, identifiable event expected to close the gap between price and intrinsic value, such as an earnings release or restructuring. Without a catalyst, a thesis may stay unrealized indefinitely.

Market-wide risk that cannot be diversified away, such as interest-rate or recession shocks. It is the only risk the market prices, and it is captured by beta in the cost of equity.

Combining assets whose returns do not move perfectly together to reduce portfolio volatility without lowering expected return. It addresses unsystematic risk but leaves market risk intact.

A standardized measure from minus one to plus one of how two return series move together. Lower correlation between holdings delivers greater diversification benefit for the same volatility.