AIM

The Alternative Investment Market (AIM) is a specialized unit of the London Stock Exchange (LSE) catering to smaller, more risky companies.

Balance sheet

A financial statement that summarises a company’s assets, liabilities, and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.

Compound Annual Growth Rate (CAGR)

Measures an investment’s annual growth rate over time, including the effect of compounding (where any income is reinvested to generate additional returns). CAGR is typically used to measure and compare the past performance of investments or to project their expected future returns.

Dividend

A variable discretionary payment made by a company to its shareholders.

Dividend per share (DPS)

Dividend per share (DPS) is the sum of declared dividends issued by a company for every ordinary share outstanding.

Earnings per share (EPS)

EPS is the bottom-line measure of a company’s profitability, defined as net income (profit after tax) divided by the number of outstanding shares.

FTSE 100

The index tracks the 100 largest public companies by market cap on the London Stock Exchange.

FTSE 250

The index tracks the 250 largest public companies by market cap on the London Stock Exchange.

Forward earnings

An estimate of the future earnings of a business, usually covering the present financial year or the next one.

Gearing

Gearing is a measure of a company’s debt relative to its equity, showing how far its operations are funded by lenders versus shareholders. For investment trusts: The effect of borrowing money for investment purposes (financial gearing). The amount a company can ‘gear’ is the amount it can borrow in order to invest.

Gross domestic product (GDP)

The value of all finished goods and services produced by a country within a specific time period (usually quarterly or annually). When GDP is increasing, people are spending more and businesses may be expanding. GDP is a broad measure of the size and health of a country’s economy and can be used to compare different economies.

Inflation

The rate at which the prices of goods and services are rising in an economy. The consumer price index (CPI) and retail price index (RPI) are two common measures; the opposite of deflation.

Initial public offering (IPO)

The process of issuing shares in a private company to the public for the first time.

NAV total return (investment trusts)

The theoretical total return on shareholders’ funds per share reflecting the change in NAV assuming that dividends paid to shareholders were reinvested at NAV at the time the shares were quoted ex-dividend. A way of measuring investment management performance of investment trusts which is not affected by movements in discounts/premiums.

Open-ended investment company (OEIC)

An OEIC is a type of collective investment scheme that pools the money of a group of investors who count as shareholders. It is a common structure for UK-domiciled funds. Most are UCITS-compliant.

Price-to-earnings (P/E) ratio

A popular ratio used to value a company’s shares compared to other stocks or a benchmark index. It is calculated by dividing the current share price by its earnings per share.

Share buybacks

Where a company buys back their own shares from the market, thereby reducing the number of shares in circulation, with a consequent increase in the value of each remaining share. It increases the stake that existing shareholders have in the company, including the amount due from any future dividend payments. It typically signals the company’s optimism about the future and a possible undervaluation of the company’s equity.

Valuation metrics

Metrics used to gauge a company’s performance, financial health, and expectations for future earnings, e.g. P/E ratio and ROE.