7 Investing Terms Every Beginner Should Understand

Free Cash Flow Shows Available Cash

Free Cash Flow is the cash a company has left after paying for its regular operations and capital spending. Beginners can use it to understand whether a business is generating real cash. Strong and steady FCF can support growth, debt payments, dividends, or other investments.

ROIC Measures Capital Efficiency

ROIC stands for Return on Invested Capital. It shows how effectively a company uses invested capital to generate operating profit. A higher ROIC can indicate efficient capital use. Comparing ROIC across similar companies can help beginners understand business quality.

Operating Leverage Can Boost Profits

Operating Leverage explains how fixed business costs can affect profits when sales change. A company with high fixed costs may see profits rise quickly when revenue grows. However, profits can also fall faster when sales decline. This makes operating leverage important when studying business performance.

Dilution Can Reduce Your Ownership

Dilution happens when a company issues additional shares, increasing the total number of shares available. If you already own shares, your percentage ownership can fall unless you buy more. Beginners should understand dilution because new share issues can affect earnings per share and ownership value.

Drawdown Shows How Far An Investment Falls

Drawdown measures how much an investment declines from a previous peak before recovering. It helps investors understand the size of a fall during difficult periods. Looking at historical drawdowns can provide useful context about risk, although past declines do not predict how an investment will behave.

Volatility Shows Price Movement

Volatility refers to how sharply and frequently an investment's price moves over time. High volatility means larger price swings, while lower volatility generally means smaller movements. Beginners should remember that volatility measures movement, not whether an investment is good or bad. Prices can move in either direction.

Market Capitalisation Shows Company Size

Market capitalisation, or market cap, represents the total market value of a company's outstanding shares. It is calculated by multiplying the share price by the number of outstanding shares. Beginners can use market cap to compare company sizes, while remembering that size alone does not determine investment quality.

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