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What is a Breakeven Price?
There will be a premium paid by investors for the right to establish positions using options. The price of the underlying security must move to a certain point for the options position to become profitable. The strike price of an options contract names the price that an investor can use to buy or sell the underlying security, but the breakeven price will be the strike price plus the amount of the investor’s premium or net debit. Breakeven price can apply to a multi-option strategy such as a spread, or to a single option position. Continue reading...
What is a vertical spread?
A Vertical Spread involves the strategy of buying and selling an equal number of options on the same underlying security with the same expiration date, but different strike prices. Vertical Spreads can be both bullish and bearish, depending on your view of the underlying security. If you use calls, you are constructing a Vertical Bull Spread, and if you’re using puts, you’re constructing a Vertical Bear Spread. Continue reading...
What is Net Income?
Net income is the amount of earnings left over once expenses have been deducted from sales. In short, it is the net amount of profit or loss. It is calculated by taking total earnings in a period (such as a quarter), and deducting all elements of the cost of doing business (labor, depreciation, fixed expenses, overhead, etc…) Net income is ultimately a measure of a company’s profitability, and its calculation should be scrutinized closely to ensure all expenses are being accounted for accurately. Continue reading...
What is Net Worth?
Net worth is the total value of a person or entity’s assets, minus all of their outstanding liabilities. Net worth is most often used in personal finance, with the simple calculation of Net Worth = Assets - Liabilities. In the business context, net worth is also known as book value or shareholder’s equity, and those with rising book value mean they are generating more revenue and obtaining property more quickly than they’re accumulating debt. A rising market value does not necessarily correlate to a rising net worth, as the market may bid up a company’s market capitalization absent profit growth. Continue reading...
What does net long mean?
Investors are net long when they own more long positions than short positions in a security, derivative, or fund. It could mean that a fund manager, for instance, is net long on all of the holdings in the funds, i.e., the fund holds more long positions than short positions. Some funds could be the opposite and be net short. A long position - or to be “long a stock” - means that an investor has share ownership and will receive economic benefit if the share price rises, and vice versa. Creating and maintaining a long position is simple: an investor buys and owns the investment. Some asset managers will employ a “long-only” strategy, only buying and selling securities in the portfolio as a management strategy - they will not use options or shorting strategies as a result. Continue reading...
What is Return on Net Assets?
Return on Net Assets is a calculation used to determine how well a company performs, relative to its resources. Return on Net Assets gives investors an idea of how well a company uses its resources to generate profits. Net assets includes not only fixed, tangible assets, but also the net working capital of a business. Working capital is defined as Current Assets minus the Current Liabilities of the business. The net profits for a period are divided by the net assets to arrive at the Return on Net Assets. Continue reading...
What is an Account Balance?
An account balance is the amount either credited to or owed on a ledger assigned to a particular entity or line-item. The balance of an account is the net debit or credit assigned to it after all transactions have been documented for a current period. Transactions might be deposits, withdrawals, interest credited, fees, or other activity. The account in question could be a personal savings or checking account, or a ledger account at a business or institution, or another form of account, such as the macroeconomic concept of current national account. Accounts are said to be “in the red” when there is a net debit (negative) amount, and “in the black” when there is a net positive balance (net credit). Continue reading...
What is Tangible Net Worth?
Tangible Net Worth is another word for Book Value or Net Asset Value. Only the tangible assets and cash are included, and any liabilities are subtracted. Any depreciation that would otherwise be included for accounting purposes is added back in. Tangible net worth, or book value, is the remaining balance after intangible assets and all liabilities are deducted from net assets. This is the amount that will be divided among shareholders in the event of a company liquidation, and the minimum that the company would be purchased for by an acquiring company. Shareholders can use this as a bare-minimum estimation of the value of their shares. Continue reading...
What is a bear put spread?
A bear put spread involves the use of two puts, one sold and one bought, at different strike prices, with the intention of profiting from declines in the underlying stock. A Bear Put Spread uses two put contracts, one long and one short, in such a way to achieve a maximum profit from modest downward movements in the underlying stock. A long put is purchased a strike price nearer the money that the short put contract. Continue reading...
How Do I Calculate my Net Worth?
Calculating your net worth is a simple and worthwhile endeavor, and should be done once a year to measure your progress. Generally speaking, your net worth is the sum of all of your assets, minus the sum of your liabilities. For example, to calculate your net worth, you would need to add up the dollar values of all of your assets – usually consisting of your house, your cars, savings accounts, retirement accounts, CDs, cash, etc…, and your most valuable possessions (you don’t need to include your desk lamp into the calculations). Continue reading...
What is the 'Non-Current Assets to Net Worth' Ratio?
The non-current assets to net worth ratio will give the analyst an idea of how much of a company’s value is tied-up in non-current assets. As a quick refresher, ‘non-current assets’ are those that most likely will not convert to cash within a year’s time, also known as a long-term asset. Where a company’s non-current asset to net worth ratio lies depends on the industry, but generally speaking a company wants to avoid having that ratio rise above 1 to 1.5. That means the company is highly illiquid, and could be vulnerable in the event of an economic shock. Continue reading...
What is Net Operating Income?
Net Operating Income (NOI) is a measure of profitability most often used with income producing real estate businesses. In the real estate world, net operating income is calculated by taking all revenues generated by a property (rent, parking, etc…) from all of the operating expenses needed to upkeep the property, which can include insurances, taxes, maintenance, utilities, and so on. Net Operating Income is a before tax figure, so does not include principal and interest payments on loans, depreciation and amortization. If the NOI figure is negative, it is referred to as a net operating loss (NOL). Continue reading...
What is Net Present Value?
Net Present Value (NPV) is the difference between present value of net inflows versus the present value of outflows (expenses). The net present value is a good analyst tool for measuring the profitability of a company’s project or new undertaking, like expansion into a new market. It measures the anticipated cash inflows (revenues) from the undertaking versus the anticipated costs of the new project (also in present value terms). Continue reading...
What is the 'Fixed Assets to Net Worth' Ratio?
The fixed assets to net worth ratio is a calculation intended to measure the solvency of a company. It generally tells the analyst what percentage of a company’s assets are cash vs. fixed assets. To calculate the ratio, you divide net fixed assets into net worth. A fixed assets to net worth ratio greater than 0.75, generally, means that a company has too much of their net worth tied up in assets like equipment, machinery, land, and so on. Continue reading...
What is Net Operating Profit After Tax?
Net Operating Profit After Tax (NOPAT) is a way to measure profits that excludes the impact of debt financing (via tax benefits and costs). The easiest way to think about Net Operating Profit After Tax is as a company’s profit if it were unleveraged, i.e., if it had no debt. There are costs associated with debt but also tax benefits, so there’s some give and take. The reason an analyst might use NOPAT is to gain a more accurate look at the operating efficiency of a leveraged companies, since it excludes the tax savings many companies get because of existing debt. Continue reading...
What is market breadth?
Market Breadth is a descriptor that is used in several market indicators such as the daily breadth, the A/D Line, the McClellan Oscillator, and Arms Index. Breadth is the relative difference in the amount of advancing stocks and declining stocks. Daily breadth is simply computed by subtracting one from the other, or creating a ratio in which one is divided by the other. Daily breadth is closely related, even interchangeable, with the Advance/Decline ratio. It can also refer to the difference between New Highs and New Lows, or Net New Highs. Continue reading...
What is a "spread"?
Spread has several meanings in finance, but the most general usage is to describe the difference between the bid and the ask prices for a security, where a narrower spread would indicate high trading volume and liquidity. It also might refer to a type of options strategy in which an investor purchases two calls or two puts on the same underlying security but with different expiration dates or strike prices. Continue reading...
What is Return on Assets?
Return on Assets, or ROA, is an efficiency ratio which quantifies how much profit a company can generate with the assets it has. Return on Assets is a ratio of the net income of a company divided by the amount of assets it has on the books. It can also be synonymous with Return on Investment (ROI), at least at a corporate level. Theoretically this gives analysts an idea of how much profit a company could generate by buying more equipment or other assets, or how efficiently they use the assets in which they have invested. Comparing companies in a specific industry to their peers with ratios such as this one can be illuminating. Continue reading...
What is the Advance/Decline Divergence Oscillator?
The advance/decline divergence oscillator (also called the McClellan Oscillator after its creators) tracks the rate of change in the advance-decline line (net advances). The AD line is formed from the Net Advances/Declines calculated daily at market close; this represents the proportion of stocks which advanced (increased) in price that day versus those which declined – the size of the difference is called the daily breadth. The advance/decline divergence oscillator can be applied to any group of stocks or exchange. Continue reading...
What is Return on Equity?
Return on Equity refers to the return on shareholder’s equity, which is like looking at the compounding effects of profits. Shareholder’s equity, in the standard accounting equation, is the amount of assets and retained earnings in a company over and above the company’s liabilities. Return on Equity is a ratio which divides the net income of a company by the total shareholder’s equity in a company, which is effectively looking at the profitability of the profits of a company. Continue reading...