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Beginner Investors: How to Understand Stock Investing Lingo

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·3 min read
In this article:
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  • (0:30) - How To Start Investing Right Now: Basic Stock Terms

  • (6:45) - Understanding How To Use Stock Valuation Metrics

  • (20:15) - What Exactly Is Arbitrage and How Can You Use It?

  • (25:30) - The Federal Reserve: Hawkish vs Dovish

  • (33:35) - Episode Roundup: AAPL, MSFT, XOM, TWTR, TSLA, ATVI, FIVN

  • Podcast@Zacks.com

 

Welcome to Episode #325 of the Zacks Market Edge Podcast.

Every week, host and Zacks stock strategist, Tracey Ryniec, will be joined by guests to discuss the hottest investing topics in stocks, bonds and ETFs and how it impacts your life.

This week, Tracey is going solo to give some help to beginner investors.

Perhaps, you are new to stock investing and have started listening to this podcast and watching CNBC. But you’re confused by some of the terms that are thrown around.

Tracey wants to give you some help.

Apple is Expensive: Huh?

You might have heard analysts saying Apple AAPL is “expensive.” Yes, it’s trading over $150 a share, but the price isn’t what the analysts are talking about.

Apple currently trades with a forward P/E of 26. When analysts on television say it is “expensive” they are likely talking about its P/E.

Apple’s earnings are only expected to rise 8% this fiscal year. Yet Apple has one of the highest P/Es among the FANGMAN stocks.

Just know that it’s not about share price when looking at valuation.

ExxonMobil: Forward or Trailing P/E?

Another confusing concept for beginners may be on what type of P/E is being used. YahooFinance has the trailing P/E on its main quote page but Zacks has the forward P/E.

It can be a problem when a company has strong year-over-year earnings growth like ExxonMobil XOM.

ExxonMobil is expected to grow earnings by 125% in 2022. It’s forward P/E is cheap, at just 7.8x. But ExxonMobil’s trailing P/E is more than double, at 16.1.

That’s a big difference. Be sure you know which type of P/E you are using.

What is Arbitrage? Twitter and Activision Blizzard

Beginning investors might have heard the word “arbitrage” thrown around recently and wondered what it was all about.

There are two good examples of the arbitrage trade occurring right now.

The first is with Elon Musk’s offer to buy Twitter TWTR and the second is with the Microsoft’s MSFT proposed acquisition of Activision Blizzard ATVI.

Arbitrage is when a trader buys shares of a company that has an acquisition offer because those shares are under the buy out price. They are betting that the deal goes through and they make the difference.

For example, Elon Musk offered to buy Twitter at $54.20 but the shares recently traded in the $30s. David Einhorn at Greenlight Capital recently announced he bought a position, with an average price of $37.24.

That’s the arbitrage. He is betting the court orders the deal to go through at $54.20.

Microsoft has an offer to buy Activision Blizzard at $95 per share. But Activision Blizzard is now trading around $79. Earlier in the year, Warren Buffett announced that he had put on a big arbitrage trade, buying 9.5% of Activision Blizzard in the belief that Microsoft would be able to go through with the deal and he would make the difference.

New investors shouldn’t get thrown by fancy investing lingo. It’s usually not as difficult as it seems.

What Other Confusing Investing Terms Should Beginners Know About?  

Tune into this week’s podcast to find out.


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Apple Inc. (AAPL) : Free Stock Analysis Report
 
Microsoft Corporation (MSFT) : Free Stock Analysis Report
 
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Twitter, Inc. (TWTR) : Free Stock Analysis Report
 
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