Investing terms can often feel confusing, especially for beginners. This glossary is designed to give you clear, simple definitions of the most important concepts in fundamental investing so you can understand how markets work and make better financial decisions.
Fundamental investing focuses on analyzing businesses based on their financial performance, competitive advantage, and long-term value. To do that effectively, you need to understand the language investors use—from basic terms like assets and cash flow to more advanced concepts like return on invested capital (ROIC) and discounted cash flow (DCF).
In this investing glossary, each term is explained in plain language with a focus on real-world understanding—not technical jargon. Whenever possible, definitions are connected to broader investing concepts so you can see how each idea fits into the bigger picture.
You’ll learn key terms related to:
Financial statements and accounting concepts
Business analysis and valuation methods
Stock market fundamentals and investment strategies
Risk, return, and long-term decision-making
If you’re just getting started, this glossary is the perfect place to build your foundation. If you’re already learning, it will help reinforce and clarify the concepts that matter most.
Start with our complete guide: What Is Fundamental Investing
Then explore deeper topics in Investing Basics and Business Analysis
A common size statement presents financial statement items as a percentage of a total. Common size statements are commonly used for the income statement and the balance sheet. A common size income statement presents each item on the income statement as a percentage of sales. A common size balance sheet presents each item on the […]
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Bad debt expense is an expense account which represents accounts receivable the firm expects to go uncollected. An accounts receivable is created when a firm sells a good or service and allows the customer to pay for the good or service at a future date. Some customers, however, are likely to default on their obligations.
Allowance for doubtful accounts is a contra account that adjusts accounts receivable for the expected amount of uncollectible accounts. The allowance for doubtful accounts contra account is associated with the allowance method, which is one of two ways for accounting for uncollectible receivables. The other method is the direct write-off method, in which bad accounts
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An expense is a cost associated with the generation of revenue. Some expenses, such as depreciation, represent the reduction in the value of an asset. Such expenses are called noncash expenses because they have no immediate cash impact. Other expenses represent a current payment or the recognition of a future payment. If the company uses
Revenue is payment or the promise of future payment for the rendering of goods or services. If the company uses cash-basis accounting, the company will recognize revenue when payment is received from customers. If the company uses accrual-basis accounting, the company will recognize revenue when the revenue is earned, regardless of when payment is received.
Dividends are distributions of cash, stock, or property made to a corporation’s shareholders. When a company generates an operating surplus, the company must determine how to best use that surplus. A public company has five alternatives for its cash surplus. The company can (1) invest in future growth, (2) acquire other businesses, (3) pay down
The direct method cash flow statement presents operating cash flows from the “top down”, according to the sources and uses of cash. In contrast, the indirect method starts with net income and adds or subtracts changes in working capital accounts until net income is reconciled with operating cash flow. Typical cash flow sources presented on
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Under the indirect method cash flow statement, operating cash flow is calculated by reconciling net income to cash flow. The reconciliation involves (a) adding back to net income any noncash expenses, such as depreciation and amortization, and (b) adding or subtracting changes in operating working capital accounts on the balance sheet. An increase in a
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Book value refers to the accounting net worth, or owner’s equity, of the business. Book value is presented on the balance sheet in the owner’s equity section. The owner’s equity section on the balance sheet equals the firm’s assets minus the firm’s liabilities. Book value can be calculated with all of the firm’s assets or
Cash flow from investing activities, also called investing cash flow, refers to the net difference between cash sources and cash uses related to a firm’s investing activities. Cash flow from investing activities is one of three sections of the cash flow statement. The other sections of the cash flow statement are cash flow from operating
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