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expiration date

The last day that an option contract is valid. After this day, the option can no longer be exercised by its owner and becomes worthless.

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Free cash flow (FCF) is the cash that can be freely taken out of the company after it has paid for maintenance of its property, plant and equipment. Many investors believe that this figure is a more reliable figure for profitability than net income, because it is less prone to tampering by management.

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Financial statement

A table which provides an overview of the financial performance of a company. Every publicly listed company is required to make three of these statements publicly available:

  1. Income statement
  2. Balance sheet
  3. Cash flow statement
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implied volatility

The market's expectation of the future volatility of the underlying stock.

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If the underlying stock price is above the strike price (for calls) or under the strike price (for puts). This means that exercising the option will earn you money.

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Income statement

A financial statement which reflects the financial performance of a company over a certain period, oftentimes referred to as the "profit and loss statement". It includes such things as revenue, expenses, and the net income earned over that period.

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Intrinsic value

An estimate of the "true" value of a company, assuming that the market price does not always reflects this value correctly. This is the cornerstone of the value investing strategy.

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Law of Large Numbers

An economical law which states that growth rates will decline when companies become bigger. A high growth rate is unsustainable, simply because the company would otherwise become bigger than the entire world economy at one point. This law implies that investing in small-cap stocks offers more growth potential.

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A liability is something a company owns which is costing money. This includes loans, accounts payable, accrued expenses, and all other money the company owes to other parties.

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Margin of safety

A concept strongly emphasized by Benjamin Graham, which suggests to only buy a stock when the market price is significantly below the company's intrinsic value. By applying a margin of safety, you reduce the downside risk of subpar future performance, while increasing surprises on the upside when the company performs better than expected.

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Market cap

The current market value of all shares outstanding. So if the company has 1.000 shares outstanding, and the stock price is $35, the market cap is 1000 * $35 = $35.000.

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Net income

The amount of money a company earned after deducting all costs of doing business, often referred to as "the bottom line". Net income can be found on the income statement and is the most commonly used figure for assessing how profitable a company is. However, be wary of the fact that this figure is highly susceptible to manipulation by management.

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The net present value (NPV) is the current value of an amount of money in the future, as if it existed today. A dollar today is worth more than a dollar in the future, since that dollar could be earning an interest rate when invested today. We calculate the present value of a future dollar by discounting it.

Net present value = Future value / (1 + Discount rate) ^ Number of years from today

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option Delta

A ratio which compares the volatility of the option price to the volatility of the underlying stock price. For every $1 a stock price changes, the option value changes with the value of Delta.

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option premium

The purchase price of an option contract, which is also the income received by the writer (seller) of the option contract. The quoted premium is a per share value, so multiply by 100 to calculate the total premium.

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