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Finance GlossaryMean Reversion
Mean Reversion
Definition of Mean Reversion
Mean Reversion is a market concept that suggests prices can approach back towards their historical average over time. When a stock trades far above or below its usual level, it is expected to gradually return to the mean.
Related Terms
Capital in Trading
Capital is the total amount of money that a trader can use to buy and sell securities. There are variations of the term, the most common one is “starting capital”. This is the amount of money a trader starts their journey with.
Basis Trading
Basis trading means futures trading strategies that use the difference between the spot price and the futures contract price of a stock or commodity.
The difference between the spot and futures prices forms the “basis” for the trading strategy. Hence the name basis trading. These are the two ways in which a trader may use the basis:
The difference between the spot and futures prices forms the “basis” for the trading strategy. Hence the name basis trading. These are the two ways in which a trader may use the basis:
- Short the basis : Done if the price difference or basis is expected to reduce
- Long the basis :Done if the price difference or basis is expected to increase
Discounted Cash Flow
Discounted cash flow is a method of valuing a company in the present based on future cash flows. An investment may be profitable in the present if the discounted cash flow is above the current cost of investing.
The formula to calculate discounted cash flows is:
DCF = Cash Flow Year 1 / (1+r1)^1 + Cash Flow Year 2 / (1+r2)^2 + Cash Flow Year N / (1+r)^n
The formula to calculate discounted cash flows is:
DCF = Cash Flow Year 1 / (1+r1)^1 + Cash Flow Year 2 / (1+r2)^2 + Cash Flow Year N / (1+r)^n
Alpha
An Alpha indicates the measure by which a stock or portfolio has managed to outperform a benchmark like an index of shares.
A positive Alpha means that the security or portfolio is beating the market while a negative Alpha means that it is lagging.
Alpha can also be used to measure the competence of a fund manager and their strategies.
A positive Alpha means that the security or portfolio is beating the market while a negative Alpha means that it is lagging.
Alpha can also be used to measure the competence of a fund manager and their strategies.
Annual Earnings Change
An Annual Earnings Change is the difference between a company’s earnings from the present and previous fiscal year. The formula for annual earnings change is:
Current Fiscal Year Earnings - Previous Fiscal Year Earnings
Say for example a liquid nitrogen manufacturing company earned Rs. 50 crores in the current fiscal year and Rs. 29 crores in the previous fiscal year. Their annual earnings change will be:
Rs. 50 crores - Rs. 29 crores = Rs. 21 crores.
Current Fiscal Year Earnings - Previous Fiscal Year Earnings
Say for example a liquid nitrogen manufacturing company earned Rs. 50 crores in the current fiscal year and Rs. 29 crores in the previous fiscal year. Their annual earnings change will be:
Rs. 50 crores - Rs. 29 crores = Rs. 21 crores.
Accrued Expenses
An accrued expense is the cost that is incurred in the current accounting period but is due to be paid in the future.
More simply, an accrued expense is an unpaid bill due in the future for goods or services that have already been received by a company.
Accrued expenses show up as liabilities on a company’s books.
More simply, an accrued expense is an unpaid bill due in the future for goods or services that have already been received by a company.
Accrued expenses show up as liabilities on a company’s books.
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