2 Investment essentials

In Chapter 1, we claimed that programmers’ traits can make wizards of bits and bytes outstanding investors. But traits (and brains) alone won’t do. Take the following statement that you might find in any financial analysis of a share price: “With a P/E ratio of over 25, this stock seems overvalued.” For someone new to investing, sentences like that or dialogs between investors in movies such as Wall Street or The Big Short might sound like a foreign language. In 2003, Eric Evans published his book Domain-Driven Design, which contains principles for creating software in unknown domains for software engineers. One cornerstone of these principles is ubiquitous language. This principle claims that each domain has created its language with terminology only domain experts use. An essential part of software engineering is learning to understand and speak this language. So, let’s start the next part of our journey by getting deeper into the domain language of investment.

2.1 Accounting in a Nutshell

2.1.1 Income Statement

2.1.2 Balance Sheet

2.1.3 Free Cash Flow

2.2 Industry Classification

2.2.1 Sectors and Economic Cycles

2.3 Capitalization

2.4 Metrics and Ratios

2.4.1 Liquidity

2.4.2 Debt

2.4.3 Earnings

2.4.4 Valuation

2.4.5 Profitability

2.4.6 Efficiency

2.4.7 Dividends

2.4.8 Ownership

2.4.9 Sustainability

2.5 External Assessments

2.5.1 Scoring Systems

2.5.2 Ratings systems

2.5.3 Target Prices

2.6 Summary